[Senate Hearing 112-82]
[From the U.S. Government Printing Office]
S. Hrg. 112-82
PREVENTING IMPROPERLY PAID FEDERAL ASSISTANCE IN THE AFTERMATH OF
DISASTERS
=======================================================================
HEARING
before the
AD HOC SUBCOMMITTEE ON DISASTER RECOVERY AND INTERGOVERNMENTAL AFFAIRS
of the
COMMITTEE ON
HOMELAND SECURITY AND
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
MARCH 17, 2011
__________
Available via the World Wide Web: http://www.fdsys.gov/
Printed for the use of the Committee on Homeland Security
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----------
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware SCOTT P. BROWN, Massachusetts
MARK L. PRYOR, Arkansas JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri JOHN ENSIGN, Nevada
JON TESTER, Montana ROB PORTMAN, Ohio
MARK BEGICH, Alaska RAND PAUL, Kentucky
Michael L. Alexander, Staff Director
Nicholas A. Rossi, Minority Staff Director and Chief Counsel
Trina Driessnack Tyrer, Chief Clerk
Joyce Ward Publications Clerk and GPO Detailee
AD HOC SUBCOMMITTEE ON DISASTER RECOVERY AND INTERGOVERNMENTAL AFFAIRS
MARK L. PRYOR, Arkansas, Chairman
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
MARY L. LANDRIEU, Louisiana SCOTT P. BROWN, Massachusetts
JON TESTER, Montana RON JOHNSON, Wisconsin
Donny Williams, Staff Director
Amanda Fox Professional Staff
Ryan Tully, Minority Staff Director
Kelsey Stroud, Chief Clerk
C O N T E N T S
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Opening statement:
Page
Senator Pryor................................................ 1
Senator Landrieu............................................. 3
Prepared statements:
Senator Pryor................................................ 29
Senator Landrieu............................................. 32
WITNESSES
Thursday, March 17, 2011
Elizabeth Zimmerman, Deputy Associate Administrator, Office of
Response and Recovery, Federal Emergency Management Agency,
U.S. Department of Homeland Security........................... 6
Michael Chodos, Deputy General Counsel, U.S. Small Business
Administration................................................. 7
Peggy Gustafson, Inspector General, U.S. Small Business
Administration................................................. 16
Matt Jadacki, Assistant Inspector General for the Department of
Homeland Security.............................................. 18
Alphabetical List of Witnesses
Chodos, Michael:
Testimony.................................................... 7
Prepared statement........................................... 41
Gustafson, Peggy:
Testimony.................................................... 16
Prepared statement........................................... 44
Jadacki, Matt:
Testimony.................................................... 18
Prepared statement........................................... 46
Zimmerman, Elizabeth:
Testimony.................................................... 6
Prepared statement........................................... 34
APPENDIX
Questions and responses submitted for the record from:
Ms. Zimmerman................................................ 51
Mr. Chodos................................................... 68
Ms. Gustafson................................................ 70
Mr. Jadacki.................................................. 74
PREVENTING IMPROPERLY PAID
FEDERAL ASSISTANCE IN THE AFTERMATH OF DISASTERS
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THURSDAY, MARCH 17, 2011
U.S. Senate,
Ad Hoc Subcommittee on Disaster Recovery
and Intergovernmental Affairs,
of the Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:06 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Mark L.
Pryor, Chairman of the Subcommittee, presiding.
Present: Senators Pryor and Landrieu.
OPENING STATEMENT OF SENATOR PRYOR
Senator Pryor. All right. I will go ahead and call us into
order.
I want to thank our witnesses for coming today. We are
going to have two panels.
I also want to start by acknowledging the ongoing fight to
save lives in the wake of one of the deadliest natural
disasters in modern times. I know all of my colleagues are
lifting up the people of Japan in their prayers and their
thoughts, and we are trying to find ways to help them. There
are millions of Japanese who have been impacted by this, and of
course we are watching every day. It seems like every time you
turn on the TV or hear the news it is getting a little bit
worse. Certainly with these nuclear reactors, problems we will
be watching very closely.
I am very proud of the American military, and our search
and rescue folks, and the various other experts that we have
been sending over there to try to help them in their time of
need.
I want to welcome our witnesses from the Federal Emergency
Management Agency (FEMA) and the Small Business Administration
(SBA) and the Inspector General's (IGs) offices of both
agencies, as well as all of my colleagues and the visitors who
have joined us, for the first hearing of the Subcommittee on
Disaster Recovery and Intergovernmental Affairs.
A recently released report from the United Nations showed
that 2010 was one of the worst years on record for natural
disasters and that we are in a period of unusually frequent
disasters. As the U.S. Government prepares to meet the
challenges that are sure to come, we must ensure that our
response and recovery mechanisms are strong enough to handle
catastrophes ranging from a hurricane in the Gulf of Mexico to
an earthquake in Arkansas.
Today, we will discuss ways to prevent the Federal
Government from making improper payments in the wake of these
disasters. The Government Accountability Office (GAO) has
determined that improper payments by government agencies have
risen from an estimated $20 billion at the turn of the century,
to $125 billion in 2010. As we prepare our government to more
effectively manage the increased numbers of disasters, it is
absolutely critical that we also work to ensure that Federal
Government resources are distributed more efficiently in the
aftermath.
Federal agencies provide many types of disaster assistance
to survivors, and there are many government agencies involved.
One thing I want to emphasize is that we are not out to vilify
the disaster victims or to subject those who have already
suffered harsh tragedies and debt collection efforts and
financial ruin, et cetera. We are not out to say that they are
at fault.
I know that everyone makes errors in the process, and we
are trying to find those errors and fix the inefficiencies by
the Federal agencies. Our focus is not on the victims, on the
citizens of the United States, but really on the Federal
agencies to make sure we have our act together and we have the
right systems in place.
So we will look at these systems, and we will certainly
look at the Office of Inspector General (OIG) recommendations
for ensuring that it does not happen again.
FEMA announced some improvements to its recoupment programs
over the past few days, and I would like to ask them a number
of questions about that. FEMA is not the only Federal agency
involved in disaster assistance. Department of Housing and
Urban Development (HUD), delivers disaster Community
Development Block Grants (CDBG) funds to impacted communities
and directly to individuals, and also administers the Disaster
Housing Assistance Program (DHAP) through an interagency
agreement with FEMA.
HUD's role in disasters has increased dramatically over the
past two decades. More than $30 billion in HUD's CDBG program
has been used since 1992 to provide flexible Federal funds to
support States and local governments during these long-term
recoveries. Unfortunately, HUD is not able to be here today,
and we will be working with them and following up with them
separately to make sure that we understand what they are doing,
where they are going and how things are going there.
Of course, in addition to FEMA and HUD, the SBA plays a
very important role in disaster assistance through the Disaster
Loan Program. We intend to ask them today how many of these
loans end up in default and inquire as to how the agency goes
about collecting the debt. We will also ask the SBA OIG what
recommendations it can make to FEMA about improving the
recoupment capacity because SBA, by virtue of dealing with
loans, is better equipped than FEMA to recoup the money.
With that, I would like to turn it over to my esteemed
colleague from Louisiana and have her opening statement.
OPENING STATEMENT OF SENATOR LANDRIEU
Senator Landrieu. Thank you, Chairman Pryor, and I really
appreciate your focus on this important issue.
I do think that we have to take seriously our
responsibility to curb government waste where we find it, and
to eliminate and prosecute fraud and abuse. We must do this to
restore public confidence, to reduce the Federal deficit and to
rein in the national debt. Recoupment of improper payments is
an important part of that effort.
But it is important, however, and that is why I really
wanted to be here this morning, to say that we not rush to
judgment to--and this is not you at all, but I hear others
sometimes trying to score political points--where this issue is
involved when it comes to citizens who have experienced tragedy
and loss as a result of disasters.
Where fraud has been committed we will, and should, target
and prosecute it. I co-sponsored the Emergency and Disaster
Assistance Fraud Penalty Enhancement Act with Senator Sessions.
I am sure you remember that bill, Chairman Pryor, which was
signed into law in 2007, and significantly increased prison
sentences and fines for people convicted of fraudulently
obtaining Federal disaster assistance.
The Justice Department (DOJ), I understand, has established
a Hurricane Fraud Task Force to investigate and prosecute fraud
cases and has secured numerous convictions--I would like to
hear more about that--under these new sentencing guidelines.
But there is a dangerous tendency among some lawmakers, and
I want to specifically say this Chairman excluded, and some
members of the press to assume that improper payment is the
same thing as fraud. Neither FEMA nor the Inspector General has
been able to provide me--maybe they have some information
today, but up until today--with an estimate of how many of
these 160,000 cases truly represent fraud.
