[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]







                     FRAUD IN THE HUD HOME PROGRAM

=======================================================================

                             JOINT HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                AND THE

                            SUBCOMMITTEE ON
                         INSURANCE, HOUSING AND
                         COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 2, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-81







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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
              Subcommittee on Oversight and Investigations

                   RANDY NEUGEBAUER, Texas, Chairman

MICHAEL G. FITZPATRICK,              MICHAEL E. CAPUANO, Massachusetts, 
    Pennsylvania, Vice Chairman          Ranking Member
PETER T. KING, New York              STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          MAXINE WATERS, California
STEVAN PEARCE, New Mexico            JOE BACA, California
BILL POSEY, Florida                  BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York         KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio               JAMES A. HIMES, Connecticut
FRANCISCO ``QUICO'' CANSECO, Texas   JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee
      Subcommittee on Insurance, Housing and Community Opportunity

                    JUDY BIGGERT, Illinois, Chairman

ROBERT HURT, Virginia, Vice          LUIS V. GUTIERREZ, Illinois, 
    Chairman                             Ranking Member
GARY G. MILLER, California           MAXINE WATERS, California
SHELLEY MOORE CAPITO, West Virginia  NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey            EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina   WM. LACY CLAY, Missouri
LYNN A. WESTMORELAND, Georgia        MELVIN L. WATT, North Carolina
SEAN P. DUFFY, Wisconsin             BRAD SHERMAN, California
ROBERT J. DOLD, Illinois             MICHAEL E. CAPUANO, Massachusetts
STEVE STIVERS, Ohio















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 2, 2011.............................................     1
Appendix:
    November 2, 2011.............................................    67

                               WITNESSES
                      Wednesday, November 2, 2011

Beaudette, James M., Deputy Director, Departmental Enforcement 
  Center, Office of General Counsel, U.S. Department of Housing 
  and Urban Development..........................................    41
Donohue, Kenneth M., former Inspector General, U.S. Department of 
  Housing and Urban Development..................................    39
Handelman, Ethan, Vice President for Policy and Advocacy, 
  National Housing Conference....................................    43
McCarty, John P., Acting Deputy Inspector General, Office of 
  Inspector General, U.S. Department of Housing and Urban 
  Development....................................................    38
``Smith, Jane'', convicted of defrauding organizations that 
  received funds from the U.S. Department of Housing and Urban 
  Development's HOME Investment Partnerships Program.............     8
Truax, Timothy, convicted of defrauding organizations that 
  received funds from the U.S. Department of Housing and Urban 
  Development's HOME Investment Partnerships Program.............    12

                                APPENDIX

Prepared statements:
    Beaudette, James M...........................................    68
    Donohue, Kenneth.............................................    72
    Handelman, Ethan.............................................    77
    McCarty, John P..............................................    80
    ``Smith, Jane''..............................................    87
    Truax, Timothy...............................................    92

              Additional Material Submitted for the Record

Biggert, Hon. Judy:
    Letter from a coalition of housing industries................   102
    Letter from Enterprise Community Partners, Inc...............   104
    Letter from Enterprise Community Partners, Inc...............   106
    Letter from The Housing Trust of Santa Clara County..........   108
    Letter from SWJ Housing......................................   109
Biggert, Hon. Judy; and Gutierrez, Hon. Luis:
    Letter from Daniel Solomon Design Partners...................   110
    Written statement of Deborah DeSantis, Corporation for 
      Supportive Housing.........................................   112
    Letter from LINC Housing.....................................   115
    Letter from MidPen Housing...................................   117
    Letter from the National Housing Conference..................   119
    Letter from Resources for Community Development..............   123
Gutierrez, Hon. Luis:
    Letter from the National Association of Home Builders (NAHB).   125
    Letter from the National Council of State Housing Agencies 
      (NCSHA)....................................................   126

