THE USE OF PROCEEDS FROM GULF COAST
DISASTER LOANS
Report Number: 09-06
Date Issued: January 15, 2009
Prepared by the
Office of Inspector General
U. S. Small Business Administration
U.S. Small Business Administration
Office of Inspector General
To: Steven Smith, Chief, Executive Office of Disaster
Strategic Planning and Operations
Memorandum
Date:
January 15, 2009
Herbert L. Mitchell, Associate Administrator
Office of Disaster Assistance
/s/ original signed
From: Debra S. Ritt
Assistant Inspector General for Auditing
Subject: Audit of the Use of Proceeds from Gulf Coast Disaster Loans, Report No. 09-06
This final report summarizes the results of our audit of the Use of Proceeds from
Gulf Coast Hurricane Disaster Loans. As of November 2008, approximately
$6.6 billion in loans had been disbursed to assist Gulf Coast disaster victims. The
objectives of the audit were to determine whether the Office of Disaster Assistance
(ODA) has adequate controls in place to reasonably ensure that the proper
documents were secured from borrowers and adequately reviewed before making
subsequent1 loan disbursements to disaster victims.
To determine whether ODA had adequate controls to secure the proper documents
before distributing additional loan proceeds, we reviewed Borrower’s Progress
Certification forms and other supporting documents on 127 of 4,252 statistically
sampled loans that were disbursed between October 2005 and October 2007. We
compared these documents to requirements established in the Loan Authorization
and Agreement for each loan, and Standard Operating Procedures (SOP) for the
Program. To determine whether the Small Business Administration (SBA)
adequately reviewed the expenditure of prior proceeds, we reviewed Borrower’s
Progress Certifications and entries in SBA’s Disaster Credit Management System
(DCMS). We also interviewed ODA staff assigned to the Fort Worth Loan
Processing and Distribution Center (PDC), including attorneys within the
Accounts Department, to determine the process followed for subsequent
disbursement reviews. Additionally, we reviewed policy revisions relating to the
requirements for subsequent disbursements.
1
Throughout the report we refer to subsequent disbursements, which include those disbursements made after the initial
distribution of loan proceeds.
2
Finally, we contacted contractors associated with 31 loans to verify that they had
completed work as claimed by borrowers, and visited selected borrowers’ homes
to inspect progress made on repairs.
We conducted the audit from December 2007 to August 2008, in accordance with
Government Auditing Standards as prescribed by the Comptroller General of the
United States.
BACKGROUND
In 2005, Gulf Coast Hurricanes Katrina, Rita and Wilma caused more than
$118 billion in estimated property damage. Many of the disaster victims of these
hurricanes were eligible for SBA disaster loans. Before SBA can disburse funds,
disaster loan applications must undergo various stages of processing. Real estate
physical disaster loans over $10,000 and economic injury loans over $5,000 must
be secured with collateral. Initial disbursements are made to borrowers in these
amounts. Subsequent disbursements can be made to borrowers, as requested,
based on support for how prior disbursements were used. Generally, secured loans
are disbursed in stages that correspond with the borrowers’ needs and how they
spent prior disbursements.
The Borrower’s Progress Certification (SBA Form 1366) requires the borrower to
certify that he/she used initial loan funds in accordance with the Loan
Authorization and Agreement (SBA Form 1391). The form requires borrowers to
itemize expenditures made with the loan proceeds and to attach receipts as proof
of expenditures.2 Prior to 1994, ODA was required to perform receipt reviews for
all subsequent disbursement requests after $10,000 had been disbursed to
borrowers on both unsecured and secured physical loans to ensure the proper use
of proceeds before authorizing further disbursements.
In 1994, the threshold for secured loans was temporarily raised to $25,000, and
subsequently made permanent in SOP 30 50 4, Disaster Assistance Program,
which allowed subsequent disbursements up to $25,000 upon receipt of the SBA
1366 from the borrower demonstrating how 80 percent of prior proceeds had been
used. These requirements were important controls to ensure repair work was
being performed and to deter fraud in the disaster loan program. However, in
March 2006, ODA again changed its requirements for reviews of borrower
expenditures by requiring evidence of how previously disbursements had been
used only when the aggregate amount of funds disbursed would exceed $50,000.
Additionally, case workers could use their discretion in determining which
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Borrowers are not required to provide proof of expenditures on items costing less than $1,000.
3
documents could serve as evidence of how prior proceeds were used. In
November 2007, ODA made the new threshold permanent in version 6 of its SOP.
