(ATTORNEY GENERAL SETTLEMENT 2012) North Carolina Department of Justice

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1 APRIL 2014 State Project/Program: NATIONAL MORTGAGE SETTLEMENT PROGRAM (ATTORNEY GENERAL SETTLEMENT 2012) North Carolina Department of Justice Authorization: United States of America, et. al. v. Bank of America Corp., et. al., Civil Action No General Assembly of North Carolina, S.L North Carolina Housing Finance Agency Agency Contact Person-Program Mary M. Holder (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 auditor 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. Auditors may request documentation of monitoring visits by the State Agencies. I. PROGRAM OBJECTIVES The 2012 National Mortgage Settlement ( Settlement ) is the outcome of multi-year work between state attorneys general. Funded by contributions from the five, leading mortgage servicers (Ally/GMAC, Bank of America, Citi, JPMorgan Chase, and Wells Fargo) at $25 billion, the Settlement offers much-needed assistance to distressed homeowners. While the majority of the direct benefits the Settlement offers to homeowners will be overseen and handled directly by the servicers, a portion of the Settlement s proceeds was awarded to states to fund local priorities. In North Carolina, the North Carolina Housing Finance Agency ( Agency and NCHFA ) was asked by the Attorney General to oversee disbursement of $30.7 million ( Settlement or Program ), which will be used to support legal assistance services, to support the state s Housing Trust Fund, and to build the capacity of housing counseling agencies. C-4 NCHFA-2 1

2 The primary purpose of this funding is to build the human capital, training, technology, and marketing and outreach capacity of HUD-approved housing counseling agencies providing foreclosure prevention counseling to distressed homeowners, and to support the consumer protection and foreclosure prevention work of designated legal service partners. The Settlement s consent order puts special emphasis on the benefits available to eligible households. Funded agencies approved for this demonstration must be able to assist homeowners with getting access to refunds and the benefits specifically outlined in the language of the Settlement. Settlement benefits to existing homeowners whose loans are serviced by the five servicers associated with the Settlement include, but are not limited to: 1) reducing principal balances on loans where borrowers are delinquent or at risk of default and owe more on their homes than what they are worth ( underwater ), 2) refinancing for borrowers who are current on their mortgages, but owe more than their homes are worth ( underwater ), 3) principal forbearances for borrowers who are unemployed, 4) short sales, 5) assistance during transitions, 6) stipulations to prevent blight, 7) service-member benefits, and 8) servicing standards and requirements. Settlement benefits to eligible homeowners whose homes were sold or taken into foreclosure between January 1, 2008 and December 31, 2011 include restitution cash payments. II. PROGRAM PROCEDURES 1. General. Housing Counseling Agencies. In July, 2012, the North Carolina Housing Finance Agency invited sixty-two, nonprofit housing counseling agencies approved by the U.S. Department of Housing and Urban Development with experience in providing in-person, foreclosure-related housing counseling to express interest in participating in the North Carolina Housing Finance Agency s National Attorneys General Settlement-funded capacity building demonstration. Interested agencies were asked to submit proposals and requests for funding according to the published Guidelines for Proposals and Requests for Funding to address four, capacity building focus areas: Human Capital, Training, Technology, and Marketing (i.e., outreach to Settlement benefit-eligible households and clients in need of housing counseling services.) In August, 2012, proposals and requests for $34.3 million in funding ( applications ) were received from 77% of the invited agencies. The respondents represented both urban and rural service delivery areas, good geographic coverage of the state, and organizations of large and small size. The Agency had $13.97 million available to allocate to maintain housing counseling services in existing counties, expand housing counseling services into underserved counties, train new counselors, improve technology, and support outreach to borrowers eligible for Settlement benefits from their servicer or in need of housing counseling services. Individual agency funding requests were adjusted to ensure uses were appropriate, met the Agency s understanding of the intent of the Settlement. C-4 NCHFA-2 2

