Audit Report on the Housing Development Corporation’s Administration of the Mitchell-Lama Repair Loan Program

AUDIT REPORT IN BRIEF

The Mitchell-Lama program was enacted by New York State to encourage the construction and continued operation of affordable rental and cooperative housing.  The City Housing Development Corporation (Corporation) holds first mortgages on approximately 75 Mitchell-Lama rental and cooperative housing developments.  In 2004, the Mitchell-Lama Preservation Program was created by the Corporation to encourage owners to keep their properties within the Mitchell-Lama program and thereby protect the tenants living in these developments.  As part of the Preservation Program, the Repair Loan Program makes financing available to owners and cooperative corporations for making necessary capital improvements on buildings in disrepair.  Upon entering the Repair Loan Program, a building must remain in the Mitchell-Lama program for the duration of the term of the loan or a minimum of 10 years.  The repairs must be approved by the Corporation in advance of making the loan.

The Corporation’s Asset Management division is responsible for administering the Mitchell-Lama Repair Loan Program.  Its Engineering group is responsible for monitoring the work and approving the release of loan funds.  Information about the Repair Loan Program (repair loan dollar amounts, project/property identifying information, and a brief description of the capital work) is recorded in an Oracle database.

A May 2006 policy report by the New York City Office of the Comptroller entitled “Affordable No More:  An Update” stated that as of November 2005, 4,112 rental units and 8,959 cooperative units citywide were preserved by the Mitchell-Lama Preservation Program.  As of the commencement of this audit, the Corporation had provided $72,782,134 in Repair Loan funding to 18 Mitchell-Lama properties.  (See Appendix I for a list of the projects.)

Audit Findings and Conclusion

The Corporation has been approving property repairs to be financed by the Repair Loan Program, and these approvals are being made by Credit Committee vote prior to the loan closing date.  Also, the repairs/improvements funded by the Repair Loans were performed in a satisfactory manner.

However, we found that Repair Loan funds totaling more than $10 million are not being used in accordance with the program criteria.  The audit found that Repair Loan funds are being used to reduce accounts payable, to pay off principal and/or interest of loans obtained from private entities, and to pay liens. 

• $2,369,717 was used to pay off non-repair accounts payable or accounts payable of an unidentified nature.
• $7,900,849 (which is 10.9 percent of all Repair Loan funding) was used to pay off private loans and accounts payable for prior repair work. 

The audit also identified a number of areas where controls and procedures could be strengthened.  Additionally, for six of 18 cases (33 percent), discrepancies were found between the loan closing dates shown in the listing extracted by Corporation officials from its database and those stated in the Loan Closing Memos.

Audit Recommendations

This report makes a total of six recommendations, including that the Corporation:

• Ensure that Repair Loan Funds are only used for new capital repair/improvement work or system modernization as per the program’s criteria; other uses should be denied.
• Develop guidelines as to how estimates should be presented.  These guidelines should address soft costs, contingencies, funding sources, and work item breakouts.    
• Develop formal procedures for reviewing and approving changes in project work scopes and/or funding. 
• Ensure that loan closing memos are prepared in a timely manner. 
• Develop guidelines to explain how to count superintendent-occupied units in specific situations. 
• Ensure that closing dates associated with Repair Loans are correct in its database system.

Corporation Response

In its response, the Corporation agreed with five recommendations and disagreed with one recommendation.  HDC stated, “Under the terms of the Board’s approval, the President of the Corporation is authorized to make repair loans subject to HDC Credit Committee approval . . . As stated in your report, all Mitchell Lama Repair Loans were made with Credit Committee Approval.  HDC therefore does not agree with your finding that funds were not used in accordance with program criteria.”