We do know that thousands of payments described as improper
by the Department of Homeland Security Inspector General (DHS
OIG) went to people who were seriously affected by this
disaster and used these moneys for urgent and legitimate needs.
For example, in order to provide a fuller picture, let me say
these are just some examples of what would be categorized as
potential fraud or ``improper payments'':
People who lost title to their home or insurance documents
during the flooding. Let me be very clear. After Hurricane
Katrina, when the levees broke that should not have broken and
breached in I think over 52 places, thousands of homes were
destroyed within hours. People did not have time to grab copies
of their titles or insurance documents.
Why those titles and insurance documents could not be
provided by any agency of the government is still a source of
great concern.
Why tax forms could not be provided by the IRS and my
citizens had to be berated time after time for not being able
to produce copies of their tax records is still beyond my
comprehension.
But they lost those materials. They now may be challenged
because they could not provide them.
Other people could not provide a free and clear title
because their home has been in families for generations. I
would like to remind people that some people paid off their
mortgages decades ago. We also have households that split up
after disasters due to space constraints and other reasons.
Maybe one part of the extended family went to Atlanta, one part
of the family went to L.A. and one part of the family went to
Milwaukee, Wisconsin. They may now be accused of accepting
duplicate payments.
People who own second homes where their children or parents
live separately from them. Their assistance may have been
classified as improper payments.
People who use funds to pay for childcare expenses. There
were no schools open. There were no daycare centers open in St.
Bernard Parish and hardly any in the city of New Orleans. I
want people to remember that.
People sometimes are targeted because of data entries and
errors by FEMA employees, including bank account numbers,
addresses and social security numbers. And Mr. Chairman, these
could be termed improper payments.
People being targeted because of mix-up or emissions of
suffixes like junior or senior, or street suffixes like
boulevard, drive or highway. Sometimes those are classified as
improper or not in order.
People who received rental payments in excess of HUD's fair
market value in the area, even if they spent all of their funds
on rental expenses, which, you will go back and look, spiked
significantly upwards of 40 percent in some areas because the
supply was so reduced that prices went up.
And I could go on and on.
So my point is absolutely where we find fraud, Mr.
Chairman--and you, as a former prosecutor, most certainly have
an extraordinary record in this regard--we want to prosecute
fraud. But we want to be careful as we are examining these
things that it is really fraud that we are after and not honest
disaster victims who made reasonable good-faith decisions in
the aftermath of a storm.
It is noteworthy that many of my constituents reported
overpayments themselves. Eighteen million dollars, I
understand, of insurance funds in question were reported to
FEMA by disaster survivors themselves. So from Hurricanes
Katrina, Rita, Gustav and Ike and maybe others, they in fact
reported themselves that they were overpaid because these are,
for the most part, honest, hard-working citizens that were in a
very desperate situation.
Second, I want to remind this Subcommittee and all
observing that the reason that we are into this mess in the
first place is because the Republican leadership, in my view,
undercut funds to FEMA. That agency that showed up when
Hurricane Katrina happened was a shell of itself because of
year after year of budget cuts and ignoring the importance of
investing in response. So there were no computer systems that
were efficient and effective, information technology (IT) was
insufficient and payments went out without the necessary
safeguards in place.
I understand that, but I am wondering: Is that the fault of
the disaster victims who received the assistance or the Federal
Government for not having its systems in order?
That is an important question because what I see, what is
alarming to me, and I am going to stop in a minute, Mr.
Chairman--you have been very gracious--is that the Republican
leadership in the House is getting ready to do the same thing
as we speak through the CR, cutting FEMA funding and
investments in IT underfunding the Disaster Relief Fund, to set
up again what looks to me like a repeat of the past. I am going
to do everything I can to make sure that does not happen.
I will submit the rest of my statement for the record.
And Mr. Chairman, you have been a great advocate for us.
And I just want to make sure that people realize the
Disaster Relief Fund currently has a shortfall of $1.565
billion. The fund will be exhausted in June. I have written to
the President. I have asked him to send to Congress an
emergency supplemental funding request. He has not done so to
date.
And the House Republican leadership wants to basically take
the money that is in Homeland Security that you and I fought
for, Mr. Chairman, that prepares for future disasters, to pay
for the past disasters. This is not going to work, and what is
going to happen is something is going to fall between the
cracks.
So I am not going to stand by and let honest people in
Arkansas, Tennessee, or Louisiana be prosecuted for fraud when
our Federal Government will not do its job to get the systems
funded and sufficient and up and running.
So I thank you for letting me come. I have to go to the
floor. But please keep me posted, and I look forward to helping
you in any way to ferret out the fraud but to be careful in the
way we do it and to make sure that when we are doing it the
taxpayers actually save money rather than wasting it in the
process.
Many of these payments were $2,000 or $1,000. So to spend
millions of dollars trying to find and run down $1,000 here and
$2,000 there, I am not sure how cost effective that will be,
but we should measure it. And I thank you so much for focusing
on this.
Senator Pryor. Thank you for all that you do, but certainly
on this issue because you have been a tireless advocate for
your State and for your constituents back home. So thank you,
and your remarks are well stated.
I know Senator Landrieu has to go and manage the Small
Business bill on the floor, but I want to introduce our first
panel.
Our first witness today is Elizabeth Zimmerman. She is
Deputy Associate Administrator of the Office of Response and
Recovery at the Federal Emergency Management Agency.
Our second witness today is Michael Chodos. He is the
Deputy General Counsel at the Small Business Administration.
I want to welcome both of you.
So, Ms. Zimmerman, why don't you lead off?
STATEMENT OF ELIZABETH ZIMMERMAN,\1\ DEPUTY ASSOCIATE
ADMINISTRATOR, OFFICE OF RESPONSE AND RECOVERY, FEDERAL
EMERGENCY MANAGEMENT AGENCY, U.S. DEPARTMENT OF HOMELAND
SECURITY
Ms. Zimmerman. Great. Good morning, Chairman Pryor and
distinguished Members of the Subcommittee. My name is Elizabeth
Zimmerman, and I am the Deputy Associate Administrator of the
Office of Response and Recovery at FEMA. It is an honor to
appear before you today on behalf of FEMA to discuss our
process for recouping improper disaster assistance payments.
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\1\ The prepared statement of Ms. Zimmerman appears in the appendix
on page 34.
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The recoupment process is challenging, yet it is legally
required by FEMA's responsibility to protect taxpayer dollars.
FEMA's highest priority in the immediate aftermath of a
disaster is helping the people who need it most and providing
assistance as quickly as possible. However, FEMA must balance
the requirement to quickly distribute funds with its
responsibility to be good stewards of the taxpayer dollars.
FEMA also continues to aggressively take measures to prevent,
detect and work with our partners to punish fraud related to
disaster assistance.
As a result of both the lawsuit and the new DHS regulations
in 2007, FEMA has been working to make significant changes to
our recoupment process. When an individual is identified as
recipients of an improper disaster assistance payment, FEMA
will send them a notice of debt letter.
The letter, now written in plain, easy to understand terms,
outlines how much money is owed to the government along with
the reasons why funds are being recouped. The notice of debt
letter is a bill and specifies the amount of money that is due
to FEMA within 30 days. After 30 days, FEMA will begin charging
interest on the debt at the interest rate which is set by law.
However, when an individual receives the notice of debt
letter, he or she has several options which include paying the
amount in full, requesting a payment plan, requesting a
compromise of all or part of the debt based on inability to
pay, or filing an appeal within 60 days.
Also, per the DHS regulations, applicants wishing to appeal
a recoupment decision may request an oral hearing. Such
requests will be granted when an appeal cannot be resolved by
reviewing documentary evidence alone.
Regulations require FEMA to decide appeals and issue final
decisions in writing within 90 days. However, if an applicant
is provided an oral hearing as part of his or her appeal
process, the timelines associated may vary due to the logistics
of coordinating that hearing.
Over the last few months, FEMA has been reviewing the cases
of approximately 160,000 applicants that may have received
improper disaster assistance payments to verify if this is in
fact a debt and the amount that is owed of the debt.
Earlier this week, we published the Federal Register notice
announcing our intent to proceed with recoupment and outlining
the revised recoupment process. We also began mailing notice of
debt letters yesterday. These letters will be mailed on a
rolling basis, starting with the most recent disasters.
Unfortunately, during the response to any disaster, whether
through fraud, human or accounting errors, or for other
reasons, assistance sometimes goes to individuals who are not
eligible for the assistance. However, we also have implemented
measures to minimize the error rates and overpayments and
ensure that disaster assistance is given expeditiously only to
those who truly need it.
Early in the recovery from Hurricanes Katrina and Rita,
FEMA implemented changes to the disaster assistance application
process which minimized the error rate for overpayments and
reduced the opportunity for waste, fraud and abuse. In fact, as
a result of the measures put in place, we have drastically
reduced the error rates for improperly disbursed funds, which
have gone from 14.5 percent after Hurricane Katrina to less
than 3 percent error rate in Fiscal Year 2009.
