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We audited the U.S. Department of Housing and Urban Development’s (HUD) resident home-ownership program grant for Lakeview East Cooperative (project) based on the results of a risk assessment of multifamily housing programs in Region 5’s jurisdiction (States of Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin).  The audit was part of the activities in our fiscal year 2017 audit plan.  Our objective was to determine whether the Lakeview East Cooperative (Cooperative) and management agent operated the project in accordance with HUD’s requirements and HUD’s grant agreement with the 707 Tenants’ Association.

The Cooperative and management agent did not operate the project in accordance with HUD’s requirements and the grant agreement.  The Cooperative and management agent did not determine the fair market value of memberships to support that members did not pay more than the fair market value for their memberships and HUD’s secured interest in the memberships was appropriately valued.  Further, they could not provide sufficient documentation to support that (1) the payments to HUD from initial membership sales were accurate, (2) the Cooperative used its share of the proceeds from initial membership sales in accordance with the grant agreement, and (3) housing was affordable for all members.  In addition, they did not ensure compliance with other requirements of the program.  As a result, the Cooperative is at risk of having to reimburse HUD more than $18.1 million.

We recommend that the Director of HUD’s Multifamily Midwest Region require the Cooperative to resolve the issues and implement adequate procedures and controls to address the weaknesses cited in this audit report and make a preliminary determination as to whether the Cooperative is in default of the grant agreement.

Recommendation Status Date Issued Summary
2017-CH-1006-001-A Closed September 05, 2017 Implement adequate procedures and controls to ensure that memberships are sold at or below the fair market value and HUD’s secured interest in the memberships is appropriately valued.
2017-CH-1006-001-B Closed September 05, 2017 Have a representative of HUD at the closing for membership sales to sign the HUD notes.
2017-CH-1006-001-C Closed September 05, 2017 Develop and maintain a waiting list for rental units that meets the requirements of the resident home-ownership plan and considers the tenant profile.
2017-CH-1006-001-D Closed September 05, 2017 Implement adequate procedures and controls to ensure that any rental units vacated by current households or units associated with memberships which were repurchased by the Cooperative and then remained vacant more than 6 months, are rented to very low-, low-, or moderate-income households selected from a waiting list for rental units that meets the requirements of the resident homeownership plan and considers the tenant profile.
2017-CH-1006-001-E Closed September 05, 2017 For the two units for which the Cooperative acquired the memberships associated with the units from members and which had been vacant for more than 6 months, rent the units to households that meet the tenant income profile.
2017-CH-1006-001-F Closed September 05, 2017 Provide sufficient documentation to support that HUD had received 50 percent of the proceeds from initial membership sales as of May 2017. If the Cooperative cannot do this, it should pay HUD half of the principal on the promissory notes payable to the Cooperative for all of the membership sales less the amount the Cooperative can support that it paid HUD for initial membership sales.
2017-CH-1006-001-G Closed September 05, 2017 Implement adequate procedures and controls to ensure that HUD receives its full share of the proceeds from future initial membership sales.
2017-CH-1006-001-H Closed September 05, 2017 Provide sufficient documentation to support that the Cooperative used its share of the proceeds from initial membership sales in accordance with the grant agreement. If the Cooperative cannot do this, it should transfer funds from its operating account, in an amount equal to half of the principal on the mortgages to the Cooperative for all membership sales less the amount the Cooperative can support that it used for eligible purposes, to a reserve account to be used in accordance with the grant agreement.
2017-CH-1006-001-I Closed September 05, 2017 Implement adequate procedures and controls to ensure that its share of the proceeds from initial membership sales is used in accordance with the grant agreement.
2017-CH-1006-001-J Closed September 05, 2017 Implement adequate procedures and controls to ensure that the Cooperative receives HUD approval before using the $148,872 in proceeds from initial membership sales offset by undisbursed funds which was in the Cooperative’s reserve for replacements account for the project.
2017-CH-1006-001-K Closed September 05, 2017 Sign the amendment to the use agreement which would require the Cooperative to ensure that monthly housing expenses did not exceed 35 percent of the members’ monthly adjusted gross income only at the time of sale. If the Cooperative does not sign the amendment, it should verify the current household income for all members to determine whether the members are paying more than 35 percent of their households’ monthly adjusted gross income for monthly housing expenses. For any members that are paying more than 35 percent of their households’ monthly adjusted gross income for monthly housing expenses, it should determine the amount the household overpaid and reimburse the household that amount. It should also implement adequate procedures and controls to ensure that members do not pay more than 35 percent of their households’ monthly adjusted gross income for monthly housing expenses.
2017-CH-1006-001-L Closed September 05, 2017 Implement adequate procedures and controls to ensure that it sells memberships to the same proportion of very low-, low-, and moderate-income households as stated in the resident income profile in paragraph 4.a. and required by paragraph 10.b. of the use agreement.
2017-CH-1006-001-M Closed September 05, 2017 Require the member for whom it tried to transfer the membership associated with a unit in which the remaining member passed away, to move into the unit or continue to pursue the release of the member’s membership rights to the Cooperative.
2017-CH-1006-001-N Closed September 05, 2017 Require the members who did not maintain their unit at the project as their principal residence to move into the unit or continue to pursue the sale of their membership in the Cooperative.
2017-CH-1006-001-O Closed September 05, 2017 Provide sufficient documentation to support that the single occupant of a unit was a member of the Cooperative. If the Cooperative cannot do this, it should determine who has the right to membership associated with the unit, transfer the membership to that person if appropriate, and require him or her to move into or sell the unit.
2017-CH-1006-001-P Closed September 05, 2017 Implement adequate procedures and controls to ensure that members maintain their units at the project as their principal residence or sell their memberships.
2017-CH-1006-001-Q Closed September 05, 2017 Rent the unit that was used to provide rent-free housing to former employees of the management agent to a very low-, low-, or moderate-income household selected from a waiting list for rental units that meets the requirements of the resident home-ownership plan and considers the tenant profile.
2017-CH-1006-001-R Closed September 05, 2017 Implement adequate procedures and controls to ensure that the project’s units are used for rental or cooperative housing unless otherwise approved by HUD.
2017-CH-1006-001-S Closed September 05, 2017 Implement adequate procedures and controls to ensure that it submits the required reports to HUD to show continued compliance with the program.
2017-CH-1006-001-T Closed September 05, 2017 Ensure that the Cooperative’s board members and responsible staff of the Cooperative’s management agent are provided training on HUD’s requirements and the grant agreement.
2017-CH-1006-001-U Closed September 05, 2017 Consider removing from the Cooperative’s board the member who did not maintain their unit as their principal residence.
2017-CH-1006-001-V Closed September 05, 2017 Make a preliminary determination as to whether the Cooperative is in default of the grant agreement. If it is preliminarily determined that the Cooperative is in default, HUD should provide the Cooperative notice of the determination and propose corrective or remedial actions to address the default and prevent the Cooperative from repaying the remaining $18,149,023, which HUD disbursed for the project ($18,607,467 in funds disbursed for the project – $458,444 in proceeds from initial membership sales the Cooperative remitted to HUD).