3 In its review of interested agencies proposals and requests for funding, the Agency considered each counseling agency s ability to: 1) provide NCHFA with a HUD 9902 Form and other data related to counseling, by activity, funder, and/or outcome; 2) access and properly enumerate current capacity building needs (e.g., human capital, technology, training, marketing), as compared to best scenario capacity levels; 3) substantiate and explain specific ways how addressing capacity building needs at best scenario levels will positively affect the provision of counseling services, efficiency, production, sustainability, service delivery area penetration, relationships with mortgage servicers; 4) quantifiably demonstrate how capacity would increase and how capacity building funding would positively affect, improve, or expand the following for each organization: a) counseling services, b) organizational efficiency, c) ability to assist more homeowners effectively with making housing decisions, d) ability to maximize mortgage servicer restitution refunds to homeowners from the Settlement, e) ability to resolve more mortgage delinquency issues with effective outcomes for homeowners (lower interest raters, loan modifications, other options), f) ability to facilitate more effective relationships with mortgage servicers, g) ability to compliment other foreclosure prevention programs, and h) ability to leverage other funding sources (counseling, operations, etc.) 5) track how funding for capacity building will be used 6) provide regular (e.g., semiannual) reports, data analysis, and single tracking of use of funds, linking specific activities, outcomes, and/or achievements to the availability and receipt of this particular funding source 7) meet other program or related requirements, including but not limited to: a) being in operation for at least four years, b) being financially stable as supported and evidenced by audits and other financial documents, c) having staff with at least three years of foreclosure prevention counseling experience, d) having an office that is handicapaccessible and open during appropriate, business operating hours and e) having sufficient insurance and resources to conduct business with the public. The Agency s relationship with participating housing counseling agencies is governed by a Funding Agreement, which outlines requirements for program funding, disbursements, reporting and other provisions like conflict of interest, adequate insurance coverage, and fiscal responsibility/recordkeeping. Approved, submitting housing counseling organizations that met program threshold criteria for organizational capacity and program standards remain eligible for multiyear participation as long as funds are available and approved counseling or legal service agency remains in compliance. C-4 NCHFA-2 3

4 The Agency refers to this demonstration as the Housing Counseling Capacity Building Program, funded by the 2012 National Mortgage Settlement. Legal Service Agencies. The legal services partners ( legal service agencies and legal service providers ) participating in this demonstration were not a part of the same selection, application, and proposal review cycle as the housing counseling agencies. The legal services partners were selected by the NC Department of Justice prior to the Agency s involvement in the program and more specifically before the Agency was asked to administer the funding for housing counseling agencies and act as the fiscal agent for disbursing funding to the legal service partners. While some of the details were clarified with the Agency s input, the North Carolina Department of Justice in general oversaw eligibility, selection, and funding amount decisions and established most of the program requirements and expectations for legal service agencies funded under the Settlement prior to the Agency s involvement. The legal service partners are 1) Legal Aid of North Carolina and two state universitybased consumer protection law clinics at 2) North Carolina Central University and 3) the University of North Carolina at Chapel Hill. Their relationships with the Agency will be governed by Memoranda of Understanding, which will outline their scope of funded work, requirements for funding disbursements and reporting, and other program provisions. At the time of submission of this report, the details related to this part of the funding, the program, and the memoranda themselves were still being finalized. The Agency refers to this demonstration as Legal Services, funded by the 2012 National Mortgage Settlement. Other. A portion of the funding will be directly governed and administered by the Agency in an effort to oversee and offer training for the housing counseling network statewide. The agency has provided global industry training for counselors across the state in the amount of $340, Program Model and Compliance. In general, the disbursement of these Settlement funds to housing counseling agencies and to the legal service agencies does not follow an outcome-based, fee for service model of funding tied to a specific, loan-related outcome, housing counseling session or legal services activity, or prescribed, unit-level billing method. The Settlement funding s use in North Carolina is intended to support the breadth of efforts that allow the network of counseling and legal service providers to meet the needs of foreclosure-affected communities. Further and as far as compliance, any participating agency that receives and expends $500, or more in federal funds during the fiscal year or who are institutions of higher learning established by the State of North Carolina must comply with OMB A-133 C-4 NCHFA-2 4

