HOME INVESTMENT PARTNERSHIP PROGRAM. U. S. Department of Housing and Urban Development. North Carolina Housing Finance Agency

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1 APRIL State Project/Program: SINGLE-FAMILY REHABILITATION PROGRAM Federal Authorization: 24 CFR 92 U. S. Department of Housing and Urban Development North Carolina Housing Finance Agency Agency Contact Person Program Dick Smith-Overman (919) Agency Contact Person Financial Bobby Waring (919) Address Confirmation Letters To: Bobby Waring North Carolina Housing Finance Agency P. O. Box Raleigh, NC The auditor should not consider the Supplement to be safe harbor for identifying audit procedures to apply in a particular engagement, but the auditor should be prepared to justify departures from the suggested procedures. The audit can consider the supplement a safe harbor for identification of compliance requirements to be tested if the auditor performs reasonable procedures to ensure that the requirements in the Supplement are current. The grantor agency may elect to review audit working papers to determine that audit tests are adequate. I. PROGRAM OBJECTIVES The primary objective of the Single-Family Rehabilitation program ("SFR") is to make a long-term positive impact on the state's stock of standard affordable housing by encouraging the moderate, but comprehensive, rehabilitation of existing scattered-site single-family housing units owned or occupied by very low- and low-income, elderly or disabled households. II. PROGRAM PROCEDURES 1. General. Local governments, 501(C) (3) nonprofit organizations and regional councils of government are invited to apply to the North Carolina Housing Finance Agency ("NCHFA") for funding in Agency-designated counties under the Single-Family Rehabilitation ("SFR") program through competitive, quasi-annual funding cycles. Applications are rated and ranked based on past performance under like or similar projects and organizational capacity. Beginning with SFR06, funding will be made available to successful applicants proposing to serve Agency-designated counties across the state on a four year rotation. B

2 Successful applicants ("recipients") are contracted, through Funding Agreements, to operate the program within their service areas in accordance with published Program Guidelines, which vary from funding cycle to funding cycle. Recipients receive copies of the Program Guidelines as part of an Administrator's Manual which also contains copies of all required SFR report forms, loan documents, etc. (which also vary from cycle to cycle). The manual has tabs where Recipients should insert copies of their Application for SFR Funding, executed Funding Agreement, adopted Assistance Policy and all relevant correspondence. An alphabetical index is included for easy searching and cross-referencing. (References below to specific sections of the Program Guidelines are indicated by the letters PG followed by section and paragraph numbers, e.g., PG 3.2.) Recipients funded under more than one cycle (and their auditors) must take care to use the correct Guidelines, forms or documents for each individual cycle (referred to as SFR06, SFR07, SFR08 and SFR09). All Recipients should also ensure that any NCHFA letters or memoranda, which have the effect of amending Program Guidelines, are being heeded. Each cycle of SFR is funded from one or more of the following three resources: 1) the federal HOME Investment Partnerships Program ("HOME" -- CFDA ); 2) Stateappropriated funds designated as HOME program matching funds ("HOME Match"); and 3) the North Carolina Housing Trust Fund (more specifically, "Stripper Well" funds which can only be used for energy-efficiency measures G.S. 122E-60(d)). Program Guidelines and procedures for each cycle are designed to meet regulatory requirements of all funding sources used for that cycle. In the case of HOME, the SFR guidelines exceed minimum federal requirements (24 CFR 92) in numerous specifics such as in rehabilitation standards, income targeting, and reporting requirements. Likewise, the Recipient s adopted Assistance Policy may be more stringent than either Federal or state requirements. Where it is, this all-important document takes precedence. Recipients that are units of local government must comply with state conflict of interest statutes (G.S ). Nonprofits must comply with G.S. 143-C In addition, all recipients are subject to federal procurement standards requiring written conflict of interest policies (OMB circular A-102 for local governments and OMB circular A-110 for nonprofit agencies). Generally, recipients are constrained from organizational conflicts of interest or non-competitive practices among contractors that may restrict or eliminate competition or create the appearance of impropriety. 2. Monitoring of Recipients by NCHFA. In addition to remote monitoring through review of Activity Reports, NCHFA monitors recipient activity by assigning Rehabilitation Officers to work with all recipients, serving as "case managers" to ensure the success of their assigned projects. Case managers visit each recipient for on-site monitoring at least once during the course of their SFR project (see PG 3.11). A ten-page monitoring checklist guides the review, which includes a review of at least three SFR case files, plus thorough inspections of the three dwelling units those files represent. The emphasis is on the recipient's fidelity to their own written B