Case workers in the Accounts Department at the PDC are responsible for
reviewing subsequent disbursement requests to ensure borrower receipts support
their use of prior loan proceeds. If more detailed reviews are needed, the
Accounts Department can request that the Loss Verification Department conduct
them. Despite which group conducts the reviews, all disbursements are ultimately
approved by the Accounts Department.
RESULTS IN BRIEF
ODA did not have adequate controls to ensure that proper borrower certifications
and receipts were submitted with requests for subsequent disbursements. Based
on our sample, 69 of the 127, or 54 percent, of the disbursements were made
without proper documents and certifications. Rather, ODA processed
disbursements with incomplete and unsigned certifications from borrowers. For
example, case workers relied on vendor quotes and contractor proposals as
evidence of work completed, receipts of questionable authenticity, and in many
instances, no supporting documentation.
This occurred because ODA made procedural changes that eliminated from review
borrower documentation supporting how prior proceeds were used for
disbursements under $50,000 on secured loans and provided ODA case workers
with discretion over which documents to review in determining whether prior
proceeds had been used appropriately when disbursing over $50,000 in aggregate.
Previously, case workers were required to review the Borrower’s Progress
Certification forms and accompanying receipts. As a result, ODA processed
questionable claims involving potential fraud. Based on several smaller samples,
the OIG identified 4 potential false statements from borrowers and one instance
where a damaged home was not brought back to its original condition, as required,
with the use of loan proceeds.
Through discussions with vendors associated with 31 of the disbursements, we
determined that ODA accepted inadequate support for $350,000 in expenditures
on four loans that, upon further analysis, proved to be false claims made by the
borrowers. Contractors hired to make the repairs on the affected properties told us
they had not completed the work claimed by the borrowers. Although the support
submitted by the borrowers was questionable, case workers did not follow up with
contractors and/or inspect the damaged property to verify whether the proceeds
were used as claimed. Further, because ODA had not secured borrower
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certifications for these expenditures, the Agency may have weakened its ability to
pursue criminal penalties as well as civil remedies from these borrowers under the
False Claims Act.
ODA officials told us that the review requirements were changed to expedite the
disbursement process and to make it easier for borrowers to get subsequent
disbursements. However, in changing the requirements, the Associate
Administrator for Disaster Assistance acknowledged that his office did not inform
borrowers of the changes in requirements for obtaining subsequent disbursements.
Consequently, borrowers continued to submit certifications and receipts, and
although these submissions were incomplete or inaccurate, they were accepted by
SBA, but not reviewed. Had ODA reviewed these documents it may have noted,
as the OIG did, that some of the documentation was questionable or false.
Further, while we acknowledge that ODA may have been unable to review every
disbursement given the large volume of Gulf Coast loans, at a minimum, we
believe it should have reviewed a sample of disbursements to obtain assurance that
funds were spent in accordance with borrowers’ loan agreements, and should have
automatically rejected unsigned forms from borrowers. Further, because the
change in review requirements was implemented through an amendment to SBA’s
SOP, this policy is in effect for all current and future loans. Therefore, the
problems noted in the audit will likely persist until the procedure is strengthened.
Finally, while ODA officials told us that reviews had been completed for all
disbursements over $50,000 in aggregate, we could not confirm whether reviews
had actually been made because individuals conducting the reviews did not always
sign the Borrower Progress Certification forms or document their reviews in
DCMS. Based on DCMS entries, we confirmed that loss verifiers reviewed 33 of
the 127 disbursements. However, the remaining 94 disbursements were reviewed
by ODA case workers who did not document their reviews in DCMS or on the
certification forms, with 30 of these that required reviews. Program officials told
us that the SOP does not require reviewers to sign these forms, which would
provide evidence of reviews. Further, ODA did not require that site visits to
damaged properties take place, in cases where questionable receipts were
submitted as evidence of the use of loan proceeds.
We recommended that ODA reject unsigned and/or incomplete Borrower’s
Progress Certification forms. Further, because the “use of proceeds” review is an
important control to detect fraudulent claims and to make sure repairs are being
made, we also recommended that ODA revise its SOP to require either a review of
all, or a sample of, disbursements over $10,000 to provide assurance that
borrowers used prior disbursements in accordance with their Loan Authorization
and Agreement. The SOP should also require that the Borrower’s Progress
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Certification forms and supporting receipts be reviewed and the certification be
signed by ODA to document that a review was made. Finally, we recommended
that ODA re-emphasize with reviewers that they should conduct site visits or
contact vendors to confirm expenditures when questionable contractor receipts are
submitted by borrowers.
All recommendations were agreed to by ODA. We request written comments to
our office identifying planned actions and target dates.
