Core Issue: Funds meant for multi-family projects were improperly used for a vehicle refurbishment benefiting a related entity.
Impacted Requirements: Noncompliance with HUD regulations on the use of replacement reserve funds due to co-mingling of finances.
Recommended Follow-Up: Implement strict cash management practices to ensure operational separation between entities, possibly using a third-party line of credit.
Finding Text
Finding No. 2022-001 (Noncompliance) - ALN 14.155 Mortgage Insurance for the Refinancing of Existing Multi-Family Housing Projects Criteria: Funds withdrawn from the replacement reserve with HUD?s approval to purchase a vehicle, were used for refurbishment of an old truck that was on the books of another non-HUD funded related entity. Condition: Funds for operating the multi-family projects were co-mingled between related entities. Context: Audit procedures over compliance relating to special tests and provisions revealed non-compliance with respect to the use of funds withdrawn from the replacement reserve. Cause: The Organization co-mingled funds required to operate its various multi-family projects. Effect: The Organization was not in compliance with the requirements relating to withdrawal of funds from the replacement reserve as the amount was used for the benefit of a related entity which is not a permitted use of the funds. Recommendation: Management should avoid transfers of cash between entities and maintain an operational discipline to keep the operations of each entity separate by 1) being self sufficient or 2) implementing a third-party line of credit to cover peaks and valleys on cash flow. Response: Management concurs with the finding and is working towards operational discipline to prevent transfers between entities.