3 policies (their Assistance Policy, Procurement Policy, conflict of interest policy, etc.), and the appropriateness, completeness and cost-effectiveness of the rehabilitation process. III. COMPLIANCE REQUIREMENTS A. Activities Allowed or Unallowed Program funds may be used for three purposes only: 1) "Hard costs" (materials, labor, etc.) associated with the rehabilitation of eligible dwelling units; 2) "soft costs" for activities ancillary to the rehabilitation work (inspections, work write-ups, cost estimates, etc.); and 3) administrative costs accrued in the management of the SFR project in general. More specific definitions of these three cost categories are provided in the Program Guidelines at section 2.2, "Eligible Uses of Funds" ("PG 2.2"). Definitions vary slightly by funding cycle. Hard costs per dwelling unit cannot exceed a set total per unit. Recipients may set more stringent limits, in their adopted Assistance Policies, than program limits, which vary by funding cycle (see PG 3.2). Soft costs and administrative costs are limited, on a unit-by-unit basis, to a percentage of hard cost expenditures. For example, under SFR02, a recipient may claim up to 10% of hard costs on a given unit as soft costs, and an additional 7.5% of hard costs as administrative expenses. Thus, if the rehabilitation contract amount on a unit were $10,000, the recipient could claim up to $1,000 in soft costs and $750 in administrative expenses. Under SFR06, SFR07, SFR08 and SFR09, a recipient may claim up to 15% of hard costs on a given unit or a maximum of $5,000 as soft costs and an additional 10% of hard costs as administrative expenses. (Under SFR 06, SFR07 and SFR08, up to $5,000 in administrative funds may be spent and requisitioned prior to completing the first unit in the project. Under SFR09, administration funds may be spent and requisitioned following the execution of a Funding Agreement. However, $1,000 of administrative funds, per dwelling unit, will be held by NCHFA until all paper work necessary to close out an SFR project has been received by the Agency. While administrative funds are limited relative to total hard costs for completed units, it is not necessary to tie all administrative funds to specific completed units. Costs associated with targeted units that fail to be rehabilitated for whatever reason, may be recouped by spreading the cost over other units that are completed provided that the maximum per unit is not exceeded.) Expenditures are reported to NCHFA in detail, along with beneficiary demographics, etc., via quarterly Activity Reports, for SFR02 and via semi-annual reports for SFR06 and SFR07, and quarterly reports under SFR08 and SFR09 (supplied with the Administrator's Manual) on a unit-by-unit basis. Activity Reports cover even calendar quarters and are due at NCHFA by the last day of the 1 st month of each new quarter under SFR02, SFR08 and SFR09 (PG 3.10 has been amended by a memo dated 9/23/03). Under SFR06 and SFR07, Activity Reports cover 6 month durations (4/1 9/30 &10/1 3/31). Beginning with the cycle of the Program (SFR2000), the reporting system has been automated, with recipients receiving computer discs holding the reporting system as a Microsoft Excel file. The recipients are required to complete a computerized 2-page B

