Arizona Audit Reports

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Date Issued: February 9, 2011
Audit Memorandum No.: 2011-LA-1801
File: 3MB

Title: Review of Compliance With the Real Estate Settlement Procedures Act by DHI Mortgage, LTD, and Its Closing Agents

We reviewed Federal Housing Administration (FHA)-insured loan settlement documents from two branches of DHI Mortgage Company, LTD (DHI Mortgage), in Arizona. During a previous audit of loan origination by the same branches (audit report number 2009-LA-1018), there was information indicating that the Real Estate Settlement Procedures Act (Act) might have been violated; however, we were unable to report on the issue at the time. Our review followed up with the objective to determine whether DHI Mortgage branch offices in Arizona charged borrowers for services and disclosed settlement charges in accordance with the Act's and the U.S. Department of Housing and Urban Development's (HUD) requirements. The report conveys our concerns regarding the potential noncompliance with certain sections of the Act, irrespective of the responsible parties. There are no recommendations with the report. As of July 21, 2011 the responsibility to administer the Act will be transferred to the Bureau of Consumer Financial Protection established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Date Issued: February 8, 2011
Audit Report No.: 2011-LA-1006
File Size: 887KB

Title: The City of Mesa, AZ, Needs To Improve Its Procedures for Administering Its Neighborhood Stabilization Program Grant

Title: The City of Mesa, AZ, Needs To Improve Its Procedures for Administering Its Neighborhood Stabilization Program Grant We audited the City of Mesa's (grantee) Neighborhood Stabilization Program (NSP1) grant to determine whether the grantee administered the grant in accordance with HUD's program requirements. The audit was started primarily because the Office of Inspector General's (OIG) audit plan includes objectives to review Housing and Economic Recovery Act grantees and because staff from the U.S. Department of Housing and Urban Development's (HUD) Office of Community Planning and Development raised general concerns about the nonprofit subgrantee selected by the grantee to administer a portion of the grant.

We found the grantee's procedures for administering its NSP1 grant were not adequate to ensure that HUD's program requirements were met. The grantee (1) did not maintain adequate controls over construction contractor draw requests, (2) failed to ensure the eligibility of labor costs claimed by its subrecipient, (3) did not require payment and performance bonds for construction contracts as required, (4) charged unsupported employee salary costs to the NSP1 grant, and (5) failed to properly enforce the program's continued affordability requirements.

We recommend that the Acting Director of the San Francisco Office of Community Planning and Development require the grantee to implement procedures to ensure that NSP1 requirements are met and to ensure that $328,207 in grant funds could be put to better use. In addition, we recommended the grantee be required repay $22,344 in ineligible costs charged to the grant.

Date Issued:August 2, 2010
Audit Report No.: 2010-LA-1014
File Size: 3 MB

We audited the Homelessness Prevention and Rapid Re-Housing Program at the State of Arizona Housing Department (Department) because it was the largest single Homelessness Prevention and Rapid Re-Housing Program grant awarded within Arizona under the American Recovery and Reinvestment Act of 2009 (Recovery Act). Our objective was to determine whether the Department administered the grant in compliance with Recovery Act and other applicable regulations. We found that the Department had adequate policies and procedures to ensure that Recovery Act funds were accounted for separately and reporting requirements were met. However, it did not have adequate policies and procedures to ensure that its subrecipients properly established eligibility for program participants and activities and maintained source documents for program expenditures in accordance with the applicable documentation requirements for Federal grants. Further, the Department's policies and procedures were not adequate to ensure that subrecipients received adequate training and monitoring to ensure compliance with the specific Homelessness Prevention and Rapid Re-Housing Program regulations. We recommend that HUD require the Department to provide supporting documentation or repay unsupported amounts for $75,543 in program expenditures. We also recommend that HUD require the Department to provide adequate training and monitoring to its subrecipients to ensure that they have implemented policies and procedures to comply with Homelessness Prevention and Rapid Re-Housing Program requirements and to maintain appropriate source documentation for program expenditures. By ensuring that its subrecipients properly establish and document that program participants and activities are eligible, the Department will reduce the risk of waste, fraud, and abuse for its remaining Recovery Act funds under the program.

Issue Date: March 19, 2010
Audit Report No.: 2010-LA-1009
File Size: 5MB

Title: DHI Mortgage Company, LTD ’s Scottsdale, AZ, Branches Did Not Follow FHA-Insured Loan Underwriting Requirements

We audited Federal Housing Administration (FHA)-insured loan processes at two DHI Mortgage Company, LTD (DHI Mortgage), branches in Scottsdale, AZ, to determine whether DHI Mortgage originated, approved, and closed FHA-insured single-family loans in accordance with U.S. Department of Housing and Urban Development (HUD) requirements. We recently conducted an audit of DHI Mortgage's Tucson and Scottsdale branches and identified significant underwriting deficiencies and improper restrictive addenda/liens to the purchase contracts. Based on the results of our prior audit, we chose to audit the remaining two DHI Mortgage Scottsdale branches.

