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OIG Reports

Report 9-13 – Application of Insurance Offsets on Disaster Loans for the Midwest Floods of 2008,

Date Issued: 
Monday, July 6, 2009
Report Number: 
9-13

To: Steven Smith
Chief, Executive Office of Disaster Strategic Planning and Operations

James E. Rivera, Acting Associate
Administrator, Office of Disaster Assistance

From: Debra S. Ritt Assistant Inspector General for Auditing

Date: July 6, 2009

This report summarizes the results of our audit of the Small Business Administration’s (SBA) Application of Insurance Offsets on Disaster Loans for the Midwest Floods of 2008. Under the Stafford Act(1) Federal agencies administering disaster benefits must ensure that individuals receiving assistance have not already been compensated for their losses by another program, from insurance, or from any other source. The audit objective was to determine whether SBA properly reduced Midwest flood loan balances to reflect insurance offsets.

To address the audit objective, we reviewed a statistical sample of 99(2) of 788 active Midwest Floods disaster loans totaling $8,942,000 for borrowers, who either were located in Flood Zone A(3) or who carried flood insurance, to determine whether all applicable insurance payments were identified and properly offset against each loan’s verified loss. We identified flood insurance payments made to the sampled loan recipients based on information reported in the National Flood Insurance Program (NFIP) database. We identified hazard insurance payments by contacting insurance companies listed in SBA’s Disaster Credit Management System electronic loan files. We also interviewed Office of Disaster Assistance (ODA) loan officers and case managers at the Disaster Loan Processing and Disbursement Center in Fort Worth, Texas to obtain an understanding of the insurance offset process used prior to loan approval and during loan disbursement.

The audit was performed between August 2008 and April 2009 in accordance with Government Auditing Standards as prescribed by the Comptroller General of the United States, and included such tests considered necessary to provide reasonable assurance of detecting abuse or illegal acts.
We found that ODA did not correctly identify or offset insurance payments on 9 of the 99 loans we sampled, which resulted in $126,876 in duplicate benefits. Further, ODA did not take steps to recover some of the duplicate benefits after it became aware of them. The majority of the errors occurred because loan officers did not check with insurance companies to determine the amount of insurance that had been paid prior to each disbursement, as required. Because contacting the insurance companies before each disbursement may be burdensome for loan officers, we recommended that ODA revise its SOP to require confirmation of insurance payments only prior to loan approval and before the final disbursement occurs.

On June 25, 2009, both offices submitted their formal responses. Management agreed with our findings, concurred with both recommendations, and has taken action to implement the OIG recommendations.

BACKGROUND

The Small Business Administration provides direct disaster loans to homeowners, renters, businesses and nonprofit organizations to help them return to pre-disaster condition. Section 5155 of the Stafford Act requires Federal agencies providing disaster assistance to ensure that businesses and individuals do not receive disaster assistance for losses for which they have already been compensated. An individual receiving Federal assistance for a major disaster shall be liable to the United States to the extent that such assistance duplicates benefits to the individual for the same purpose. Therefore, the borrower is only eligible to receive disaster loan funds in the amount of the uncompensated loss.
To comply with the Act, Standard Operating Procedure (SOP) 50 30 requires ODA to determine the borrower’s uncompensated loss, which is the total verified loss due to the disaster, minus any applicable duplicate benefits. All insurance payments for the same purpose as the disaster loan are considered a duplicate benefit.
During the summer of 2008, several Midwestern states suffered approximately $15 billion in damages due to extensive flooding. These damages resulted in increased flood insurance claims from disaster victims. Although obtained through commercial insurance companies, all national flood insurance policies are provided by the NFIP, which is administered by the Federal Emergency Management Agency (FEMA). Consequently, FEMA maintains a record of all national flood insurance payments made to flood victims.

RESULTS

ODA Did Not Always Correctly Account for Insurance Recoveries

ODA did not always reduce disaster loans by insurance recoveries, which resulted in 9 loan recipients receiving $126,876 in duplicate benefits. When we informed ODA officials or they otherwise became aware of the duplicate benefits, they took action to offset $94,319 of the payments on 5 of the loans. However, $32,557 must still be offset to arrive at the uncompensated loss for the 4 remaining loans. For example:

  • A duplicate benefit of $5,834 occurred on one loan, even though ODA had two opportunities to identify and correct it. Although the borrower indicated that an insurance claim was pending at loan approval, the case manager did not check on the status of the claim with the insurance company prior to issuing the final loan disbursement. Had the case manager done so, she would have identified a $5,834 insurance claim payment. Additionally, the Agency received written notice of the insurance payment 11 days after final loan disbursement, but no action was taken to collect the duplicate payment.

  • The borrower on another loan informed ODA at loan approval that she had received two separate insurance payments – one for $5,982, and one for an unknown amount. Neither the loan officer nor the case manager contacted the insurance company during loan approval or the disbursement process to determine the amount of the second payment. According to the insurance company, the second payment was $2,190, which should have been deducted from the SBA loan amount.

