Michigan Instruction HB-1-3550

Appendix 7

**CONCERNS OF THE MANAGEMENT CONTROL REVIEW FOR THE SECTION 504 LOAN AND
GRANT PROGRAM**

I.  **General:** This instruction addresses concerns raised as a result
    of the FY 2005 Management Control Review for the Section 504 Loan
    and Grant Program.

II. **Paragraph 12.3:** Once the application is accepted, the Loan
    Originator is required to record the date the application is
    received. HB---1-3550, 3.5 clearly states applications must be date
    stamped when they are received. This date is used to track priority
    for processing. The Loan Originator must review all applications
    received within 30 days to determine whether, based on unverified
    information the applicant appears to be eligible for the program. If
    a determination of eligibility cannot be made within 30 days after
    the receipt of a completed application, or there are additional
    delays in processing an application, the applicant must be notified
    in writing of the circumstances causing the delay and the
    approximate time needed to make a decision using the appropriate
    handbook letters in HB-1-3550. A current copy of the appropriate
    letter must be placed in the applicant's file.

III. **Paragraph 12.4 (A)** : When income determinations are made, it is
     essential that the Loan Originator properly calculate income and
     considers incomes from the appropriate household members. In most
     cases, HB 3550-1, Attachment 4-A, which provides a Sample Worksheet
     for Computing Income can help calculate each type of income
     manually. The annual income calculation includes incomes from all
     household members. Adjusted income is calculated by subcontracting
     any deductions that apply to the household from annual income. For
     repayment income, the Loan Originator must consider only the income
     of household members who will be a party to the note. The annual,
     repayment, and or/adjusted incomes must be verified, calculated,
     and documented properly.

IV. **Paragraph 12.4(D):** In determining repayment ability, the Loan
    Originator must work with the applicant in completing a realistic
    Budget and/or Financial Statement, which includes all debts as
    stated on the application, financial statement or credit bureau
    report. When determining repayment, the budget must consider and
    account for items such as non-cash benefits, (food stamps,
    scholarships, free clothing, meal on wheels, free transportation,
    etc.) which help reduce the applicant's budgeted expense.

V.  **Paragraph 12.4(D):** We are responsible for working jointly with
    the applicant/borrower in preparing and/or reviewing the budget in
    determining repayment ability for a 504 loan/grant. The Loan
    Official should attempt to reach a consensus on the actual and
    planned monthly expenses that the

PN 816 (8/8/06) 66

> applicant/borrower spends or proposes to spend for the next 12 months.
> If
>
> there are disagreements on certain expense items, a thorough
> discussion
>
> should be held and negotiation should occur. If consensus cannot be
> reached,
>
> the Loan Official should thoroughly document the reasons by line item.
> The applicant should provide written documentation to justify the
> expense in question. Any deviations or changes in the entries on the
> budget must be dated and initialed both the the Loan originator and
> applicant.
>
> Attached is a copy of the official USDA Food Plans that will be
> helpful in developing realistic food budgets for our applicants. This
> file may be accessed on the Center for Nutrition Policy and Promotion
> (CNPP's) home page at:
> [http://www.cnpp.usda.gov](http://www.cnpp.usda.gov/)

VI. **Paragraph 12.3:** The Loan Originator is required to visit the
    property within 30 days of the receipt of the completed application
    to identify which repairs are essential. Photographs are needed of
    the property and essential repairs to clearly identify health and
    safety hazards during this initial visit. The Loan Originator is
    required to provide the applicant with a detailed set of
    specifications, which will be utilized to solicit at least three
    bids when feasible.

> Property values should be estimated and there should be documentation
> as to the method used to arrive at the value of the property. Also,
> case files should show that the health and safety hazards have been
> removed or to verify the before and after conditions following the
> completion of repairs. There should be documentation in the case files
> to indicate there are a limited number of contractors in the area.

VII. **Paragraph 5.22**: Acceptable repair bids must include a complete
     breakdown on materials and labor and describe the quantity,
     quality, size, grades, styles, and model number to clearly identify
     the work and materials to be furnished.

> Prior to any actual construction, a preconstruction conference must be
> held with the borrower and contractor to ensure all parties understand
> what work is to be included in the contract, payments, inspections,
> warranties and other relevant information.