DHI Mortgage did not follow HUD requirements for originating, approving, or closing FHA-insured loans. Specifically, all 20 of the loans reviewed contained underwriting deficiencies, and 12 of these had significant deficiencies that impacted the insurability of the loan. The significant underwriting deficiencies included improper calculation of income, inadequate documentation of income, inadequate determination of credit and/or debt, and inadequate compensating factors when the debt-to-income ratio exceeded HUD's benchmark ratio. We also reviewed all of the loans in our audit period that were either "new construction" or "new condo" to determine whether improper restrictive covenants were recorded against the FHA-insured properties. We identified eight loans that had prohibited restrictive addenda to the purchase contracts.

We recommend that the Deputy Assistant Secretary for Single Family Housing require DHI Mortgage to (1) indemnify HUD for more than $2.5 million for loans that did not meet FHA insurance requirements and (2) reimburse HUD $265,420 for the amount of claims and associated fees paid on loans that did not meet FHA insurance requirements.

Issue Date: October 9, 2009
Audit Report No.: 2010-LA-1801
File Size: 474KB

Title: The Navajo Housing Authority's Implementation of the Recovery Act-Funded Projects which HUD Should Provide Additional Monitoring, Window Rock, AZ

We conducted a capacity review of the Navajo Housing Authority's (Authority) operations. The objective of the review was to evaluate the Authority's capacity to administer its American Recovery and Reinvestment Act (Recovery Act) funds and identify related potential internal control weaknesses that could impact its ability to properly administer the funds. We did not find evidence indicating that the Authority lacked the basic capacity to administer its Recovery Act funding. However, we did identify some concerns that could impact its ability to meet the Recovery Act obligation and expenditure timeframes and ensure that its funds are expended in accordance with program requirements.

We recommended that the Administrator, Southwest Office of Native American Programs (1) provide additional monitoring and technical assistance related to the Authority's implementation of the Recovery Act project, as needed, to ensure that the Authority has the appropriate capacity to properly administer its Recovery Act funds and (2) require the Authority to review it written policies and procedures and adapt them to address construction contractor procurement and monitoring.

Issue Date: September 25, 2009
Audit Report No.: 2009-LA-1021
File Size: 131.37KB

Title: The Housing Authority of the City of Eloy Lacked Capacity to Administer Its Recovery Act Capital Fund Grant Without Outside Assistance

We performed a capital fund administrative capacity review of the Housing Authority of the City of Eloy (Authority) because, despite the Authority's persistent management problems, HUD awarded the Authority a Public Housing Capital Fund grant of $113,672 under the American Recovery and Reinvestment Act of 2009 (Recovery Act). Our objective was to determine whether the Authority had sufficient capacity to administer its Recovery Act Public Housing Capital Fund grant in accordance with applicable rules and regulations.

We determined the Authority did not, by itself, have the capacity to administer its Recovery Act Public Housing Capital Fund grant in accordance with applicable rules and regulations. HUD's Office of Public Housing had rated the Authority as troubled for years, and despite intensive technical assistance from HUD, the Authority had been unable to establish sound operational and financial management. As a result, the management of the Authority was in transition as HUD sought to establish an agreement for management assistance between the Authority and another public housing authority. We recommended that HUD seek to establish a management agreement with another housing authority or management entity as soon as possible. We also recommended that HUD require a partnership agreement or contract that would provide additional capacity to manage the Recovery Act grant and that HUD closely monitor all Recovery Act expenditures and deadlines. Without the proposed additional capacity that would be provided by a management agreement and a partnership to administer the Recovery Act projects, the Recovery Act capital fund grant would be at risk for waste, fraud, and abuse.

Issue Date: September 15, 2009
Audit Report No.: 2009-LA-1019
File Size: 1.76MB

Title: The Owner of Park Lee Apartment's, Phoenix, Arizona, Violated Its Regulatory Agreement with HUD

We audited Park Lee Apartments to determine whether it complied with the U.S. Department of Housing and Urban Development's (HUD) regulatory agreement and other federal requirements. We found that Park Lee Apartments did not use its project funds in compliance with HUD and other federal requirements. Specifically, the owner and/or management agents violated the regulatory agreement with HUD by paying $512,562 in questioned costs from the project's operating account when the project was in a non-surplus-cash position. The questioned costs included the payment of development expenses from operating funds ($439,439), ineligible and unsupported disbursements ($45,623), and a wire transfer of project revenue to the owner ($27,500). In addition, the owner maintained the project in poor physical condition and submitted annual audits of the financial statements that did not meet HUD requirements.

