Finding Text
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.