5 requirements. In addition, agencies that are non-profit organizations will be subject to the administrative requirements of the OMB Circular A-110 as it may be amended and A- 122, and will also be required to submit compliance reports required under N.C.G.S. 143C Local government awarded agencies must comply with all requirements of the Local Government Commission. As the National Mortgage Settlement is a fixed Settlement, the one-time funding awarded to the Agency is a time-limited funding resource. There is only one funding and application cycle for this program. The period of performance for this program is from October 1, 2012 through June 30, Monitoring of Sub-grantees by NCHFA. The Agency will receive production/activity and expenditure reports manually submitted (monthly from the housing counseling agencies and annually from the legal service providers). The production/activity content of the report will outline the activities undertaken in the four focus areas (for housing counseling agencies) and by the legal services agencies (Legal Service of North Carolina and the two law clinics) for a specific reporting period. The expenditure-related content of the report will include invoices and specific documentation for program activities undertaken and direct cost expenses incurred. This is what allows the Agency to provide reimbursement to the awarded agencies for program-related activities. III. COMPLIANCE REQUIREMENTS 1. Activities Allowed or Unallowed Housing Counseling Agencies. Program funds may be used by the housing counseling agencies for four purposes only: 1) Human Capital, 2) Training, 3) Technology and 4) Marketing. In general, funding is not allowed for activities that do not meet the Agency s interpretation of the intent of the Settlement or definition of the best use of funds. Counseling agencies are required to closely carry out funded activities according to their proposal and funding request approved by the Agency, and must also request pre-approval before undertaking expenses across the four focus areas. More detail on this can be found in the Funding Agreement and the Guidelines for Submitting Proposals and Funding Requests provided to the housing counseling agencies. The funding is designed to support direct costs associated with and allowable under the Human Capital focus area (i.e., recruiting, hiring, or training counseling staff or other personnel to provide direct housing counseling services, improve intake and appointment setting, improve compliance and reporting, meet demand, or expand services.) Maintaining existing staff capacity to continue current counseling activity that is C-4 NCHFA-2 5

6 consistent with the objectives and benefits of the Settlement is also an allowable use of funds. The following items are unallowed under the Human Capital Focus Area: 1) rent/lease, purchase, expansion or retrofit of office space; 2) utilities; 3) membership and subscriptions; 4) postage; 5) insurances and other administrative expenses; 6) office furniture and fixtures; 7) merit increases/raises; 8) program-specific supplies; 9) full funding of counseling staff without reason; 10) accounting, finance, management, or other support, coordinator or operational positions that do not directly result in outreach to Settlement-eligible households or potential counseling beneficiaries and/or focus on oversight of AG-funded activities; 11) expansion to counties the Agency determines are adequately served; 12) legal-related activities. Secondly, the funding is designed to support direct costs associated with the Training focus area. What this includes is funding for existing or newly hired staff participate in approved in or out-of-state training conducted in person, on site, or online. Allowable training includes but is not limited to the following topics and skills: 1) foreclosure prevention counseling, 2) pre-purchase counseling, 3) working with existing properties, 4) neighborhood revitalization, 5) specific housing counseling skills, 6) using the Microsoft Office Suite, 7) understanding the Hope LoanPort, 8) using Housing Counselor Online, 9) use of CounselorMax, 10) using other housing counseling software, 11) understanding HUD s Forms or its Notice of Funding Availability process, 12) conducting reverse mortgage counseling, 13) preparing to take the national reverse mortgage counseling exam, 14) understanding mortgage loan servicing procedures and regulations, 15) learning to work more effectively with mortgage servicers, 16) administering NCHFA foreclosure prevention programs, 17) developing better fiscal management, and 18) managing a housing counseling program or nonprofit organization. Funding also can be used to subsidize expenses (i.e., scholarships) for out-of-state training and travel, in-state training and travel, and specific housing certifications. The following items are not allowed as an eligible use of funds under the Training focus area: per diem and training for volunteers, board members, and/or consultants. Thirdly, the funding is designed to support direct costs associated with Technology. In other words, funding can be used to enhance technological tools and access to help further a housing counseling agency s staffing, service delivery efficiency, training, reporting and tracking, and marketing capacity, as well as for technological capacity building that supports or in a measureable way assists with reaching or providing services to households eligible for Settlement benefits. Allowable uses include but are not limited to: 1) acquiring (by lease or purchase) software, equipment, and/or related services associated with the agency s counseling operations (e.g., client services, marketing, compliance, reporting and/or communications with external partners). Examples of allowable expenses include equipment like laptops and monitors, software applications like counseling software or that assist with website development, and information technology maintenance costs. Unallowable expenses include: 1) cell phones, 2)Ipads/tablets, 3) laser pointers, 4) new phone systems (upgrades are allowed), 6) social and electronic media available at no charge; 7) toll-free phone numbers and ongoing service; and 8) excessive requests for ongoing technology expenses (e.g., website maintenance) where sustainability beyond program is not demonstrated. C-4 NCHFA-2 6