Although FEMA has made improvements to reduce the
opportunity for overpayments, if a potential recoupment case
shows evidence of fraud, FEMA's fraud prevention unit
investigates; where appropriate, refers cases immediately to
the DHS Office of the Inspector General for criminal review.
The process has never stopped.
Because of the changes we have implemented to both the
application process and the recoupment process, we are now able
to minimize the need for recoupment in the first place and
ensure that we have a smooth, transparent and fair process to
recoup overpayments where necessary.
Thank you again for the opportunity to appear before you
today, and I am happy to answer any questions the Subcommittee
may have.
Senator Pryor. Thank you. Mr. Chodos.
STATEMENT OF MICHAEL CHODOS,\1\ DEPUTY GENERAL COUNSEL, OFFICE
OF FINANCIAL PROGRAM OPERATIONS, U.S. SMALL BUSINESS
ADMINISTRATION
Mr. Chodos. Good morning, Chairman Pryor and distinguished
Members of the Subcommittee. My name is Michael Chodos, and I
am the Deputy General Counsel at the Small Business
Administration. It is an honor to appear before you today on
behalf of SBA to discuss the safeguards in place at our agency
to identify improper payments and to prevent duplication of
benefits (DOBs) in our disaster lending program.
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\1\ The prepared statement of Mr. Chodos appears in the appendix on
page 41.
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SBA plays a crucial role in helping individuals and
businesses recover after a disaster. SBA's disaster loans help
rebuild homes, replace damaged property and allow businesses to
get back up and running, and their employees back to work.
But SBA's job does not stop with providing critical
disaster loan assistance. SBA also makes sure that assistance
is provided and supervised in accordance with applicable law.
SBA takes very seriously its ongoing responsibility to prevent
waste, fraud and abuse. Maintaining integrity and
accountability in all our programs is a fundamental agency
priority.
For that reason, SBA appreciates deeply the role that the
Office of the Inspector General plays in helping ensure that
our programs are effectively managed. During this
Administration, SBA and the OIG have worked in partnership to
make improvements across the agency. We believe the OIG reports
that the Subcommittee is examining today are excellent examples
of clear, actionable input from the OIG upon which the agency
has been able to build real improvements that make its programs
more efficient and effective.
In general, SBA agreed with the OIG's recommendations in
these reports, and we have taken steps to implement them. Let
me describe just a few of the most significant changes we have
made.
SBA's Office of Disaster Assistance (ODA) revised the
sampling design methodology for estimating improper payments.
Specifically, the office contracted with a statistician to
review the process and revise the methodology in accordance
with the Office of Management and Budget (OMB) guidance.
We also reengineered the quality control (QC), process.
Previously the QC process was performed by a group of employees
which reported to the same management team that was responsible
for loan origination. They now report directly to the Director
of Program Policy and Evaluation in headquarters. Our QC team
is now better trained, more independent and more effective.
Our loan eligibility and disbursement process has been
reviewed and improved too. Our line managers have received new
and extensive training on how to detect and avoid improper
payments.
We have strengthened our process for identifying, applying
and offsetting insurance payments received by our borrowers to
make sure that all available insurance is applied before loan
proceeds are disbursed.
And we have improved our ability to track and collect
insurance benefits by obtaining and following up on documented
assignments of insurance proceeds.
In addition to improving our own systems, we continue to
improve our coordination and cooperation with other agencies
involved in disaster relief. SBA and FEMA have consistently
worked together to improve our delivery of disaster assistance
to disaster victims and avoid potential duplication of
benefits.
SBA and FEMA have implemented interagency agreements which
allow us to share information and data bases, and to coordinate
our loan and benefit review and eligibility determinations.
These data exchanges are important tools that provide improved
disaster assistance to victims, accelerate referrals to SBA and
help both agencies evaluate potential duplicative benefits in
real time.
Finally, SBA's Office of Disaster Assistance senior
leadership and FEMA's response and recovery management teams
have initiated quarterly meetings to discuss ways to enhance
the delivery process and provide better assistance to disaster
victims.
While SBA is pleased with the progress it has made to
eliminate improper payments and work more closely with other
agencies like FEMA, we recognize that additional work remains.
As hurricane season approaches, SBA is well aware of the
important role it plays in the lives of disaster victims. We
are also well aware of our role as a steward for taxpayer
funds. With the changes implemented thus far, SBA is confident
that it will be able to carry out both roles efficiently and
effectively.
Thank you, and I look forward to your questions.
Senator Pryor. Thank you. Again, I want to thank you all
for being here.
I have a few questions for the panel. We have some Senators
who are not able to attend this morning, and it is very
possible that they will submit questions for the record, and I
may submit some followups for the record as well.
I will start with you Ms. Zimmerman. What do you identify
as the key factors contributing to improper payments in the
aftermath of disasters? In other words, why are there so many
improper payments?
Ms. Zimmerman. Yes. When you look back at Hurricanes
Katrina and Rita, and the amount of, that it was a major
catastrophic event for the United States when we had not
experienced anything like that in decades, the number of
individuals that needed immediate assistance, getting
assistance out there is very important. So the agency looked at
the best ways to do that and as we were registering people and
to make sure that we could get some assistance out on the
ground.
So it is important that we acknowledge the fact of we were
trying to take care of our first mission of taking care of
disaster survivors, but also trying to be good stewards of
taxpayer dollars.
So as the numbers from Hurricanes Katrina and Rita were
higher, as I said, the improper payment rate of 14.5 percent,
and being able to put in the safeguards that we did shortly
thereafter, to further, to lower that to less than 3 percent in
the following years.
Senator Pryor. Do you have any thoughts on why there are so
many improper payments?
Mr. Chodos. Thank you, Chairman Pryor. At the SBA, our
program is a lending program as distinct from a grant program,
and so following up on what Senator Landrieu said a moment ago,
the improper payment analysis is not the same thing as an
analysis of money lost. It is an analysis of whether or not all
of the appropriate rules, procedures and eligibility
determinations were undertaken in each and every case.
And so at the agency, at our agency, the IG looked into and
focused on some ways in which our process for determining
eligibility, for obtaining all required collateral, for
assuring repayment ability and for making sure that insurance
proceeds were properly applied. They looked at all of that to
see if we were following those procedures properly and
implementing them effectively.
I think that the opportunity for improvement for the SBA
came in being able to relook at those procedures and make sure
that we had better training, better methodology and better
implementation on those fronts. That, I think, is where the
improper payment problem arose.
Senator Pryor. And do you feel that SBA has taken the steps
necessary to clean that up?
Mr. Chodos. Yes. I think the first step in taking effective
steps is to make sure you understand the problem, and the IG
has been very effective in helping us focus on the areas where
procedures in place, but they were not effective, as effective
as they could have been. So the SBA has implemented changes in
methodology, improvements in training and changes in the actual
line management at every step through the process, and I
believe that the improper payment rate has now been
substantially addressed and improved.
Senator Pryor. Mr. Chodos, is there a redundancy between
the two agencies in terms of trying to help victims of
disasters? Is there an overlap where someone may so-called
double-dip?
Mr. Chodos. I would say actually there is not overlap or
redundancy; there is coordination.
In other words, FEMA provides one kind of assistance--
immediate, grant-based assistance to disaster victims. The SBA
comes in. Essentially, the best way to think of it is coming in
right behind FEMA to provide loans to help get businesses and
individuals back up on their feet.
So the SBA needs to coordinate and does coordinate with
FEMA to make sure that when a loan is being considered the SBA
knows about such grants as have already been made by FEMA.
There is excellent coordination between the agencies now to
share data bases and information, to make sure then when we are
considering whether to make a loan and in what amount we know
about what FEMA has already done and in what amount.
Senator Pryor. Let me ask you, Ms. Zimmerman. I know that
if Senator Landrieu were here she would ask a similar question.
Hurricane Katrina happened in late August 2005, and we are
just now sending out a large number of recoupment letters. Why
the 6-year delay in recoupment?
In trying to put myself in the shoes of the victims of
Hurricane Katrina, I try to imagine them opening their mail and
saying, wait, I owe the Federal Government X amount of dollars
for something 6 years ago?
Why the delay? I guess that would be the first question.
Ms. Zimmerman. Sure. Back in April 2007, so 2 years after
the disaster, just about 2 years after, a lawsuit was filed by
a number of applicants, saying that they had not been given due
process in their claims. We were already in the recoupment,
doing recoupment following Hurricanes Katrina and Rita.
And then in June 2007, that case went before the court, and
the court rendered the decision that FEMA had to stop its
recoupment process.
So from June 2007----
Senator Pryor. And you had to stop the entire process, not
just with that class?