 
                     FRAUD IN THE HUD HOME PROGRAM

                              ----------                              


                      Wednesday, November 2, 2011

             U.S. House of Representatives,
                          Subcommittee on Oversight
                            and Investigations, and
                 Subcommittee on Insurance, Housing
                         and Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittees met, pursuant to notice, at 2:38 p.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the Subcommittee on Oversight and Investigations] 
presiding.
    Members present from the Subcommittee on Oversight and 
Investigations: Representatives Neugebauer, Fitzpatrick, Posey, 
Renacci, Canseco; Capuano, Waters, Baca, and Miller of North 
Carolina.
    Members present from the Subcommittee on Insurance, Housing 
and Community Opportunity: Representatives Biggert, Hurt, 
Capito, Garrett, McHenry, Westmoreland, Dold, Stivers; 
Gutierrez, Waters, Cleaver, Velazquez, Watt, and Sherman.
    Also present: Representatives Royce, Huizenga, and Green.
    Chairman Neugebauer. Good afternoon. This joint hearing of 
the Subcommittee on Oversight and Investigations and the 
Subcommittee on Insurance, Housing and Community Opportunity of 
the Committee on Financial Services will come to order.
    I would let all of of the Members know that all Members' 
opening statements will be made a part of the record. Each side 
has agreed to limit themselves to 10 minutes. And with that, I 
will yield to myself for an opening statement.
    We had a hearing on the HOME Program in the past, back in 
the summer. I think from the conversations I have had with a 
number of Members, it left more questions than answers because 
it still appears to us as, we have done more investigation, 
that there is not a sufficient amount of oversight going on for 
this particular program. And hopefully, this is not indicative 
of what is going on with other programs.
    Now let me be clear, because I think there has been some 
confusion about the purpose of these hearings. These hearings 
are not about the worthiness of the HOME Program. These 
hearings are about oversight, and accountability. When we take 
American taxpayers' money, they expect us to spend it in an 
appropriate way.
    They also expect us to guard and make sure that those funds 
are expended in the appropriate way, and more importantly, that 
none of that money is lost to fraud.
    What we are going to hear today--we have two witnesses who 
have actually been convicted of fraud in these programs. And 
unfortunately, that is a crime, and they are going to pay the 
price for that.
    But the other issue is, is they are going to detail how 
easy it was for these particular programs to be defrauded, and 
they are also going to detail that very little oversight about 
HUD was made for these programs. For me, personally, and I 
think for members of this committee, we find that troubling.
    And so our purpose today for this hearing is to ascertain 
what happened and hopefully stop it from happening in the 
future, but also, I think, more importantly, to send a message 
to the Administration that when you are spending American 
taxpayers' money, there is accountability that goes with that, 
and if the procedures are not in place, they need to be put in 
place to prevent this kind of behavior in the future.
    I think one of the other things we are going to ascertain 
is that very little due diligence has been performed when these 
monies are granted to certain entities. We are going to hear 
that people who got some of this money were probably as 
surprised as anybody that their grant was actually awarded, 
because they didn't have the background or the experience to, 
in many cases, execute these programs.
    So I look forward to the hearing today, and to our 
witnesses. And with that, I yield to the distinguished ranking 
member of the Subcommittee on Oversight and Investigations, Mr. 
Capuano.
    Mr. Capuano. Thank you, Mr. Chairman. Mr. Chairman, I would 
like to start out by saying that I have not been happy with 
what has led up to this hearing. Up until now, I think that the 
Democratic side of this subcommittee has been incredibly 
cooperative on every hearing thus far. I have shared your 
general goals and your general approach to various issues, 
including this one.
    I totally agree that oversight is an important thing, and 
that we want to make sure that every tax dollar is well 
accounted for, to the best of our ability.
    Nonetheless, I believe that our side has been treated 
unfairly, and I think especially, up until this point, to my 
knowledge, we have not done anything to deserve it. And I kind 
of hope that this is the last time that this happens.
    As far as the witnesses go, my hope is that we will be 
swearing in these witnesses. Even though there is a law on the 
books that says you cannot lie to Congress, I think it is 
appropriate when we have people who have been convicted of 
serious crimes, that they understand very clearly and 
unequivocally that they can't lie in court. I know they know 
that. They can't lie here either.
    And the other aspect of it, I would like to make sure that 
the witnesses know that if they intend to use this as some sort 
of attempt or forum to say, I didn't do it, the dog ate my 
lunch, or I was forced to do it or whatever their other reason 
was, this is not the place and that is not why we are here.
    First of all, it is the wrong forum. Second of all, we are 
the wrong people. They need to understand very clearly that 
they are here for the specific purposes that the chairman has 
outlined, which I agree with. And that is it. If they intend to 
use any other names, our own rules call for those names to be 
subjected in public. They need to be done in executive session. 
So I am hoping that we can avoid all that.
    As far as the substance of the hearing goes, again, I think 
everyone here--you won't find anybody who thinks oversight is 
not an important thing, and that we don't need to protect our 
tax dollars. We all want that, particularly those of us who 
actually think that these programs are important.
    The worst possible thing that can happen to people like me 
is to have these programs abused by anyone, for any reason, 
because it then empowers people who don't like the programs in 
the first place to say, let us shut down the program or let us 
dramatically reduce the program.
    So, in fact, I have always been the person who wants more 
oversight and more accountability, and I welcome this hearing, 
and I thank the chairman for calling it.
    Chairman Neugebauer. And I thank the gentleman. Now, I 
would like to yield to the chairman of the Subcommittee on 
Insurance, Housing and Community Opportunity, the gentlewoman 
from Illinois, Mrs. Biggert.
    Chairwoman Biggert. Thank you, Mr. Chairman, and good 
afternoon.
    I would like to welcome today's witnesses. Today's hearing 
is a continuation of the committee's work to examine HUD's 
oversight of the HOME Program. HOME is the government's largest 
affordable housing construction program. HUD is in charge of 
the program, and ultimately accountable to the Congress and 
taxpayers for the program's outcome.
    In June, the full Financial Services Committee held the 
first hearing on HUD's HOME oversight. During that hearing, 
what we learned was extremely troubling: inaccurate and 
incomplete information in HUD's database, as well as 
insufficient monitoring of participating jurisdictions, 
projects and individuals in charge of HOME funds which allow 
waste, fraud, and abuse.
    Millions and possibly billions of taxpayer dollars intended 
to fund affordable housing for people in need may have been 
loosely expended, or worse, swindled by criminals. We have 
uncovered that, in some cases, individuals and organizations 
readily took taxpayer-funded HOME dollars, but never actually 
built a unit of housing, or only built a few units where many 
units had been pledged.
    For example, my staff recently took pictures of a Chicago 
property that was funded with HOME dollars. HUD's database 
reported that 65 units of housing were built with the funds of 
this project. The pictures clearly indicate that there are not 
even close to 65 units of housing at this location. In fact, it 
looked more like four units.
    So that begs the questions: who has the money; where are 
the units that were promised; has HUD demanded repayment for 
the units that were not built; and has the developer been cited 
or sanctioned by HUD for not completing the job?
    Today, we will examine what steps HUD must take to close 
the door on any further abuse of taxpayer dollars. HUD's 
current ``Trust but don't verify'' approach to oversight is 
unacceptable. Taxpayers who are paying for this program deserve 
better. And families in need of housing, whom the program was 
intended to help, deserve better too.
    With that, I look forward to hearing from today's 
witnesses, and to holding future hearings on this and other HUD 
programs as we do the oversight. I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    Mr. Gutierrez is recognized.
    Mr. Gutierrez. Thank you, Chairman Neugebauer, Chairwoman 
Biggert, and Ranking Member Capuano for working to organize 
this joint hearing today. This is indeed a very unusual 
hearing, because, in my 20 years in Congress, I have never had 
the primary first witnesses who come before the committee be 
two convicted felons.
    I have certainly never had testimony from a felon, who 
donated more than $5,000 to the National Republican 
Congressional Campaign Committee during the height of the 
embezzlement and the fraud that she committed to the Federal 
program.
    I am going to ask the witness about that donation. I am 
going to ask her if embezzling from the HOME Program helped to 
free up extra cash to help Republicans in Congress. And I am 
going to ask whether my Republican colleagues have looked into 
this, and made sure those funds have been returned to the 
proper source.
    I think the absurdity of this hearing speaks to the 
difficulty the Majority is having in making the points they 
seem determined to make about the HUD HOME Program, whether the 
facts support those points or not. The embezzlement that we are 
going to hear about from the convicted felons began under 
George Bush's Administration, while he was President of the 
United States, and when my colleagues who are in the Majority, 
were in the Majority.
    It is highly irregular to send and to need convicted felons 
to explain how the HOME Program is susceptible to fraud. 
Usually, we have experts or law enforcement come to speak 
before us.
    I have seen whistleblowers testify, honest Americans who 
are concerned about potential abuse, who risk their well-being 
to help us fix programs. I have listened intently to community 
organizers, advocates, consumers, academics--these are credible 
witnesses who help us to improve our programs.
    I have 11 letters in support of the HOME Program, and I ask 
unanimous consent to submit them for the record, Mr. Chairman.
    Chairman Neugebauer. Without objection, it is so ordered.
    Mr. Gutierrez. One of the letters is signed by 23 different 
organizations, including Habitat for Humanity, the National 
Association of REALTORS, the U.S. Conference of Mayors, and 
even the YMCA. These groups have experience implementing HOME 
honestly.
    Why didn't we ask any of them to come and testify before 
us? I am really not here today to blame the witnesses. That is 
up to the legal system. And while I am sure that both of these 
individuals are very knowledgeable regarding the crimes they 
have committed, I can't help but wonder what the Majority hopes 
we will learn from them.
    It seems to me that a logical explanation of their presence 
is that the witnesses are here as examples of how our system 
works. Two people broke the law, violated the rules of the HOME 
Program for personal gain, and they got caught.
    They were prosecuted. One has been sent to jail. The other 
one will certainly soon go to jail. It seems to me the system 
worked. We can and should make sure every Federal program is 
run well, and that anyone who abuses the system or breaks the 
law is caught and punished.
    However, we can't hope to stop people from attempting to 
break the law. We can strengthen and improve our efforts to 
catch people who break the law. If that were the purpose of 
today's hearing, then I would happily and willingly 
participate.
    Any weaknesses or vulnerabilities in the HOME Program 
should be addressed. But let us not be fooled. One way to judge 
the strength of the accusations against the HOME Program is to 
judge the quality of the witnesses.
    I believe the way this hearing is being conducted makes 
clear that the purpose today is to score political points and 
generate exciting headlines. I hope in the future we can do 
better. Now, let us talk about what the HOME Program really is. 
In my district in Chicago, the HOME Program has created 15,000 
new housing units for low-income households. It has helped low-
income families stay in their homes and preserved the only real 
financial asset that many of them have, and I certainly hope 
that we will delve into those issues.
    Chairman Neugebauer. I thank the gentleman.
    Mr. Fitzpatrick is recognized for 1 minute.
    Mr. Fitzpatrick. Thank you, Mr. Chairman, for reconvening 
on this important issue of taxpayer protection and 
congressional oversight.
    In my county, Bucks County, Pennsylvania, HOME funds have 
been used to complete worthy projects. The local Department of 
Community Development has leveraged the funds with other 
private and public resources to provide needed affordable 
housing. This is how the system is supposed to work, and it is 
probably the rule and not the exception.
    However, in this environment, with the deficit crisis and 
the kinds of fiscal restraints that we are under, no program 
can be immune from examination, especially where there are 
reports of waste and examples of fraud.
    In this day and age, with the technological capabilities 
becoming more user-friendly and more adaptive, there is no 
excuse for a lack of monitoring and reporting with these 
projects. We saw examples during the last hearing of other 
Departments that have managed to develop a way of tracking 
their projects, so I think it is a reasonable expectation that 
HUD can figure it out as well.
    We should be able to track the actual progress of HOME 
projects and not simply the money that is being spent. Part of 
our job as Representatives is to ensure that every dollar that 
is sent down here--that constituents are receiving value.
    We are not here today to debate the merits of the HOME 
Program, but rather we are here to make sure that the necessary 
internal controls are in place and that they guarantee a good 
return on the investments.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Virginia, Mr. Hurt, is recognized for 1 
minute.
    Mr. Hurt. Thank you, Mr. Chairman. I want to thank 
Chairwoman Biggert and you, Mr. Chairman, for holding today's 
hearing and for your continued commitment to conducting 
rigorous oversight of the programs within the committee's 
jurisdiction.
    Today's hearing is a continuation of this committee's 
effort to improve the management of HUD's HOME Program. As we 
learned at our last hearing on this subject in June, HUD is not 
taking the steps necessary to hold HOME grantees sufficiently 
accountable for the funds that they receive.
    We also discovered that HUD is not utilizing the best 
available management practices and that the agency lacks 
sufficient internal controls to stop fraud and abuse in the 
HOME Program.
    Today, we will hear from witnesses who understand how 
flawed this program is and have exploited the Program's 
weaknesses at the expense of the American taxpayer. With our 
Nation over $14 trillion in debt, the citizens of my district, 
Virginia's 5th district, will not accept mismanagement of 
taxpayer resources. My constituents expect Congress to closely 
scrutinize Federal programs to identify and eliminate waste, 
fraud, and abuse.
    Again, I want to thank Chairwoman Biggert and Chairman 
Neugebauer for holding this hearing today, and I look forward 
to the testimony from our witnesses. And I yield back the 
balance of my time.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman, Mr. Westmoreland, is recognized for 
1 minute.
    Mr. Westmoreland. Thank you, Mr. Chairman, and I, too, want 
to thank you and Chairwoman Biggert for having the hearing. And 
I want to compliment you on the witnesses, because I don't 
think there is any better way to find out the holes in a 
program than to have people who have found those holes, and 
know how the system works, give us a better idea of what we can 
do to prevent this type of fraud.
    There are instances where HUD does not even have the 
complete addresses for some of the HOME projects. Even if it is 
new construction projects and they haven't even been assigned 
an address, completed projects should have an address. We 
should know where these projects are located so we can at least 
have the ability to ride by and to see the progress of it 
rather than having the supervisor give us all the files. I hope 
the committee will continue this tough oversight into this and 
all the HUD programs and continue to bring about the best 
witnesses possible who can testify as to where these holes are. 
I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman, Mr. Dold, is recognized for 1 
minute.
    Mr. Dold. Thank you, Mr. Chairman.
    Clearly, this hearing is not about terminating or defunding 
HUD's HOME Program. As my colleague from Illinois aptly pointed 
out, the HOME Program does actually fund some very important 
projects. And I would just simply say that if we are able to 
root out some of the waste and the fraud, think about how many 
more programs we would actually be able to fund, to the benefit 
of the taxpayers.
    When I look at--as a small business owner, one thing I do 
know is that those who manage an organization, those who spend 
other's money must create and maintain adequate systems and 
controls, checks and balances if we are going to have these 
types of programs succeed.
    The witnesses that we have today--Congressman Westmoreland 
noted that one of the best ways to do it is to identify the 
holes. These witnesses have identified the holes.
    If we look at our credit cards, we look at our checks, the 
people who helped devise these security systems that we have in 
place today were not law enforcement; in fact, they averted law 
enforcement for years and years. They were the criminals who 
actually got around those systems.
    So I think we, as Congress, need to use this oversight 
authority to be able to find out how we can strengthen this 
program for the taxpayers, because surely the American people, 
the taxpayers and Congress will demand no less. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Texas, Mr. Canseco, for 1 
minute.
    Mr. Canseco. Thank you, Mr. Chairman.
    Our Nation has a debt of just over $14.9 trillion; over 
$126,700 per American household on average. This is a spending-
driven debt crisis that has us borrowing approximately 40 cents 
of every dollar. And every time the Federal Government spends a 
dollar on its priorities, that is a dollar that could have been 
spent on priorities of the American people, such as purchasing 
a home, starting a small business, or sending a kid to college.
    When we are deficit spending, we are borrowing it from the 
future opportunities of our children and our grandchildren, 
thus we must ensure that each and every dollar that the Federal 
Government spends is not needlessly spent. The purpose of 
today's hearing is as a follow-up on an earlier hearing that we 
had with the full committee, and it is to look at whether or 
not HUD has in place policies and procedures to ensure that 
precious taxpayer dollars are not being wasted on the HOME 
Program.
    Serious allegations of waste, fraud, and abuse have been 
leveled against the HOME Program, and given our Nation's 
serious fiscal challenges, we cannot afford to allow wasteful 
spending to occur. I look forward to hearing from our witnesses 
today, as we attempt to discover answers to the serious 
questions that have been raised by the HOME Program. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    Chairwoman Biggert. Mr. Chairman?
    Chairman Neugebauer. The gentlewoman is recognized.
    Chairwoman Biggert. Mr. Chairman, I ask unanimous consent 
to insert the following material into the record: a November 1, 
2001, letter from SWJ Housing Development and Consulting; a 
November 1st letter from a coalition of housing industries, a 
November 1st letter from the LINC Housing Corporation; a 
November 1st letter from MidPen Housing; an October 31, 2011, 
letter from the National Housing Conference; a November 1st 
letter from Daniel Solomon Design Partners; a November 1st 
letter from Enterprise Community Partners; a November 1st 
letter--a second letter from Enterprise Community Partners; a 
November 1st letter from the Housing Trust of Santa Clara 
County; written testimony of Deborah DeSantis, president and 
CEO, Corporation for Supportive Housing; and a November 1st 
letter from Resources for Community Development.
    Chairman Neugebauer. Without objection, it is so ordered.
    We will now go to our first panel. The first witness will 
be ``Ms. Smith.'' She will be joining us remotely, and I don't 
know if she is--or do we have her--``Ms. Smith'', are you 
there? We will see if we can fix that.
    The second witness will be Mr. Truax.
    And, Mr. Truax, I would ask you a question. Were you 
promised anything in order to induce you to testify today and 
are you here of your own free will and volition?
    Mr. Truax. I am here of my own free will.
    Chairman Neugebauer. Yes. But you were not promised 
anything in return for your testimony, is that correct?
    Mr. Truax. No.
    Chairman Neugebauer. Thank you.
    Do we know if we have ``Ms. Smith?'' Okay, I think we have 
``Ms. Smith.''
    Can you hear me, ``Ms. Smith?'' ``Ms. Smith'', can you hear 
me?
    Ms. Smith. Yes, sir, I can hear you.
    Chairman Neugebauer. Thank you very much for being here.
    ``Ms. Smith'', I need to ask you a few questions before you 
give your testimony.
    Are you voluntarily testifying today?
    Ms. Smith. Yes, sir, I am.
    Chairman Neugebauer. Can you tell us why you are testifying 
today?
    Ms. Smith. Yes, sir. One of the things that you experience, 
especially from--I hear a little feedback.
    Chairman Neugebauer. And were you promised anything to 
induce you to testify to this committee today?
    Ms. Smith. No, I was not.
    Chairman Neugebauer. Thank you for making yourself 
available. ``Ms. Smith'', your written testimony will be made a 
part of the record.
    At this time, the committee will recognize you to give your 
oral testimony. And you may begin now. You have 5 minutes.