7 Finally, the funding is designed to support direct costs associated with counseling agencies employing Marketing strategies that would impact their ability to reach more households eligible for the refunds and benefits offered by the Settlement, as well as other housing counseling services. Allowable marketing activities include: in-person outreach, communications through print, social and electronic media, advertising, and other marketing approaches. Marketing and outreach-related expenses not allowed under the program include: contractual or other work with a professional marketing firm only for general or comprehensive local counseling agency marketing and branding; funding annual outreach, marketing or fundraising events; and annual reports. Legal Service Agencies. The program allows the legal service providers to utilize their funds for consumer protection and foreclosure prevention legal services and related activities. In general, the disbursed program funds are designed to augment organizational capacity and link future disbursements to the ongoing achievement of each agency s projected program goals. It is expressly understood that the Agency reserves the right to adjust disbursement schedules and award amounts if (i) the awarded agency is providing services at a pace slower than projected (ii) if there is any change in the Agency s draw schedule or (iii) if the awarded agency, in the sole discretion of the Agency, is not in compliance with any of the terms of the Funding Agreement, including not expending funds at all or expending for ineligible uses. If applicable, some disbursements may only be issued upon the conclusion of a satisfactory audit performed by the Agency. If awarded agency is audited and the audit results are unsatisfactory, disbursement of funds may be suspended until such findings are addressed and corrected. Finally, program funds cannot be provided directly to lenders, homeowners, or other interested parties. Suggested Audit Procedure The counseling agencies must submit a monthly progress and expenditure report to the Agency by the 10th of each month. The progress and expenditure reports are designed to update the Agency (monthly for housing counseling agencies and annually for the legal service agencies) on progress in expending program resources and each of the four focus areas. Each monthly report must consist of the following: 1) Monthly Grantee Program and Expenditure Report and2) Supporting documentation for report, including information as may be required by the Agency in connection with request for funding and/or reimbursement. There will be a review of documentation and awarded agency records of expenses incurred as compared to monthly reports, funding disbursements and requests for pre-approval. The objective is to ensure that program funds were used exclusively for eligible, allowable program activities from the four focus areas. C-4 NCHFA-2 7

8 For the legal service providers, there is an annual reporting process. It will include a review of documentation to ensure the scope of, budget for, and expenses for anticipated work matches expenses were actually incurred and activities that were undertaken. 2. Allowable Costs/Cost Principal For Activities Allowed or Unallowed, see narrative in III.1 above. The program recognizes that the amount of expenses for allowable activities can vary by agency, region of the state where the services are provided or activities conducted, an awarded agency s access to other funding sources that can be leveraged, etc. As a result, there are not reasonable ranges provided for the allowable costs; however, the Agency does confirm the validity of expenses for which an awarded agency is requesting reimbursement or receiving funding by a review of documentation (e.g., receipts, invoices, audits) or reports from the awarded agency. The Agency also requires the housing counseling agencies to divide their funding award (at their discretion) between the four focus areas and determine how much of their award they want to fund each focus area. Housing counseling agencies and legal service providers will not be paid or reimbursed for expenses that exceed the amount of their total award. 3. Cash Management Housing Counseling Agencies. Program funds must be held in an interest-bearing account in a financial institution insured by the agency of the federal government, and any balance exceeding the insurance coverage must be collaterally insured (i.e., the financial institution must provide a letter stating that Government securities, up to the amount exceeding insurance coverage, have been set aside to insure payment of the excess deposit). The awarded agency is responsible for depositing program funds into a separate, interest-bearing account. Program funding is not meant to replace current or future fee-for-service arrangements between counseling agencies and servicers, lenders, or other interested parties. The Agency will disburse funds to the awarded agency provided it is 1) meeting certain program goals, 2) fulfilling certain agreed-upon activities, 3) providing monthly progress and expenditure reports for eligible costs, and 4) complying with program requirements. The program is designed to disburse funds monthly to counseling agencies on a reimbursement basis and after receiving monthly reports showing expenses the awarded agency has undertaken and covered. However, and as a way to assist with laying the groundwork for strengthening capacity, the initial disbursement of program funding was advanced in December, 2012 at an amount equal to 15% of the Agency s total award. This is the only foreseeable instance of advancing funding to housing counseling agencies as part of this program and is outlined in the Funding Agreement. C-4 NCHFA-2 8