VIII. **Paragraph 12.9**: In order to ensure that applicants do not
      receive more than the maximum allowable grant assistance of
      \$7,500, the Loan Originator must document the amount of any grant
      provided to each grantee. A list of previous grant recipients is
      required to be maintained in the operational files and new
      applicants are checked against this list. In additional, the
      applicant's social security number on the application must be
      confirmed to ensure previous grants have not been made using an
      incorrect social security number.

> PN 816 (8/8/06) 67

IX. **1902-A** : Supervised Bank Accounts (SBA's) are used to assure the
    correct expenditures of all or a part of a loan and grant fund.
    SBA's are established in accordance with RD Instruction 1902-A,
    unless proceeds are disbursed to the contractor in full when the
    work is complete and has been inspected. All SBA accounts must be
    properly monitored.

> Program Directors should ensure that field offices are trained in the
> correct use of SBA's outlined in the above instruction. There must be
> a paper trail reflecting all transactions. When one lump sum payment
> is needed, funds should be obligated, without using a SBA. Checkbooks
> for SBA must be kept in a secure, locked file cabinet or office safe
> and a borrower should never sign blank checks.
>
> Funds from leveraged sources should not be commingled with 504 funds.
> These funds should be tracked separately.

X.  Chapter 12 : Grant funds are only available to eligible homeowners
    age 62 and over for the purpose of removing identified health or
    safety hazards, or remodeling dwellings to make them accessible to
    household members with disabilities. Section 504 loan funds are
    available for repairs to improve or modernize a home, make it safer
    or more sanitary, or remove health and safety hazards. The
    identified health and safety hazards should be separated from the
    loan improvements and other sources of partnerships.

  ----------------------- ----------------------- ------------------------
  Section 504 Grants      504 Loans               Partnership/Leveraging

  Health and Safety       Repairs for             Other sources of
  Hazards                 Improvements            Partnership

  Unsanitary Plumbing     Exterior and Interior   Weatherization Programs
  Conditions              Painting                

  Hazardous Electrical    Storm Windows           Community Development
                                                  Block Funds

  Sewer Line or Septic    Insulation              HUD's Funds
  Tank Failure                                    

  Unsafe Structural       Gutters and Downspouts  County and State
  Conditions                                      Agencies

  Code Violations         Carpet (only to remove  Community Action Groups
                          health and safety       
                          conditions)             

  Leaking Roofing         Replacement of sinks,   Non-Profit Organizations
                          toilets                 

  Faulty Heating          Floor covering          Churches
                          (replaced with like or  
                          similar material)       

  Installation of grab    Security Doors          Faith-based
  bars, railing and other                         organizations
  accessibility devises                           
  to assist the elderly                           
  and disabled                                    
  ----------------------- ----------------------- ------------------------

> PN 816 (8/8/2006) 68
>
> Chapter 12, 12.2A of the HB-1-3550: Handbook lists eligible purposes
> and restrictions for the use of Section 504 funds. Some examples of
> eligible purposes are follows:

-   Health and safety violation-foundation, structural, code
    deficiencies, etc.

-   Major system deficiencies -- heating system, electrical, plumbing,
    etc.

-   Interior and exterior deficiencies -- walls, ceiling, soffits, etc.

-   Weather and energy conservation -- storm windows and doors,
    insulation, weather stripping, etc.

-   Roofing, gutters, and downspouts

-   Improvements for accessibility to disabled persons-baths for
    wheelchairs access, installing wider doors, and exterior ramps.

The following are ineligible loan purposes:

-   Changes for aesthetic appeal

-   Air conditioning (only for medical reasons)

-   Satellite dish

-   Ceramic Tile

-   Carpeting (only to remove health and safety hazard) must be
    documented

-   Enlargement of windows such as bay windows

-   Sidewalk, driveway repairs (only to remove safety hazard) documented

-   Appliances such as ranges, refrigerators, washers/dryers, trash
    compactors and other appurtenances are not eligible for our program

-   Room additions (only for overcrowded conditions) must be documented

To justify the removal of health and safety hazards, the loan official
must carefully document the case file to explain the circumstances.

-   See HB-1-3550 and DLOS Training Manual. All required forms from
    UNIFI must be used and maintained properly and timely.

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