Report 9-09 – Audit of Borrower Eligibility for Gulf Coast Disaster Loans
Date Issued: Tuesday, March 31, 2009
Report Number: 9-09

This final report summarizes the results of our audit of Borrower Eligibility for Gulf Coast Hurricane Disaster Loans. The objective of the audit was to determine whether the Small Business Administration (SBA) had controls in place to prevent ineligible applicants from receiving disaster loans for properties that were not their primary residences.

To address the audit objective, we reviewed 35 sampled disaster home loans to Grand Isle, Louisiana applicants that were referred to us by our Investigations Division. These loans were disbursed between October 2005 and October 2008.
To determine whether individuals received loans for properties that were not their primary residences, we compared address information contained in the sampled loan applications to residences claimed on Federal income tax returns, and reported in Louisiana voter registration and homestead exemption databases. We also reviewed entries in SBA’s Disaster

Credit Management System (DCMS) to determine whether SBA adequately verified applicant residences reported in loan documents as required by Standard Operating Procedure (SOP) 50 30 5, which was in effect at the time that the sampled applications were processed. We also interviewed Office of Disaster Assistance (ODA) staff assigned to the Fort Worth Loan Processing and Disbursement Center (PDC) to gain an understanding of the loan approval process for borrowers who owned multiple properties.

We conducted the audit between June and December 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 were eligible for SBA physical disaster loans. As of November 2008, approximately $6.6 billion in loans had been disbursed to assist these disaster victims. Individuals are eligible to apply for a home loan if they own and occupy their primary residence and have suffered a physical loss to that residence. Home owners and renters can apply for loans for personal property losses.

Based on SOP 50 30 5, Disaster Assistance Program,1 loan applicants are required to complete a Disaster Home Loan Application (SBA Form 5C) to begin the loan application process. Applicants are instructed to list any properties they own or rent on their applications. SOP guidance states that although some applicants may have more than one residence, applicants may receive a home loan for only their primary residence. If the applicant owns more than one property, loan officers must verify whether the property is the applicant’s primary residence by checking homestead exemption and voter registration databases, among other sources. The homestead exemption database is a registry maintained by the state of Louisiana, which lists the addresses and property values of all homes registered within the state. While these sources may not definitively show proof of a person’s primary residence, they are good indicators of where borrowers reside the greatest percentage of the year. Borrowers are also required to complete a Tax Information Authorization Form (IRS Form 8821) and give SBA access to their Federal income tax filings to verify income.

RESULTS IN BRIEF

ODA did not have adequate controls in place to ensure that borrowers were eligible to receive disaster home loans. Specifically, of the 35 loans in our sample, 29, or 83 percent, were approved without adequately verifying whether the property was the applicant’s primary residence. Further, ODA did not obtain proof of ownership for one loan applicant. A list of the 29 loans is provided in Appendix I.

We found that 8 of 29 properties may not have been the applicants’ primary residences. ODA had disbursed $683,200 on these 8 loans. Because the 8 applicants potentially made false claims, we have referred these loans to our Investigations Division. 1 This SOP has since been replaced by SOP 50 30 6.
In determining primary residence eligibility, ODA did not follow policy guidance, which directs loan officers to check relevant homestead exemption databases, voter registration records, or Federal tax returns when a residency is questioned. Instead, ODA reviewed the National Emergency Management Information System (NEMIS), maintained by the Federal Emergency Management Agency (FEMA), which shows only occupancy data, and may be dated.

While checking sources listed in the SOP is more reliable than NEMIS, it is more time-consuming and may not provide conclusive evidence of a borrower’s primary residence. Consequently, ODA will need to identify a more reliable method of confirming applicant primary residency.

Finally, one borrower received a Housing and Urban Development (HUD) Road Home Grant for approximately $19,000 after he received an SBA disaster loan for $38,900, resulting in a duplicate benefit.