4 Unit Completion Report (UCR) for each unit as it is completed. The UCR is then printed off and submitted within 60 days as the cover sheet to SFR loan documents (that have been assigned to NCHFA). UCR data is automatically transferred to the Activity Report form which it is printed and submitted to the Agency at the end of each calendar quarter for SFR02, SFR08 and SFR09, and on the dates specified at the end of the above paragraph for SFR06 and SFR07. Recipients under SFR99 were given the option of using the automated reporting system, or using the system developed for SFR98. Verify through a review of documentation that hard cost disbursements match those reported on Activity Reports, and that SFR funds disbursed by the recipient were used exclusively for eligible rehabilitation hard costs, soft costs and administrative expenses. B. Allowable Costs/Cost Principles See paragraph III.1. "Activities allowed or unallowed", above. The costs of any activities other than the three eligible activities hard costs, soft costs and administration are unallowed (including assistance to rental properties). See PG 2.2 for specific breakdown of eligible costs by category. C. Cash Management The use of multiple funding sources to support funding cycles prior to SFR2000 created a somewhat complex situation with regard to cash management. (See Section 3 of the Program Guidelines for those cycles, "Program Financial Administration".) Where HOME Match or Housing Trust Funds are involved, funds are fronted to recipients in quarters of the total available. Those funds must be held in an interest-bearing account and accounted for separately. Where HOME funds are involved, recipients must establish a separate account and disburse all funds within 12 days of receipt from the Agency (PG 3.3). See (c)(2) of the Home Regulations. HOME funds are disbursed on a reimbursement basis only, so any interest earned on HOME deposits should be minimal. Under funding cycles funded by a combination of HOME and Housing Trust Funds, or HOME and HOME Match funds, two different systems are used to requisition funds from NCHFA. Typically, HOME Match and Housing Trust Funds are requisitioned by checking a box at the bottom of the first page of an Activity Report. Recipients are eligible to check this box when their balance of program funds on hand is less than the greater of $5,000 or 10% of all program funds received to date. On the other hand, HOME funds are requested on a separate requisition for Home Program funds form. A detailed Invoice Log must be attached to each requisition to account for the disposition of all funds requested. D. Davis-Bacon Act All housing units assisted by SFR recipients are owner-occupied, therefore Davis-Bacon Act labor standards do not apply at the local level. B

5 E. Eligibility Recipients must maintain on file third-party documentation that all homeowners benefiting from program assistance have household incomes below 80% of the area median. (A chart in the Administrator's Manual lists the income levels by household size.) In addition, recipients' selection of beneficiaries must be done in accordance with their adopted and NCHFA-approved Assistance Policies (see PG 4.1) which typically specify more stringent income targeting, as well as targeting assistance to households with special housing needs, such as elderly, disabled, single-parent, etc. (Note: Under SFR06, SFR07, SFR08 and SFR09, only elderly and /or disabled owner-occupants or homeowners with households with one or more elderly and/or disabled fulltime household members are eligible for SFR assistance) Income eligibility is based on anticipated annual income as defined at section 2.4 of the Program Guidelines (PG 2.4). NCHFA on-site monitors will review income verification procedures and documentation during their review. F. Equipment and Real Property Management Acquisition of equipment or real property with SFR program funds is not an eligible use of funds; therefore, federal guidelines on equipment and real property management do not apply at the local level. G. Matching, Level of Effort, Earmarking Level of effort is monitored by the Agency through quarterly (SFR02, SFR08, SFR09) or semi-annual (SFR06, SFR07) activity reports and on-site monitoring visits. Typically, there is no penalty for recipients failing to meet their production goals except loss of program funds when the contract period has ended and a ratings penalty for any future applications for funding. Under earlier SFR cycles (SFR98, SFR99, SFR00 and SFR02), a minimum percentage (typically 50% to 70%, depending on the cycle) of beneficiaries must be below 50% of area median income. In addition, recipients are expected to serve households with special needs, such as the elderly, handicapped, large households (5 or more), and singleparent households, in at least the proportion specified in their approved application for funding. Under SFR06, SFR07, SFR08 and SFR09, all beneficiaries must be below 80% of area median income. Agency case managers monitor compliance through semi-annual activity reports (SFR06, SFR07) or quarterly activity reports (SFR08, SFR09). Verify through a review of documentation that any matching funds reported on quarterly activity reports actually contributed to the reported rehabilitation job(s). B