     STATEMENT OF ``JANE SMITH'', CONVICTED OF DEFRAUDING 
 ORGANIZATIONS THAT RECEIVED FUNDS FROM THE U.S. DEPARTMENT OF 
 HOUSING AND URBAN DEVELOPMENT'S HOME INVESTMENT PARTNERSHIPS 
                            PROGRAM

    Ms. Smith. Thank you, sir.
    Thank you, everyone on the committee for allowing me the 
opportunity to speak to you today.
    As I said in my written testimony, I started working for a 
nonprofit not because I sought out the work. It was actually 
something that I kind of tripped into, and was actually 
promoted to the executive director position about a year, maybe 
2\1/2\ years after getting there.
    I was not necessarily formally trained on how to do it, but 
the organization was--
    Chairman Neugebauer. ``Ms. Smith'', I am going to ask you 
to suspend just for a minute. We are going to work on a little 
technical detail here.
    Ms. Smith. Yes, sir.
    Chairman Neugebauer. ``Ms. Smith'', this is the first time 
we have done this, and so I am kind of winging this a little 
bit. But I need to swear you in as a witness.
    Do you mind me doing that?
    Ms. Smith. No, sir.
    [Witness sworn.]
    Chairman Neugebauer. Thank you very much.
    And Mr. Truax, let's go ahead and get this out of the way 
with you as well.
    [Witness sworn.]
    Chairman Neugebauer. Thank you.
    ``Ms. Smith'', I apologize for that. You can now resume 
your testimony. Thank you.
    Ms. Smith. Okay. As I was saying, I started working for a 
nonprofit. I definitely was not necessarily equipped to run a 
nonprofit. I didn't have a lot of knowledge on what it was a 
nonprofit was to do.
    I was afforded to go to a couple of conferences there in 
Washington, D.C., for community development work, and actually 
got a chance to see what nonprofits were doing in terms of 
workforce development and community development work. I then 
went back to my respective community and started working on 
that.
    Our board at the time was not equipped either to understand 
what it was that community development was all about. But we 
started doing some really good work in terms of workforce 
development, and then we kind of moved into housing. And, 
again, we were not equipped at all to be in housing, but we got 
started. And we actually rehabbed a lot of houses, and we also 
had an opportunity to develop a residential property from the 
ground up of affordable housing.
    But there are a lot of things that did not happen well on 
our part in making that a reality. One of the things that did 
happen well was that we were able to help a lot of young people 
get job training and actually get work in the construction 
field. Some of the things that I encountered were a lot of 
bumps and holes in the road as it relates to doing development 
in a community and a lot of political things that kind of 
hindered the process from going the way it should have.
    [The prepared statement of ``Ms. Smith'' can be found on 
page 87 of the appendix.]
    Chairman Neugebauer. I thank you, ``Ms. Smith.'' And we 
will come back to you in just a few minutes with some 
questions.
    We are now going to recognize Mr. Truax for 5 minutes for 
your summary of your testimony.
    Mr. Truax. Chairwoman Biggert, Chairman Neugebauer--
    Mr. Capuano. Mr. Chairman, could we swear Mr. Truax in 
first?
    Chairman Neugebauer. We already did.
    Mr. Capuano. He has been sworn in, as well?
    Chairman Neugebauer. Yes.
    Mr. Capuano. All right.
    Mr. Chairman, I would like to make a motion that we strike 
15 different paragraphs of the 30 paragraphs Mr. Truax 
submitted in his written testimony. I did not do this with the 
other witness because the other witness only had a few things.
    Of the 30 paragraphs of testimony, 15 of them have no 
pertinence whatsoever to this. It is a litany of: ``I am sorry 
I did this; I didn't mean it; I won't do it again; I didn't 
have any intent to do any wrongdoing,'' which is all well and 
good, but my fear is that this gentleman has not yet been 
sentenced, to my knowledge.
    My fear is that if this goes into the hearing record as 
written, the next thing that will happen is we will see this at 
a sentencing hearing that somehow Congress approved that he 
didn't mean it, he--and I am not saying whether he did or he 
didn't. I have no opinion on the matter. I just don't think 
that this hearing record should be used by anyone to build 
their record relative to whatever sentence they may or may not 
get out of the prisons.
    It has nothing to do with the pertinent information that 
Mr. Truax may or may not be able to give us. But 15 of these 
written paragraphs have nothing to do with the items that you 
personally stated--and I agree with--are the purpose of this 
hearing.
    I am not here to determine whether Mr. Truax did or did not 
commit a crime. I am not here to determine whether he meant to, 
what his intent was, whether he is sorry, or any of those other 
items. That is for the courts; that is for the people who are 
going to sentence him; and that is the appropriate place.
    So I would make a motion that we strike these 15 irrelevant 
paragraphs. And I have a list here if you would like to see it.
    Chairman Neugebauer. There was a unanimous consent request?
    Mr. Capuano. That is fine by me.
    Chairman Neugebauer. I am going to object. I hear what the 
gentleman is saying, but I think it is a dangerous precedent 
for this committee to start determining what parts that they 
like about witnesses' testimony and what they don't like about 
witnesses' testimony.
    We ask witnesses to submit their testimony, and then they 
will have a chance to summarize it.
    The gentleman will have an opportunity to question Mr. 
Truax. If he wants to question his motives for being here, that 
is certainly his prerogative.
    But I find it definitely a dangerous precedent for us to 
start ascertaining what parts of someone's testimony we are 
going to make a part of the record and what we are not going to 
make a part of the record.
    Mr. Capuano. Mr. Chairman, I respect that. That is why I 
did not make the same motion, though I thought there were parts 
of the previous witness's testimony.
    But on this particular case of the entire 30 paragraphs: 
``I felt I wasn't doing anything really wrong''; ``It was never 
my intent to defraud or steal from anyone''; ``I was hoping 
that contractor number two would honor the arrangement''; ``I 
repeatedly told them both that I had realized what I was doing 
in the terms was wrong''; ``I was sincerely sorry for getting 
involved''; ``I am truly sorry for what I did''; ``I truly and 
sincerely regret my''--all of which may be true, and I don't 
suggest that they are not. But I don't see how they shed an 
ounce of light onto this or relate to his testimony on the 
relevant matter.
    And the only thing I am asking is that this Congress not be 
used as a tool for someone else to, at a later time, use the 
testimony that they submitted that suggests that somehow 
Congress thinks that they were right. That is all I am 
suggesting.
    It has nothing to do with the substance of what we will 
hear. It has simply to do with, that is not what the Congress 
does. We don't determine intent by someone who is about to be 
sentenced. That is not our role. That is not our purpose here 
today, at least not as I understand it.
    Chairman Neugebauer. No, the purpose here of this hearing 
is to ascertain where the holes are in the system; that appear 
to continue to be in this program--
    Mr. Capuano. I agree.
    Chairman Neugebauer. --and it is not to ascertain the 
motives of why the witnesses are coming. These witnesses have 
both stated they came here freely, of their own will. They were 
promised nothing in return.
    We asked them to come and share with this committee how 
easy it was for them to game this system, which I find 
troubling, and I know the gentleman finds troubling. It is much 
like the counterfeit--when the FBI wants to figure out who is 
producing the best counterfeit bills, they go to the people who 
have produced counterfeit money.
    And when you go--we have gone to the crime scene here, and 
we found that there was a crime being committed--
    Mr. Capuano. Mr. Chairman, that has nothing to do with my 
motion. My motion is simply to strike impertinent, irrelevant 
testimony.
    Chairman Neugebauer. And the Chair rules that we will not 
accept the gentleman's--
    Mr. Westmoreland. Would the Chair yield?
    Chairman Neugebauer. Gentleman?
    Mr. Westmoreland. Mr. Chairman, I think that when somebody 
goes through--and I have read the testimony--goes through it, I 
think the good point is to be made--
    Chairman Neugebauer. Does the gentleman have a point of 
order?
    Mr. Westmoreland. No--I just had a comment.
    Mr. Gutierrez. Mr. Chairman?
    Chairman Neugebauer. Yes.
    Mr. Gutierrez. Continuing with the point of order, on page 
4, the second paragraph--or the first paragraph at the 
beginning of--``Before I continue, I would like to state in 
my''--I am listening to the chairman what the purpose of the 
hearing is, and then I am reading the testimony.
    And it says, ``Before I continue, I would like to state in 
my defense''--it is not for them to come and state what their 
defense is. This is to come and learn about the program. He is 
going to have a chance as a convicted felon to go before a 
judge and to plead clemency or in his defense. We are not a 
jury here. We are not judges. We are just a congressional 
hearing.
    It says, ``My original intent through all my criminal 
activity was to simply get a few dollars as compensation for 
helping them get work. It was my intent to manage the 
individual--but finally the payment would come to me and would 
absorb that during a later time. The concept was at the time 
that we would have enough work to be''--in other words, he is 
excusing himself. I just think this should be stricken from the 
record. It is not pertinent.
    Ms. Waters. Will the gentleman yield?
    Mr. Gutierrez. Surely.
    Ms. Waters. Has this witness been convicted already?
    Mr. Gutierrez. Yes.
    Ms. Waters. Did he need the permission--is he on bail? Is 
this witness out on bail?
    Chairman Neugebauer. I think what we need to do is, the 
gentleman made a point of order. I ruled on the point of order. 
If you want to ask the gentleman--you are going to have an 
opportunity to ask the gentleman questions about where he is in 
his legal issues. But what we really need to do is--I have 
ruled on the point of order, so we really need to proceed with 
the hearing, and the gentlewoman will have an opportunity--
    Ms. Waters. Will the gentleman yield?
    What is being requested is prior to the gentleman's 
testimony that we find out--
    Chairman Neugebauer. And the Chair has ruled on the issue. 
And so, we need to proceed with the hearing.
    Mr. Truax, you are recognized for 5 minutes.

      STATEMENT OF TIMOTHY TRUAX, CONVICTED OF DEFRAUDING 
 ORGANIZATIONS THAT RECEIVED FUNDS FROM THE U.S. DEPARTMENT OF 
 HOUSING AND URBAN DEVELOPMENT'S HOME INVESTMENT PARTNERSHIPS 
                            PROGRAM