We recommended that ODA instruct loan officers to follow the SOP requirements for residency verification until a revised method can be developed, and take steps to revise its current procedures for verifying an applicant’s primary residence, including considering the use of either Choice Point or other credit bureau databases. We also recommended that ODA request remittance from HUD for the Road Home Grant amount that duplicated disaster benefits awarded under the SBA loan.

Management disagreed that 83 percent of the loans were not properly reviewed to justify the primary residence determination. Management also believes that 17 of the 29 loans the audit identified as lacking adequate verification of the applicant’s primary residence were appropriately verified, and provided a spreadsheet (Appendix V) citing reasons for its position. We believe ODA inappropriately relied on NEMIS data, which is not sufficient for making primary residence determinations. Further, the additional sources that ODA listed in Appendix V were identified in response to the report, and not done at the time of loan approval. Therefore, the report is accurate in stating that ODA did not adequately verify applicant residency needed for eligibility determination at the time it approved the 17 disputed loans.

Finally, management concurred with our three recommendations. Because management did not identify specific actions it plans to take on the first and second recommendations, or provide target dates for implementation, we do not consider management’s comments to be fully responsive to any of the recommendations.

RESULTS

ODA Did Not Adequately Verify Applicant Residences on 83 Percent of the Loans Reviewed

ODA did not have adequate controls in place to ensure that properties approved for loans were the applicants’ primary residences. Questions about residency usually arise during loan closing when the applicant identifies other properties that he/she owns that will be used as collateral for the loan. When there is a question of residency, SOP 50 30 5 requires that various sources be checked to determine which property is the applicant’s primary residence. These sources include the homestead exemption database, voter registration records, or Federal tax returns, among other sources. Despite this requirement, the audit disclosed that ODA did not adequately verify applicant residences on 29, or 83 percent, of the 35 loans sampled.

For 21 of the 29 loans, applicants listed multiple properties during the loan closing process. A comparison of the addresses claimed on these 29 loan applications against those claimed in voter registration databases, tax filings, and homestead exemption databases revealed that 8 properties may not have been the applicants’ primary residences. For example:

  • One borrower, who applied for a loan in 2005, listed his primary residence as Grand Isle, Louisiana and reported two other properties within the state that were located in Gretna and Luling. However, the borrower was not listed in the homestead exemption database for Grand Isle, indicating that he may not have had a primary residence there. Additionally, the address reported on the borrower’s 2004 Federal tax returns differed from that listed as the primary residence on the borrower’s loan application.

  • Another borrower, who owned three properties, received a loan in 2006, although the damaged property listed on the loan application was not reported in homestead exemption and voter registration records. Furthermore, the address on the borrower’s 2005 tax returns was different than the address of the damaged property listed on the loan application.

Because borrowers for the eight loans may have made false claims in applying for their SBA loans, we have referred these cases to our Investigations Division for potential criminal prosecution.

Although ODA loan officers were aware of the SOP guidance for verifying questionable residences, they did not believe that the procedures outlined in the SOP were mandatory. Instead they said it was ODA’s practice to use NEMIS, which is a centralized system maintained by FEMA that tracks all individuals who have applied for disaster assistance.

According to FEMA, NEMIS provides insufficient information upon which to verify an individual’s primary residence because it does not provide the length of occupancy, and the occupancy data may be dated. For example, during an inspection, FEMA officials told us that NEMIS identified an individual as residing in Texas, although the applicant had not lived there for 10 years.

While checking multiple data sources listed in the SOP is a more reliable process than relying on NEMIS, it is more time-consuming and may not provide conclusive evidence of a borrower’s primary residence. For example, borrowers may not be listed in voter registration records if they did not register to vote, or in the homestead exemption data base if they did not file for homestead exemption. Consequently, ODA will need to identify a more reliable method of confirming applicant primary residency. For example, ODA may want to consider using Choice Point or reports from credit bureaus, which provide residency information.