Ms. Zimmerman. Right. FEMA had to stop their entire
recoupment process.
So in 2008, through discussions with the court, it was in
September 2008 that FEMA actually filed a public Federal
Register notice stating that there was any. We had stopped our
recoupment process and we would put it on hold until such time
that we were able to allow it to go forward. So with FEMA doing
that in August 2009, the case was actually dismissed.
Now in that time period also is when DHS adopted the debt
collection regulations and changed the process. So during that
time period, no recoupments could happen until August 2009 when
the court case was actually dismissed.
I came on board with FEMA and the Federal Government in
June 2009. At that time, it was brought to my attention and
others joining the Administration, the agency, that this was
sitting here.
So as we have been looking at it and moving it forward,
making sure it was--the No. 1 thing for us was to make sure we
were doing the right thing; we were doing it the right way.
We know that the disaster survivors that were impacted by
this and what we were going to potentially be going back and
asking them. So it is a process that has taken time to make
sure that we could do it right, do it efficiently and not place
additional burden upon the disaster survivors.
Senator Pryor. Let me ask about a case from my State as an
example. We do not have a lot of these cases in my State, but
we do have some.
Ms. Zimmerman. You do have some.
Senator Pryor. There is an applicant who appears to owe
$28,800, and the reason given is that he applied to receive
assistance for a property that was not his primary residence.
Will that notice of debt letter be the first he hears of the
debt?
Ms. Zimmerman. Yes.
Senator Pryor. OK. For 5 years, 6 years, he has been
totally unaware that he received this payment improperly?
Ms. Zimmerman. Yes, unless he has been contacting and
working with our case managers at our processing center. We
have not been able to go back and send any letters or do
anything up until we filed the Federal Register notice earlier
this week.
Senator Pryor. Before the lawsuit, the court determined
that FEMA was not following due process, whatever that might
mean in this circumstance. You are confident FEMA is doing that
now?
Ms. Zimmerman. Yes. What we did after the case was filed,
looking at our process, the thing that came back was the fact
that our letters did not give sufficient information to the
disaster survivors.
So we have changed our letters so that it is very clear and
plain as to why it is and in detail why it is we are asking for
this money back, giving the specific reason which was not there
before. Plus, it affords if an individual cannot provide the
information completely in documentary, written form, they can
write and they can request oral hearing, which was not afforded
prior.
Senator Pryor. And as I understand it, the total dollar
amount here is $643 million?
Ms. Zimmerman. That was the potential.
Senator Pryor. OK.
Ms. Zimmerman. As we have been going through the 168,000
cases, I can guarantee you that number will come down for the
cases, and therefore the dollar amount will also come down.
Senator Pryor. So when you have 168,000 cases, does that
mean you have 168,000 payments? Is that how that works?
Ms. Zimmerman. Yes, it is the applicants themselves.
Senator Pryor. That you think potentially could be
erroneous. The 168,000 could be potentially could be.
Ms. Zimmerman. Yes, that is right. That is the number of
cases that we are looking at to verify that it is still because
it was noted some of those cases have been sitting for
potential recoupment for a number of years.
Senator Pryor. So are you sending the letters out to all
168,000, or is there a screening process before you send out a
letter?
Ms. Zimmerman. Yes. That is why we are taking our time to
make sure we are doing it right. We are not going to send out
letters to the whole 168,000. As we go back and review the
cases, if we have additional information that was potentially
overlooked, those cases will no longer be sent a letter.
Senator Pryor. Do you have a sense of how much that
$168,000 number will be pared down?
Ms. Zimmerman. I do not at this time.
Senator Pryor. Now are those individuals and businesses?
Ms. Zimmerman. No, just individuals.
Senator Pryor. Just individuals. Is the bulk of that in
Louisiana?
Ms. Zimmerman. So the bulk of it is from Hurricanes Katrina
and Rita.
Senator Pryor. In Louisiana? The bulk?
Ms. Zimmerman. In Louisiana, Mississippi, Alabama, yes.
Senator Pryor. OK. And that $643 million and that 168,000
figure, is that just for the two hurricanes or is that
everything?
Ms. Zimmerman. That is everything.
Senator Pryor. I see. OK. Let me just ask a few more
questions. I do not want to keep you all day, but I do have a
few more, and then I will submit the rest for the record.
Let's see. Let me go back to Ms. Zimmerman if I can. How
does the FEMA appeals process work?
Apparently, there is a new process now. You get a letter.
And how long does it take?
If I get a letter and I want to dispute the claim, it
sounds like I can may be in touch with a case manager
initially. Then, if I want a hearing or further appeal, I get
that. How long does that process take?
Ms. Zimmerman. Yes. Once we send out the letter, the letter
is dated and an applicant has 30 days from the date of the
letter to get back to us.
Within that letter, it spells out what they can do. They
can send in their payment. They can call us and pay by credit
card. They can call in and request a payment plan if they are
not able to pay in full, or they may call in and request a
compromise to that debt, to have a compromise either partial or
in full. If they cannot do that, they need--the No. 1 thing is
to make sure everybody does call in or correspond back within
30 days.
Also, they can file an appeal. With the letter, they find
out what it is they need to submit if they are going to put in
an appeal to us. Beyond that, after the 30 days, they do
actually have 60 days to submit the appeal.
If they do not contact us within the 60 days, then they
will get a letter of intent of which we will send to them, to
forward their debt on to the Department of Treasury.
So within--and once the clock--after 60 days, or after 30
days, they start to accrue interest. That is by law that we do
that. And like I say, the appeal must be within 60 days from
the date of receiving the letter.
Senator Pryor. OK. If they go through the appeal process,
do they still have to pay interest on the full amount that they
have to pay?
Ms. Zimmerman. Yes. If it is----
Senator Pryor. In other words, I am clarifying that had
they done this within 30 days and just cut a check, they would
not have any interest payment.
Ms. Zimmerman. Correct.
Senator Pryor. But if they appeal it sounds like it could
potentially take several months to go through the process.
Ms. Zimmerman. We have 90 days to respond to their appeal.
If we, for some reason, are unable to respond to them within 90
days, the interest stops accruing after 90 days.
Senator Pryor. OK. All right. And at any point does either
FEMA or the Department of Treasury turn this over to a debt
collector, or is this all done by the government?
Ms. Zimmerman. This is done by the government.
Senator Pryor. Now let me ask you, Mr. Chodos, if I can. My
sense is that because the nature of SBA assistance is more in
the loan area there is an issue that arises frequently: The
loan value and how much you should loan vis-a-vis insurance.
Can you walk me through that and explain some of the tensions
and how they are resolved?
Mr. Chodos. Yes. Thank you, Chairman Pryor, for that
question.
The basic structure that permits the agency to make
disaster loans requires that the agency make a loan for the
uninsured damage done to a business or to personal property.
So the agency is required to look at a number of things in
order to determine how much of a loan can be made. First and
foremost, it needs to look at the level of the damage, the
verifiable level of damage. The next thing it needs to look at
is whether or not the disaster victim has insurance, either
flood insurance or hazard insurance.
Senator Pryor. Let me stop right there because I know after
Hurricane Katrina there was a real problem with the insurance
industry saying: Oh, wait a minute, this was not caused by
wind. This was caused by water and vice-versa.
Victims got the runaround from the insurance industry. And
I know there were some lawsuits about that, but I do not know
how all that worked out in the end.
So while that is in limbo are you looking at the
individual's policy and saying well, the insurance company
ought to cover this?
I mean how do you do that? How do you know?
Mr. Chodos. As a general proposition, the agency deals with
the damage, meaning the total damage amount, and then insurance
payments.
So for example, generally, agency loans for repair or for
economic injury are not disbursed all at once. The agency will
determine at the beginning the amount of the overall loss, will
ask the borrower to let the agency know how much insurance is
available and will begin to distribute the loan as construction
and repair take place.
Now the agency also receives insurance payments as those
come in. And as you have just pointed out, insurance payments
often come in over time.
Senator Pryor. Right.
Mr. Chodos. And when they come in over time, sometimes it
is days, weeks, months or even years. And what the agency will
do is apply those insurance payments when they come in to
reduce the remaining balance on the loan.
But if they do not come in, if there is not actual
insurance coverage for a particular disaster, then the agency
is not going to penalize the borrower by saying well, we think
you could have gotten insurance, but your insurance company
would not pay it, so we are now penalizing you.
Senator Pryor. So does that mean the insurance payments get
assigned to you? Is that how it works?
Mr. Chodos. So the agency has several tools available to it
to make sure that it gets insurance payments.
So one thing it does, of course, is to deal voluntarily and
directly with the borrowers, almost all of whom work with us
very cooperatively to let us know about their insurance
coverage and to make sure we get payments.
