[Senate Hearing 112-82]
[From the U.S. Government Printing Office]

                                                         S. Hrg. 112-82



                               before the


                                 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
                        and Governmental Affairs

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               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


                   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

Opening statement:
    Senator Pryor................................................     1
    Senator Landrieu.............................................     3
Prepared statements:
    Senator Pryor................................................    29
    Senator Landrieu.............................................    32


                        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


Questions and responses submitted for the record from:
    Ms. Zimmerman................................................    51
    Mr. Chodos...................................................    68
    Ms. Gustafson................................................    70
    Mr. Jadacki..................................................    74

                       PREVENTING IMPROPERLY PAID



                        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.


    Senator Pryor. All right. I will go ahead and call us into 
    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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?


    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.
    \1\ The prepared statement of Ms. Zimmerman appears in the appendix 
on page 34.
    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.


    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.
    \1\ The prepared statement of Mr. Chodos appears in the appendix on 
page 41.
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    Go ahead.


    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 
    \1\ The prepared statement of Ms. Gustafson appears in the appendix 
on page 44.
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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 
    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 
    Ms. Gustafson. I do to a certain extent. I would be very 
happy to share with you in a written form kind of some 
    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 
    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 
    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 
    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 
    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 
    Has your office done a calculation of about how much those 
errors and mistakes cost the taxpayer and FEMA in Hurricane 
    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 
    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 
    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 
    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 
    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 
    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 
    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.]

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