ODA Approved One Loan without Proof of Property Ownership

Verification of property ownership is an important internal control to help prevent improper disbursement of disaster funds to individuals who may be attempting to fraudulently qualify for disaster loans. Property deeds generally establish real estate ownership and loan eligibility. According to SOP 50 30 5, when deeds are not available, ODA may use: (1) reports of damaged property from FEMA;
(2) information from Choice Point or a similar data base of property owners;
(3) property titles; (4) recorded land installments or contracts; (5) wills; (6) court documents; (7) affidavits from county officials; (8) property tax records; (9) insurance policy documents; or (10) mortgage company records as proof of property ownership.
While the loans reviewed generally were supported by property ownership documentation, we identified one loan for $50,500 that was approved without evidence that the borrower owned the property that he claimed as his primary residence on his loan application. The borrower stated that he owned a mobile home, but not the property upon which the home was located.

OTHER MATTERS

In addition to the eight loans that may have been inappropriately awarded, we identified one loan that duplicated benefits received from a HUD Road Home Grant. The HUD grant was for approximately $19,000, and was awarded after the SBA loan was made to the borrower. After HUD notified ODA of the grant, ODA did not request a remittance of the grant amount, as required. Consequently, SBA did not get reimbursed, as required, for the HUD grant it inappropriately gave to the loan recipient.

RECOMMENDATIONS

We recommended that the Chief, Executive Office of Disaster Strategic Planning and Operations direct the Associate Administrator for Disaster Assistance to:

  1. Instruct loan officers to follow the SOP requirements for residency verification until a revised method is developed.

  2. Revise its current procedures for verifying an applicant’s primary residence to ensure that a more reliable method is used than that provided in the SOP. For example, ODA should consider using either Choice Point or other credit bureau databases.

  3. Request remittance from HUD for the approximately $19,000 associated with the Road Home Grant that duplicated disaster benefits awarded under the SBA loan.

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL RESPONSE

On February 6, 2009, we provided a draft of the report to ODA for comment. On March 6, 2009, ODA submitted its formal response, which is contained in its entirety in Appendix II. On March 6, 2009, the Chief of the Executive Office of Disaster Strategic Planning and Operations also submitted his endorsement of ODA’s comments, which is shown in Appendix III. Management concurred with recommendations 1 and 2 and partially concurred with recommendation 3. ODA, however, disagreed with our interpretation of the primary residence requirements stated in the SOP and with our findings on 17 of the 29 loans that were reported as being made without adequate verification of the applicant’s primary residence. Management’s comments and our evaluation of them are summarized in the following paragraphs, listed by the headings in ODA’s response.

Management Comment 1 – The OIG’s interpretation of ODA’s requirements for primary residence determinations is inaccurate.

Management stated that the OIG believes that ODA was required to check all sources listed in SOP 50 30 5 when making a primary residence determination, which is a misinterpretation of the SOP. Instead, ODA stated that any one of the sources listed could possibly justify a primary residence determination. ODA management also referred to subsection (f) of the SOP, which authorizes the use of other similar sources that can be used, and advised that its reliance on NEMIS data met the requirements of the SOP. Therefore, ODA believes the report is incorrect in saying that ODA did not adequately verify primary residences on 83 percent of the loans reviewed.

OIG Response
We disagree with management’s assessment of our findings. The audit report does not state that all sources must be checked. Rather, the OIG looked for documentation that could lead to a conclusion that the application related to a borrower’s primary residence. ODA relied almost exclusively on NEMIS data, even though according to FEMA, NEMIS only establishes occupancy and does not show the length of occupancy needed to make a determination on primary residence.
Management Comment 2 – Finding multiple properties on flood maps is not an adequate basis for questioning the primary residence of loan applicants
Management stated that merely finding more than one address per applicant from flood maps is not an adequate basis to question a borrower’s primary residence. A more thorough review of each loan file is needed to fully understand the reason for multiple properties being flood mapped.
Management also disagreed with 17 of the 29 residence verifications that were identified as being inadequate primarily because the NEMIS database showed the applicants had at one time occupied the residences claimed. After receiving our draft report and in response to the exceptions found, ODA researched applicant residences and provided our office with a spreadsheet showing additional sources of information documenting the addresses of applicants at the time of loan approval (provided in Appendix V).