The agency also, after its recent process improvements,
gets insurance assignments in place to make sure that we have
the insurance company aware of our loan and sending us payments
directly when they come in.
Senator Pryor. OK. So the way it is set up is the insurance
company pays you, and then you credit the balance of the loan.
Mr. Chodos. Exactly.
Senator Pryor. And are you finding incidents of fraud in
this arrangement?
Mr. Chodos. Well, there is always a risk of fraud in any
program in which payments are coming from different sources at
different times and where the agency, even though it might have
documents in place, including assignments, is not literally in
control of the flow of the money.
But by and large, the problems that have been showing up
and which made their way into the IG reports about improper
payments were not specifically fraud on the agency. They
pointed out areas in which the agency's process did not
adequately identify and followup upon those payments, and then
make sure they were properly applied. For example, payments
might have come into a center and then been forwarded to the
borrower without properly doing the accounting and applying
them to outstanding balances.
Senator Pryor. I do not have the IG report on me right now,
but how many cases were there that SBA IG thinks were improper
or overpaid?
Mr. Chodos. Well, there were several reports identifying
amounts that ranged from in the--of course, the IG reports
involve sampling, and so they ranged from low figures up to
figures well in excess of several millions of dollars.
But of course, they fell into a number of different buckets
and categories, and so I think probably the simplest answer to
that question is that they identified substantial numbers of
investigated and specifically looked at loans that involved
this failure to properly apply payments. I can get you those
specific figures if you would like.
Senator Pryor. We have them somewhere, but thank you.
And Ms. Zimmerman, over at FEMA, what percent? Just human
nature being what it is, you are going to have some fraud here.
But what percentage is fraud or some sort of intentional
wrongdoing by people?
Ms. Zimmerman. So far from Hurricanes Katrina, Wilma, Rita
and the disasters we have prosecuted 1,360 cases. So of the
hundred, the millions of cases that we have had, that is----
Senator Pryor. You have prosecuted how many?
Ms. Zimmerman. One thousand three hundred and sixty.
Senator Pryor. OK. All right. Have you all done any sort of
analysis of how your collection efforts might be impacting the
people involved here?
Some of them are trying to get back on their feet, trying
to put Hurricane Katrina behind them and they are trying to
make a fresh start. Have you done any analysis of how that
might impact their ability to complete their recovery?
Ms. Zimmerman. Yes. When we look at this, we know what the
individuals have been through, all the disaster survivors of
all the disasters we work with. That is why our main focus has
been to see how we can minimize that, looking at how we work,
to make sure.
That is why we have made changes to the process, to make
sure that we fix it, so that in the future we do not have to go
back and do this, so looking at this.
By law, we must go back and collect the debt for improper
payments, but we do look at this, and we want to work with
people and be sensitive to what it is they are going through
and what they have gone through over the years.
Senator Pryor. Let's say that you have a person out there
who just will not pay, so you turn it over to the Treasury.
Then what do they do?
Ms. Zimmerman. Then the Treasury will work with them to see
what they can do. Once again, they can request some compromise
of the debt and work with them in that.
Senator Pryor. Is anybody analyzing how much it costs the
government to try to recoup this money?
In other words, are we coming out ahead on this or are we
losing money on this?
Ms. Zimmerman. That is one of the things also as we are
looking at this process and being sensitive to the economic
times for both the government and for individuals, looking at
how we do this, how we provide due process and do our due
diligence in this. So it is something that we have great
concern of also, and that is why we are trying to do it the
best that we can.
Senator Pryor. But have you done any analysis of how much
it actually costs to try to collect? I mean say every thousand
dollars you collect, how much it actually costs the government
to do that.
Ms. Zimmerman. No. I mean we are doing this within our own
infrastructure that is already in place with our national
processing centers, the case managers that are there working on
this and our FEMA finance individuals that are also there. So
the infrastructure is already in place. We are not having to
set up anything new. This is something that the case workers
did prior to 2007, and they will continue in the future.
Senator Pryor. Thank you. Well, I could ask a lot more
questions. This is interesting, and you are both obviously are
on top of it and a good resource for the Subcommittee, so I
appreciate that.
What I would like to do at this point is just hold my
questions for the record, and I am sure I will be submitting
some additional questions to you, and we will keep the record
open here for 2 weeks. I would really appreciate it if you all
could get back with us on those, and other Senators will
probably have questions as well.
So I want to thank you both for being here, and for your
helpful testimony, and I am glad that you both are on top of
it. We look forward to working with you. So, thank you.
Mr. Chodos. Thank you.
Ms. Zimmerman. Thank you, Chairman.
Senator Pryor. Now what we will do is we will move on to
our second panel, and it is going to take just a minute here
for the staff and witnesses to switch and get in place here.
Let me go ahead and introduce our two as they are getting set
up, in the interest of time.
Our first witness on the second panel is Peggy Gustafson. I
hope I am pronouncing that the right way. If I am not, you tell
me. Peggy Gustafson is the Inspector General at the Small
Business Administration. She has had a long career in doing
this type of work, and one of those jobs was here with Senator
McCaskill if I understand that correctly. So that is great.
And our second witness is Matt Jadacki, the Assistant
Inspector General for the Emergency Management Oversight in the
Office of Inspector General at the Department of Homeland
Security, one of the longer titles I have seen, but an
important title.
And again both of you all bring great expertise and
background to the table, and we appreciate that.
So Ms. Gustafson, would you like to start? We are doing a
5-minute rule on your opening statements, and by the way, both
of the previous witnesses kept it under 5 minutes. So I should
have given them the gold star when they were here, but I did
not.
Go ahead.
STATEMENT OF PEGGY GUSTAFSON,\1\ INSPECTOR GENERAL, U.S. SMALL
BUSINESS ADMINISTRATION
Ms. Gustafson. Thank you, Senator Pryor. My name is Peggy
Gustafson, and thank you for the opportunity to testify today
on behalf of the Office of Inspector General, Small Business
Administration.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Gustafson appears in the appendix
on page 44.
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And especially, thank you for the opportunity to get me
back in this hearing room where I have spent many hours when I
was a staffer on the Hill. It is exciting for me to be here.
So, just personally, thank you.
I want to focus my testimony today on several audits that
our office has recently conducted regarding duplicate benefits
in the Disaster Loan Program in SBA. As noted, this program
provide low interest long-term loans for physical damage caused
by disasters to both individuals and to businesses, regardless
of size. It is not specifically a small business program. This
is the loan program for disaster victims in the Federal
Government.
As Mr. Chodos had indicated, borrowers are not entitled to
obtain loans for any amounts that are covered by insurance,
grants or other nongovernmental sources. And what SBA does is
they enforce this restriction on duplication of benefits by
either reducing the amount of the loan approved in the
forefront, in the beginning, during the processing, closing or
disbursing of those loans, or requiring those borrowers who
have received their disaster loans to assign any insurance
benefits they receive to SBA, which, as noted, would be used to
pay down the balance of any loans that have been completely
disbursed already.
The benefits to a proper duplication of benefits analysis
are many. For one thing, when a duplication of benefits
analysis is done right and is effective, it reduces the amount
of debt owed to the Federal Government because it does reduce
the amount of outstanding loans and the amount of loans made.
This immediately has the impact of reducing cost to the
taxpayers because these disaster loans do carry a taxpayer
subsidy.
And the other thing that a duplication of benefits analysis
is it allows that other Federal moneys to go to victims who
have not been fully compensated for their loan, which is to say
if it prevents a disaster victim who has had all their needs
met from getting assistance, that assistance can then go to
somebody who still has unmet needs as a result of the disaster.
So it is a benefit to all disaster victims when it is done
correctly.
We, the OIG, recently conducted three audits that reviewed
the effectiveness of SBA's attempt to reduce duplication of
benefits. The most recent audit that we completed was issued
last month, and it examined whether disaster servicing centers
had effective systems for processing insurance recovery checks
to avoid the duplication of benefit. And the other two audits
related to the Gulf Coast disasters and the disaster loans for
the Midwest floods, and looked at whether SBA was adequately
checking for insurance benefits when it was processing and
disbursing those loans.
The February 2001 audit found that SBA did not have
effective procedures in place to avoid duplication of benefits
when it was receiving checks for borrowers from insurance
companies. We actually found that the two servicing centers
that SBA had, one had a 47 percent rate of error and the other
had a 23 percent error rate in a duplication of benefit
analysis.
As indicated, SBA had agreed with our recommendations and
is working to implement those recommendations already, which is
something that we find to be a very positive result. They are
attempting to recover some of the duplicate benefits from
borrowers and are involved in increased training for those
individuals in the servicing centers that are faced with doing
this duplication of benefit analysis in the face of these
recovery checks.
