Audit 402673

1. Criteria: The Project shall establish and maintain a replacement reserve to aid in funding extraordinary maintenance and repair and replacement of capital items. An amount as required by HUD, as applicable, shall be deposited monthly in the reserve fund in accordance with the Regulatory Agreement or HAP contract. 2. Condition: During the review of the required Replacement and Replacement (R&R) deposit, it was noted that the Project did not make the deposit in the correct increased amount after the new required rate became effective. 3. Cause: The shortfall in the required deposit is attributed to the lack of timely communication and authorization for the increase to PGIM Real Estate Loan Services (“PGIM”) (presumably the entity responsible for administering or making the deposits). Historically, HUD provided Form HUD-9250 (Approval of Operating Budget) to formally approve the increased required deposit directly to Prudential. Beginning in Fiscal Year (FY) 2019, this direct approval process by HUD was discontinued, leaving PGIM without clear formal notification for the required increase. Consequently, PGIM did not increase the deposit amount and continued to remit funds at the old, lower rate. 4. Effect: As a result of the deposits being made at the insufficient rate, the Project's Replacement Reserve Fund had a shortfall of $6,432 as of the year end. 5. Recommendations: We recommend management implement internal controls surrounding Replacement Reserve deposits to ensure annual HUD increases in the required R&R deposit amounts are promptly identified and communicated to Prudential, so the deposit rate is updated in a timely manner. 6. Views of Responsible Officials: Management agrees with the recommendations and will review and implement a procedure to ensure the HUD increases are communicated to Prudential on timely basis. Furthermore, management deposited the delinquent amount of $6,432 into the Replacement Reserve account subsequent to year end.