A REPORT FROM THE OFFICE OF INTERNAL AUDIT

A REPORT FROM THE OFFICE OF INTERNAL AUDIT PRESENTED TO THE CITY COUNCIL CITY OF BOISE, IDAHO AUDIT / TASK: AUDIT CLIENT: REPORT DATE: October 14, 2013 AUDIT GRADE: #13-04, Property Rehabilitation / Loan Processes City of Boise - Housing and Community Development Division / Treasury Division Satisfactory REPORT AUTHOR: APPROVED FOR RELEASE: Steven Rehn CIA, CFSA Steven Rehn CIA, CFSA AUTHORITY: Boise City Code, 1-09-03 FY2013 Work Plan

Task #13-04, Housing Loan and Rehab Programs Date of Audit: April 28, 2013 INTRODUCTION The Office of Internal Audit undertook a scheduled review of the loan processes and procedures in place at the City of Boise s Housing and Community Development Division (HCD). Audit also elected to perform an overview of the recently completed Neighborhood Stabilization Program (NSP) that the Division participated in over roughly a three-year period ending the latter part of 2012. Utilizing grant funding obtained through the Department of Housing and Urban Development, HCD is generally involved in assisting low and moderate income (LMI) citizens in obtaining safe, sanitary, and affordable housing. They work toward achieving that end through a number of methods: Funding affordable loans to assist in the acquisition of permanent residential housing; Funding affordable loans to assist existing homeowners in rehabilitating / repairing housing that is in need of emergency repairs, or code updates; Providing grants to further these acquisition and / or repair activities; Maintaining and operating a substantial inventory of rental housing that is priced for, and made available to LMI citizens; Participating in programs that provide emergency shelter; and, Partnering with external entities to further the goals of housing and economic opportunities. The loan and rental programs are generally carried out with funding through the Community Development Block Grant program (CDBG), and the Home Investment Partnerships Program (HOME). With respect to the loan programs, HCD is responsible for applicant screening and loan underwriting. Once the loans are funded and set up on an in-house mortgage system, on-going servicing is handed off to the City s Treasury Division. Other specialty groups Collections and Legal, for instance become involved on an as-needed basis. The Housing and Economic Recovery Act of 2008 (HERA), through the NSP program, provided funding for the acquisition, rehabilitation, and sale of residential housing units to LMI citizens. The intent of the NSP program was to aid in stabilizing areas that had been negatively affected by foreclosures, vacancy, and / or property abandonment. HCD participated in this program locally, with the Idaho Housing and Finance Association (IHFA) acting as the lead statewide grantor agency. 2

SCOPE AND METHODOLOGIES Internal Audit established the scope of the review to include loan activities from FY 2010 through FY 2012; and the entire life cycle of the Neighborhood Stabilization Program. The objectives of the audit were established as follows: Assess current lending-related functions, including compliance with underwriting and lending procedures; Ensure that compliance with applicable lending related regulations is being achieved; Ensure that loans are receiving proper attention relative to servicing activities, and that the loans are administered consistent with the terms of the promissory notes and deeds of trust; Ensure that an appropriate accounting of loan servicing activities has and is occurring that all associated general ledger accounts are properly reconciled; and, Assess the level of overall performance that was achieved within the HERA / housing purchase, rehabilitation, and sale program. The Office of Internal Audit utilized a combination of interviews, observations, recalculations, and detailed attribute testing in order to accomplish the defined objectives. The work that was planned and performed was deemed to be sufficient to support the findings, recommendations, and conclusions contained within this report. 3

EVALUATION AND COMMENTS Based on the work performed, and on Internal Audit s evaluation of the results, Housing and Community Development s lending operations are deemed to be performing at a Satisfactory level. A Satisfactory grade is typically assigned where reportable issues are encountered, but they do not appear to represent a pattern or a practice. Generally, internal controls are in place and functioning reasonably well. Internal Audit last reviewed HCD s lending activities in fiscal year 2009. Since that time, our review suggests the Division has realized continuing improvements in their lending-related processes. Procedural guidance is in place and is regularly observed, loan files are adequately documented, and underwriting activities conform to overall program guidelines. Additionally, lending staff utilize an automated system to produce the necessary loan disclosures, which helps ensure compliance with form, content, and accuracy requirements. Internal Audit did note one issue of concern. However, that particular deficiency related to downstream servicing activities that are accomplished in the City s Treasury Division. Due to a staffing-related change, an annually-required escrow analysis for a small number of loans (twelve) was not performed as required. While there do not appear to be any significant negative consequences to the borrowers involved, this oversight does represent a violation of requirements contained within federal lending-related regulations. Also, as indicated in earlier sections of this report, we reviewed HCD s participation in the NSP housing program. Results support the fact that the Division generally achieved the overall deliverables that were articulated at the onset of the project. Further, it appears that a number of factors associated with these deliverables were not necessarily controllable by the Division, which may have contributed to the length of the program, and a slower pace of goal achievement than might otherwise have been the case. The following report sections provide additional details on these topics. (Refer to Appendix A for additional details concerning Internal Audit s existing grading scale.) 4

