Source: http://mesaaz.gov/city-hall/city-auditor/audits
Report Date: February 23, 2017
Department: Community Services/Housing & Community Development Division
Subject: Housing Rehabilitation Program
Lead Auditor: Karen Newman
OBJECTIVE This audit was conducted to determine whether adequate controls are in place to ensure compliance with Housing Rehabilitation Program requirements for eligibility, procurement, and expenditures.
SCOPE & METHODOLOGY The audit scope included Homeowners Rehabilitation projects (under the Housing Rehabilitation Program) completed in fiscal years 2014 through 2016. To meet our objective, we interviewed staff members, reviewed Housing and Community Development policies and procedures, reviewed project documentation, and performed other tests and procedures as necessary.
BACKGROUND The City of Mesa’s Housing Rehabilitation Program is administered by the Housing and Community Development Division of the Community Services Department. It is funded by the Community Development Block Grant (CDBG) awarded to the City by the U.S. Department of Housing and Urban Development (HUD).
In FY 2016, the City was awarded a total of $3.2M in CDBG funding.
Of that amount, the City Council allocated $1.25M for housing rehabilitation activities, of which $650,000 was used specifically on the Homeowner’s Rehabilitation Program for eligible owner-occupied homes. Each fiscal year, the City adopts an Administrative Plan for the Homeowners Rehabilitation Program. This document outlines the specific requirements for participation in the program, contractor selection and performance, and procedures for placing loans/liens on the properties. The Plan is designed to ensure compliance with federal guidelines, while meeting the goals of the program, which include:
• Eliminate health and safety hazards in homes
• Benefit low-income, very low-income, extremely low-income, and disabled residents
• Improve neighborhoods and encourage long-term stability
• Address energy efficiency issues
CONCLUSION In our opinion, internal controls are in place and operating effectively to provide reasonable assurance that Homeowners Rehabilitation projects are conducted in accordance with the majority of applicable requirements. However, improved controls are needed to ensure that exceptions to program requirements are adequately approved and documented, and that project change orders are signed by the homeowner before work proceeds.
A summary of our observations and recommendations is included below.
For additional details and responses from management, please see the attached Issue and Action Plans (IAPs).
OBSERVATIONS & RECOMMENDATIONS:
1. Observation: Exceptions to program requirements are not always documented as required by the Administrative Plan. The Plan allows for exceptions when warranted, but expressly states that exceptions must be documented and approved by the Rehab Committee.
We found exceptions granted in all areas of the program (i.e. eligible participants, properties, expenses, contracting, liens); however, the project files contained no documentation for the exceptions.
Recommendation: Exceptions to program requirements should be documented and approved by the Rehab Committee. Additionally, the "Housing Rehabilitation Program Checklist" should include a step to ensure that the project file includes documentation for exceptions granted.
ISSUE AND ACTION PLAN
Issue #1: Exceptions to Program Requirements Not Documented
Observation: Exceptions to program requirements are not always documented in the project files, as required by the Administrative Plan.
Criteria:
The Administrative Plans for FY13/14 and FY14/15 state: "In cases of particular need and/or special extenuating circumstances, the Loan Review Committee may grant exceptions to any of these rules. In case an exception is granted, a "Memo to the File" stating why the except ion was warranted will be placed in the project file."
The Administrative Plan for FY15/16 states: "In cases of particular need and/or special extenuating circumstances, the Rehab Committee may grant exceptions to any of the guidelines and rules stated in the Housing Rehabilitation Administration Plan. In case an exception is granted, a memo to the file stating why the exception was warranted will be placed in the project file."
Comments: To ensure compliance with federal regulations, the Homeowners Rehabilitation Program Administrative Plan contains specific language regarding participant, property, and expense eligibility; loan/lien filings; and contracting requirements. When exceptions are warranted, documentation regarding the reason for the exception, along with proper approval, should be included in the project file.
When testing for compliance with program requirements, we found that the following exceptions were made, but were not documented as required:
• 4 exceptions to the requirement that a manufactured home must be built before June 15, 1976.
• 2 exceptions to the requirement that mortgage payments must be current.
• 4 exceptions to the requirement that "the Major Rehab Program will allow up to $50,000 of repairs to qualifying homes of low-income homeowners."
