The group managing Nottingham's 32,000 council homes has been slammed by auditors for giving some people preferential treatment.
Nottingham City Homes was awarded only one star and its prospects for improvement rated "uncertain" in an Audit Commission report.
The group, which took over the homes last April, said changes have been made since the report.
Nottingham City Council said it is investigating the findings.
'Unhelpful staff'
The report also said there is not enough investment in housing stock to meet the government's Decent Homes Standards, and called for a further £260m in funding.
It also criticised the group, officially known as the Arms-Length Management Organisation (Almo) for a lack of proper maintenance work.
"I know it is a difficult report - but inspectors looked at an allocation policy that we no longer have"
The report said 50% of tenants found it difficult to contact staff, and 20% said staff were "unhelpful".
Officers have allocated homes to applicants described as homeless without referring the cases for assessment.
All homeless cases are supposed to be referred to Nottingham City Council's housing aid department.
Customer service was also criticised, with leaflets only printed in English, when many tenants do not speak the language.
Lynn Pennington, Almo chief executive, said: "I know it is a difficult report - but inspectors looked at an allocation policy that we no longer have.
"We have a new policy to eradicate the problems and minimise the need for 'manual' allocation of housing - it isn't a problem anymore."
She admitted that the group's leaflets were not up to proper standards and apologised for the lack of "transparency", but added changes have been made.
She predicted Almo "will succeed" and get two stars at the next inspection.
The local Conservative and Liberal Democrat groups have issued a joint statement welcoming the critique and calling for Almo's strategic board to have elected tenant members and independent advisors.
If Almo fails to reach two stars in the next six to 12 months, it could miss out on £165m of government funding.
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