OIG Response

Because flood mapping identifies multiple properties either owned or used as addresses by the applicant, it serves as an indicator to alert the Agency to conduct further research to confirm the primary residence of loan applicants. Therefore, we agree that further research is needed, as management suggests, to establish the applicant’s primary residence. However, when flood maps identified multiple properties, ODA did not perform additional research to confirm that the property claimed was the individual’s main residence. Instead, ODA relied solely on NEMIS data, which shows occupancy, but not the length of time the applicant occupied the property.
Based on the spreadsheet accompanying management’s response to the draft report (shown in Appendix V), ODA acknowledged that it relied on NEMIS to make the eligibility determinations. However, the spreadsheet also lists additional sources of information on applicant residences, which incorrectly suggests that these sources were checked at the time of the eligibility determination. This is not true and very misleading. The additional sources of information were identified in response to the draft report and were not used to verify residency at the time of loan approval. We also wish to note that the majority of the applicants listed on the spreadsheet provided only Post Office box address, which increases the risk of fraud and elevates the need to verify where these individuals resided at the time of the disaster. Provided below is our rationale for why the information ODA provided was not sufficient to dispute our findings on the 17 loans:

  • Loan #8 – ODA did not adequately verify the applicant’s residence even though the address provided was a Post Office box. Credit bureau reports and Federal tax returns were not reviewed at the time of the eligibility determination. ODA claimed it relied on the address used for insurance recoveries, which was insufficient as individuals can have insurance on multiple properties.

  • Loan #9 – ODA’s eligibility determination was based on NEMIS, which does not establish length of residency. Other sources cited were not reviewed at the time of the eligibility determination.

  • Loan #11 – ODA’s determination was based solely on NEMIS.

  • Loan #12 – ODA’s determination was based on the driver’s license of one of the applicants. However, the applicants were husband and wife, who had separate addresses. Further, the DCMS loan file showed that the borrowers had received a Road Home grant to repair property they owned, while they presented themselves as renters for the disaster loan. Therefore, there were red flags in the loan file that should have prompted ODA to further research the applicants’ primary residence. [FOIA ex. 7(A)].

  • Loan #13 – ODA made its determination based on the address used for insurance recoveries. However, because an individual can have multiple properties insured, this source was insufficient to establish the applicant’s primary residence.

  • Loan #15 – ODA’s determination was based on NEMIS data, which was insufficient to establish the individual’s primary residence. The pay stub in the loan file showed a Post Office box address.

  • Loan #16 – ODA made its determination based solely on NEMIS data. Other documents cited listed Post Office box addresses and were not considered in the eligibility determination.

  • Loan #17 – ODA made its determination based solely on NEMIS data.

  • Loan #18 – ODA relied on the applicant’s driver’s license which was not sufficient to show the length of time the individual resided at the address needed to establish the property as the applicant’s primary residence.

  • Loan #19 – ODA made its determination based solely on NEMIS data. Other documents cited were not considered for loan approval, and all listed a Post Office box address.

  • Loan #21 – ODA made its determination based solely on NEMIS data. Other documents cited were not analyzed at the time of loan approval.

  • Loan # 22 – ODA approved the loan even though the applicant used a Post Office box address, which was also used on other documents that ODA researched. The death certificate for the applicant’s spouse showed the residence as being the address of the spouse in 2004; however, by itself the certificate does not demonstrate that the applicant lived there at the residence at the time of the disaster.

  • Loan #23 – ODA made its determination based on NEMIS and insurance data. NEMIS is insufficient as a source as it does not show length of occupancy, and insurance documents are inadequate as individuals can insure multiple properties.

  • Loan #24 – ODA approved the loan based on the Post Office box address and did not establish that the applicant lived in Grand Isle. In fact, the applicant also owned another property in Baton Rouge. Other documents that ODA researched after loan approval also disclosed a Post Office box address for the applicant.