• 1 exception to the requirement that "Homeowners who have previously participated in the program cannot participate again as long as there are other applicants on the waiting list, and/or if the original lien has not been forgiven."
• 1 exception to the requirement that "All change orders over $1,500 (Sub-contractor’s price) will require three bids."
• 4 exceptions to the requirement that "The contract will be for sixty (60) working days. The contractor may request in writing, an extension for extenuating circumstances beyond the contractor's control. The Housing Supervisor will deny or grant in writing, an extension for a sufficient amount of time to complete the performance."
• 1 lien exception on an NSP home purchase rehab.
• Lien exceptions for all Emergency Repair Program projects – a policy change was made to process these as grants instead of liens, but the Plan was not amended to reflect this change, and the exception was not documented in the project files.
Recommendation: Housing Services should implement more effective internal controls to ensure that exceptions to program requirements are documented in the project files.
For example, the “Housing Rehabilitation Program Checklist” should be revised to include a step to ensure all exceptions are documented as required.
Management Response: Action Plan #1:
More effective internal controls have already been implemented as demonstrated on the updated Housing Rehabilitation Program Checklist. which is attached. Please see attached checklist for reference.
Individual or Position Responsible: Housing Rehab Specialist and Supervisor
Estimated Completion Date: January 2017
2. Observation: Project change orders were not signed by the homeowner and/or contractor before work proceeded as required by the Administrative Plan. Even though the homeowner is not required to pay for change orders, and Housing Services now records change order amounts as grants instead of liens, the homeowner must approve of any work to be done before the contractor proceeds.
Recommendation: Required signatures should be obtained for all change orders before work proceeds.
Issue and Action Plan
Issue #2: Required Signatures Not Obtained for Change Orders
Observation: Project change orders were not signed by the homeowner and/or contractor prior to work proceeding.
Criteria: The Administrative Plans for FY13/14, FY14/15, & FY15/16 state: "The Homeowner must be informed of any changes to the contract or other problems encountered during the rehabilitation work, and sign the Change Order form before work proceeds."
The Administrative Plan for FY15/16 states: "The contract or will sign the Change Order, have the homeowner sign the Change Order, and return it to the HCD Rehab office before proceeding with any work.”
Comments: These requirements are intended to prevent unauthorized change orders and unnecessary program expenses, which could preclude other homeowners on the waiting list from receiving necessary repairs.
30 of 33 change orders reviewed did not have required signatures.
Recommendation: Required signatures should be obtained for all change orders before work proceeds. Or, if appropriate, management should re-evaluate the change order process and related risks, and update the Administrative Plan to reflect current practices.
Management Response: Action Plan #2:
The Administrative Plan was updated July 1, 2016 to state change order approval from the homeowner is required before work proceeds.
Please see attached page 20 from the Administrative Plan with this requirement. Also attached is the Change Order form with a signature line for the homeowner’s authorization.
The following new protocol ensures that internal controls are put in place to effectively utilize these tools.
- Change Orders
- Coordination of all Change Orders will be handled by the Housing Rehab Specialist for all projects.
- Prior to any work being performed, all Change Orders will be submitted to the Housing Rehab Specialist.
1. The requirements for submission have been met.
2. If not already performed, a site inspection will be performed to verify the necessity of the Change Order.
3. The proper documentation will be attached (including the site inspection verification).
4. City approval (budget & scope) must be approved by: a). the Inspector; b). the Housing Rehab Specialist; and c). Program Supervisor.
5. After the Program Supervisor has approved, the Homeowner must also approve.
6. After Step #5, the Housing Rehab Specialist will issue the Notice to Proceed (signed by the Housing Rehab Specialist and the Program Supervisor) on the Change Order with copies to the Homeowner.
Notes: Step #4
The Inspector signature verifies the necessity & the scope/budget;
the Housing Rehab Specialist signature verifies the project file, process and documentation are in place and that all steps are performed correctly;
the Program Supervisor signature provides the Ok to proceed.
This protocol has two separate check & balances by the Housing Rehab Specialist & Program Supervisor ensuring system success.
Individual or Position Responsible: Housing Rehab Specialist and Supervisor
Estimated Completion Date: November 2016
FOR GENERAL INFORMATION about the City of Mesa's Housing Rehabilitation Program
http://mesaaz.gov/city-hall/city-auditor/audits
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