    Mr. Truax. I first want to thank you for the opportunity to 
come before you today and assist in your awareness of the 
potential for fraud within the HUD program. Let me state at the 
outset that I know the program has its flaws. It can be 
defrauded, as I possess this knowledge because I sit before you 
as a man convicted in front of the Federal middle district 
court and who awaits his trial, but I also believe the program 
has its merits.
    It is not easy to admit that I have engaged in a criminal 
act and it is a fact of no particular pride in presenting to 
you today. And I can say with a certainty that is imputed to a 
person such as myself, who has defrauded the HOME Program, that 
I am willing to bet that such fraud continues at the hands of 
others who hold the position I once held.
    In appearing before you today, I am a man who engaged in a 
criminal act, was caught, and awaits his payment to society. 
However, through my testimony before you, I would like to find 
a way to improve the system, to close the loopholes that I 
exploited, so that the program will be much better, much 
stronger and more effective in its achievements.
    My experience in the construction industry began in 1994 as 
a heavy-equipment operator; 10 years later, I became employed 
by Dolphin County in facility maintenance, where I engaged in 
all aspects of construction and remodeling.
    When the position of HOME rehabilitation opened, I applied 
for the position, and was employed until my resignation in 
2010. My duties as a HOME rehab specialist included: soliciting 
applications from homeowners who qualified for government 
assistance in repairing their residences; soliciting the 
contractors for work to be completed; awarding the contracts; 
and verifying that the work had been completed before the 
contractor was paid.
    Essentially, I was the master of my own domain in that I 
rarely was supervised, and I was inspected by HUD only once 
every 3 years. When HUD had determined it wanted to audit the 
HOME Program, a representative from the Philadelphia office 
would contact me to request that I select files and homes for 
inspection when the representative visited.
    Being the primary person in charge of the entire process, 
it was my sole decision what homes or related files would be 
selected. The examiner would review the files and only 
sometimes complete a home visit.
    Whenever an applicant submitted an application for HOME 
rehabilitation, I would review it. And as the process should 
work, the application would be publicized for bids and 
submitted by contractors interested in completing the work. In 
the early portion of my employment, that is how it was done.
    However, when I began abusing the system, I would forward 
the homeowner's applications to certain selected contractors 
and keep them informed of the lowest bids I received at any one 
point, ultimately providing the chosen contractor with the 
lowest external bid information so that he could submit an even 
lower bid and thereby be awarded the work.
    Many times, because I had no oversight, I would simply 
provide the selected contractor with the application and take 
the bid he submitted as being the lowest, ultimately awarding 
the work to the contractor. Given that the Philadelphia 
examiner would only visit once every 3 years, and review only 
the files that I selected for the review, the process was 
virtually foolproof, or so I thought.
    As to how I selected contractors in my particular activity, 
I met one of the three individuals with whom I took the money 
in the course of my work. Because I have not received their 
permission to represent the contractors' individual names, I 
will refer to them as contractors one, two, and three.
    Contractor one was referred to me by way of a third party 
as a contractor who might be interested in getting involved 
with the Program. I contacted him to come to the office, fill 
out an application for the Program, which he did and for which 
he was approved as a contractor.
    Contractor one completed roughly four to five jobs and 
appeared to do more than acceptable work. Throughout that time, 
and because of my ongoing contact, we developed a relationship. 
On one occasion, when contractor one and I were socializing 
after work, he turned the conversation to the state of his 
financial situation.
    I know I am running out of time. I am going to conclude 
here.
    Unfortunately, the process was entirely too simple to 
defraud merely by way of its own setup. With examination by the 
supervising Philadelphia HUD representative taking place only 
once every 3 years, and relying upon me to choose the files for 
review, I knew my wrongdoings might never be revealed. 
Obviously, I never considered getting caught, and I took 
advantage of the Program's total lack of proper oversight.
    When the investigating officer came to me to ask questions 
about the situation, I realized at that point that I was 
caught, and I completely agreed with everything and completely 
cooperated.
    [The prepared statement of Mr. Truax can be found on page 
92 of the appendix.]
    Chairman Neugebauer. I thank the gentleman for his 
testimony--and we will have an opportunity for some Q&A here in 
a minute.
    ``Ms. Smith'', we are now going to go to you for questions. 
And I will be asking you the first question.
    We may not have the video, but ``Ms. Smith'', can you hear 
me?
    Ms. Smith. Yes, sir, I can.
    Chairman Neugebauer. Okay. ``Ms. Smith'', after reading 
your testimony, I was struck how quickly you went from a 
temporary receptionist in your organization to the executive 
director who managed affordable housing projects overseeing 
millions of dollars of Federal funds.
    I was further intrigued that you said you had no idea what 
it meant to operate a nonprofit and that your board of 
directors was, in many cases, just as clueless, that there was 
really nobody within the organization who understood how to 
develop affordable housing.
    You went on to say that even the contractors you worked 
with did not have the capacity to carry out the work.
    Did HUD ever raise any concerns about your organization and 
the fact that it had no experience in doing building and 
development prior to committing these millions of dollars to 
these projects?
    Ms. Smith. One of the things that is very easy--
    Mr. Gutierrez. Mr. Chairman? Before the witness continues, 
I thought the agreement was that we were going to see her, that 
this was going to be a video conference. Is it only an audio 
conference?
    Chairman Neugebauer. We are having video technical 
difficulties, and so we are only able to get audio at this 
time.
    Mr. Gutierrez. It is very difficult, and very unusual to 
have this kind of hearing. And it says the committee is, ``To 
the maximum extent feasible, the committee shall make its 
publications available in electronic form''--okay?--``Audio and 
visual coverage of the committee hearing--to the maximum extent 
feasible, the committee shall provide audio and video coverage 
of each hearing or meeting for the transaction of business in a 
manner that allows the public to easily listen and view the 
proceedings.''
    We can't view these proceedings. It is impossible to view 
these proceedings.
    Chairman Neugebauer. I appreciate the gentleman. Due to the 
fact that we are having technical difficulties, this is the 
maximum that we can provide. This hearing is being covered by 
audio and video. We are just unable to get the video--
    Ms. Waters. Will the gentleman yield?
    Chairman Neugebauer. Certainly.
    Ms. Waters. How do we know who is talking?
    Chairman Neugebauer. The gentlewoman did see ``Ms. Smith'' 
a while ago, and so--
    Ms. Waters. I didn't see her and she didn't answer the 
questions that you asked. You asked her if she had been induced 
in some way--
    Chairman Neugebauer. And the answer was no.
    Ms. Waters. No, there was noise on the audio, and we did 
not hear her answer those questions, and we can't see her now. 
What are we listening to? Who is this?
    Chairman Neugebauer. I respect the gentlewoman, but we are 
going to proceed with the hearing with the technology that we 
have available.
    And so, ``Ms. Smith'', if you would go ahead and answer the 
question. Did you have any interface with HUD and did they ever 
question the ability of you or your board to be able to take on 
a fairly complex housing project?
    Ms. Smith. As I was saying before, Mr. Chairman, when we 
started doing affordable housing, we were not asked by HUD 
about our capacity.
    One of the reasons we weren't asked is because we hired the 
expertise, if you will. We brought in a consultant who could 
lend us the understanding that we needed. And we included that 
in all of our applications. But HUD never came and had a face-
to-face interview with any of us to verify that what we put in 
that application was in fact accurate.
    If you read the application, we looked like we knew what we 
were doing, but in fact, again, nobody knew. We just hired a 
consultant who understood the process to actually do the 
application for us.
    Chairman Neugebauer. And so in the 3-year history of that 
project, from when you started that project until you were 
caught in this situation, did HUD ever visit this site?
    Ms. Smith. I was out there on the site quite often, and we 
never got any visitations from HUD.
    Quarterly, we were asked to do reports, and, again, we did 
not do the reports. We had the consultant come in and do the 
reports for us, and they were sent, and everything was fine as 
far as HUD was concerned.
    Chairman Neugebauer. Mr. Truax, in the last HOME hearing we 
had, there was a number of projects that were identified, 
records that were opened and some of them were closed. Some of 
them were dropped from the books. That would indicate that some 
of those projects were closed out.
    But when people made site inspections, they found vacant 
lots there.
    Can you explain how in the system, projects that hadn't 
been completed, maybe haven't even been started, were actually 
put on the books or then closed out? Did you have the ability 
to go to the Web site or to the database and mark projects 
closed-out?
    Mr. Truax. In the IDA system?
    Chairman Neugebauer. Yes.
    Mr. Truax. Yes, I had the ability to do that.
    Chairman Neugebauer. Could you hold the microphone just a 
little bit closer to you?
    Mr. Truax. Yes, I had the ability to do that.
    Chairman Neugebauer. Can you just walk us through that 
process a little bit?
    Mr. Truax. I am not quite sure the question and the process 
of--
    Chairman Neugebauer. If you were trying to hide that a 
project wasn't completed, but the time was running out on when 
you should have finished that project, could you just go to the 
system and say that project is closed out?
    Mr. Truax. Yes.
    Chairman Neugebauer. And did you do that?
    Mr. Truax. Yes, because I knew that it was usually a 3-year 
period before I would be audited. Like I said in my statement, 
they would ask me to select the files.
    Chairman Neugebauer. So they would call up and say, ``Hey, 
we are going to come out and look at some of your projects.'' 
And, obviously, you didn't pick the ones that you were 
shuffling around.
    Mr. Truax. Correct.
    Chairman Neugebauer. And how long would that visit 
typically last?
    Mr. Truax. They were usually there for a week, because they 
would actually audit the CDBG program as well as the HOME 
Program and first-time homebuyers.
    Chairman Neugebauer. How long would they spend with you 
particularly?
    Mr. Truax. It would be just a couple of days.
    Chairman Neugebauer. How many visits while you were in that 
capacity did you actually have?
    Mr. Truax. We only had one visit from HUD while I was 
there. It was after the first year I was there.
    Chairman Neugebauer. And what would be that time period 
that you only had one visit?
    Mr. Truax. It would have been in 2008.
    Chairman Neugebauer. But when did you start--
    Mr. Truax. Oh, I am sorry. What was--
    Chairman Neugebauer. Was that a 10-year period--you had one 
visit in 10 years, 5 years?
    Mr. Truax. My length of employment was only for 3 years.
    Chairman Neugebauer. Okay. And so you had one visit in a 3-
year period?
    Mr. Truax. Yes.
    Chairman Neugebauer. All right. I am going to yield 5 
minutes to Mr. Capuano.
    We will say that you can continue to ask questions of ``Ms. 
Smith.'' We tried everything possible to get her video back up. 
Her audio is still working. So if you choose to direct 
questions to her, you may, but we still can't get--now, we have 
the video up.
    I yield to the gentleman for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman
    First of all, I would like to point out for the audience 
that ``Ms. Smith''--that is not her real name. We have agreed 
to withhold her name because the Bureau of Prisons has asked us 
to do so. That is why I agreed, and because the chairman asked, 
and I thought it was the respectful thing to do.
    But I want people to know that ``Ms. Smith'' is not her 
real name. ``Ms. Smith'', did you work for HUD?
    We lost the--
    Ms. Smith. No, sir, I did not.
    Mr. Capuano. As I understand it, you worked for a nonprofit 
organization, is that correct?
    Ms. Smith. Yes, sir, that is correct.
    Mr. Capuano. And did you have any other funds other than 