In the other audits that were performed in 2009, we had
found that the issue was that the loan officers had not been
checking to see if insurance payments had been made before
approving disbursing of loans. And again, SBA agreed with our
recommendations and has made very positive changes to make sure
that those kinds of checks, those kinds of calls are being made
to see whether there are insurance proceeds that need to be
taken into consideration.
So in general, the results of these three audits have been
well received by the agency, which we found to be a very
positive development. We are pleased with the actions that they
have taken, and we look forward to working with SBA and this
Committee, going forward, to do anything more that needs be
done in the area of duplication of benefits. Thank you.
Senator Pryor. Thank you. Mr. Jadacki.
STATEMENT OF MATT JADACKI,\1\ ASSISTANT INSPECTOR GENERAL,
EMERGENCY MANAGEMENT OVERSIGHT, OFFICE OF INSPECTOR GENERAL,
U.S. DEPARTMENT OF HOMELAND SECURITY
Mr. Jadacki. Good morning, Mr. Chairman, and thank you for
pronouncing my name correctly. It is about the first time in 30
hearings somebody got it right, so I appreciate that.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Jadacki appears in the appendix
on page 46.
---------------------------------------------------------------------------
As you mentioned, my name is Matt Jadacki, the Assistant
Inspector General for Emergency Management Oversight at
Homeland Security. Thanks again for the opportunity to discuss
the Federal Emergency Management Agency, the progress they have
made to recoup improper payments and to prevent and deter
fraud, waste and abuse.
Improper payments have been a growing problem, as you
pointed out in your opening statement, for the Federal
Government. Reported improper payments by government agencies
have increased significantly from an estimated $20 billion in
2000 to approximately $125 billion last year.
The Congress and the President have brought increased
attention to this issue. The Improper Payments Elimination and
Recovery Act of 2010 has focused agencies' attention not only
toward identifying programs vulnerable to improper payments and
estimating the annual error rate of such programs as called for
by the Improper Payments Act, but requiring agencies to
determine the cause of such improper payments, describe the
actions taken or planned to correct these causes and report the
actions to recover the improper payments.
A March 2010 Presidential memorandum, ``Finding and
Recapturing Improper Payments,'' states that executive
departments and agencies should use every tool available to
identify and reclaim funds associated with improper payments.
As a former Chief Financial Officer (CFO) at FEMA, I am
keenly aware of the difficult decisions necessary to provide
assistance to disaster survivors. If FEMA spends too much time
verifying all the details in an application, they may be
criticized for delivering disaster assistance too slowly.
Conversely, if they drop or circumvent controls designed to
detect or prevent improper payments in order to expedite
assistance, they may be criticized for disbursing funds that
are more prone to fraud or erroneous payments. FEMA needs to
balance its delivery of assistance with some level of control
to provide assurances that funds are delivered to eligible
recipients in the proper amounts.
Since Hurricanes Katrina and Rita, FEMA has disbursed over
$7 million in disaster assistance payments under its
Individuals and Households Program (IHP). Last summer, we began
an inspection of FEMA's fraud prevention efforts as part of
planned audit work. We learned that FEMA was not attempting to
recoup the 160,000 individual cases of improper IHP payments
totaling $643 million, identified by FEMA following Hurricanes
Katrina and Rita.
Many factors result in these improper payments. Because of
the high volume of applicants following Hurricanes Katrina and
Rita, FEMA turned off many of its systems controls in order to
process registrations quickly, allowing thousands of cases of
potentially fraudulent and other improper payments to occur.
Some applicants used vacant lots, post office boxes, cemeteries
as their damaged addresses. Others received payments for
property based on falsified rental agreements with addressed in
a damaged area. FEMA also made improper payments based on
multiple registrations with the same disaster-damaged
addresses.
In some cases, human error led to the improper payments.
For example, a FEMA case worker may have entered incorrect
banking information into the National Emergency Management
Information System (NEMIS) data base, resulting in a
nonapplicant receiving payment.
In some cases, the applicant's insurance covered the damage
or a secondary residence was damaged, making the applicant
ineligible for assistance, but the applicant was not aware of
these conditions of eligibility, and the FEMA case worker did
not collect all the necessary information to make that
determination.
These improper payments were discovered in a number of
ways. Some resulted from audits by our office and the
Government Accountability Office. Tips were received by various
fraud hotlines, from neighbors and Federal, State, and local
officials. FEMA's fraud prevention investigative branch
uncovered cases through data-mining and calls from law
enforcement officers. Still others were found by FEMA during
staff reviewing applicants' files when assistance needed to be
extended or an applicant applied for a second type of
assistance.
FEMA stopped recouping these payments in June 2007 as a
result of a lawsuit. The same year Department of Homeland
Security issued department-wide data collection standards which
superseded FEMA's process. FEMA developed a new recoupment
process which has been awaiting approval from the FEMA
Administrator since 2008.
In November 2010, FEMA staff began a review of each case.
If the review results in a finding that the payment was proper,
FEMA records will be revised and any portion of the debt paid
to date will be reimbursed. The applicant may appeal, make the
required payment or call FEMA to negotiate a payment plan,
request a compromise or waiver of all or part of the debt based
on inability to pay. If the repayment of the debt is not
resolved, FEMA forward the debt to the Department of Treasury.
Two days ago, subsequent to submission of my written
statement, FEMA announced that a new recoupment process had
been approved. However, the announcement did not state when the
first notices would be mailed, and we believe that this step
should begin promptly.
FEMA has made improvements in internal controls after
Hurricanes Katrina and Rita and prior to Hurricanes Ike and
Gustav, which resulted in significant decreased in duplicate,
improper and potentially fraudulent registrations. Leading
reasons for the improvement include multiple tests by a
contractor to check the validity of information supplied by
applicants, such as Social Security numbers, damaged property
addresses as well as in-person inspections of every damaged
property to validate damage, occupancy and ownership.
We will soon be issuing a report on FEMA's fraud prevention
efforts, which includes additional background on the recoupment
issue, and discusses the current status of FEMA's fraud
prevention and investigative branch created after the four
hurricanes in Florida in 2004. The report will suggest possible
improvements to internal controls for the IHP program and
encourages fraud prevention awareness training for all
employees.
Mr. Chairman, this concludes my prepared remarks. I will be
happy to answer any questions you may have.
Senator Pryor. Thank you both.
If I could start with you, Ms. Gustafson. Is that close
enough?
Ms. Gustafson. That is perfect.
Senator Pryor. OK. Let me ask a little bit of a technical
question, I guess, about Section 312 of the Stafford Act. It is
the duplication of benefits section. Do you believe that the
language needs to be rewritten or clarified to give better
guidance to the agency about how to interpret the statute
across agencies?
Ms. Gustafson. Actually, I can answer that question now----
Senator Pryor. All right.
Ms. Gustafson [continuing]. Because I think it definitely
does.
Senator Pryor. It needs to be rewritten.
Ms. Gustafson. I absolutely think it does need to be
rewritten. I think that there have been a lot of--first off, I
do not think it is the clearest language ever anyway.
Senator Pryor. Right.
Ms. Gustafson. But I think that there have been significant
developments in the Federal Government's response to disaster
victims and kind of the disaster relief framework that really
caused me to believe there should be a long look at Stafford.
For example, as you noted in your opening statement, HUD
plays a very big role in disasters now, and that really was not
the case when that section was first written. And I think it
would be helpful because you are talking about at least three
agencies with primary responsibility for money. I mean you have
SBA with loans, you have FEMA with their grants, and you have
HUD with CDBG.
I think it would be tremendously helpful for the government
to give very specific, clear notice of what Congress's intent
is as far as how each of those agencies should be. They know
they need to coordinate, but what Congress views how they
should coordinate and kind of what the disaster relief should
look like.
Senator Pryor. Well, let me ask. The followup on that then
is do you have either on paper or in your minds how that should
be changed and how those responsibilities should be
coordinated?
Ms. Gustafson. I do to a certain extent. I would be very
happy to share with you in a written form kind of some
thoughts.
I mean I do think that my preference, just kind of speaking
just informally here, is I think that there is a germ of an
idea of what the relief should like. I mean what the Stafford
Act envisions, which is immediate relief, loans that the
government would then expect to be repaid but then also grants.
And I think that you can keep that kind of intent on the
government in place but just kind of tighten it up, which is to
say acknowledge that the first thing you need to do is get
money to the disaster victims.
I mean they do not need to be waiting for loans to get
money that they need right away, but then note that in general
there is some money that probably should be given in the form
of loans that the government would expect to have back, and
then again grants as well.
So I would be happy to get back with you on something
specific. We would be very happy to work with staff to talk it
through.
Senator Pryor. Yes, that would be great. If you could put
your thoughts down in writing. It does not have to be
legislative language but just the concepts and how you think
the pieces of the puzzle fit.
And also, as you are doing that, let me ask this question.