9 Funds received by housing counseling agencies should be accounted for separately from funds received from all other sources. The accounting system must provide for: 1) accurate, current and complete disclosure of the financial condition and financial results of the program in accordance with the reporting requirements and funding Agreement; 2) records that identify adequately the source and application of funds for activities supported by the program. These records must contain information pertaining to program awards and authorizations, obligations, unobligated balances, assets, liabilities, expenditures and income; 3) effective internal control over, and accountability for, all funds under this Agreement; 4) comparison of actual expenditures with budgeted amounts for the project; 5) accounting records that are supported by source documentation (e.g., invoice, receipts, or contracts); and; 6) systematic methods to ensure timely and appropriate resolution of audit findings and recommendations. Housing counseling agencies should not use program funds in combination with servicer, investor, or other reimbursements when doing so is in excess of the agency s actual cost of implementing the program-eligible activity. Legal Service Agencies. The process for disbursing funds to the legal service agencies differs from the process for the housing counseling agencies and even differs between the legal service providers. The Agency will advance funding for the two law clinics in one disbursement for the period of performance in the amount of 100% of their funding award, upon receiving required organizational documentation (e.g., program budget, scope of work, W-9 form, compliance forms). The Agency will disburse funding to Legal Aid of North Carolina in equal monthly disbursements for the period of performance starting in the first quarter of 2013 and/or as governed by the MOU between the Agency and LANC. Legal service agencies should not use program funds in combination with servicer, investor, or other reimbursements when doing so is in excess of the agency s actual cost of implementing the program-eligible activity. Suggested Audit Procedure: Compare program invoices and monthly/annual reports submitted by the housing counseling agency or legal service provider with program funds disbursed by the Agency to verify that services and expenses incurred were equal to funds received. 4. Conflict of Interest Conflict of Interest. Housing Counseling Agencies. As part of the application review process, the Agency reviews copies of procedures, policies, and/or disclosures that (1) address maintaining consumer privacy and (2) govern conflict of interest, how each organization handles money, and organizational ethics. As outlined in the Funding Agreement, each housing counseling agency must provide a conflict of interest statement that addresses conflicts that may arise involving counseling agency s management, employees, and the members of its board of directors or other C-4 NCHFA-2 9