HOME funds that flowed through that organization?
    Ms. Smith. Yes, sir, we did.
    Mr. Capuano. Did you steal those too?
    Ms. Smith. I am sorry?
    Mr. Capuano. Did you steal that money too?
    Ms. Smith. There were funds that were mismanaged, yes, sir.
    Mr. Capuano. So you stole that money too. So you stole 
anything you could get your hands on, I respect that.
    At one point in your testimony, you stated--I think it was 
testimony or maybe the news reports--that you were pressured by 
politicians. And I do not want you to name those here today, 
because that is not the purpose of this hearing. But I would 
like to know, did you pass those names along to the Justice 
Department?
    Ms. Smith. Yes, sir.
    Mr. Capuano. And have there been any prosecutions as a 
result of that?
    Ms. Smith. There were some.
    Mr. Capuano. And were they convicted?
    Ms. Smith. There were a couple who were, sir.
    Mr. Capuano. That is good to hear. I am glad to hear that.
    As I understand it--again, I think this was news reports--
your activity was basically from, give or take, the year 2000 
and give or take the year 2005, is that correct?
    Ms. Smith. No. It was prior to then, sir.
    Mr. Capuano. Say it again, I am sorry?
    Ms. Smith. It was prior to 2005.
    Mr. Capuano. But between the years 2000 and 2005, is that 
right?
    Ms. Smith. Yes, sir.
    Mr. Capuano. And do you know who the President of the 
United States was then?
    Ms. Smith. It would have been George Bush.
    Mr. Capuano. That is what I thought.
    And do you know who the Secretary of HUD would have been at 
that time?
    Ms. Smith. No, sir, I don't know--
    Mr. Capuano. It was Mr. Martinez and Mr. Jackson.
    Do you know who the Speaker of the House was at that time?
    Ms. Smith. I don't recall.
    Mr. Capuano. That would be Mr. Hastert.
    Mr. Truax, were you hired at any time by HUD? Were you paid 
or employed by HUD at any time?
    Mr. Truax. No.
    Mr. Capuano. You worked for another governmental entity, is 
that correct?
    Mr. Truax. Correct.
    Mr. Capuano. And did that governmental entity provide any 
oversight whatsoever to you?
    Mr. Truax. Just a supervisor.
    Mr. Capuano. Did that supervisor oversee you?
    Mr. Truax. Yes.
    Mr. Capuano. I guess, as I read your testimony, honestly, 
it sounds like old-fashioned bid-rigging and kick-back scheme, 
if you want the truth.
    Was there anything special about what you were doing other 
than the fact that you were stealing money?
    Mr. Truax. No.
    Mr. Capuano. And ``Ms. Smith'', it strikes me that what I 
saw of yours, it was just old-fashioned taking anything that 
was on the table.
    Is there any special, secret thing that you can enlighten 
us with as to what kind of crime that we could be able to stop 
in the future?
    Ms. Smith. I am not sure that I understand your question.
    Mr. Capuano. Because when we went through the Wall Street 
thing, a lot of us--I don't know about anybody else--but I 
learned a lot about some of the ways that Wall Street operated 
because we didn't know it. But the truth is here in these 
testimonies--I am not suggesting it is good, but what I have 
read is just pretty much plain, old-fashioned, straight-up 
crime that could happen and does happen anywhere.
    Now, I am more than happy to find ways--and I actually 
appreciate that there is no way in the world that any auditor 
at any level should allow the person being audited to pick the 
projects that they get audited on. That is a very substantive 
commentary that should not happen, and I would hope that we 
would be able to address that issue.
    But, nonetheless, bid-rigging, kickbacks--I don't know how 
we will ever stop those. It is not just the HOME Program. Every 
single program in the history of mankind has been subject to 
that type of fraud.
    And I am really interested in some insight as to what we 
can do. Do either of the witnesses suggest somehow that we 
should have a HUD auditor at all of the 15,000 people who 
utilize HOME Programs? Is that your suggestion, Mr. Truax?
    Mr. Truax. No.
    Mr. Capuano. ``Ms. Smith'', do you suggest that we have a 
HUD auditor sitting at the shoulder of each of the 15,000 
people who receive HOME money?
    Ms. Smith. I am not suggesting that you have an auditor, 
but I am suggesting that there should be more hands-on 
interaction.
    As it stands today, HUD only requires applications. Anybody 
can put anything on paper and make it look good.
    Mr. Capuano. I am having a hard time hearing you. I did 
read at some point, ``Ms. Smith'', that you said that if you 
had more training, that would have been good.
    Is that something that you said at one point?
    Ms. Smith. Sir, if HUD had provided more training to the 
organizations that it selects to fund--because every 
organization that comes to the table, they are not thinking, 
``Oh, let me just go to HUD and get a couple of dollars.'' They 
start off with good intentions, but if the organization that is 
giving them the funds takes for granted that this organization 
knows what it is doing--
    Mr. Capuano. No, and I respect the fact that HUD should 
have more of a--I have no problem with that concept. I don't 
think you will find anybody who disagrees with that. But at 
some point, I am just wondering if you had received more 
training, would that have stopped your criminal activity? Or 
would that just made you better at it?
    Ms. Smith. I don't know that I necessarily understand the 
way you are wording your question. If there was more training, 
maybe there would be better understanding of how things should 
have been done, especially for an organization that didn't have 
any clue whatsoever.
    Mr. Capuano. My time has run out and I appreciate--
    Mr. Gutierrez. Point of parliamentary inquiry, Mr. 
Chairman?
    Chairman Neugebauer. The gentleman will state his inquiry.
    Mr. Gutierrez. Thank you.
    Is it appropriate to ask the witness who the two elected 
officials who were indicted and convicted were?
    Chairman Neugebauer. We don't think that is--
    Mr. Gutierrez. No, I am just--I am just going to see what 
the chairman--are we keeping that a secret?
    Chairman Neugebauer. Yes, I think--
    Mr. Gutierrez. It seems to me if we want to know, we should 
find out who they were and call them and they can tell us--
    Chairman Neugebauer. The gentleman certainly is welcome to 
do that--
    Mr. Gutierrez. And is it appropriate to ask who the 
consultant was that ``Ms. Smith'' says was hired and was the 
primary reason, according to her testimony, in getting these 
HUD contractors? Is it appropriate to ask who that consultant 
was?
    Chairman Neugebauer. I think what we have asked the 
witnesses to do is not to recount the acts themselves, but to 
focus on the purpose of this hearing, and that purpose is to 
identify that it is--it seems to be fairly easy to game the 
HOME Program. And that when there is a situation where the 
program is defrauded, there are two losers: the American 
taxpayers; and the intended beneficiaries.
    And as the gentleman outlined, in his district they have 
had a number of projects that were beneficial to his district. 
But when someone takes an opportunity to defraud the system, 
then the system suffers from that and the taxpayers. So what we 
are trying to focus on, in order to get back to this hearing, 
is not to defend the HOME Program, not to tear down the HOME 
Program--
    Mr. Gutierrez. Mr. Chairman, if I might--
    Chairman Neugebauer. But--
    Mr. Gutierrez. --just continue, it is just that I 
understand that to be the goal and it just seems to me since 
``Ms. Smith'' stated that she--the organization would not--that 
they didn't fill out anything; that the only reason they got 
the money--I am paraphrasing what she says--they got the money 
was because they hired the right--
    So it seems to me if you are going to find out, we should 
find out what consultants do so that we can intervene at that 
level.
    Chairman Neugebauer. The gentleman made a point of order--
was it appropriate? The Chair rules that it is not appropriate 
to ask for the specific names.
    I now recognize Mrs. Biggert for 5 minutes.
    Ms. Waters. Will the chairman yield?
    Chairwoman Biggert. Thank you, Mr. Chairman.
    I would first ask ``Ms. Smith''--did HUD officials 
physically inspect the projects or conduct on-site visits?
    Ms. Smith. No, ma'am, they did not. We provided reports and 
pictures to them.
    Chairwoman Biggert. Did they review the paperwork?
    Ms. Smith. I was not present when they received the 
paperwork. I assume that they did.
    Chairwoman Biggert. Did they ever come back and say to you, 
``This doesn't seem to be complete. Do you have more 
information?''
    Ms. Smith. Never.
    Chairwoman Biggert. Okay. You testified that there was a 
large HUD HOME project, Emerson, that had many cost overruns.
    Ms. Smith. Yes, ma'am.
    Chairwoman Biggert. Do you recall that?
    Ms. Smith. Yes.
    Chairwoman Biggert. How many of the units was the project 
supposed to deliver?
    Ms. Smith. We delivered the final application, and what 
we--the first application had about nine more units, but 
because of the cost, we cut nine out and that was approved. But 
we delivered what we said we were going to deliver.
    Chairwoman Biggert. Okay. So there was no problem with that 
project?
    Ms. Smith. There was no problem with the amount of units 
that we said that we would deliver. We did deliver those. But 
there was an enormous amount of cost overruns. We could not 
take it out of the actual project budget because that was 
pretty much set in stone. What we did was we had to take it 
from other funds from within the organization.
    Chairwoman Biggert. All right. Should that project have 
been stopped due to budget overruns?
    Ms. Smith. Oh, absolutely, without question, it should have 
been stopped.
    Chairwoman Biggert. But you didn't propose that.
    Ms. Smith. Actually, politically, it was not suitable to 
propose doing that.
    Chairwoman Biggert. Okay. Mr. Truax, did HUD ever 
physically inspect the projects or conduct on-site visits?
    Mr. Truax. Yes, but only at the direction of myself as far 
as the units--on what units to see.
    Chairwoman Biggert. Okay. And that was with the 3 years, 
did it--
    Mr. Truax. Yes.
    Chairwoman Biggert. Only once--
    Mr. Truax. Only one time.
    Chairwoman Biggert. --in 3 years.
    Did they review the paperwork?
    Mr. Truax. Yes.
    Chairwoman Biggert. And did they ever come back and say 
that it wasn't complete enough?
    Mr. Truax. No.
    Chairwoman Biggert. All right. Did you have incomplete 
projects?
    Mr. Truax. When I left, yes.
    Chairwoman Biggert. Do you think that HUD would have 
flagged your incomplete projects if they had had more random 
and frequent inspections?
    Mr. Truax. Absolutely.
    Chairwoman Biggert. But you still would have just told them 
which ones to go to?
    Mr. Truax. Yes, if they gave me that opportunity.
    Chairwoman Biggert. And did they ever say, ``I want to see 
something else?''
    Mr. Truax. No.
    Chairwoman Biggert. Okay. Did anyone from HUD ever question 
the information that you included in the HUD database about 
completed projects?
    Mr. Truax. No.
    Chairwoman Biggert. Did anyone ever question the accuracy 
of the information?
    Mr. Truax. No.
    Chairwoman Biggert. Okay.
    ``Ms. Smith'', same question to you. Did anyone from HUD 
ever question the information that you included in the HUD 
database about completed projects?
    Ms. Smith. No, never.
    Chairwoman Biggert. Did anyone question the accuracy of the 
information?
    Ms. Smith. Absolutely not.
    Chairwoman Biggert. Mr. Truax, I think that law enforcement 
uncovered this scheme?
    Mr. Truax. Yes.
    Chairwoman Biggert. And was HUD involved in that, too?
    Mr. Truax. No.
    Chairwoman Biggert. So did HUD ever uncover your fraud?
    Mr. Truax. No.
    Chairwoman Biggert. But law enforcement did?
    Mr. Truax. Yes.
    Chairwoman Biggert. Could you tell us how?
    Mr. Truax. Somebody in the county did ask the investigating 
officers of our Criminal Investigation Department to look into 
me receiving kickbacks. Upon that time, the U.S. investigating 
office came in. They went over a few files, and saw that I did 
do that. I admitted it openly, and I helped them throughout the 
entire investigation on everyone involved.
    Chairwoman Biggert. Okay. Thank you.
    ``Ms. Smith'', what happened? Did HUD discover your fraud 
scheme?
    Ms. Smith. No, ma'am. There was an investigation that took 
place with a couple of my board members, and it was sort of a 
snowball effect, but HUD was never involved in any of the 
investigations.
    Chairwoman Biggert. Thank you. My time is up. I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    And now, Mr. Gutierrez is recognized for 5 minutes.
    Mr. Gutierrez. Thank you so much.
    Let me first of all, ``Ms. Smith'', so you defrauded the 
HOME Program and embezzled the HOME Program between 2000 and 
2005. Is that correct?
    Ms. Smith. We had HOME Program dollars, but--
    Mr. Gutierrez. When did you steal the money--in 2000 and 
2005?
    Ms. Smith. Yes, but the actual--
    Mr. Gutierrez. Okay.
    Ms. Smith. --had nothing to do with HUD funds.
    Mr. Gutierrez. It had nothing to do--no HOME funds?
    Ms. Smith. No.
    Mr. Gutierrez. So, but this is a HOME fund hearing. You are 
