Audit 412578

2025-001 ALN 10.415 – Rural Rental Housing Loan – Special Tests and Provisions – Replacement Reserve & Reserve Withdrawals Condition and Criteria: USDA Rural Development regulations require Reserve for Replacements accounts to be maintained as supervised accounts and require Agency approval for withdrawals. Specifically, 7 CFR § 3560.306(e)(2) states that reserve accounts must be supervised accounts that require the Agency to approve all withdrawals. Additionally, USDA Rural Development guidance requires borrowers to submit Form RD 3560-12 and obtain Rural Development approval prior to disbursing reserve funds for eligible expenditures. During testing of Reserve for Replacements account activity, we noted that withdrawals totaling $91,499 were made during the year without evidence of an approved Form RD 3560-12 for each withdrawal in the year. Amount of Questioned Costs: $91,499 Context: The Authority was unable to provide Form RD 3560-12, Request for Authorization to Withdraw Reserve Funds, for each withdrawal in the current year. Cause: The Authority’s internal controls over the Replacement Reserve & Reserve Withdrawals process that were in place lacked the necessary controls over monitoring of related HUD regulatory requirements. Effect: Failure to obtain required Rural Development approval may result in noncompliance with USDA Rural Rental Housing program requirements. In addition, unauthorized withdrawals reduce Agency oversight over reserve funds and increase the risk that restricted funds could be used for expenditures that have not been reviewed and approved by Rural Development. Auditor’s Recommendation: We recommend management implement procedures to ensure all future withdrawals from the Reserve for Replacements account are supported by an approved Form RD 3560-12 and receive documented Rural Development approval before funds are disbursed. Management should also review all withdrawals made during the year and consult with Rural Development regarding any necessary corrective actions for withdrawals processed without approval. Grantee Response: Current management acknowledges the finding and will follow the auditor’s recommendation.

2025-002 ALN 10.415 – Rural Rental Housing Loan – Reporting Condition and Criteria: USDA Rural Development regulations require borrowers participating in the Rural Rental Housing program to submit complete annual financial reporting information, including Form RD 3560-7 (Multiple Family Housing Project Budget/Financial Information), Form RD 3560-10 (Borrower Balance Sheet), and the Borrower Certification of Performance Standards (HB-2-3560 Attachment 4-C/4-F) as part of the annual reporting process. Handbook HB-2-3560, Chapter 4, Section 5 and 7 CFR 3560.308 require borrowers to maintain and submit these documents to demonstrate compliance with program requirements and the financial and operational condition of the project. Amount of Questioned Costs: None. Context: Management was unable to provide Forms RD 3560-7, RD 3560-10, and the Borrower Certification of Performance Standards for the fiscal year under audit. As a result, auditors were unable to verify that the required annual financial reporting package was prepared and submitted to Rural Development in accordance with program requirements. Cause: Management did not maintain adequate records to ensure required Rural Development reporting forms and certifications were retained and available for review. Additionally, procedures were not in place to monitor compliance with annual reporting requirements. Effect: Failure to prepare, submit, and retain required Rural Development reporting documents may result in noncompliance with loan agreement provisions and USDA Rural Development regulations. The absence of these documents limits Rural Development's ability to assess the project's financial condition, operational performance, and compliance with applicable program requirements. Additionally, the lack of documentation impairs the ability of auditors to verify compliance with federal reporting obligations. Auditor’s Recommendation: Management should establish procedures to ensure all required Rural Development annual financial reporting forms and certifications are prepared, submitted timely, and retained in the project's records. These procedures should include maintaining copies of Forms RD 3560-7, RD 3560-10, the Borrower Certification of Performance Standards, and related submission records to demonstrate compliance with USDA Rural Development reporting requirements. Grantee Response: Current management acknowledges the finding and will follow the auditor’s recommendation.