RESULTS
54 Percent of Borrowers Did Not Adequately Disclose How Loan Proceeds
Were Used or Certify to Their Expenditures
Our review of 127 disbursements disclosed that ODA had not secured adequate
supporting documentation for 69, or 54 percent, of the disbursements, prior to
distributing subsequent loan proceeds. These disbursements totaled $10.1 million.
Of the 69, 13 were over $50,000 in aggregate, although reviewed under the new
requirements, were disbursed without adequate evidence supporting how prior
proceeds were spent. The other 56 disbursements were under $50,000 in
aggregate. While ODA requires borrowers to send in receipts and certify how
proceeds were used, these were not reviewed by ODA and hence a majority of
them were accepted even though they were incomplete.
In 43 of the 69 instances, borrowers submitted vendor quotes and contractor
proposals as evidence of work completed, receipts of questionable authenticity,
and incomplete and unsigned borrower certifications of how loan funds were
spent. In the remaining 26 instances, disbursements were made to individuals who
had provided no supporting documentation. For example:
• One borrower received $1.5 million without any supporting receipts. The
only documentation provided was a letter from the contractor, stating that
he was paid by the borrower for work he had performed. However, the
letter did not identify how much of the completed work was associated with
the SBA loan.
• ODA disbursed $850,000 to a borrower based solely on invoices provided
by vendors. However, the borrower did not submit receipts to demonstrate
that he had actually paid the vendors.
• One borrower received $1.5 million by submitting primarily cancelled
checks that he wrote to himself for cash, which predated his SBA loan.
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• One borrower received $256,517 based on a vendor quote that was used as
evidence of work completed. Upon contacting the vendor to verify that the
proceeds were used for work on the borrower’s home, we learned that the
vendor only billed the borrower for approximately $1,200.
• Another borrower received $361,600, but submitted only a blank and
unsigned Borrower’s Progress Certification form with no receipts or any
other documentation supporting his use of the loan proceeds.
• ODA disbursed $47,100 to another borrower, who submitted only an
estimate for needed repair/reconstruction work. Our site visit to the
borrower’s damaged property revealed that the borrower did not use the
proceeds to bring his home back to pre-disaster condition, as required by
his Loan Authorization and Agreement. Rather, the borrower had only
renovated the garage, while the rest of the house remained unfinished.
Of the missing documents, the Borrower’s Progress Certification forms and
accompanying receipts are the most critical evidence for determining borrower use
of proceeds. The certification form is the borrower’s representation of how he/she
spent prior loan funds. Borrowers are asked to list on the form 80 percent of the
expenditures they made with the SBA loan proceeds and to attach receipts
supporting those expenditures. Should SBA later discover that the information
provided on the forms is false; the certification can then be used as evidence of a
false claim for purposes of pursuing either criminal penalties or civil remedies
under the False Claims Act. Under the Act, any person who knowingly presents to
the United States Government a false or fraudulent claim for approval is liable to
the U.S. Government for civil penalties of not less than $5,000 and not more than
$10,000, plus three times the amount of damages the Government sustained
because of the act of that person.
ODA Changed Documentation Requirements, Potentially Impacting Its
Ability to Ensure Proceeds Are Used Properly and to Pursue Criminal and
Civil Remedies for Fraudulent Claims
In March 2006, ODA temporarily changed its review requirement to those
disbursements over $50,000 in aggregate, and in November 2007, ODA reissued
the SOP, making the change permanent. However, according to the Associate
Administrator for Disaster Assistance, borrowers were not notified of this change
and continued to submit certifications and receipts with requests for subsequent
disbursements below $50,000. ODA accepted these submissions, but did not
review them as only aggregate disbursements exceeding $50,000 require a review
of prior proceeds use.
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PDC officials told us that their intention in changing the review requirement was
to expedite the disbursement process and make it easier for borrowers to get
subsequent disbursements. They acknowledged the risk involved in not verifying
disbursements, but stated, “it was a trade-off they had to live with, realizing that
the new procedures would de-emphasize the importance of the Borrower’s
Progress Certification form.” While ODA may have been unable to timely review
every disbursement given the large volume of loans processed for the Gulf Coast
hurricanes, at a minimum, we believe ODA should have reviewed a sample of
subsequent disbursements between $10,000 and $50,000 to provide assurance that
borrowers were generally using their loan funds as intended.
Further, we believe that when ODA first raised the threshold to $25,000 in 1994,
its basic policy of controlled disbursements did not change. In its 1994
memorandum, ODA states that because it was criticized in the past for borrowers
using their loan funds for ineligible purposes, their intent was to control
disbursements as funds are expended or committed in accordance with the loan
agreement. Consequently, we do not believe that waiving prior proceed reviews
for all disbursements under $50,000 is consistent with ODA’s prior guidance, or
that a permanent change in the review requirements is justified. In recent
discussions with ODA, it agreed to review a sample of disbursements exceeding
$10,000.