Do you think that the three agencies with the primary
responsibility agree on what their roles should be, or is there
a legitimate conflict or disagreement about how they should be
working in these disasters?
Ms. Gustafson. I think that there is enough ambiguity in
the laws and the regs right now that it is not that they
necessarily do not agree, but I think that they would be aided
by more specific guidance.
I do think HUD is an incredibly important player at the
table. I think they are not brand new but more recent. I think
that every agency is doing what they believe their mission to
be, but I do not know.
Absolutely, I mean I think they are taking their mission
very seriously. I think they are doing it. But I do not know
that as they act along those lines whether the coordination is
exactly where it needs to be.
Senator Pryor. Right. And part of that, at least in large
part in your mind, is because the statute is hazy on that?
Ms. Gustafson. Yes.
Senator Pryor. Yes.
Ms. Gustafson. Yes, and that we are talking about different
agencies at different times.
Senator Pryor. Right.
Ms. Gustafson. So HUD comes in at a different time.
Senator Pryor. Right. OK. Well, if you could work on that
for us, that would be great, and share that with our staff. We
would like to look at that, and maybe if we can work through
the process maybe we can develop some legislation on it.
You said a few moments ago, I think at least the way I
heard what you said is that there seems to be a pattern where
SBA staff is not checking with insurance companies to know what
has been paid or what will be paid. Not to put Mr. Chodos on
the spot, but on the previous panel he said that he felt like
there was pretty good coordination between the insurance
industry and SBA. So I guess I am detecting a note of
inconsistency there.
Ms. Gustafson. I think that rather than inconsistency I was
really talking about what the audits had found, and those
audits were in 2009. I think that my audit staff has been very
satisfied with the changes that SBA has made, which is to say
doing the regular checks with the insurance company, doing the
training that says before you do a disbursement you are going
to call the insurance company on record and say have you
disbursed any of the money.
So no, rather than discontent, I think that is an example
of kind of a before-and-after testimony.
Senator Pryor. Do the insurance companies have to deal with
SBA by law, or is this one of these things that basically the
insured sort of assigns his payments, or his rights, under the
insurance contract to you? Is that how that works?
Ms. Gustafson. Yes, they do not have to deal with it by
law.
So basically, the way that it kind of has to work, given
the current law, is SBA is initially dependent on the insured
for telling SBA that there is insurance there. Now they tend to
be home, so there is usually insurance. And I do not know that.
I am not saying that is a problem. But first you have to hear
that there is an insurance company, and then you will get the
assignment and send it to the insurance company.
And sometimes the insurance company, as a lawyer, does not
really care. So they will be sending the checks direct. That
definitely does happen----
Senator Pryor. Right.
Ms. Gustafson [continuing]. Where they still send their
checks directly to the insured, even in the face of an
assignment. It is not that they are doing anything against the
law. They are just doing the way they are doing.
Senator Pryor. Right. But what you are saying is you are
very pleased with the changes that have occurred.
Ms. Gustafson. Yes.
Senator Pryor. And you think it is set up the proper way
now, about as best as possible. They are doing it the way they
ought to do it now?
Ms. Gustafson. They are doing the best that they can do.
Yes, they are doing it the way they ought to be doing it. And
my understanding is the testing that they have even done to see
if it is being done, it is being done. So they have instituted
that type of control, and it appears that control is being used
by the employees at the center.
So, yes.
Senator Pryor. As best you can tell are there any obstacles
that remain between SBA and the insurance company? Are there
any legal reasons or even State law reasons, or anything like
that, that are causing a problem there as best you can tell?
Ms. Gustafson. No, I do not think there are any legal
obstacles. No.
Senator Pryor. OK. Mr. Jadacki, let me ask you about
something that you said. You mentioned that several of FEMA's
programs are at high risk for improper payments, and there were
$186 million in improper payments in 2010; there are likely to
be about $163 million in improper payments in 2011 and another
$140 million in 2012.
To me, when I hear numbers like that, it sounds like we
have a chronic problem. Year after year after year, we are
seeing the same problems over and over. Is that fair?
Mr. Jadacki. Yes, there has been a number of programs that
are identified high risk. It is not only the disaster programs.
It also includes national flood insurance programs and other
types of preparedness grants.
And again, I want to make it clear. An improper payment
does not necessarily have to be fraud. It could be the correct
payment to the incorrect person or individual.
But FEMA is required by law to estimate how much the
percentage would be and the total amount based on that
percentage every year under the Improper Payments Act.
Senator Pryor. And so how? Give me a sense of context here
because again if you are talking about maybe $186 million 1
year, $163 million another, $140 million another year, it does
seem maybe there is a downward trend, maybe. But in the
context, how much money are we talking about total here where
there might be $186 million in improper payments?
Mr. Jadacki. It all depends on whether you are dealing with
disaster payments alone and the amount of disaster activity
during that period. It could be a major catastrophic event, and
you would see a spike like we saw after Hurricanes Rita and
Katrina. In low disaster years, it could be significantly less.
So it is hard to predict based on just a steady average like
other programs would have.
Senator Pryor. So does FEMA need to make changes to prevent
these improper payments, and if so, what would those be?
Mr. Jadacki. Again, I think FEMA has already done a lot. As
I mentioned in my written statement, the amount of improper
payments for Hurricane Ike, for example, in Texas has dropped
off significantly.
One of the important things to remember is that there was a
lot of expedited assistance that happened after Hurricane
Katrina. We all know about the $2,000 debit cards that went
out, and they lost control about who received those things.
And also, an important back-end control is when the
inspectors actually go out and validate the information with
the people living in the homes that were damaged so they can
provide documentation to support the damage. In a lot of cases,
the individuals were not even in the area making it impossible
to get accurate damage assessments.
And what FEMA did was base the amount of payment on the
water levels taken from aerial views. So a really important
back-end control was not in place after Hurricane Katrina.
We did some analysis after the Midwest floods, for example,
in Iowa, and we saw a really big drop-off in improper payments
because they started using contractors to check basic things
like Social Security numbers, addresses, number of checks going
to the same address, or outliers where individuals might live
in a different State than was affected. We were looking for
those types of things.
It is critical to identify these things early on too. If we
wait 5, 6 years later, it just makes it really difficult to
recoup the funds.
Senator Pryor. Right. And so are you confident that the new
procedures are better?
Mr. Jadacki. The procedures are better. There are some
controls that were either circumvented or dropped after
Hurricane Katrina that are back in place right now.
There are always going to be opportunities for fraud. There
are always going to be opportunities for one of the issues FEMA
deals with all the time is insurance. They have to check on the
application whether insurance or not. They cannot duplicate the
payment if a claimant also gets insurance. If they do not check
the box that there is insurance on there, there is literally no
way FEMA can validate who the insurance company and whether the
proceeds are coming in.
So there are always going to be opportunities for improper
payments, but I think just doing basic checks like Social
Security number, doing even spot-checks on residences, is going
to help mitigate improper payments.
There are other tools they should be using too, such as
data-mining and predictive analysis so they can focus on some
of the more vulnerable areas.
Senator Pryor. OK. So having floods in, say, North Dakota
or something is one thing. Do you think these the new
procedures--will stand up to another massive disaster like a
hurricane, or something similarly large-scale, such as
earthquakes?
Mr. Jadacki. If we look at the example in Japan right now,
where a tsunami literally wiped residents away and a lot of
people, it is very difficult to validate people owned those
homes and whether they lived in them or not.
It is just I think FEMA needs to come up with some
alternative measures. And when they took the aerial view and
based on the water, it was probably a good compensating control
they put in place, but certainly nothing perfect. When you have
a catastrophic event like that, it is going to be very
difficult to do those important validations and those types of
things.
Senator Pryor. Let me go back to something you said a few
moments ago. You mentioned the debit cards.
Mr. Jadacki. Right.
Senator Pryor. And I think those were hard to track. It may
be hard for you to get a handle on the number of how much of
that was ``wasted.'' That means improper or maybe fraudulent, a
lot of different categories I could go into.
But anyway, debit cards would be an example, but there were
lots of other examples with FEMA during Hurricane Katrina. We
could go through a long list. There was this whole thing about
ice being moved around and stored and all that. In our State,
we ended up housing tens of thousands of trailers, and mobile
homes.
Has your office done a calculation of about how much those
errors and mistakes cost the taxpayer and FEMA in Hurricane
Katrina?
Mr. Jadacki. We have done a lot of work in this area, but
we have not come up with an estimate. We did a lot of work
after Hurricane Ike, for example and found out there were
improvements in some of the logistics management, and I think
FEMA is making good progress.
But we still did find some major problems down there, and a
lot of it was just lack of coordination. It may not be the
logistics system itself. It is people in Washington ordering
commodities, people on the ground ordering commodities, the
State getting commodities. And it does result in waste if you
are getting three types of commodities and only one type is
needed.
