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67–119 PDF 2011

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 

and Governmental Affairs 

( 

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(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

MARK BEGICH, Alaska 

SUSAN M. COLLINS, Maine 

TOM COBURN, Oklahoma 

SCOTT P. BROWN, Massachusetts 

JOHN MCCAIN, Arizona 

RON JOHNSON, Wisconsin 

JOHN ENSIGN, Nevada 

ROB PORTMAN, Ohio 

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 

MARY L. LANDRIEU, Louisiana 

JON TESTER, Montana 

JOHN ENSIGN, Nevada 

SCOTT P. BROWN, Massachusetts 

RON JOHNSON, Wisconsin 

DONNY WILLIAMS, Staff Director 

AMANDA FOX Professional Staff 

RYAN TULLY, Minority Staff Director 

KELSEY STROUD, Chief Clerk 

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(III) 

C O N T E N T S 

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 

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(1) 

PREVENTING IMPROPERLY PAID 

FEDERAL ASSISTANCE IN THE AFTERMATH 

OF DISASTERS 

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 

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2 

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. 

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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. 

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4 

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, hardworking 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? 

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5 

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? 

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6 

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

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. 

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 

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7 

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

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. 

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. 

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8 

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 

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9 

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 

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10 

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. 

H605-41331-79W7 with DISTILLER

11 

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. 

H605-41331-79W7 with DISTILLER

12 

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. 

H605-41331-79W7 with DISTILLER

13 

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. 

H605-41331-79W7 with DISTILLER

14 

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. 

H605-41331-79W7 with DISTILLER

15 

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. 

H605-41331-79W7 with DISTILLER

16 

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

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. 

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 speH605-41331-79W7 with DISTILLER

17 

cifically 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 

H605-41331-79W7 with DISTILLER

18 

1The prepared statement of Mr. Jadacki appears in the appendix on page 46. 

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. 

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. 

H605-41331-79W7 with DISTILLER

19 

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 

H605-41331-79W7 with DISTILLER

20 

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? 

H605-41331-79W7 with DISTILLER

21 

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 

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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 

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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 backend 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. 

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24 

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 

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25 

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? 

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26 

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. 

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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? 

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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.] 

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