City spending of federal funds prompts audit
Investigation reveals policy problems in Homebuyer Assistance program
Originally published in the Daily O’Collegian
Nearly $110,000 in federal funds intended to help poor Stillwater residents buy homes of their own was given to middle-class buyers who did not qualify to receive the money; an eight-week investigation of the city-run Homebuyer Assistance program by The Daily O’Collegian revealed.
As a result of The O’Collegian’s investigation, the state commerce department will audit the program Wednesday and could require the city; not the loan recipients, to repay the money to the state.
“We’ve got a serious situation,” said Scott Myers, state commerce department director of programs.
The Homebuyer Assistance program also gave nearly $39,000 in city funds not regulated by federal guidelines to homebuyers who would not have qualified as low-income if the rules had been applied. Among those buyers was the Homebuyer Assistance administrator, Shannon Morris, who received nearly $1,200 to help buy her $71,800 home even though she was $10,000 over what a federal oversight agency defined as low-income.
The administrator who replaced Morris in January 2004 said the city’s own Homebuyer Assistance guidelines were “vague in nature” until the City Commission approved the program’s first written policy in September.
Established six years ago, Homebuyer Assistance gives up to $3,500 in the form of a second mortgage to low-income homebuyers for help with down payments.
Since 1999, Homebuyer Assistance has provided $671,586 to Stillwater homebuyers. About 80 percent of the financing has come from Community Development Block Grants, which are administered and regulated by the Oklahoma Department of Commerce and the U.S. Department of Housing and Urban Development.
HUD sets income limits to control the distribution of CDBG funds. The money is intended for low- to moderate-income homebuyers, according to HUD policies.
However, an examination of recipient applications and program records provided by Stillwater’s Community Development Department indicates city officials ignored the HUD income limits and established higher limits by dividing Homebuyer Assistance into three plans: A, Band C.
In a telephone interview this past week, Morris agreed that she had approved loans for applicants over the HUD income limits but she contended the loans were permitted under federal guidelines.
A HUD official in Fort Worth, Texas, said Monday the federal agency would not comment on the Homebuyer Assistance program until after the state commerce department audit is completed.
Over the limit
The examination of city-provided records found $109,776 in loans was given to 33 applicants, or 18 percent of those who received CDBG funds, who did not have low- to moderate-incomes as defined by HUD guidelines. On average, ineligible recipients’ annual incomes were $6,966 over the federal limits.
For example, Morris in 2002 approved the applications of a Stillwater police officer and a firefighter, whose total incomes were both above limits. In an Oct. 18, 2002, letter to a state commerce official, Morris asked permission to approve their applications for CDBG-funded loans, saying they “clearly qualify for the program.” After examining the files, the policies of the City of Stillwater, the CDBG regulations and the HUD regulations, it is my opinion that there is no impediment” to providing the loans, she wrote.
According to the documents provided to The O’Collegian by the Community Development Department, the firefighter’s $36,633 total income was $14,233 over the HUD limit for a single-income household and the police officer’s $32,400 income was $3,600 over the limit for a three-person household.
In another instance, a couple was approved for a $2,219 loan, but their combined income of about $42,000 was about $17,000 over the HUD limit for a two-person household in Payne County, according to their application and the mortgage record filed at the Payne County Courthouse.
Applicants are required to report their monthly income in a section of the two-page Homebuyer Assistance application. Proof of that income, such as pay stubs and tax returns, is also required. The O’Collegian obtained copies of recipients’ applications, but not their pay stubs or tax returns, under the state Open Records Act.
The largest difference between an income limit and the actual income on an application was $21,368. Handwritten notes on that couple’s application indicate their combined income was $46,968.
Morris said the income information included on the applications was not necessarily accurate.
“I never went by what they put on their application,” Morris said in a telephone interview this past week. “When I go through and get copies of their pay stubs and their tax returns and all those things, that’s what I always go by.”
However, The O’Collegian investigation found that 18 of the 33 applications with an applicant reported income above HUD limits also had handwritten income calculations initialed by Morris that were still higher than the federal limits.
More handwritten notes indicated some applicants’ loans were given under Plan B, which The O’Collegian investigation found accounted for most of the applicants with incomes over the limit. However, the plan under which each loan was made is unclear because not all applications indicate the plan and because the city did not provide any list or database identifying which plan was used for each loan.
Plan not approved
Plan B will be at the heart of the dispute between the city and the commerce department.
Morris said city Community Development staff created Plan B after receiving applications from “a lot of people who were just barely over our income limits. ”
Recipients under Plan B had to buy homes in a southeast Stillwater target area outlined by city officials. Those applicants were allowed a higher income limit than those purchasing a home elsewhere in the city.
For example, the 2002 federal income limit for a one-person household was $22,400. Under Plan B, city officials disregarded that limit and set it at $40,000. Officials set a $50,000 limit for households larger than one person. In contrast, the federal limit for a two-person household that year was $25,600.
Morris said the commerce department was aware of those income limits, but commerce officials this past week said they could find no record of Plan B in the city’s CDBG applications and they were not aware of the plan. Morris said city officials assumed the commerce department approved of the income limits because the department never objected to the city’s application.
“We wouldn’t do anything without commerce approval,” said Morris, who left her Stillwater job in December 2003 to become CDBG coordinator for the city of Edmond.
Commerce officials said they obtained a document mentioning Plan B during a regularly scheduled audit of Stillwater’s CDBG programs but the document was not included in Stillwater’s grant application.