RECOMMENDATIONS Audit s Findings are detailed below; including any recommendations that were made, and management s responses to those suggestions. Finding #1: Annual Escrow Analysis HCD carries out an on-going loan program in furtherance of its affordable housing, and housing rehabilitation objectives. The Treasury Division of DFA has assumed responsibility for the primary servicing functions associated with the loan portfolio. While reviewing the adequacy of overall servicing efforts, we noted a small number of the loans, approximately twelve, had Impound balances essentially, accounts maintained for the payment of real estate taxes and property insurance. Treasury staff indicated no escrow analysis had been performed on these loans since a change in staffing had occurred. Audit established the staffing change date as having occurred in mid-calendar year 2012. As the loan-servicing entity, the City is required to provide these borrowers with an annual statement of escrow analysis, and to establish escrow contribution amounts that will result in satisfying the cushion requirements and limitations contained within the Real Estate Settlement Procedures Act (RESPA). The required analysis that should have been performed at the beginning of calendar year 2013 did not occur. Impound balances generally appear to be adequate; however, compliance was not achieved with the provisions of RESPA. Recommendation Internal Audit recommends that management review the requirements, and implement procedures to ensure that all applicable RESPA requirements are satisfied going forward. Borrowers will be assured that their impound amounts are sufficient to meet on-going tax and / or insurance requirements. Management Response Treasury has added performing escrow analysis to the work plan to be completed in early 2014 using analysis functionality within the existing loan accounting software. The following schedule has been established: Escrow Analysis will run on January 14, 2014. Letters without escrow refunds will be mailed January 15, 2014. Letters with escrow refunds will be mailed January 20, 2014. Thank you for discovering this oversight. 5

Neighborhood Stabilization Program NSP was a part of the 2008 federal stimulus program originally enacted through HERA. The funds were delivered through HUD s CDBG funding stream. Idaho Housing and Finance Association (IHFA) administered the program throughout the state of Idaho, working with select local entities such as HCD to accomplish program goals. HCD s objectives were to acquire foreclosed or abandoned properties; and to rehabilitate and make those properties ready for sale to eligible homebuyers who were at or below 120% of AMI (Area Median Income). The Division received a conditional award letter on April 10, 2009, and an executed sub-recipient agreement on July 1, 2009; both from IHFA. The official program close out date for HCD was September 19, 2012. The total initial award to HCD was $1.8 Million. Administrative costs were limited to 8% of the award amount. Following is a summation of the Division s program accomplishments: Performance Metric Anticipated Performance Actual Performance ^ Total Spending $1,800,613 $1,974,006 Number of Structures Acquired and Rehabilitated 10-11 13 Program Life Cycle 18 Months 35 Months Average Values per Structure Acquisition Price $1,275,482 $98,114 Appraised Value $1,405,000 $108,077 Cost versus Market Value 1% below Appraisal Range from 1.0% to 21.5% 8.9% below Appraisal Rehabilitation Costs $297,723 $22,902 Other / Holding Costs $127,811 $9,832 Total Property Investment $1,701,016 $130,847 Sales Price $1,385,900 $106,608 Financial Subsidy to Buyer ~ $213,126 $16,394 Net Proceeds From Sale $1,172,774 $90,213 Net Program Cost / (Loss) ( $528,242) ( $40,634) ^ Note: Exclusive of $127,693 total cost of a duplex acquired for rental purposes. This activity was approved as an eligible use of program funds under an interim program amendment. Also, total program spending exceeded original budgets due to the reinvestment of program income back into the program. ~ Note: Provisions to assist Homebuyers in filling needs-based gaps were incorporated into the original program by HCD s grantor agency IHFA, and by the lead agency, HUD. 6