Finally, by allowing case workers the freedom to choose the supporting
documentation upon which to base their reviews, many disbursements were made
without adequate or any documentation showing how prior proceeds were spent.
ODA Disbursed Funds Based on Questionable Claims Made by Four
Borrowers
Of the 69 borrowers who did not sign or adequately complete the Borrower’s
Progress Certification forms, four made false claims about how they spent prior
loan proceeds. SBA made subsequent disbursements to these borrowers based on
vendor quotes, and one proposal for repair and reconstruction work that had not
been completed. Specifically:
• One borrower submitted a vendor quote for $256,517 in electrical work.
However, the vendor who performed the work told us that he had
completed only approximately $1,200 of the work. Although the quote was
submitted on company letterhead and signed both by the borrower and
vendor, the borrower provided no documents or receipts to support this
quote for completed work.
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• A second borrower submitted a $50,000 vendor quote for a room addition,
roof, ceiling, chimney, and siding repair as evidence of work he claimed
had been completed on his home. However, the vendor whom the borrower
claimed had performed the work denied completing any work for the
borrower. The borrower had transmitted the quote to SBA from the
vendor’s fax machine, to make the quote appear to be an official document
authorized by the vendor. However, the vendor told us that he was not
aware that the borrower had used his fax to transmit the quote to SBA.
• A third borrower submitted a contractor proposal for $26,400 in repair
work for drywall; the replacement of windows, doors, and trim; and
plumbing and siding work that was prepared on a standard form such as
could be purchased from an office supply store, rather than on the
contractor’s official letterhead. No other supporting documents or actual
receipts for work completed were provided. The contractor, when
contacted, told us that he completed only about $1,500 worth of work on
the property.
• Finally, a fourth borrower submitted a vendor quote for $13,551 for work
that the borrower claimed had been completed on his home. However, the
vendor told us that he had not completed any work for the borrower.
ODA inappropriately accepted vendor quotes and proposals as evidence of work
performed and did not follow-up with contractors to confirm whether the work had
been performed. Additionally, ODA did not make site visits to the properties to
determine whether borrowers had used their loan proceeds in accordance with
their Loan Authorization and Agreements. [FOIA ex. 7(A)
]
ODA Reviews of Prior Disbursements Were Generally Not Documented
According to information in DCMS, loss verifiers reviewed 33 of the 127
disbursements, and documented their reviews in DCMS. However, the remaining
94 disbursements were reviewed by ODA case workers who did not document
their reviews in DCMS or on the certification forms, with 30 of these that required
reviews. ODA employees stated that they had performed reviews, although they
were unaware of any language in the current SOP requiring them to sign the
forms, which would provide evidence that reviews were conducted.
ODA employees are not required to sign the Borrower’s Progress Certification
form prior to making a subsequent disbursement. Further, because ODA no longer
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requires that case workers use this form in conducting their reviews, it has no way
of determining whether a review was conducted.
RECOMMENDATIONS
We recommend that the Chief, Executive Office of Disaster Strategic Planning and
Operations direct the Associate Administrator for Disaster Assistance to:
1. Reject Borrower’s Progress Certification forms/claims that are unsigned and/or
incomplete without making subsequent disbursements.
2. Revise SOP 50 30 6, to require that a review be conducted of how prior
proceeds were used on a sample of, disbursements exceeding $10,000 to
provide the Agency with some assurance that borrowers used prior proceeds
appropriately. The SOP should also require that the Borrower’s Progress
Certification form and supporting receipts be reviewed and signed by ODA to
document that a review was made.
3. Require site visits or follow-up with vendors when questionable invoices,
including quotes for large dollar amounts with no receipts, unsigned
certifications or vendor quotes, inadequate certifications, or no official
documents, are submitted to verify the accuracy of what the borrower has
reported.
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL
RESPONSE
On October 22, 2008, we provided a draft of the report to ODA for comment. On
December 17, 2008, ODA submitted its formal comments, which are contained in
their entirety in Appendix I. On December 18, 2008, the Chief of the Executive
Office of Disaster Strategic Planning and Operations submitted his endorsement of
ODA’s comments, which is provided in Appendix II. ODA concurred with all
three of the report recommendations, but disagreed with the report’s description of
the disbursement thresholds and its characterization of the timing of and reasons
for the changes to the thresholds. ODA’s specific comments and the OIG’s
evaluation of them are summarized below.
