Congress established NSP to try to reduce inventories of foreclosed homes by providing funding to state and local governments to, among other things, acquire and rehabilitate or demolish foreclosed and abandoned homes. HERA allows grantees to use NSP 1 funds to establish financing mechanisms for the purchase and redevelopment of foreclosed homes and residential properties; purchase and rehabilitate homes and residential properties that have been abandoned or are in foreclosure in order to sell, rent, or redevelop them; establish land banks for foreclosed homes and residential properties; demolish blighted structures; and redevelop demolished or vacant properties. Land banks are governmental or nongovernmental nonprofit entities established, at least in part, to assemble, temporarily manage, and dispose of vacant land for the purpose of stabilizing neighborhoods and encouraging reuse or redevelopment of urban property. Land banks often acquire properties through tax foreclosures, intergovernmental transfers, nonprofit transfers, and open-market purchases but can also acquire them through foreclosure. In addition to these five eligible uses, HERA outlined the following key requirements for using NSP 1 funds, as follows: 1. All NSP 1 funds must be used within areas of greatest need as determined by grantees on the basis of the following factors: percentage of homes financed by subprime loans, and likelihood of a significant rise in the rate of foreclosures. 2. All NSP 1 funds must be used to benefit households with incomes at or below 120 percent of AMI. 3. At least 25 percent of NSP 1 funds must benefit households with incomes at or below 50 percent of AMI. 4. The sale, rental, or redevelopment of abandoned and foreclosed homes must remain affordable to the above income groups for the longest feasible term. 5. All NSP 1 funds must be used (obligated) by grantees within 18 months of their receipt. 6. All properties must be acquired at a discount established by HUD. 7. If a property is sold to an individual as a primary residence, the sale price cannot be more than the total acquisition and redevelopment costs. In October 2008, HUD issued guidance on implementing NSP 1 in a Notice in the Federal Register. With respect to the requirement that NSP 1 funds be used within 18 months, HUD stated, “funds are used when they are obligated by a state, unit of general local government, or any subrecipient thereof for a specific NSP activity; for example the acquisition of a specific property.” According to the Notice, funds are considered to be obligated for an activity when orders are placed, contracts are awarded, and goods and services are received. HUD specified that funds are not obligated for an activity when subawards (for example, grants to subrecipients or units of local government) are made. The Notice also stated that grantees must expend their NSP 1 funds within 4 years of receipt. In accordance with HERA, HUD established a required discount rate that would apply to any property acquired through NSP 1. Initially, HUD set the discount at 15 percent for grantees’ total acquisition portfolios but subsequently reduced it to 1 percent per property acquired. HUD reduced the required discount to provide grantees with more flexibility in acquiring foreclosed properties and to avoid the potentially adverse impact of discounts on neighborhood property values. Among other provisions, HUD required that each NSP- assisted homebuyer complete at least 8 hours of homebuyer counseling. HUD also required that NSP 1 grantees submit “NSP 1 action plans” in the form of substantial amendments to their existing CPD consolidated plan. HUD required grantees to identify in these plans areas of greatest need within their states or communities, approaches for implementing NSP 1 and expected program outputs, and plans for complying with key requirements. After grantees submitted these plans and HUD approved them, HUD executed grant agreements for NSP 1. NSP 1 implementation has a tight time frame (see fig. 1). For instance, HUD had to establish its formula for allocating funds 60 days after the enactment of HERA. As HERA linked NSP 1 to CDBG, HUD was able to take advantage of the administrative infrastructure of one of the federal government’s largest and most flexible community and economic development programs. Established in 1974, CDBG provides states and local entitlement communities—eligible metropolitan cities and counties—with funding to address locally determined community and economic development priorities. CDBG funds may be used to rehabilitate housing, improve infrastructure, provide job training, and fund nd other community-determined projects. other community-determined projects. Mr. Sept. Mr. Some examples include the building of community centers or firehouses, or repairing sewage treatment plants. foreclosed homes in each state or locality, subprime mortgages in each state or locality, and homes in default or delinquency in each state or locality. As