As suggested by the table above, several areas appear to be worthy of additional comment relative to HCD s program accomplishments. 1. Program requirements called for the acquisition of properties at a minimum of 1% below the properties then-current appraised values. HCD met and exceeded that requirement, achieving an overall discount of 8.9%. 2. HCD originally anticipated it would acquire, rehabilitate, and dispose of approximately 10 to 11 properties over an 18-month period. The Division renovated 13 properties. The actual program life cycle at 35 months was roughly double the original expectation. HCD appears to have experienced delays that were not dis-similar to those experienced by NSP participants nationwide. Changing property inventories, private sector competition, and delays in working with and through the private financial services providers caused delays in program implementation nationally. 3. Transaction history indicates the properties were held for an average of nearly 17 months between acquisition and sale. These extended holding periods likely increased, at least marginally, the costs associated with maintaining / holding the properties. 4. Program thru-put ultimately achieved what was anticipated; though the cycle time to re-sell appears to have been somewhat protracted. An investment of roughly $2 Million, and nearly three years of administrative effort yielded thirteen housing solutions. 5. In order to house each of the thirteen qualified buyers, the program provided an average economic subsidy (via loss on sale) of nearly $41,000 per sale including the direct assistance provided to the buyers in order to close their transactions. HUD did not establish minimum sales prices, and did anticipate that losses on sale would occur since one of the program requirements stipulated sales prices less than the value of the properties post-rehabilitation values. HUD essentially viewed any loss incurred on sale as a non-recoverable development subsidy. The program yielded several benefits that were consistent with overall NSP program goals. As the lead grantor agency, IHFA s goals included the acquisition and rehabilitation of foreclosed properties in order to return them to the market, thereby assisting in the stabilization of neighborhoods. Associated with those goals were the aims of providing affordable housing, and ensuring a sustained period of affordability for those housing units. 1. HCD partnered with the Federal National Mortgage Association to identify and acquire foreclosed / abandoned properties in targeted areas of the City. The Division also partnered with local lenders to facilitate the ultimate sale of the properties. Surplus housing inventory was removed from the market through the re-development / rehabilitation activities. 7

2. Working within program parameters established by IHFA, and with financing that was underwritten and managed by IHFA, qualified LMI homebuyers who purchased HCD s properties were successfully housed. 3. Deed restrictions common to the affordable housing environment were utilized to ensure sustained periods of affordability for the subject properties. 4. Tangentially, the program likely provided demonstrable benefits to the local economy as well. Stimulus funds were injected into the local market through the use of area contractors and service-providers associated with the acquisition, renovation / repair, and re-sale of the acquired properties. Overall, HCD appears to have achieved its goals relative to the NSP program. 8

CONCLUSION Overall, members of the management team responsible for the Housing and Community Development loan functions have implemented effective internal control systems. The Division was also successful in achieving program goals associated with the recently completed Neighborhood Stabilization Program; the City s stock of sustained, affordable housing was enhanced as a result of these efforts. Internal Audit would like to express its appreciation for the assistance provided the management and staff of the Housing and Community Development Division during the course of this review. MANAGEMENT PARTICIPANTS James Birdsall, Division Manager / Housing & Community Development AnaMarie Guiles, Program Manager / Housing & Community Development Richard Downen, Deputy Assistant Treasurer / Department of Finance & Administration 9

APPENDIX A Evaluation and Grading of Audits Each audit will be evaluated or graded, and will receive one of the five following ratings. Grades will be assigned based on the perceived best fit. Thus, not all attributes associated with an assigned grade may be present within a given Department or Division. High Satisfactory No significant weaknesses or deficiencies were noted during the audit. If any issues were noted, they were clearly insignificant or inconsequential. The audited area displays a high degree of control and management oversight is effective. Satisfactory Reportable issues may exist within the audited area, but they are not deemed to be representative of pattern or practice within the area. Issues are typically of an isolated nature. Overall, systems of internal control are effective, and management oversight is adequate and supportive of the accomplishment of goals and objectives. Low Satisfactory Reportable issues exist within the audited area, and are encountered frequently enough to lose the appearance of isolated. Systems of internal control appear to be marginally adequate at best. Management oversight is not always effective to ensure the quality of operations. Needs Improvement Weaknesses or deficiencies are encountered on a relatively frequent basis within the audited entity or function. Issues noted, and their frequency, are suggestive of a pattern or practice of inadequate oversight. Internal control mechanisms may not be universally in place, implemented, or actively observed. Management oversight is weak, or is not always effective. Unsatisfactory Material or significant deficiencies are noted within the operations under review. Issues may pose risks that are either missioncritical or mission-fatal. Management has failed to implement appropriate internal controls. Management oversight is ineffective, absent, or willfully avoided. 10