6 H. Period of Availability of Federal Funds Funding Agreements allow Recipients a maximum of 24 months to complete their SFR projects. All rehabilitation hard costs must be obligated to specific rehabilitation jobs by the end of the 21-month period (the Date of Completion). Recipients then have 90 additional days in which to complete all project activities, submit a Certification of Completion and Final Cost form to NCHFA (on the form provided in the Administrator's Manual), and return any unused program funds, including interest earned on SFR deposits. I. Procurement and Suspension and Debarment As with selection of beneficiaries, SFR procurement requirements (PG 3.7) emphasize having a written policy and a fair, open and competitive process. Most SFR rehabilitation work is accomplished by eligible private, for-profit construction contractors, which are procured through competitive sealed bids. Where this is not the case, recipients must submit written procurement standards to NCHFA for prior approval (to use staff labor and supervision, etc.). In all cases, written contracts must be used. See section 4.2 "Rehabilitation Procedures" for details of SFR procurement requirements. The integrity of the recipient's procurement process is reviewed by NCHFA's on-site monitors when competitive bidding is used, but not when staff labor is used. Verify that recipients who use staff labor for construction work are following competitive procurement practices for materials and tracking job costs as appropriate. J. Program Income SFR loans to homeowners are to be made by the recipient, then assigned to NCHFA (PG 4.4), thus no income from loan repayments should accrue to recipients. However, SFR funds received from NCHFA must be deposited in interest-bearing accounts. SFR funds from the Housing Trust Fund and Match are disbursed in 25% or 50% increments. The first disbursement is made soon after the Funding Agreement is executed. Subsequent disbursements are made only after existing funds on hand have been reduced to a certain level (which varies from funding cycle to cycle. The interest earned on such deposits is deemed program income and is considered part of the recipient's SFR allocation. Interest income may be used for program-eligible activities during the SFR performance period. Any balance of (unused) interest income must be remitted to NCHFA with the recipient's Certification of Completion and Final Cost (PG 3.4 and PG 3.12). SFR funds from HOME are disbursed on a reimbursement basis, so no interest should accrue. When SFR funds are deposited with other funds, verify that an appropriate share of the combined interest earnings is being credited to the SFR project. B

7 K. Real Property Acquisition and Relocation Assistance Real property acquisition is not an eligible activity under SFR, nor is permanent relocation. Temporary and voluntary relocation may occur when the scope of rehabilitation work includes lead-hazard reduction activities that might create a temporarily unsafe environment. Certain eligible relocation expenditures are detailed in section 2.7 of the Program Guidelines. L. Reporting Recipients must submit a Unit Completion Report within 60 days of completing each rehabilitation job (i.e., within 60 days from the date on the check for the final disbursement on a dwelling unit), and an Activity Report semi-annually for SFR06 and SFR07 and quarterly for SFR02, SFR08 and SFR09 regardless of their level of activity. Within 90 days of their Date of Completion, they must submit a Certification of Completion and Final Cost report (PG 3.10). NCHFA case managers review these reports carefully upon receipt. M. Subrecipient Monitoring NCHFA staff will monitor recipient performance in accordance with P.G Recipients are required to monitor staff and contractor performance in accordance with P.G Recipients must also ensure that contractors are neither suspended nor debarred. N. Special Tests and Provisions As with all rehabilitation work, construction contract amendments ("change orders") are commonplace with SFR-funded work. Because change order prices are negotiated outside of the competitive arena, they present a challenge to recipients' systems of internal control. It is a must that more than one recipient staff member approve each change order, and that some test of cost reasonableness be applied. Verify that an adequate system of internal controls is in place to ensure against impropriety with respect to change orders. B