Management Comments
Management commented that the report did not take into consideration that ODA
had legitimate reasons for changing its policy. Namely, ODA’s decision to
increase the threshold to $50,000 was to ensure that borrowers had adequate funds
in the rebuilding process as many contractors would not commit to a major
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construction project without a substantial down payment on the contract.
Management also commented that the report was incorrect in stating that:
• SOP 30 50 5 required receipt reviews for subsequent disbursements after
$10,000 was disbursed.
• ODA went from a $10,000 disbursement level without receipts directly to a
$50,000 level in response to the Gulf Coast storms.
• A borrower is required to attach receipts as proof of expenditures for items
costing less than $1,000.
• Borrowers were still required to submit certifications and receipts with
requests for subsequent disbursements after ODA increased the
disbursement threshold to $50,000.
OIG Response
The report does not comment on whether management inappropriately raised the
disbursement threshold. Instead, the report focuses on ODA’s responsibility to
ensure that prior disbursements have been used appropriately before disbursing
additional funds, especially because in its 1994 memorandum ODA acknowledged
that it had been criticized in the past when borrowers used their proceeds for
ineligible purposes. We believe ODA has a fiduciary obligation to the taxpayers
to ensure that loan funds are used as intended.
Regarding the report’s characterization of the disbursement threshold, we believe
the report is correct in stating that the original threshold was $10,000. This
threshold is still in effect for unsecured loans, but has been increased to $50,000
for secured loans. To support our interpretation, we have provided in Appendix
III excerpts from ODA’s policy memoranda and SOPs establishing these
thresholds. Further, as shown in Appendix III, we correctly stated the requirement
in SOP 30 50 5 that receipt reviews be made for subsequent disbursements above
$10,000 on unsecured loans, and have added language characterizing review
requirements for subsequent disbursements on secured loans.
We agree that ODA is correct in stating that the threshold did not jump directly
from $10,000 to $50,000. We have added language to show that the threshold for
secured loans increased incrementally, from $10,000 to $25,000 in 1994, and then
to $50,000 in 2006.
To clarify that borrowers are not required to attach receipts as proof of
expenditures for items costing less than $1,000, we added a footnote stating that
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borrowers are not required to provide proof of expenditures on items costing less
than $1,000.
With respect to whether borrowers were required to submit certifications and
receipts with requests for subsequent disbursements, after ODA increased the
disbursement threshold to $50,000, SOP 50 30 6 states that prior to any
subsequent disbursement where the funds disbursed would, in aggregate, exceed
$50,000, SBA must have evidence that funds previously disbursed have been used
in accordance with the loan agreement. This evidence may include the borrower’s
progress certification, paid invoices, and a joint payee check, among other
documents. The SOP language is provided in Appendix IV.
Finally, ODA agreed with all three recommendations and proposed an acceptable
alternative to recommendation 3. However, it did not indicate a target date and
specific actions it plans to take on recommendation 1, or provide target dates for
completing actions proposed on recommendations 2 and 3. Consequently, to be
fully responsive to the recommendations, we request that ODA provide an
additional response within 15 days of the final report date.
ACTIONS REQUIRED
We request that you submit written comments identifying (1) the actions you plan
to take to implement recommendation 1 and the target date for completion of such
action, and (2) target completion dates for recommendations 2 and 3. We would
appreciate receiving your additional comments within 15 days of the final report
date.
We appreciate the courtesies and cooperation of the Office of Associate
Administrator for Disaster Assistance and DCMS Operations Center
representatives during the audit. If you have any questions concerning this report,
please call me at (202) 205-[FOIA ex. 2] or Pamela Steele-Nelson, Director,
Disaster Assistance Group, at (202) 205-[FOIA ex. 2].
APPENDIX I. AGENCY RESPONSE
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APPENDIX I. AGENCY RESPONSE
14
APPENDIX I. AGENCY RESPONSE
15
APPENDIX I. AGENCY RESPONSE
16
APPENDIX I. AGENCY RESPONSE
17
APPENDIX III. EXCERPTS FROM ODA’S POLICY
19
MEMORANDA AND SOPs ESTABLISHING THE $10,000
THRESHOLD AND RECEIPT REVIEWS FOR UNSECURED LOANS
APPENDIX III. EXCERPTS FROM ODA’S POLICY
20
MEMORANDA AND SOPs ESTABLISHING THE $10,000
THRESHOLD AND RECEIPT REVIEWS FOR UNSECURED LOANS
APPENDIX IV. EXCERPT FROM ODA’S SOP ON REVIEW
REQUIREMENTS FOR SUBSEQUENT DISBURSEMENTS OVER
$50,000
APPENDIX IV. SOP LANGUAGE
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