It is difficult, but I think FEMA is doing much better.
They have a better, more robust emergency management system. I
know they are doing a lot of partnering now with the private
sector. The experts out there, like some of the Wal-Marts and
some people that are actually used to moving commodities and
goods and things.
They have a number of pre-disaster contracts in place, so
they do not have to start doing a lot of things like they did
after Hurricane Katrina where they were literally going through
a phonebook, trying to find who sells travel trailers and buy
their entire inventory.
So I do not think they are there yet, and I do not know if
there is a ready State when FEMA is going to be there, but I
think they are making improvements since Hurricane Katrina.
Senator Pryor. But you think your office has done enough
work on it to where maybe you can put together a global number
about how much was again I will use the word ``wasted.'' That
may not be the best word, but how much was wasted there in
Hurricane Katrina.
Mr. Jadacki. That might be difficult for us to do. Again,
it all depends on interpretation of waste.
I mean you talked about the travel trailers up in Hope,
Arkansas, and I had the opportunity to visit. They overbought.
We saw the memo that says ``buy.'' We never saw the memo that
says ``stop buying.''
Senator Pryor. Right.
Mr. Jadacki. As a result, we have an airport up there full
of travel trailers. That might be considered waste. But when
the decision was made, who knew?
And also the decision that you could not put travel
trailers in flood plains was an issue too.
So there were a lot of things that constituted waste, but
if you are on the ground you are trying to make the best
decision.
Senator Pryor. Not to relive that whole trailer thing, but
I think it cost them something like a million dollars a week
just to maintain.
Mr. Jadacki. Maintain that facility, right. Yes.
Senator Pryor. To maintain trailers that they could never
use. I mean the whole thing was fouled up. But I may work with
you on that, see if we can get a more accurate sort of global
number there.
Let me ask about Ms. Gustafson said a few moments ago that
she did think that Section 312 should be revised, maybe should
be rewritten, so there is better coordination and people know
their roles. It is kind of unclear right now.
Do you agree with that? Do you think we ought to rewrite
312?
Mr. Jadacki. I think the Stafford Act is broadly written
for a reason. I think a lot of it is interpretation although
coordination with other agencies is very difficult because of
Privacy Act concerns and sharing data.
One of the things we learned after Hurricane Katrina is
that FEMA has their temporary housing program, but we also know
that other Federal agencies have housing programs too. So FEMA
may be duplicating with the HUD, U.S. Department of Agriculture
(USDA), or Veterans Administration (VA) housing programs. But
unless you are looking for specific data, it is just difficult
to coordinate with other Federal agencies on that.
I think FEMA is doing a pretty good job. What they are
responsible for under mission assignments is to task out
activities to other agencies. For example, FEMA has an
interagency agreement with HUD to administer the Disaster
Housing Assistance Program.
And I really do not think they have a good handle on what
HUD is doing on that. So there would be some coordination to
determine whether FEMA getting the biggest bang for the buck on
that, is it cost effective, is it performing as it is planned
to perform for individuals to live independently.
So there are some issues there, but I think one of the
biggest problems is that the Privacy Act makes it real
difficult for Federal agencies to share information among
themselves.
Senator Pryor. OK. Well, we will work on that, and we will
see if we can come up with some better language and a better
Section 312.
Let me ask you again, Mr. Jadacki. I do not know if you
heard the testimony earlier, but I was asking the previous
panel about FEMA's identification of $160,000 erroneous
payments, or at least potentially that many. What percentage of
those do you think, based on your expertise and experience
might be fraud?
Mr. Jadacki. It is hard to put a number on that. I mean you
have to go through each of them. I think because FEMA dropped a
lot of controls I think there is going to be a higher instance
of fraud in these particular examples from Hurricanes Katrina
and Rita than we do normally see in a disaster.
I know the Department of Justice was very aggressive right
after Hurricane Katrina by establishing the Hurricane Katrina
Fraud Task Force which has now been converted to the National
Center for Disaster Fraud, and it continued to have individuals
being prosecuted for very small amounts, like $2,000 here and
there, and up to several hundred thousand dollars.
So it is higher than I have seen, but putting a number on
the $160,000 is very difficult. I would expect it would be
higher than other disasters, but I just do not know how many it
would be.
If you are interested, I know DOJ published a 5-year
anniversary of their work they did on the Hurricane Katrina
Fraud Task Force, and that identifies all the convictions,
indictments, restitutions. It is a pretty interesting document,
to give you some sort of sense of the activity down there.
Senator Pryor. If we can get that, that would be great.
And I guess based on what you just said it is fairly safe
to say that if FEMA does not have the right controls in place
it almost encourage fraud, or you are going to see a higher
incidence of it.
Mr. Jadacki. Yes. We issued a report a couple years ago
that discussed where claimants could apply for assistance
online or apply for assistance by phone. If you apply for
assistance by phone, some of the controls are dropped--
basically, Social Security numbers. And we actually found
Social Security numbers, 123-45-6789, some of those types of
examples, and they were paid checks.
Senator Pryor. Yes.
Mr. Jadacki. And we saw sequential ones too if you applied
online.
So we said, this does not make any sense; FEMA needs to do
the basic checks on those claims.
So even something as simple as just doing a quick
background check on Social Security numbers, and a lot of the
information is open-source information. FEMA does not need to
go to Social Security. They can go to ChoicePoint and some of
those organizations that provide that. Accredited companies can
provide that information for you.
Senator Pryor. OK. Well, you mentioned a few moments ago
that there were some prosecutions down to fairly small dollar
amounts, $2,000, et cetera.
Mr. Jadacki. Yes.
Senator Pryor. Do you have a sense of how much it costs the
government to try to recoup this money?
Mr. Jadacki. It was a zero tolerance policy that the
Department of Justice had down there. Working with U.S.
attorneys for a number of years, and other agencies, it usually
had to be a high dollar amount or some sort of sensitive issue
before they would take the case.
One of the things they wanted to do is provide a deterrent.
So prosecuting a $2,000 case may have cost money, but provides
a deterrent when you put the people in handcuffs and on TV.
That zero tolerance messages was one they wanted to send out:
We are watching every single case no matter how small.
It is hard to measure how much a deterrent it is, but there
was an increase in checks coming back to the Federal
Government. When fraudsters see these types of cases, they
realize that they might be next. So that was DOJ's goal.
I think they have raised the threshold now, but it is
important to get out there early to show that we are checking.
We may not get everybody, but the fact is you may be selected
or you may be targeted. It is a big deterrent.
Senator Pryor. Have you guys done any kind of analysis
about how much it costs to try to recoup this?
I recall one of the previous panelists said that a lot of
this is done by existing government personnel. Right?
Mr. Jadacki. Right.
Senator Pryor. So I assume she might say that it does not
cost anything because they are already there and they are
working anyway.
Mr. Jadacki. Exactly.
Senator Pryor. But then again, there are a lot of hours and
a lot of resources that are devoted to this. So have you all
done an analysis on that?
Mr. Jadacki. We have not done an analysis, but I think it
is important to recognize that it is part of the role of the
Federal Government to have internal controls in place. And one
of the internal controls is to actually review files and make
sure payments are legitimate, even on a sampling type basis.
But the fact is these internal control checks are
identified by law. FEMA must review improper payments when FEMA
sends a 44-cent envelop out to an improper payment recipient
they may get a certain percentage of the money back or not. But
at least it starts a process, and then they can make a
determination whether it is worth pursuing or not.
Somebody may say oh, I have been waiting for 10 years for
you guys to come and recoup this money that I have in my bank.
I am going to send it back to you.
But in other cases, if it is going to result in prolonged
litigation, it may not be cost effective to pursue.
Senator Pryor. OK. I do not know if this is the right
forum, but I would like to request that you both do that
analysis and try to give us a sense of how much it costs to
recoup this money. So again, if you want me to do it in a
letter or if you want me to just ask for it here, I can, either
way.
Mr. Jadacki. OK.
Senator Pryor. We can talk about that.
Mr. Jadacki. Sure.
Senator Pryor. But I do think that is important for us to
know. I know everybody is trying to do the right thing, trying
to recoup that should not have been paid out, but at some point
you need to do some sort of cost-benefit analysis to see if it
is worth really pursuing some of this, or see if there is a
threshold there.
You have been great. I could ask more questions, and I may
submit a few more followups for the record, but I really
appreciate your attention to this and your work on this.
We will hold the record open for 2 weeks. I anticipate that
we will have at least a couple of our Senators, maybe more,
submit questions for the record, and we look forward to working
with you on those.
So with that, what I would like to do is go ahead and
adjourn this hearing but continue to work with you all in
various capacities as we move forward. Thank you.
[Whereupon, at 11:29 a.m., the Subcommittee was adjourned.]
A P P E N D I X
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