Finding 3820 (2023-002)

2023-002 – Significant Deficiency and Noncompliance – Required Payments to General Operating Reserve Department of Housing and Urban Development Assistance Listing Number 14.126 – Mortgage Insurance - Cooperative Projects Significant Deficiency and Noncompliance Category of Finding – Special Tests and Provisions Criteria - The Cooperative’s regulatory agreement with HUD requires monthly payments to a General Operating Reserve. Deposits are 3% of member carrying charges until the balance of the reserve exceeds 15% of current annual member carrying charges. The required deposit is then reduced to 2% of monthly charges until the balance of the reserve exceeds 25% of annual carrying charges. Condition - Deposits to the segregated account for the General Operating Reserve during the period ended February 28, 2023 were $5,437 less than the required amount for the year. Cause - The Cooperative inadvertently omitted making $5,437 of monthly deposits to the General Operating Reserve in 2023. The control in place to assure the required monthly deposits were made failed to work; however, a monitoring control identified the error and corrected the deficiency prior to the conclusion of the audit. Effect - The Cooperative was out of compliance with their HUD regulatory agreement at February 28, 2023, because the General Operating Reserve was underfunded. Recommendation - We recommend that the Cooperative implement a control process to ensure adherence to the regulatory agreement and make the required monthly deposits to the General Operating Reserve. Auditee’s comment - On May 18, 2023, prior to the conclusion of the audit, the Cooperative made a deposit of $5,437 to the General Operating Reserve to fund the reserve to its proper balance. The CFO of the management agent will implement a process to ensure deposits are made as required by the regulatory agreement. Status - Resolved Auditor’s non-compliance code - Z - Other Responsible party for corrective action – Craig Brinkman, CFO of Real Estate Equities Development, LLC (Management Agent)