We recommend that the Director of the San Francisco multifamily hub require the project's owner to repay or support questioned costs of $512,562. We also recommend that HUD's Regional Counsel pursue double damage remedies. In addition, we recommend that the Director of HUD's Departmental Enforcement Center pursue civil money penalties and administrative sanctions, as appropriate.

Issuse Date: September 10, 2009
Audit Report No.: 2009-LA-1018
File Size: 4.79MB

Title: DHI Mortgage Company, LTD's Scottsdale and Tucson, Arizona, Branches Did Not Always Follow FHA-Insured Loan Underwriting and Quality Control Requirements

We audited FHA-insured loan processes at two DHI Mortgage Company, LTD (DHI Mortgage) branches in Tucson and Scottsdale, Arizona, to determine whether DHI Mortgage originated, approved, and closed FHA-insured single-family loans in accordance with HUD requirements. We chose DHI Mortgage because the Scottsdale, Arizona, branch had a default rate that was double the default rate for FHA-insured loans for the state of Arizona, and then expanded our review to include the Tucson, Arizona, branch because some loans had both branch numbers on the documentation. DHI Mortgage did not follow HUD requirements for originating, approving, or closing FHA-insured loans. Our review identified the following deficiencies: 205 loans with prohibited restrictive addendums to the purchase contracts and 24 loans with significant underwriting deficiencies. In addition, we noted that DHI Mortgage's quality control processes had weaknesses, including failure to determine that 19 loans were not eligible for FHA insurance because the loan officer had been debarred from participation in FHA-insured loan transactions. We recommend that HUD require DHI Mortgage to (1) indemnify HUD for more than $38 million for loans that did not meet FHA insurance requirements, (2) refund or buy down FHA-insured loans for over-insurance totaling $15,749, and (3) fully implement a quality control plan in compliance with FHA requirements.

Issue Date: March 18, 2009
Audit Report No.: 2009-LA-1008
File Size: 1.22MB

Title: Campaige Place at Jackson, Phoenix AZ, Did Not Use Its Project Funds in Compliance with HUD's Regulatory Agreement and Other Federal Requirements

We audited Campaige Place at Jackson (Campaige Place) to determine whether it used its project funds in compliance with the U.S. Department of Housing and Urban Development's (HUD) regulatory agreement and other federal requirements. Campaige Place did not use its project funds in compliance with HUD's and other federal requirements. Specifically, we determined that:

• Owner advances of $73,750 were repaid when the project had no surplus cash,

• Tenant security deposit accounts were underfunded by $57,608,

• An unexplained payable of $26,328 was mistakenly recorded as a liability,

• Support was incomplete or missing for operating expenses of at least $8,341, and

• Management expenses of $20,714 were inappropriately charged to the project.

We recommend that the director of the San Francisco multifamily hub require the project's owner/agent to repay or support questioned costs of $160,413 less $81,284 already repaid or supported and to remove the unsupported payable of $26,328 from the project's accounts. We also recommend that the director require the project to establish controls to ensure compliance with HUD's regulatory agreement and other federal requirements.

Issue Date: August 4, 2008
Audit Report No.: 2008-LA-1014
File Size: 256.56KB

Title: First Magnus Financial Corporation Violated the Real Estate Settlement Procedures Act When Paying Builders and Real Estate Companies Marketing Fees and Non-Competition Fees in Exchange for Federal Housing Administration Mortgage Business

We audited the mortgage origination and business practices of the First Magnus Financial Corporation's (First Magnus) corporate office in Tucson, Arizona. The objective of the audit was to determine whether First Magnus violated U.S. Department of Housing and Urban Development (HUD) requirements by paying builders and real estate companies marketing fees and non-competition fees in exchange for the referral of Federal Housing Administration (FHA) mortgage business. We determined that First Magnus violated the Real Estate Settlement Procedures Act (RESPA) when it paid marketing fees and non-competition fees to builders and real estate companies in exchange for the referral of FHA mortgage business. As a result, First Magnus paid builders and real estate companies $32,154 in marketing fees and noncompetition fees in exchange for the exclusive referral of 236 FHA-insured mortgages totaling more than $30 million.

We recommend that HUD's Assistant Secretary for Housing-Federal Housing Commissioner require First Magnus, for any current or future FHA mortgage operations for which First Magnus may exercise management control, to ensure that the practice of paying marketing fees and non-competition fees to real estate companies and builders for referrals of FHA mortgages is discontinued. In addition, we recommend that First Magnus have their active status and approval to perform FHA business removed. Finally, we recommend that HUD's Acting Director for the Departmental Enforcement Center pursue administrative actions against the principal owners and management of First Magnus for allowing the improper practice of paying marketing fees and non-competition fees to real estate companies and builders in exchange for referrals of FHA mortgage business.