here to tell us about the HOME fund, aren't you?
    Ms. Smith. Absolutely.
    Mr. Gutierrez. So you didn't take steal any money from the 
HOME Program?
    Ms. Smith. No.
    Mr. Gutierrez. Okay. What program did you steal the money 
and embezzle it from?
    Ms. Smith. We mismanaged funds from the actual 
organization.
    Mr. Gutierrez. From the actual organization. Okay.
    So, let me ask you something. You worked at the Urban 
Enterprise Association as an executive?
    Ms. Smith. Yes, sir, I did.
    Mr. Gutierrez. Okay. And that is in Gary, Indiana?
    Ms. Smith. Yes, sir.
    Mr. Gutierrez. Okay. Are you the same person from the Gary 
Urban Enterprise Association who made a $300 contribution on 3/
10/2003 and a $5,000 contribution on 3/14/2003 to the National 
Republican Congressional Campaign Committee?
    Ms. Smith. Yes, sir, I am.
    Mr. Gutierrez. And did those funds that you gave come from 
the money that you embezzled from the organization that you 
worked at?
    Ms. Smith. It came from my salary, sir.
    Mr. Gutierrez. It came from your salary?
    Ms. Smith. Yes.
    Mr. Gutierrez. You kept two separate accounts--the money 
you stole and the money you earned?
    Ms. Smith. It came from my personal account.
    Mr. Gutierrez. So while you were embezzling money, you were 
being charitable to the Congressional Republican Campaign 
Committee, you thought that would be your largess, to give them 
$5,000. So you are a thief on the one hand but you are very 
generous with the National Republican Congressional Campaign 
Committee. Is that what we are to believe?
    Ms. Smith. If those are the words that you want to use, 
sir.
    Mr. Gutierrez. No. Okay. Who asked you and who invited you 
to contribute? Because this is pretty extraordinary, for 
somebody who is stealing money, $5,000 is a pretty 
extraordinary amount of money. Who asked you to contribute and 
invited you to contribute to the National Republican 
Congressional Campaign Committee?
    Ms. Smith. I don't actually recall how I--
    Mr. Gutierrez. You know you are under oath, right?
    Ms. Smith. I do realize that I am under oath, sir. I 
remember everything--
    Mr. Gutierrez. And you don't remember who asked you to give 
$5,000?
    Ms. Smith. No, sir. It was maybe 10 years ago. So--
    Mr. Gutierrez. 10 years ago? I mean, 20 years ago, if 
somebody asked me if I could contribute $5,000 to something, I 
think I would remember, so let me ask you something. How much 
were you earning in salary in 2003?
    Ms. Smith. In 2003?
    Mr. Gutierrez. And you are under oath.
    Ms. Smith. I understand that, sir--probably $65,000.
    Mr. Gutierrez. Excuse me?
    Ms. Smith. I am sorry?
    Mr. Gutierrez. How much was your salary?
    Ms. Smith. I am sorry, I guess I got cut off, because I 
said $65,000.
    Mr. Gutierrez. So, $65,000. And as the Republicans keep 
telling us all the time, there is a lot of taxes on all that 
money, so you were probably getting about $45,000.
    So you just had an--at a $45,000 salary, and I am being a 
little generous, take-home pay, you just had an extra $5,000 
lying around to give to the National Republican Congressional 
Campaign Committee, but you don't remember who asked you for 
it. Is that right?
    Ms. Smith. I don't really remember who actually asked.
    Mr. Gutierrez. Let me ask you something. Since you used the 
money--and I know you are trying to--you are telling me that 
your salary had nothing to do with HUD or Federal Government 
programs; that your salary had nothing to do with governmental 
programs at this not-for-profit institution, and that your 
salary--not a penny of that salary, came from governmental 
funds.
    Ms. Smith. No, sir, it did not.
    Mr. Gutierrez. It didn't? All right, we will check into 
that real shortly.
    Let me ask you something: Have they sent you the money back 
now that they know you are a convicted felon and a fraud and 
you were stealing money at the very same time from the Federal 
Government that you gave this money, did they give the money 
back to you, send you back a check?
    Ms. Smith. No, sir, they didn't.
    Mr. Gutierrez. Thank you. That is all the questions I have.
    Chairman Neugebauer. I thank the gentleman. And now the 
gentleman, Mr. Fitzpatrick, is recognized for 5 minutes.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    ``Ms. Smith'', the purpose of this hearing is to do some 
oversight with HUD and specifically in the HOME Program, to 
make certain that every dollar that the taxpayers send to HUD, 
send to Washington, are dollars that are well spent and that 
the taxpayers get value for every dollar.
    At your organization, ``Ms. Smith'', were HOME Program 
funds through HUD sent to your nonprofit?
    Ms. Smith. Actually, when we did the project, we set up an 
additional organization, because the HOME funds were not the 
only funds that made that project a reality. We also used the 
low-income housing tax credit funds as well.
    The HUD HOME funds were--was sort of like mezzanine 
financing. So there was a separate entity away from my 
organization that received those funds.
    Mr. Fitzpatrick. Did you oversee that separate 
organization?
    Ms. Smith. Yes, sir, I did.
    Mr. Fitzpatrick. And so, between your nonprofit and the 
separate organization that you oversaw, there were HOME Program 
funds and other low-income housing tax credit funds, also 
Federal funds?
    Ms. Smith. Yes, sir, there were.
    Mr. Fitzpatrick. And you oversaw the management of all 
those funds?
    Ms. Smith. Yes, sir, I did.
    Mr. Fitzpatrick. And were the HOME funds, in your opinion, 
mismanaged or stolen from the program and away from the 
intended recipients, the beneficiaries?
    Ms. Smith. Mismanaged, yes, in terms of the construction 
overruns, yes, it was completely mismanaged.
    Mr. Fitzpatrick. So were HUD HOME Program dollars lost?
    Ms. Smith. Yes, sir. We probably could have built--if we 
didn't run into the cost overruns that we experienced, we 
probably could have built more. We could have built more units.
    Mr. Fitzpatrick. ``Ms. Smith'', you indicated in your 
testimony that you started out with good intentions, but as a 
result of your lack of any experience and lack of any training, 
things went awry, correct? ``Ms. Smith?''
    Ms. Smith. Yes, sir. I am sorry. I don't know if my 
microphone has given out or what, but yes, sir, I did--
    Mr. Fitzpatrick. ``Ms. Smith'', did you indicate that your 
board also lacked any direction or training or any real 
experience in the area of community and housing development?
    Ms. Smith. I am sorry, did you hear me? I said, ``yes, 
sir.''
    Mr. Fitzpatrick. Okay. So you indicated that you were able 
to hire consultants to provide the experience that both you and 
your board lacked. Is that correct?
    Ms. Smith. Yes, sir, that is correct.
    Mr. Fitzpatrick. Did the consultants deal directly with HUD 
or was that you, ma'am?
    Ms. Smith. No one actually dealt directly with HUD. We went 
through the application process, and once the award came 
through, we didn't have any contact with HUD at all. We just 
submitted the reports as we were asked to.
    Mr. Fitzpatrick. ``Ms. Smith'', do you believe as a result 
of your lack of experience and training and your board's lack 
of experience and management training in community and housing 
development that HUD should have been more skeptical of you and 
your nonprofit?
    Ms. Smith. From my personal experience, because I learned a 
lot during the process of getting that project done and 
afterwards, I think that HUD should have looked into the fact 
that we, at the time of the application, we could not speak of 
any historical work that we had done.
    Hindsight is 20/20--that should have raised a red flag for 
HUD to say, ``Okay, what makes you think that--or what would 
lead us to believe that you have the capacity to do a project 
when you have no experience to speak of? And not only do you, 
yourself, as the executive director, not have experience, but 
there is absolutely no experience on your board either.''
    Because I do realize that sometimes nonprofits, the 
director may not have experience, but there could be members of 
the board who do actually have some experience to speak of. 
When they saw that there was nothing there, it should have 
raised a red flag to HUD to, not to discourage this 
organization from doing the work, but maybe we should be 
marrying this organization up with someone that we know has the 
track record to do the work that HUD loves to have done.
    Mr. Fitzpatrick. So, ``Ms. Smith'', you are saying that HUD 
never raised a red flag on your lack of experience?
    Ms. Smith. No, sir.
    Mr. Fitzpatrick. Did HUD ever ask any tough questions?
    Ms. Smith. There were no questions at all. Sometimes, these 
things are more politicized than we probably care to talk 
about. When you are in certain communities and you can put 
together a great application and you have some political 
support behind you, it doesn't lead to any questioning at all.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman--
    Mr. Gutierrez. Mr. Chairman?
    Chairman Neugebauer. Yes?
    Mr. Gutierrez. I have a question. It seems to me that we 
might want to go into executive session, because the witness 
just answered my question saying she got no money from HUD, she 
got no Federal money when I asked her directly that question. 
Now, she is testifying that she didn't have any supervision 
from HUD, that they never asked her. Well, why would they?
    Chairman Neugebauer. Does the--
    Mr. Gutierrez. Either she was or she wasn't. Where is the 
truth here?
    Chairman Neugebauer. Does the gentleman have a point of 
order?
    Mr. Gutierrez. Yes, I would like to go into executive 
session, because I would like to ask this witness questions, 
and specific questions, about what she is telling the truth 
about and who was telling her about these truths. Because it is 
confounding to me. I have to be very honest. She lied. She has 
lied. She is a convicted felon, so she lied already. She has 
already agreed that she lied on forms. But--
    Chairman Neugebauer. The gentleman has not made a point of 
order.
    The gentlewoman from California, Ms. Waters, is recognized 
for 5 minutes.
    Ms. Waters. Is there a motion before us for executive 
session?
    Mr. Gutierrez. Yes, I would like to go into executive 
session. I would like to ask her about the other elected 
officials. I would like to ask her who these consultants were. 
Questions that the chairman has already ruled she could not 
relate to us in direct evidence, but she can in executive 
session.
    Chairman Neugebauer. We have a motion to go into executive 
session. Is there a second?
    Voices. Second.
    Chairman Neugebauer. All right. The Chair will pose the 
question. All in favor of going into executive session, say 
``aye.''
    [A chorus of ayes.]
    Chairman Neugebauer. All opposed, say ``nay.''
    [A chorus of noes.]
    Chairman Neugebauer. The ``nays'' have it, and the motion 
is denied.
    Mr. Gutierrez. I ask for a recorded vote.
    Chairman Neugebauer. Would the gentleman agree to a show of 
hands, since we don't have the clerk here to read the roll?
    Mr. Gutierrez. No, I asked for a recorded vote to see if 
there is a quorum present.
    Chairman Neugebauer. Stand by. We will get that done. We 
will make it happen.
    The clerk will call the roll.
    The Clerk. Mrs. Biggert?
    Chairwoman Biggert. No.
    The Clerk. Mrs. Biggert votes no.
    Mr. Fitzpatrick?
    Mr. Fitzpatrick. No.
    The Clerk. Mr. Fitzpatrick votes no.
    Mr. Hurt?
    [No response.]
    Mr. King?
    [No response.]
    Mr. Miller?
    [No response.]
    Mrs. Capito?
    [No response.]
    Mr. Garrett?
    [No response.]
    Mr. McHenry?
    Mr. McHenry. No.
    The Clerk. Mr. McHenry votes no.
    Mrs. Bachmann?
    [No response.]
    Mr. Pierce?
    [No response.]
    Mr. Posey?
    [No response.]
    Mr. Westmoreland?
    [No response.]
    Mr. Duffy?
    [No response.]
    Ms. Hayworth?
    [No response.]
    Mr. Renacci?
    Mr. Renacci. No.
    The Clerk. Mr. Renacci votes no.
    Mr. Dold?
    Mr. Dold. No.
    The Clerk. Mr. Dold votes no.
    Mr. Canseco?
    [No response.]
    Mr. Stivers?
    [No response.]
    Mr. Fincher?
    [No response.]
    The Clerk. Mr. Capuano?
    Mr. Capuano. Aye.
    The Clerk. Mr. Capuano votes aye.
    Mr. Gutierrez?
    Mr. Gutierrez. Aye.
    The Clerk. Mr. Gutierrez votes aye.
    Ms. Waters?
    Ms. Waters. Aye.
    The Clerk. Ms. Waters votes aye.
    Ms. Velazquez?
    [No response.]
    Mr. Watt?
    [No response.]
    Mr. Sherman?
    [No response.]
    Mr. Clay?
    [No response.]
    Mr. Baca?
    [No response.]
    Mr. Lynch?
    [No response.]
    Mr. Miller?
    [No response.]
    Mr. Cleaver?
    Mr. Cleaver. Aye.
    The Clerk. Mr. Cleaver votes aye.
    Mr. Ellison?
    [No response.]
    Mr. Himes?
    [No response.]
    Mr. Carney?
    [No response.]
    Mr. Chairman?
    Chairman Neugebauer. No.
    The Clerk. Mr. Chairman votes no.
    Chairman Neugebauer. The clerk will report.
    The Clerk. Mr. Chairman, the ayes are four and the noes are 
six.
    Chairman Neugebauer. And the motion is not agreed to.
    The gentlewoman from California is recognized for 5 
minutes.
    Ms. Waters. Thank you very much.
    Mr. Truax, you have been convicted, but you have not been 
sentenced yet. So, are you out on bail?
    Mr. Truax. Yes.