required by HERA, all 50 state governments and Puerto Rico received an allocation of at least $19.6 million. HUD also allocated NSP 1 funds to local (city and county) governments. Figure 2 shows the total state and local government allocations for each state. HUD CPD is implementing NSP 1. CPD administers CDBG and other formula and competitive grant programs from its offices at HUD headquarters and 43 field offices located throughout the United States. The headquarters office sets program policy, while field office staff are responsible for a wide range of grant management activities, including annual reviews and approval of grantee action plans, execution of grant agreements, and monitoring of grant recipients. CPD’s monitoring of the CDBG program focuses on high-risk recipients. Each year, CPD sets a formal monitoring goal. For fiscal year 2010, the overall goal for CPD and each of its field offices was to monitor a minimum of 870 formula and competitive grant recipients. For each CPD program, field staff analyze potential risks for grantees in a number of areas, including: financial (size of grant, financial compliance), physical (physical control of assets), management (staff capacity), satisfaction (citizen complaints and grantee responsiveness), and services (meeting program objectives and progress). HUD modified the DRGR system for the purposes of collecting and maintaining information on NSP activities. DRGR is new to NSP 1 grantees and HUD field staff unless they had prior experience with Disaster Recovery Assistance grants, another program managed by CPD. In its NSP 1 Notice, HUD explained that no other reporting system was as flexible as DRGR and that statutory time frames did not allow sufficient time to develop a new system or modify an existing one to perfectly fit NSP. HUD’s key modifications to DRGR included: adding data fields to collect information specific to NSP, such as land removing drop-down menu selections for ineligible uses under NSP; and adaptations to enable grantees to designate whether properties had been resold or rented or were single- or multifamily. DRGR was set up to monitor grantees’ progress in implementing NSP 1 by tracking budgets, obligations, expenditures, and program outputs. DRGR also serves as a financial management system through which grantees obligate and draw down funds. At the beginning of NSP 1, grantees inputted their NSP 1 action plans into DRGR. In their actions plans in DRGR, grantees set up their budgets and performance measures for different DRGR activities that were linked to larger projects. The action plan serves as a template for required progress reports, or Quarterly Performance Reports (QPR), that grantees must submit to HUD field staff on a quarterly basis. QPRs show updated information on NSP 1 progress for grantees’ projects and activities listed in DRGR. For each DRGR activity, NSP 1 grantees complete data fields that include (1) the projected start date, (2) the national objective (the income group the activity benefits), (3) the responsible organization (either the grantee or a subrecipient), and (4) the activity type (e.g., acquisition, rehabilitation, demolition). For each DRGR activity, grantees must also include a narrative and output measures—for example, the number of housing units or properties acquired, rehabilitated, land banked, or demolished, or the numbers of households or persons benefiting from the activity. In addition, grantees must list the addresses of properties benefiting from the activity but are not required to include the amount of funds spent on each property in DRGR. In a June 2009 report, the HUD OIG concluded that DRGR was sufficient to collect the basic information that HUD needed to monitor NSP 1. In a September 2009 report, the HUD OIG reviewed selected controls within DRGR in order to examine whether funds were properly safeguarded. While the OIG did not find misuse of funds in their review, they did identify several weaknesses, including access policies and testing of transactions, that CPD staff have been addressing. HERA required NSP 1 grantees to obligate all of their funds within 18 months, creating a September 2010 deadline for most grantees. In order to obligate their funds, grantees had to satisfy certain conditions, including providing a specific property address and (where applicable) a detailed scope of work for rehabilitating, constructing, or demolishing a property. According to HUD guidance, grantees are considered to have obligated NSP 1 funds once they have placed orders, awarded contracts, received goods and services, or executed similar transactions that will require payment by the grantee. For example, funds for acquiring a property are considered obligated when the property seller accepts the grantee’s purchase offer. Data in DRGR indicate that the vast majority of the 309 NSP 1 grantees met their deadline for obligating funds. As a result, more than 99 percent of NSP 1 funds were obligated as of October 1, 2010.