We are performing a 12/31/18 audit of a for-profit client with a HUD Section 223(f) Coinsured Loan.  In the prior year, they had refinanced their HUD mortgage with a new HUD mortgage.  As part of the mortgage refinance, the entity was required to establish an escrow account to be used for non-critical repairs.

During 2018, the entity submitted a withdrawal request from this escrow account for reimbursement of $1,052,954.48 of repairs and it was approved by their mortgagor. Immediately following, a distribution was taken for this amount, which exceeded the entity’s surplus cash available for distribution.

Our question is, should these funds have remained with the project until surplus cash was available for distribution?  Or might there be an exception? In a similar situation, we spoke with a HUD contact and they considered the distribution to have been made from non-project cash.