Finding Text
2022-002: Special Tests (Significant Deficiency)
Federal Agency: U.S. Department of Agriculture (“USDA”)
Program Title: Section 538 Rural Rental Housing Loans
Assistance Listing Number: 10.438
Federal Award Source: Direct Funding
Pass-Through Entity: N/A
Pass-Through Identifying Number: N/A
Criteria – USDA’s program rules require that the Organization places restrictions on the monthly rent charged to tenants. Per the USDA handbook for the program, HB-1-3565 Chapter 8, section 5 Part E, the monthly rent for any individual housing unit, including any tenant-paid utilities must not exceed an amount equal to 1/12th of 30 percent of 115 percent of AMI (Adjusted Median Income) adjusted for family size based on the income limits set forth by USDA.
Condition – During our audit of the special test requirements over rent restrictions we noted that calculated monthly rent was not taking into consideration an estimate of tenant-paid utility costs (i.e., a utility allowance) to be paid by the tenant.
Cause – The finding appears to be the result of an oversight of the Section 538 program requirements and a breakdown in internal controls.
Effect and Context – Although there was no instance where a utility allowance was calculated as required, there also was no direct effect to tenants of section 538 properties. Per the sample of 40 tested out of 323 units, when the subsequently estimated utility allowance was deducted from the USDA approved rent limit (as defined above), the net USDA approved rent limit was significantly in excess of the actual rent charged to the tenant and therefore, the monthly rent charged to tenants was within the required limits. Our sample was a statistically valid sample.
Questioned Costs – None noted.
Recommendation –We recommend the Organization implement policies and procedures to be in accordance with USDA Handbook HB-1-3565, Chapter 8, section 5 Part E, specifically pertaining to establishing an estimate of tenant-paid utility costs when determining monthly rent for new tenants. We also recommend that this analysis be updated annually or when information is received from utility companies of a utility cost increase. This analysis should be properly reviewed and approved by an appropriate level of management to evidence compliance with the requirement.
View of Responsible Officials - We agree with the finding. We have implemented procedures to ensure compliance with rent restrictions dictated by USDA. See our Corrective Action Plan for the fiscal year ended December 31, 2022 for additional detail.