Finding Text
Criteria: The mortgagor (Company) is required to establish and maintain a replacement reserve to aid in funding extraordinary maintenance and repair and replacement of capital items. The replacement reserve funds must be deposited in a federally insured depository in an interest-bearing account. An amount as required by HUD ($42,684 annually) will be deposited monthly in the reserve fund. Condition: During our testing, we noted that the Company made only six of the twelve required monthly deposits to the replacement reserve account during the audit period. As a result, the replacement reserve was not funded in accordance with HUD requirements. Cause: The Company changed management agents during the fiscal year. Effective controls were not in place to ensure the required monthly replacement reserve deposits continued to be made and monitored during the transition. Effect: The Company did not meet the replacement reserve funding requirement under the Capital Advance Program Regulatory Agreement requiring monthly deposits. Identification as a Repeat Finding, if applicable: Not applicable. Recommendation: The Company should implement effective controls to ensure required replacement reserve deposits are made monthly in accordance with the Regulatory Agreement.