  • ODA was not aware of all flood insurance payments made to a borrower on a third loan, which resulted in $42,002 in duplicate benefits. Although the flood insurance company provided SBA with both a signed Certification of Federal Flood Insurance and a policy declaration notice, confirming that ODA had been listed as a mortgagee or lender on the policy, the insurance checks issued to the borrower did not list SBA as a co-payee. As a result, ODA was unaware of the final insurance payment until the borrower reported it 2 months after the checks were issued. Subsequently, the Agency initiated a loan modification to offset the $42,000(4) duplicate benefit.

  • A $15,000 flood insurance payment on a fourth loan resulted in a duplication of benefits. During the loan disbursement process, the borrower notified ODA of two insurance payments, which were properly offset by the Agency. However, the borrower failed to report a third insurance payment of $15,000. The insurance company did not make the $15,000 check co-payable to SBA, as requested in the Assignment of Insurance Proceeds (AIP) form signed by the borrower. After we informed ODA of the additional insurance payment, the Agency initiated a loan modification to offset the $15,000 duplicate benefit.

Six of the nine errors occurred because loan officers did not contact insurance companies before loan approval or when disbursing loan funds. SOP 50 30 requires loan officers to obtain a breakdown of all insurance payments (e.g., the settlement sheet or adjuster’s proof of loss) from the insurance agent prior to loan approval. Additionally, the SOP requires that a duplication of benefits check be completed before each disbursement is made to verify that all grant or recoveries have been addressed. This check is especially important because information on insurance claims may not be available before loan approval as the claims are still in process, and supplemental claims may occur subsequent to loan approval.

Despite the SOP requirements, ODA case managers interviewed told us that they generally did not verify insurance recovery amounts before approving loan disbursements as it was time consuming to contact insurance companies prior to every disbursement, and waiting for a response could unfairly delay loan disbursements to disaster victims. Further, they believed that the duplication of benefits check called for by the SOP required a check for only FEMA grants that may have been awarded to borrowers. Consequently, ODA should revise its SOP to require confirmation of insurance payments only prior to loan approval and before the final disbursement.

In the remaining three instances insurance companies ignored SBA’s requests to include it as a co-payee on insurance payments, even though the three borrowers had signed AIPs, giving SBA legal claim to any insurance proceeds that duplicated benefits received from their disaster loans. Although the AIP is forwarded to the insurance company, it is strictly an agreement between SBA and the borrower, and does not require the insurance company’s acknowledgement.

According to ODA managers we interviewed, the Agency has no legal grounds to compel the insurance companies to comply with their requests to make SBA the co-payee on insurance payments because the AIP only legally binds the borrower.

RECOMMENDATIONS

We recommend that the Chief, Executive Office of Disaster Strategic Planning and Operations:

  1. Revise SOP 50 30 to require confirmation of insurance payments only prior to loan approval and before the final disbursement.

  2. Reduce each of the 4 loan balances by the additional offset amounts listed in Appendix I to prevent $32,557 in duplicate benefits.

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL RESPONSE

On June 1, 2009 we provided the Executive Office of Disaster Strategic Planning and Operations the Office of Disaster Assistance the draft report for comment. On June 25, 2009, both offices submitted their formal responses. These comments are contained in their entirety in Appendix II. Management agreed with our findings, concurred with both recommendations, and has taken action to implement the OIG recommendations.

Recommendation 1

Management Comments

Management agreed with the recommendation to revise SOP 50 30 to require confirmation of insurance payments only prior to loan approval and before final disbursement. ODA stated that it will issue a Director’s Memorandum outlining the SOP change, with the change to be formally incorporated in the SOP in the next update cycle. ODA indicated that PDC training materials and course content will also be updated.

OIG Response

The OIG believes that ODA’s revision of the SOP should remedy the deficiencies noted in the audit report.Recommendation 2

Management Comments

Management also agreed with the recommendation to take action on each of the 4 loans listed in Appendix I to prevent $32,557 in duplicate benefits. ODA reviewed each of these loans and took action to ensure that the noted duplications were corrected on the loans.

OIG Response

The OIG believes ODA’s course of action should remedy the deficiencies noted in the audit report.
We appreciate the courtesies and cooperation of the Office of Associate Administrator, Disaster Assistance; Disaster Assistance Processing and Disbursement Center and DCMS Operations Center representatives during this audit. If you have any questions concerning this report, please call me at (202) 205-[FOIA ex. 2] or Craig P. Hickok, Acting Director, Disaster Assistance Group, at (817) 684-[FOIA ex. 2].

To view the appendix of this document, please refer to the attachment below.

1 P.L. 93-288, as amended, Section 5155.

2 We originally sampled 140 loans, but eliminated 41 loans that had been subsequently cancelled, which reduced the sample size to 99.

3 FEMA has designated Flood Zone A as an area with a high risk of flooding, and therefore, mandatory flood insurance requirements apply.

4 There is a $2 discrepancy between the OIG calculation and SBA’s modification. This difference was considered immaterial.