Finding 2025-002: Material Weakness, Material Noncompliance - Special Tests and Provisions, Mortgage Status and Reserve for Replacements Repeat Finding: 2024-002 Federal Agency: U.S. Department of Housing and Urban Development Federal Program Name: Section 232 Mortgage Insurance for Nursing Homes and Section 241(a) Supplemental Loan Insurance Multifamily Rental Housing Assistance Listing Number: 14.129 and 14.151 Award Period: January 1, 2025 through December 31, 2025 Criteria or Specific Requirement: HUD regulations, the applicable HUD Regulatory Agreement, and the insured mortgage loan documents require the Organization to make timely debt service payments, including principal, interest, mortgage insurance premiums, and required escrow deposits, in order to remain in compliance with HUD program requirements. Condition/Context: During the fiscal year, the Organization experienced ongoing financial distress and declining liquidity, which adversely affected its ability to meet financial obligations as they became due. As a result, mortgage payments, including required principal, interest, mortgage insurance premiums, and escrow deposits, were not made in accordance with the loan and regulatory agreements. As of December 31, 2025, delinquent amounts totaled approximately $978 thousand. Questioned Costs: $977,775 consisting of delinquent principal and interest of $762,871 and deficiencies in tax, insurance and MIP escrows of $214,904. Cause: The Organization did not maintain sufficient cash reserves or effective cash-flow forecasting controls to ensure that required debt service payments were prioritized and paid timely. Effect: As a result of the failure to make required debt service payments, the loan entered default status and was assigned from the lender to HUD, increasing HUD's exposure under the mortgage insurance program. The default resulted in the assessment of late charges and ultimately led to the appointment of a court-ordered receiver, significantly limiting the Organization's control over its operations and financial activities. Recommendation: The Receiver and the Organization should work with HUD to develop and implement a formal workout or resolution plan, including enhanced cash-flow monitoring and debt service planning, to address the loan default and restore compliance with HUD debt service requirements. Views of Responsible Officials: Management acknowledges the finding related to the failure to make required debt service payments under the HUD Section 232 and Section 241(a) insured mortgage loan agreements. The Organization experienced significant financial distress and constrained liquidity during the fiscal year, which limited its ability to remit required principal, interest, mortgage insurance premium, and escrow payments as they became due. As a result of the loan default, the mortgage was assigned to the U.S. Department of Housing and Urban Development. With the appointment of a Receiver over the Organization, responsibility for cash management, financial oversight, and debt service planning has transitioned to the Receiver. The Receiver is marketing the facility towards a sale in order to satisfy the outstanding loan balance with HUD. Interim corrective actions include enhanced cash-flow monitoring, prioritization of operational suppliers, and ongoing communication with HUD regarding the project's financial condition and sale status. Management believes that these actions will support progress towards stabilization and marketability of the Organization.
Finding 2025-003: Material Weakness, Material Noncompliance - Special Tests and Provisions, Mortgage Reserve Fund, Equipment Replacement Reserve Fund, and Special Escrows Federal Agency: U.S. Department of Housing and Urban Development Federal Program Name: Section 232 Mortgage Insurance for Nursing Homes Assistance Listing Number: 14.129 Award Period: January 1, 2025 through December 31, 2025 Criteria or Specific Requirement: The Organization is required, under the HUD Regulatory Agreement governing its Section 232 insured mortgage, to make monthly deposits into the reserve for replacement fund in amounts and at times prescribed by HUD. Reserve for replacement funds must be deposited timely and maintained in restricted accounts to ensure the availability of resources for future capital repairs and replacements. Condition/Context: During the audit period, Henry C. Nevins Home, Inc. did not make all required deposits into the reserve for replacement fund in accordance with the terms of the applicable HUD Regulatory Agreement. The required monthly reserve deposits were either not made or were made in amounts less than those required. Questioned Costs: $217,923 Cause: Cash flow constraints contributed to the failure to fund the reserve as required. Effect: The reserve for replacement fund is a mandatory, HUD restricted account intended to provide funding for major repairs and capital improvements and to protect HUD’s insured interest in the property. As a result of the failure to make required reserve for replacement deposits, the reserve account was underfunded and the Organization was not in compliance with HUD requirements under the Regulatory Agreement. Recommendation: We recommend that Henry C. Nevins Home, Inc., in coordination with the court-appointed receiver and HUD, establish procedures to ensure that reserve for replacement deposits are made timely and in accordance with the HUD Regulatory Agreement, or that appropriate waivers or modifications are obtained from HUD where compliance is not currently feasible. Views of Responsible Officials: Management acknowledges the audit finding related to the failure to make required deposits into the reserve for replacement fund in accordance with the HUD Regulatory Agreement. As disclosed in the notes to the financial statements, during the audit period the Organization was subject to a court-appointed receivership effective September 12, 2025 and is in default under its HUD-insured mortgages. As part of the receivership, control over substantially all cash management and financial decision-making activities was assumed by the court-appointed receiver. Management believes that the conditions giving rise to this finding are directly related to liquidity constraints. Given the complexities of the receivership and regulatory environment, a specific timeline for remediation is not able to be determined. As a result of the loan default, the mortgage was assigned to the U.S. Department of Housing and Urban Development. Since the appointment of the Receiver, responsibility for cash management, financial oversight, and debt service planning has transitioned to the Receiver. The Receiver and the Organization are actively evaluating available options to address the loan default which includes marketing the Organization for a sale. Interim corrective actions include enhanced cash-flow monitoring, prioritization of expenses required to continue operations, and ongoing communication with HUD regarding the sale process. Management believes that these actions will address the conditions identified and result in the satisfaction of the HUD loan.
