On September 3, 2002, the OIG issued Audit Report 2-26, Review of Out-of-Sequence Payments. The report addressed an issue identified during the OIG’s review of collateral requirements for North Carolina disaster home loans approved during FY 2000. It stated that SBA’s procedures for preventing duplication of benefits provided by other Federal agencies could be improved. Specifically, the report indicated that SBA’s Office of Disaster Assistance (ODA) should improve its procedures for preventing duplication of benefits when it issues checks to borrowers that are co-payable to another Federal Agency.
Duplication of benefits can occur when one Federal agency provides financial assistance to a borrower and another Federal agency later provides funds for the same purpose. The SBA’s Standard Operating Procedures (SOPs) list the correct order in which various Federal agencies should provide disaster assistance under a Presidential Disaster Declaration, which is referred to as the “sequence list.”
Occasionally, the Individual Family Grant Program (IFGP), the Federal Emergency Management Agency (FEMA), or similar agencies, provide an advance payment to assist a disaster victim with recovery. If the individual later receives an SBA disaster loan for the same purpose, the advance is referred to as “out-of-sequence.” Typically, FEMA notifies the SBA of assistance provided earlier by another Federal agency. When the borrower receives the SBA loan funds, he should repay the agency that provided the initial disaster recovery funds. If the SBA learns of the assistance provided by another Federal agency after it approves a loan to the borrower, but before the loan is disbursed fully, then the SBA must repay the affected agency.
The audit identified three North Carolina disaster home loans for which borrowers previously received IFGP funds from FEMA. The borrowers could not keep the IFGP funds, since they were receiving an SBA disaster loan for the full amount they were eligible to receive to recover from the disaster. To correct this duplication of benefits, the SBA prepared checks co-payable to the borrowers and the IFGP of North Carolina. The SBA’s procedures required that it send the co-payable checks directly to the borrowers, instead of the agency that previously disbursed money for the same purpose as the SBA loan. As a result, two of the three borrowers who received co-payable checks totaling $19,800 cashed them instead of repaying the IFGP. The SBA did not have a procedure for verifying with FEMA that it received the checks. The report recommended that ODA develop a more effective method of returning disaster loan proceeds to agencies that make “out-of-sequence” payments.