“It didn’t lead to thinking they were utilizing CDBG funds for anything but low-income individuals,” Myers said. “By rule, they can only utilize CDBG funds on low-income individuals. They cannot give it to a higher income person.”
Commerce officials said even if Plan B had been included in the application, it would not have been approved.
“If you’re doing homebuyer assistance, it’s based on your household income,” said Karen Adair, senior economic development specialist at the commerce department. “It’s not based on the target area because it doesn’t benefit the target area; it benefits an individual.”
Morris told The O’Collegian a clause in CDBG guidelines allowed city officials to give loans to some applicants who were over the limits. The clause says if a CDBG-funded project contributed to an area wide benefit, such as sidewalk improvements or new waterlines, in which 51 percent of the benefited people were low- to moderate-income, the rest of the CDBG money does not have to be used on low-income people. She said because Homebuyer Assistance contributed to an area wide benefit, Stillwater officials were within federal guidelines when issuing the loans to applicants with incomes above federal limits.
However, commerce officials said housing programs are not included in the 51-percent clause.
“It is not applicable to homebuyer assistance,” Myers said. “Each household has to be low income.”
Myers said housing programs have been excluded from the 51 percent clause for three decades because of the Housing and Community Development Act of 1974.
Plan B ended when the City Commission eliminated the target area on Feb. 7.
In 2002, the Stillwater Industrial Redevelopment Authority funded $45,261 in loans through Plan C of the Homebuyer Assistance program. Of that, $38,917 went to applicants with incomes more than HUD limits.
Morris said neighborhood revitalization was a higher priority under Plan C than providing loans to low-income homebuyers.
Because the redevelopment authority funded Plan C and the plan did not use “CDBG funds, Federal income guidelines do not apply,” Morris told the City Commission in a December 2001 report. This allowed the city to issue Homebuyer Assistance loans without adhering to HUD income limits.
Plan C set income limits of $40,000 for individuals and $70.000 for families. An income of $70,000 is about $44,400 above the low-to-moderate-income level set by HUD in 2002. HUD uses U.S. Census data when determining income limits for counties.
Morris, who was overseeing the Homebuyer Assistance program, received a $1,199 loan under Plan C in April 2002 to help with a down payment on her $71,800 home. Morris was single with a $32,400 income and no dependents, according to her application. The HUD income limit for a single-person household that year was $22,400.
Plan C focused on revitalizing four neighborhoods. Morris said many of her neighbors around the intersection of 10th and South West streets received Homebuyer Assistance loans.
“It really helped a lot of people who needed just that little push, like myself,” Morris said.
Morris, who was an intern at the city before being promoted to CDBG programs administrator, said she did not approve her loan application.
“I handed it straight over to (then-supervisor)
John Wesley,” she said. “We made sure commerce knew and our city manager knew just to make sure no one was going to point any fingers, and I did use a very small amount. I didn’t use the full amount, and I paid it back within months.”
In a written report, Wesley told the City Commission on Oct. 21, 2002, that because of Morris’ involvement with Homebuyer Assistance, her application was “reviewed by her supervisor and received additional scrutiny before being approved.”
The report did not mention Morris’ income.
In September, the City Commission approved the first written policy for the Homebuyer Assistance program.
“There’s a lot of gray areas within the Homebuyer Assistance,” said Jennifer Rieker, who administered the program from March 2004 until September. “This policy is to close some of those loopholes or things that were up to personal interpretation.”
Rieker left Stillwater for a job in Oklahoma City shortly before the policy was approved in September.
“We had program guidelines that were vague in nature regarding the income limits,” Rieker told a reporter in September. “(A written policy) gives city and staff the backbone to say, ‘This is what our policy is, we can’t deviate from that. It’s not up to my personal interpretation.’ It should never be.”
Rieker said the city did not inspect properties to ensure loan recipients lived at the homes and did not rent them to others.
“It’s hard to police almost 200 recipients,” she said.
To ensure compliance, Rieker said, the new policy includes a certification procedure. The single page document requires recipients to assure the city they live in the homes and are not renting to others. It will be mailed annually.
The O’Collegian requested copies of these certificates in October, but Community Development Director Paula Dennison said the city could not provide copies because the certificates had not been mailed.
Audit to begin
Myers said he thinks a high turnover rate in the city’s Community Development Department could have contributed to the confusion over which income limits should be applied under the Homebuyer Assistance program.
Two commerce department auditors will begin auditing all the city’s CDBG programs, including Homebuyer Assistance, on Wednesday.
“We’ll look at the process they used to determine who got the funds and if they met the guidelines,” said Gary Wesselhoft, a CDBG financial monitor who will conduct the audit.
Wesselhoft said that upon learning of The O’Collegian’s findings, commerce officials tried to determine if any possible exclusions existed that would have allowed Stillwater officials to give loans to people above the federal income limits.
“We fussed and cussed this down here, thinking, ‘OK, what about this, what about that,’ looking at, ‘Are there exceptions, loopholes?'” Wesselhoft said. “To our best understanding, no, there is not. It has to go to people of appropriate income guidelines, and if it doesn’t, it is considered an ineligible expense.”
The department has set no deadline for issuing a report from the audit.
“I’ll have to give them benefit of the doubt until I look at the transactions, and then if it is improper, it will be written up and they will be told to pay back funds to the Department of Commerce,”