    Ms. Waters. And what State are you from?
    Mr. Truax. Pennsylvania.
    Ms. Waters. And in order to come here, you had to have 
permission from someone?
    Mr. Truax. Yes.
    Ms. Waters. Who gave you permission?
    Mr. Truax. The U.S. attorney who is prosecuting.
    Ms. Waters. And did you have any conversations with the 
U.S. attorney, that perhaps your cooperation would be--you 
would get a lighter sentence, or the possibility of it?
    Mr. Truax. No.
    Ms. Waters. Did you have that conversation with anybody?
    Mr. Truax. No.
    Ms. Waters. Did you have that conversation with your lawyer 
that--was it suggested that you may get a lighter sentence if 
you come here?
    Mr. Sheldon. I am sorry, ma'am. I am going to have to 
object to that. That is attorney/client privilege, as to what 
my client and I discussed. That is an improper question.
    Ms. Waters. I didn't ask you what it was.
    Mr. Sheldon. You didn't. You asked my client.
    Ms. Waters. You can object if I was asking you. I didn't 
ask you.
    Mr. Sheldon. You are asking my client for an answer--
    Ms. Waters. I asked the witness who volunteered to come 
here today.
    Mr. Sheldon. He will not be--
    Ms. Waters. On my time, you don't get a chance to do that. 
I am asking the witness who appeared here today whether or not 
you had that conversation with your attorney where you 
discussed that your coming here may get you a lighter sentence?
    Mr. Truax. I am not going to answer that. It pertains to 
the attorney and--
    Ms. Waters. You are under oath, and I am asking you whether 
or not you had that conversation with your attorney.
    Mr. Truax. With all due respect, I refuse to answer on the 
grounds that it is attorney-client privilege.
    Ms. Waters. How long were you involved in the fraud and 
deception that you were convicted for? How many years?
    Mr. Truax. I was employed there for 3 years.
    Ms. Waters. Three years. About how many contractors 
competed for the contracts that you gave out that you steered 
to your three friends or people who were giving you kickbacks?
    Mr. Truax. There was an average of three contractors per 
project who were able to bid.
    Ms. Waters. These were contractors who put in a bid, whose 
bids went in the trash can or did not get considered because 
you knew where you were going to direct the contracts. Is that 
right?
    Mr. Truax. Correct.
    Ms. Waters. How many were those--
    Mr. Truax. Five.
    Ms. Waters. Over a 3-year period of time?
    Mr. Truax. Five projects.
    Ms. Waters. About five? Did any of these contractors sue 
you or the city or HUD or anybody--
    Mr. Truax. No.
    Ms. Waters. --for the deception that you were involved in?
    Mr. Truax. No.
    Ms. Waters. So would you think they have a cause of action?
    Mr. Truax. I am not a lawyer. I can't answer that.
    Ms. Waters. Do you have assets? Do you have a home?
    Mr. Truax. Yes.
    Ms. Waters. Do you have a bank account?
    Mr. Truax. No.
    Ms. Waters. Do you have any other assets?
    Mr. Truax. My home is in foreclosure. I have no bank 
account. I have no money.
    Ms. Waters. Do you know you could be liable--in addition to 
the money that you stole, you could be liable for having 
defrauded those contractors who competed in an open process 
where you steered the contracts to other contractors?
    Mr. Truax. I am not a lawyer. I can't answer that.
    Ms. Waters. So for those contractors who bid for these 
contracts, and their contracts were not even considered because 
you steered them to your friends or others who were giving you 
kickbacks, they may have a cause of action where they could sue 
you; they could sue the city; or they could sue HUD because you 
denied them an honest opportunity to compete. And if you have 
assets, then those assets may be available to them.
    So, on the record, what you said here today is you have no 
assets. Is that what you are saying?
    Mr. Truax. Correct.
    Ms. Waters. I didn't hear you.
    Mr. Truax. Correct.
    Ms. Waters. You have no assets?
    Mr. Truax. Correct.
    Ms. Waters. Okay. And so for 3 years, you were involved in 
defrauding the HOME program and others. I don't know how many 
others. Would you say that you were deceptive, at all? Would 
you say you lied? Would you say you cheated?
    Mr. Truax. Which one do you want me to answer?
    Ms. Waters. The first one. Have you lied? In all of this, 
were you telling lots of lies to people?
    Mr. Truax. No.
    Ms. Waters. You didn't lie to anyone?
    Mr. Truax. No.
    Ms. Waters. You are under oath, sir.
    Mr. Truax. I understand that.
    Ms. Waters. If you deceived them; if you took kickbacks; if 
you told the other contractors--unanimous consent for at least 
30 seconds. This lawyer whispering in his ear is taking up all 
of my time.
    Chairman Neugebauer. If the gentleman can answer that 
specific question, and then we will move on--the gentlewoman's 
time will expire.
    Ms. Waters. Did you lie when you deceived the contractors 
and/or the government? Did you lie?
    Mr. Truax. Yes.
    Ms. Waters. So you lied; you deceived--
    Chairman Neugebauer. The gentlewoman's time has expired.
    Ms. Waters. And you are before us today. Why should we 
think you are telling us the truth if you are a liar?
    Chairman Neugebauer. The gentlewoman's time has expired.
    Mr. Renacci?
    Mr. Truax. To my knowledge, I have nothing to gain from 
this. I am going to jail.
    Ms. Waters. Except what your lawyer directed you to do.
    Chairman Neugebauer. The gentlewoman's time has expired.
    Ms. Waters. I yield back the balance of my time.
    Chairman Neugebauer. Mr. Renacci is recognized for 5 
minutes.
    Mr. Renacci. Thank you, Mr. Chairman.
    I want to get to the point of HUD, more than the point of 
what you guys did. Because it appears you had some wrongdoings 
here.
    But first off, let us start with ``Ms. Smith.''
    ``Ms. Smith,'' did you work for an agency that did--I want 
to make sure--did you work for an agency that took monies under 
the HOME Program through HUD?
    ``Ms. Smith?''
    We must have lost her.
    Ms. Smith. Can you hear me?
    Mr. Renacci. ``Ms. Smith?'' Yes, did you work for an 
organization that actually received funds under the HUD HOME 
Program?
    Ms. Smith. The organization that I worked for set up a sub-
organization that received those funds, yes, sir.
    Mr. Renacci. Okay. So you were involved in the HOME Program 
through your organization as an executive director?
    Ms. Smith. Yes, sir.
    Mr. Renacci. Thank you.
    Mr. Truax, did you work for an organization that received 
HUD dollars through the HOME Program?
    Mr. Truax. Yes.
    Mr. Renacci. Okay. Mr. Truax, you said you had a number of 
projects. How many projects in total came through your 
organization?
    Mr. Truax. Throughout my tenure?
    Mr. Renacci. Yes, just an estimate.
    Mr. Truax. Under 50 in a 3-year period.
    Mr. Renacci. Okay, under 50. Under those programs, you 
actually went out and took bids. If HUD would have asked you to 
submit three bids for each program, would that have caused you 
not to be able to do what you did? If they would have actually 
used an internal control that most other banks and businesses 
use, if they would have asked you for three bids, would you 
have been able to do what you did?
    Mr. Truax. No.
    Mr. Renacci. Thank you.
    ``Ms. Smith'', if HUD would have asked you for three bids 
on all the projects that you worked on, would you have been 
able to do some of the things you did? ``Ms. Smith?''
    Ms. Smith. Hello? Can you hear me?
    Mr. Renacci. Yes. If HUD would have asked you for three 
bids for every project that you worked on, would you have been 
able to do some of the things you did as far as taking dollars?
    Ms. Smith. I think so, because some of the bids--we did 
take bids, but, again, some of those bids were politically 
driven.
    Mr. Renacci. But if they would have asked you to take three 
bids, and you were required to use the lowest bid, would you 
have been able to perform and take the dollars you did?
    Ms. Smith. If HUD had received those bids, then no.
    Mr. Renacci. Exactly. That is what normally happens in the 
banking world, in many cases.
    Now, I am going to move to another internal control. If HUD 
would have come into your organization, Mr. Truax, and done an 
unannounced, random selection, including site visits on even 
one or two of your projects, would you have been inclined to do 
what you did and take dollars?
    Mr. Truax. No.
    Mr. Renacci. ``Ms. Smith'', if HUD would have done the 
exact same thing with your organization, if they would have 
come in, done unannounced, random selections to review the 
sites on the buildings you did, would you have been prone to 
take the money you did?
    Ms. Smith. No.
    Mr. Renacci. Thank you.
    Mr. Truax, one other thing--which is another internal 
control, a normal internal control--I am a CPA, I have seen 
internal controls like this--if there was an unannounced third 
party that was able to come in and randomly select, which 
happens in many cases, some of your projects, would you have 
been prone to take the dollars you did?
    Mr. Truax. No.
    Mr. Renacci. Thank you.
    ``Ms. Smith'', if there was an unannounced third party that 
was required to come in and on an unannounced basis take a look 
at your projects and determine percentage of completion and be 
able to determine how much of the project was completed, would 
you have been able to take the dollars you did through the HUD 
HOME Program indirectly?
    Ms. Smith. No.
    Mr. Renacci. Thank you.
    So it does appear that if HUD's internal controls were up 
to a higher standard, neither of you would have been able to do 
some of the things you did as far as taking the dollars you 
did?
    Mr. Truax. Correct.
    Mr. Renacci. Thank you. I yield back my time.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Missouri, Mr. Cleaver, is recognized for 
5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Sir, I am curious about how your criminal enterprise was 
detected.
    Mr. Truax. I am sorry?
    Mr. Cleaver. How were you found out?
    Mr. Truax. Somebody thought that I was possibly receiving 
kickbacks, and they contacted our criminal investigation 
department of Dauphin County, which in turn got ahold of the 
United States investigation department, and they came to me 
asking questions. I knew what I did was wrong, and then, that 
is how they found out.
    Mr. Cleaver. Was HUD notified?
    Mr. Truax. After the investigations, yes; after the 
clarification of what was going on.
    Mr. Cleaver. Did you have any contact with the I.G.?
    Mr. Truax. Just through the interviews.
    Mr. Cleaver. The contact with the I.G., and when you were 
identified as allegedly having committed fraud, what was the 
time period between your contact with HUD, even through the 
I.G. or--
    Mr. Truax. I am not sure the exact time that they got ahold 
of HUD. When the I.G. came to me then, that is when it was all 
laid out on the table. It was instantly.
    Mr. Cleaver. Yes, I guess where I am trying to go is, do 
you think you were given permission to do this?
    Mr. Truax. Was I given permission?
    Mr. Cleaver. Yes.
    Mr. Truax. No.
    Mr. Cleaver. So you don't think HUD turned a blind eye that 
would allow criminal activity to take place?
    Mr. Truax. I don't believe so.
    Mr. Cleaver. And you have no reason to believe that, right?
    Mr. Truax. With the once-every-3-year inspection--
    Mr. Cleaver. It opened the door.
    Mr. Truax. Yes.
    Mr. Cleaver. So as best as you can recall, did you ever 
think, ``Well, we have every-3-year inspection, so this gives 
me a chance?'' As best as you can recall, did you actually 
consciously wonder how much time you had before the next 
inspection to commit fraud?
    Mr. Truax. Yes.
    Mr. Cleaver. And so you thought, ``I can get away with it, 
because HUD has an every-3-year inspection?''
    Mr. Truax. Because of the oversight, correct.
    Mr. Cleaver. How long have they had that procedure?
    Mr. Truax. I am not sure. I was only there for 3 years.
    Mr. Cleaver. But it was there when you arrived, right?
    Mr. Truax. Yes.
    Mr. Cleaver. Okay. So we have to assume that it has been 
around a while.
    Mr. Truax. Yes.
    Mr. Cleaver. It is possible that somebody else could have 
done something like this and gotten away with it 5 years ago, 
or 6 years ago.
    Mr. Truax. Sure.
    Mr. Cleaver. And your recommendation to HUD would be?
    Mr. Truax. Just to have a little tighter oversight on 
monitoring the administrators of the program.
    Mr. Cleaver. The problem, of course, is--you took a job 
that apparently had great temptation, right?
    Mr. Truax. Correct.
    Mr. Cleaver. Did you know that when you took the job?
    Mr. Truax. Pardon me?
    Mr. Cleaver. Did you realize, ``I am taking a job, but, 
man, the temptation here is going to be--''
    Mr. Truax. No. I didn't think about that--
    Mr. Cleaver. Because you had no intention--
    Mr. Truax. I had no idea--
    Mr. Cleaver. And so when HUD--when you were hired, nobody 
could have possibly assumed that you were going to commit 
fraud.
    Mr. Truax. Correct.
    Mr. Cleaver. You didn't think about fraud, the people who 
hired you didn't think about fraud. If it has happened before, 
they probably didn't think about it, the employer didn't think 
about it, right?
    Mr. Truax. Right.