Issue Date: July 14, 2008
Audit Report No.: 2008-LA-1013
File Size: 186.06KB

Title: First Magnus Financial Corporation Violated the Real Estate Settlement Procedures Act When Paying Incentives to Brokers for Generating Federal Housing Administration Mortgages

We audited the mortgage origination and business practices of First Magnus Financial Corporation's (First Magnus) corporate office in Tucson, Arizona. The objective of the audit was to determine whether First Magnus violated U.S. Department of Housing and Urban Development (HUD) requirements by paying its brokers volume-based incentives for originating and processing Federal Housing Administration (FHA) mortgages. We determined that First Magnus violated the Real Estate Settlement Procedures Act (RESPA) when it paid quality incentives, also known as volume-based incentives, to brokers for originating and processing FHA mortgages. As a result, First Magnus paid brokers $58,571 in quality incentives, also known as volume-based incentives, to originate and process 169 FHA mortgages totaling more than $24 million.

We recommend that HUD's Assistant Secretary for Housing require First Magnus, for any current or future FHA mortgage operations for which First Magnus may exercise management control, to ensure that the practice of issuing incentive payments to brokers for originating and processing FHA mortgages is discontinued. In addition, we recommend that First Magnus have their active status and approval to perform FHA business removed. Finally, we recommend that the HUD's Acting Director for the Departmental Enforcement Center pursue administrative actions against the principal owners and management of First Magnus for allowing the improper practice of issuing incentive payments to brokers for originating and processing FHA mortgages.

Issue Date: June 17, 2008
Audit Report No.: 2008-LA-1011
File Size: 155.78KB

Title: The City of Phoenix Housing Department's Controls over Section 8 Tenant Eligibility and Rent Determinations Were Not Adequate

We audited the City of Phoenix Housing Department's (Housing Department) Housing Choice Voucher program. We conducted the audit as part of the Office of Inspector General's (OIG) annual plan. The Housing Department was selected for review because it is the largest housing authority in the state of Arizona and had not previously been audited by OIG. The objective of the audit was to determine whether the Housing Department supported tenant eligibility and rent determinations in accordance with HUD requirements. We found the Housing Department did not ensure that tenant eligibility and associated housing assistance payment amounts were properly supported. As a result, it paid $371,469 in unsupported housing assistance and $12,616 in ineligible housing assistance.

We recommend that the Director of the U.S. Department of Housing and Urban Development's (HUD) Los Angeles Office of Public Housing require the Housing Department to (1) support or reimburse $371,469 in unsupported housing assistance payments; (2) reimburse $12,616 in ineligible housing assistance payments; (3) establish and implement an adequate training program, including standardized training materials, to ensure that its staff have the capability to perform tenant eligibility and housing assistance payment determinations in accordance with HUD requirements; and (4) take appropriate action to ensure that a sufficient number of staff are available to administer its Section 8 voucher program.

Issue Date: May 5, 2008
Audit Report No.: 2008-LA-1009
File Size: 196.15KB

Title: The Housing Authority of the City of Eloy, Arizona Did Not Have Adequate Internal Controls to Safeguard Assets and Ensure Compliance with HUD’s Requirements

We audited the Housing Authority of the City of Eloy (Authority) because the U.S. Department of Housing and Urban Development (HUD) had rated the Authority as troubled for five years. In 2007, the Authority had significant financials problems and terminated its executive director. We determined that the Authority did not have adequate internal controls to safeguard assets and reasonably ensure that HUD funds were used in accordance with program requirements. Because the Authority did not fully implement corrective actions required by HUD, it was not in compliance with HUD rules and regulations with respect to its annual contributions contracts with HUD, program regulations, and Office of Management and Budget circulars. As a result, more than $2 million in federal funds was placed at risk, and the Authority incurred unnecessary expenses and struggled to meet its operating expenses.

We recommend that the Director of HUD's Los Angeles Office of Public Housing require the Authority to immediately develop and implement effective policies and procedures that include sound internal controls for its operations in all areas and to immediately direct the Authority to negotiate with the Internal Revenue Service (IRS) to abate $81,537 in interest and penalties on employee withholding taxes owed. We further recommend that HUD closely monitor the Authority and its board of commissioners until management weaknesses have been resolved.

In addition, we recommend that the General Deputy Assistant Secretary for Public and Indian Housing issue proposed notices of the Authority's default of its public housing and Section 8 contracts, and take appropriate actions that will result in better use of more than $700,000 in federal funds.

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