Finding 2025-004: Material Weakness, Material Noncompliance - Special Tests and Provisions, Cash Receipts Repeat Finding: 2024-003 Federal Agency: U.S. Department of Housing and Urban Development Federal Program Name: Section 232 Mortgage Insurance for Nursing Homes and Section 241(a) Supplemental Loan Insurance Multifamily Rental Housing Assistance Listing Number: 14.129 and 14.151 Award Period: January 1, 2025 through December 31, 2025 Criteria or Specific Requirement: HUD regulations and the applicable HUD Regulatory Agreement require that project cash balances in excess of federally insured limits be maintained in financial institutions that meet minimum Government National Mortgage Association (GNMA) rating requirements in order to safeguard project funds. Condition/Context: The Organization maintained cash balances in excess of federally insured limits in financial institutions that did not meet HUD's minimum GNMA rating requirements. Questioned Costs: $698,600 in bank balances exceed the federally insured limits as of December 31, 2025. Cause: Management did not fully consider HUD-specific custodial requirements when selecting financial institutions and did not implement controls to monitor compliance with GNMA eligibility requirements for depository institutions. Effect: Although no loss of project funds was identified during the audit, maintaining uninsured cash balances in nonqualified financial institutions increases the risk of loss of project funds and reduces HUD's assurance that project assets are adequately safeguarded in accordance with program requirements. Recommendation: The Organization should transfer excess cash balances to financial institutions that meet HUD's GNMA rating requirements or otherwise structure its cash holdings to ensure compliance with federal insurance limits and HUD custodial requirements. Views of Responsible Officials: Nevins moved to this financial institution with the first HUD loan in 2015. This is a local bank that actively supports Nevin's mission in the community. Given Nevins’ current financial struggles, the balance in the bank seldom exceeds the $250,000 threshold. In addition, the receiver established its own account with East West Bank and was in the process of fully transitioning the operating account to East West Bank at the end of the fiscal year.
Finding 2025-005: Material Weakness, Material Non-Compliance - Special Tests and Provisions, Surplus Cash and Distributions to Owners or Affiliates Federal Agency: U.S. Department of Housing and Urban Development Federal Program Name: Section 232 Mortgage Insurance for Nursing Homes and Section 241(a) Supplemental Loan Insurance Multifamily Rental Housing Assistance Listing Number: 14.129 and 14.151 Award Period: January 1, 2025 through December 31, 2025 Criteria or Specific Requirement: HUD regulations and the applicable HUD Regulatory Agreement require project management to determine surplus cash in accordance with HUD requirements and to ensure that any distributions are made only from properly calculated surplus cash. The HUD Audit Guide contemplates that surplus cash calculations be accurate, supported, and subject to appropriate internal controls to ensure compliance with HUD restrictions on the use and distribution of project funds. Condition/Context: During the fiscal year ended December 31, 2025, project management did not prepare or document a surplus cash calculation in accordance with HUD requirements, nor did management implement controls to review, approve, or retain documentation supporting the required calculation. Questioned Costs: None. No distributions of project funds were identified during the period under audit that required repayment to HUD based on the absence of an independently calculated surplus cash determination. Cause: Management did not establish formal procedures or internal controls requiring the preparation, review and retention of an independent surplus cash calculation. As a result, responsibility for determining surplus cash was not clearly assigned, and management relied on external information without sufficient verification. Effect: The failure to independently calculate surplus cash and implement controls over the calculation increases the risk that project funds could be improperly distributed or used in violation of HUD requirements. This condition reduces HUD's ability to rely on the project's financial controls to ensure compliance with surplus cash restrictions and represents a material weakness in internal control over compliance, although no actual misuse of funds was identified during the period under audit. Repeat Finding: No. Recommendation: Management should establish and implement formal policies and procedures to ensure that surplus cash is independently calculated in accordance with HUD requirements and the applicable HUD Regulatory Agreement. Such procedures should include preparation of a documented surplus cash calculation at each required reporting period using HUD-prescribed criteria; Independent review and approval of the surplus cash calculation by appropriate management personnel or, where applicable, the court-appointed receiver; and retention of supporting documentation sufficient to demonstrate compliance with HUD restrictions on the use and distribution of project funds. Management should coordinate with the court-appointed receiver and HUD to ensure that surplus cash determinations are performed consistently and in compliance with program requirements going forward. Views of Responsible Officials: Management acknowledges the finding related to the absence of an independently prepared and documented surplus cash calculation. During the fiscal year ended December 31, 2025, the Organization operated in an environment of financial distress, limited staffing resources, and evolving oversight responsibilities, which contributed to informal and undocumented procedures related to surplus cash determinations. As disclosed in the financial statements, the Organization became subject to a court-appointed receivership. Following the appointment of the receiver, responsibility for financial oversight, including compliance with HUD cash flow and surplus cash requirements, has transitioned to the receiver in coordination with HUD. The receiver and management are evaluating HUD requirements related to surplus cash calculation.