10 governing body. The policy shall address situations in which any of these individuals may directly or indirectly benefit from the use of program funds and shall include actions to be taken by the awarded agency or any individual, or both, to avoid conflicts of interest and the appearance of impropriety. The policy shall be in accordance with N.C.G.S. 143C In order to keep as many options as possible available to clients and households eligible for the benefits the Settlement offers, counseling agencies must not engage in exclusivity agreements with clients seeking foreclosure mitigation, delinquency, or other housing counseling or other interested parties such as servicers or lenders, nor shall they otherwise engage in practices which exclude other counseling agencies from working with its clients or its clients servicers or lenders, should the client willingly seek assistance from another organization. Conflict of Interest. Legal Service Agencies. At the time this report was submitted, these requirements were being finalized. Legal service providers are bound by professional and organizational ethics requirements and expectations. It is likely that those will be incorporated into the conflict of interest policies that will apply to this component of the program. 5. Eligibility Housing Counseling Agencies. The intent of the Settlement is to provide benefits to those who had loans with the five servicers involved in the Settlement; yet devoting resources to agencies allows them to reach out and provide services to customers that include but are not limited to that target group. The Agency has designed a demonstration to support local counseling agencies providing services and outreach to a broad base of households impacted by foreclosure and in need of housing counseling services. The program allows housing counseling agencies to determine client eligibility for counseling-related services received that are paid for with Settlement funds. Beneficiary eligibility for the majority of the Agency s programs and initiatives involves restriction on income, outstanding loan balances, or property value. In comparison, the affected households who are eligible to receive services funded by the Settlement from counseling agencies are a far-reaching, target population. In simple terms, it doesn t matter who walks through a counseling agencies doors for counseling ; they should be able to receive services sponsored by the financial support coming from North Carolina s Settlement funding. Legal Service Agencies. The intent of the Settlement is to provide benefits to those who had loans with the five servicers involved in the Settlement and the Agency has designed a demonstration to support local counseling agencies providing services and outreach to a broad base of households impacted by foreclosure and in need of housing counseling services; yet devoting resources to legal service agencies allows them to reach out and provide services to customers outside of that target group. The legal service agencies will C-4 NCHFA-2 10

11 determine client eligibility. Details regarding this were still being finalized at the time this was submitted. 6. Equipment and Real Property Management Acquisition of equipment purchased wholly or in part by housing counseling agencies or legal service agencies with program funds must be used to support eligible activities undertaken. The awarded agency must maintain appropriate documentation to verify purchase and/or use of said equipment. Part of the Agency s monitoring will involve an inventory of items and equipment obtained in conjunction with funding under this Agreement. Program funds cannot be used for Real Property Management. 7. Matching, Level of Effort, Earmarking There is no match requirement for this program s awarded agencies. Level of effort is monitored through reports submitted to the Agency by housing counseling agencies (monthly) and legal service providers (annually). Failure to comply with program requirements may result in a recapture of funds. There is no earmarking of funding for special, targeted populations associated with this program, other than the emphasis on agencies undertaking outreach and the provision of services to households who might be eligible for Settlement benefits. 8. Period of Availability of Federal Funds The National Mortgage Settlement is not federal funding; therefore, the period of availability requirements do not apply. 9. Procurement and Suspension and Debarment The National Mortgage Settlement is not federal funding; however and to the maximum practical extent, participating agencies must promote to undertake due diligence efforts toward fair and open competition in the procurement of goods and services under the program. 10. Program Income The awarded agency remains liable for the accounting and full repayment of all unexpended program funds with interest and in accordance with the terms and conditions C-4 NCHFA-2 11

12 of the Funding Agreement. Since program funds are in an interest-bearing account, the Agency expects the awarded agency or provider to document how all interest generated from program funds has been used to support program-eligible and allowable activities. Any unexpended interest must be remitted to the Agency at the end of the program period of performance, or should the Funding Agreement be terminated by either party (whichever comes first.) Suggested Audit Procedure If program funds were deposited into an interest bearing account, the Agency will verify if interest generated was spent on program-eligible and allowable expenses. 11. Real Property Acquisition and Relocation Assistance The National Mortgage Settlement is not federal funding; however, neither real property acquisition nor relocation assistance is an eligible, allowable activity under the program. 12. Reporting The awarded agency is required to provide specified reports in a format acceptable to the Agency (on the tenth business day of every month throughout the term of their Funding Agreement, for housing counseling agencies, and annually or as specified in their Memorandum of Understanding for legal service partners) as it may be amended or extended. Agency staff reviews reports and supporting documentation to verify expenses and confirm that conducted activities are consistent with approved requests for funding, proposals, and scopes of work. 13. Sub-grantees Monitoring The Agency monitors awarded agency progress by regularly reviewing data submitted as part of monthly or annual reports. Participating agencies should keep a record of all reimbursements received and the cost of undertaking the program-funded activities. The Agency shall have the right to request copies of such records at any point during and three years after the grant period. 14. Special Test and Provisions Not applicable. C-4 NCHFA-2 12