  • Loan #25 – ODA determined the applicant’s eligibility based solely on NEMIS data. ODA should have taken additional steps to verify the residence as the applicant claimed the damaged property was the primary residence, but had represented the property as a business when applying for two prior disaster loans.

  • Loan # 26 – ODA considered the damaged property to be the applicant’s primary residence, even though the applicant reported it as a seasonal dwelling that he was staying in until his primary residence, which was damaged by an unrelated fire, was repaired. The damaged property could have been considered the applicant’s primary residence, if the applicant intended on permanently staying there; however the applicant informed ODA that it planned to move out of the damaged property once the primary residence was restored.

  • Loan #28 – ODA made its determination based solely on NEMIS data.

Management Comment 3 - OIG Use of Commercial Services and External Web Sites for Verification Purposes

Management questioned the OIG’s use of Louisiana voter registration and homestead exemption databases because these sources, at the time of the review, could have shown data that was different from what existed when ODA originally processed the loans. According to ODA, the differences could have been due to relocations, legitimate changes in primary residence, or other facts and circumstances that may have occurred in the intervening years since loan approval. Management also stated that loan officers did not have access to voter registration and homestead exemption records while processing the Gulf Coast Hurricane loans. ODA also believes that Choice Point and other credit bureau databases verify ownership only, and not residency.

OIG Response
We agree with management that voter registration and homestead exemption records are not the best sources to use for verifying an individual’s primary residence, which is one of the audit findings. Because these sources do not provide conclusive proof of residence, we recommended that SBA revise its SOP to identify other sources, such as Choice Point or other credit bureau databases. Since SBA’s SOP instructs loan officers to use these sources for verification, we used them as well to determine whether addresses recorded in these databases differed from that claimed by applicants. In doing so, we reviewed information for the same time period in which the loans were processed. Therefore, ODA’s concern that we relied on information that was different from that at the time of loan approval is not valid.

Further, we believe management’s claim that loan officers did not have access to the voter registration and homestead exemption databases illustrates that ODA did not have proper controls in place to adequately safeguard taxpayer dollars. Finally, if ODA did not believe that voter registration records and homestead data were sufficient, we question why it believes that any one of these sources could be used to justify the primary residence determination. Additionally, if loan officers do not have access to these sources of data, we question why ODA listed them in its SOP as sources that should be checked when determining eligibility. Further, Choice Point and other credit bureau databases are simply suggested sources that ODA may want to further research to determine whether they can be used to verify an individual’s primary residence.

Recommendation 1

Management Comments
Management agrees to instruct loan officers in the interim to follow the SOP requirements for residency verification. ODA previously provided instructions and training to all loan officers on the current SOP requirements to satisfy this recommendation.

OIG Response
Management’s comments are partially responsive to the recommendation. We commend ODA for issuing a memo (shown in Appendix IV) to loan processing staff and conducting training. However, once ODA revises its method for verifying primary residences as recommended, it should re-train loan officers and notify our office that the action has been completed.

Recommendation 2

Management Comments
Management agrees to research alternative methods for determining and verifying an applicant’s primary residence to see if a revised procedure would be more reliable.

OIG Response
Management’s comments are not fully responsive to our recommendation since it did not provide a target completion date or agree to inform our office of its findings and decision.

Recommendation 3

Management Comments
Management agrees that there was an error in the duplicate benefit calculation. ODA has requested the loan file from the servicing office in order to re-evaluate loan eligibility in light of the grant information. ODA agrees to collect any duplicate assistance from the appropriate party, which may be the borrower, versus HUD.

OIG Response
Management’s planned actions are responsive to the recommendation. However, it did not provide a target completion date needed to consider its comments fully responsive.

ACTIONS REQUIRED

We request that you submit written comments identifying (1) target completion dates for all recommendations and (2) your actions proposed or taken in response to 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 Chief, Executive Office of Disaster Strategic Planning and Operations, the Office of Associate Administrator for Disaster Assistance, and the 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].
 

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