    Mr. Cleaver. So what is the corrective step now?
    Mr. Truax. It is, like I said, a little tighter oversight.
    Mr. Cleaver. I am sorry?
    Mr. Truax. Maybe not having one person in charge of the 
entire program. The more people that you have involved in the 
program, the more it will deter any kind of fraudulence.
    Mr. Cleaver. Okay. So the whole issue of trust has to be 
discarded, right? In other words--Al Green, who is to my left--
Congressman Green, I trust him, so I don't need anybody to be 
an intermediary or check on him because I trust him. So I am 
wondering if you are saying that henceforth we should eliminate 
trust--
    Mr. Truax. No, but don't put--the files, for example. Go in 
and randomly pick the files during an audit or inspection.
    Mr. Cleaver. Yes.
    Chairman Neugebauer. The gentleman's time has expired.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Chairman Neugebauer. Does anybody on the--
    Ms. Waters. Mr. Chairman, a point of order. Could you 
reiterate every now and then to the committee that there is a 
woman, faceless and nameless, who is also a witness who can be 
questioned? Because we don't see her, and we don't hear her, we 
kind of forget she is there.
    Chairman Neugebauer. That is right; very good. And I thank 
the gentlewoman.
    ``Ms. Smith'' is still with us. And we periodically get 
video and she is still available for questions.
    Is there anybody else on the Minority who would like to 
question any of these witnesses?
    Mr. Green. May I have time, Mr. Chairman?
    Chairman Neugebauer. Mr. Green, you are recognized for 5 
minutes.
    Mr. Green. Thank you. I would like to yield to Mr. 
Gutierrez.
    Mr. Gutierrez. Thank you very much, Mr. Green.
    So, ``Ms. Smith'', we have conflicting testimony here. You 
never worked for HUD, did you?
    Ms. Smith. No, sir, I never worked for HUD.
    Mr. Gutierrez. Thank you.
    You worked for an organization that received HUD funds, did 
you not?
    Ms. Smith. Yes, sir.
    Mr. Gutierrez. Thank you. And that is why you are here to 
tell us about how you stole those HUD funds, and how in the 
future we can stop HUD funds from being stolen.
    Yes? No?
    Ms. Smith. Was that a question?
    Mr. Gutierrez. Yes, that is a question. Is that your 
purpose here, to tell us how you stole the HUD funds?
    Ms. Smith. I am here to tell you how HUD's funds were 
mismanaged and--
    Mr. Gutierrez. Were stolen and embezzled. Is that not 
correct?
    Ms. Smith. Were mismanaged. Yes, sir.
    Mr. Gutierrez. But ``mismanage''--did you pay off your car 
debt? Did you pay off a car debt with those ``mismanaged'' 
funds?
    Ms. Smith. No, sir, I did not.
    Mr. Gutierrez. Okay. Did you increase your salary with 
those mismanaged funds?
    Ms. Smith. Did I do what?
    Mr. Gutierrez. Did you increase your salary with those 
mismanaged funds?
    Ms. Smith. Yes, sir, I did.
    Mr. Gutierrez. Okay. So you increased your salary with 
those mismanaged funds, which we agree came from HUD.
    Ms. Smith. No, sir; again, no, sir. Those funds did not 
come from HUD. That organization had its own revenue source. 
Those funds came from that revenue source.
    Mr. Gutierrez. Then what are you doing here? This is an 
investigation into the HOME Program conducted by HUD, which you 
have nothing to do with. You never received any money from that 
Program, according to you.
    Ms. Smith. My organization, again, sir--
    Mr. Gutierrez. Your organization that you were the 
executive director of received money from HUD, did it not?
    Ms. Smith. The organization that I was the executive 
director of set up a sub-organization that received money from 
HUD.
    Mr. Gutierrez. And you managed that sub-organization, did 
you not?
    Ms. Smith. Yes, sir, I did.
    Mr. Gutierrez. There you go. So you were getting paid to 
manage that sub-organization which was receiving HUD funds.
    Ms. Smith. Yes, sir, but--
    Mr. Gutierrez. Okay. Good. We finally got to the HUD funds, 
and why you are here.
    Now, let me ask you just one more question--and I will give 
the time back to the gentleman from Texas--now that we have 
established that you were running an organization and 
supervising an organization and getting paid--right?--with HUD 
proceeds--right?--did any of those HUD proceeds go to make up 
the $5,000 contribution that you made in 2003 to the National 
Republican Congressional Campaign Committee?
    Ms. Smith. No, sir, it didn't.
    Mr. Gutierrez. You segregated the money.
    Ms. Smith. My salary did not come from those HUD--
    Mr. Gutierrez. Your salary did not, so you supervised an 
organization, but your salary didn't come from it. I am sorry. 
It is like this doesn't pass any remote test. The money came 
from there. You don't want to admit it. The Majority won't let 
us go into executive session so we can find out who the 
consultant was that designed this program.
    We can't find out who the politicians were that consult 
this program. We want to find out how all these happened, but 
we are going to be limited to asking questions of two convicted 
felons, one of whom is saying she didn't steal anything. She 
just like borrowed it and got caught before she paid it back.
    I return the time to my friend from Texas, Mr. Green.
    Mr. Green. Thank you.
    And I do want to ask just a limited number of questions. I 
will start with the lady since it is difficult to get her on 
and off.
    Ma'am, do you agree that you are a criminal?
    Ms. Smith. I agree that I conducted some unfortunate--
    Mr. Green. I am sorry. I didn't quite understand. Could you 
just answer yes or no, are you a criminal?
    Ms. Smith. I participated in some criminal acts. Yes, sir.
    Mr. Green. And you were convicted?
    Ms. Smith. Yes, sir.
    Mr. Green. Usually, when people are convicted of criminal 
acts, and they are felons, they are called ``criminals.'' You 
would not label yourself a criminal?
    Ms. Smith. How you choose to label yourself is not 
something--society can't label you. You can only label 
yourself. I choose not to label myself as that.
    Mr. Green. Let me just ask you about the definition of a 
person who has committed a crime. Let me just make this 
comment. You bring some concern to your credibility when you 
don't own up to the fact that you have committed a crime and 
that you engaged in criminal conduct, and as a result you are a 
criminal.
    That causes some disbelief in some of what you say, and I 
am sorry I didn't get to say more.
    But thank you, Mr. Chairman.
    Chairman Neugebauer. The gentleman's time has expired.
    The gentleman, Mr. Miller, is recognized for 5 minutes.
    Mr. Miller of North Carolina. Thank you. I yield my time to 
Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Miller.
    Thank you, Mr. Chairman.
    Mr. Truax, first of all, I want to say, thank you. I know 
this is probably not easy for you, and I respect that.
    I also want to thank you because in this, I don't know, we 
have been here about a couple of hours now, you provided the 
one point of light so far which, to me, was the only thing that 
I think I have heard that I could act on, which is to make sure 
that when HUD does inspect, that they don't let you or people 
like you pick their own projects to be reviewed. That is a good 
point, and I think a point that we can follow up on, and I 
intend to do so. So thank you for providing that single point 
of light.
    But I do want to ask you, on the 50-odd projects that you 
had, in the final analysis, how much Federal HOME money did you 
steal?
    Mr. Truax. I didn't steal any Federal HOME money.
    Mr. Capuano. You didn't steal any Federal HOME money?
    Mr. Truax. Not personally.
    Mr. Capuano. ``Ms. Smith'', are you still there? ``Ms. 
Smith?'' In and out--on the presumption that she is not there, 
I thought I heard her say that she did not steal any HOME 
money. I am not sure of that. That is why I wanted to ask, but 
that is what I heard.
    ``Ms. Smith'', if you come back, would you let us know 
because I don't want to put words in your mouth.
    But if I have heard that correctly, we now have two people 
here testifying as some sort of experts on how to fix the HOME 
Program, which I want to hear, yet neither of them stole any 
HOME money.
    Mr. Truax. Sir, if I may add to that?
    Mr. Capuano. Go right ahead.
    Mr. Truax. I received the money that I admitted to through 
kickbacks. I defrauded the system.
    Mr. Capuano. I understand that. But you didn't steal HOME 
money. I get that.
    And by the way, when one of my colleagues asked you if you 
had gotten three bids, would that have stopped you, in all the 
time that you did this, did you ever inform the contractors 
with whom you were working what the low bid was that they had 
to undercut?
    Mr. Truax. Yes.
    Mr. Capuano. So you told them, ``If you bid $10,000, you 
will get the contract.''
    Mr. Truax. Yes.
    Mr. Capuano. So if you had to get three of those bids, 
would you somehow not have told them what the lowest of the 
third bid was?
    Mr. Truax. Correct.
    Mr. Capuano. You would not have told them?
    Mr. Truax. Right.
    Mr. Capuano. So by simply getting three--what if you had 
gotten two bids, would you have told them?
    Mr. Truax. No.
    Mr. Capuano. What were you comparing it to? Was there a 
sole bidder?
    Mr. Truax. Sometimes.
    Mr. Capuano. But when there was a sole bidder, why would 
you have to tell them the number to bid?
    Mr. Truax. I wouldn't have to, at that point.
    Mr. Capuano. So what you did when there were competitive 
bids is you would get on the phone or in person with your co-
conspirator and say, ``This contractor over here has already 
bid $10,000, so you have to bid $9,000.''
    Mr. Truax. Yes.
    Mr. Capuano. And somehow, miraculously, if you got three of 
those, you wouldn't do that anymore? Is that what you are 
suggesting?
    Mr. Truax. No. I believe what he was asking is if we had to 
turn those bids into HUD themselves.
    Mr. Capuano. That is not the way I heard it. I heard if you 
had had to get three bids, would you do it.
    Mr. Truax. It states in here in my statement--
    Mr. Renacci. Will the gentleman yield?
    Mr. Capuano. And would you have given those bids if they 
had--
    Mr. Renacci. Would the gentleman yield?
    Mr. Capuano. Sure, I will.
    Mr. Renacci. As a CPA and what I was talking about--
    Mr. Capuano. I am a tax accountant, so you are not the only 
person here who is a--
    Mr. Renacci. Three--
    Mr. Capuano. And I am a former mayor just like you.
    Mr. Renacci. Great. When three bids come in separate and 
individual and you turn them into HUD, you don't have the 
opportunity to make--
    Mr. Capuano. Yes, that is true if you do it right, but it 
is not true if you are in conspiracy with a co-conspirator 
outside. You tell them what the other bids are. You open them 
up. And you re-seal them if you are a criminal. If you are not 
a criminal, you do it your way. If you are a criminal, you do 
it another way.
    All I am suggesting is if you are criminally oriented, 
which is fine, you are going to find a way. That is all I am 
suggesting.
    So we have two people here who haven't stolen HUD funds, as 
far as they have said. And we have people here who claim to be 
experts on how to fix it, yet to my knowledge, I have only 
heard one suggestion that we can bring to HUD that we can act 
on, that is a good one, and I intend to follow up on.
    And I simply wanted to use my time to say thank you, and 
with that I appreciate the gentleman yielding, and I yield back 
the remainder of my time.
    Chairman Neugebauer. The gentleman yields his time?
    Mr. Miller of North Carolina. I yield back the balance of 
my time.
    Chairman Neugebauer. I thank the gentleman.
    We are at this particular point in time--I want to thank 
these two witnesses. We appreciate you taking your time and 
your insight on this issue.
    And with that, this panel is excused, and we will now call 
up the second panel of witnesses.
    Chairwoman Biggert. [presiding]. I will now introduce the 
second panel of witnesses.
    We have Mr. John McCarty, acting Deputy Inspector General, 
Office of the Inspector General, U.S. Department of Housing and 
Urban Development; Mr. Kenneth Donohue, former Inspector 
General, U.S. Department of Housing and Urban Development; Mr. 
James Beaudette, Deputy Director, Departmental Enforcement 
Center, U.S. Department of Housing and Urban Development; and 
Mr. Ethan Handelman, vice president for policy and advocacy, 
National Housing Conference.
    Thank you; and thank you for your patience--having had a 
vote and then quite a long questioning period for the first 
panel. Without objection, your written statements will be made 
a part of the record, and you will each be recognized for a 5-
minute summary of your testimony. We will start with Mr. 
McCarty.
    You are recognized for 5 minutes.

STATEMENT OF JOHN P. MCCARTY, ACTING DEPUTY INSPECTOR GENERAL, 
  OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF HOUSING AND 
                       URBAN DEVELOPMENT

    Mr. McCarty. Thank you. Good afternoon, Chairman 
Neugebauer, Chairwoman Biggert, Ranking Members Capuano and 
Gutierrez, and members of the subcommittees. I am John McCarty, 
Acting Deputy Inspector General for the Department of Housing 
and Urban Development, Office of Inspector General (OIG). I 
thank you for this opportunity to discuss our investigations of 
HUD's HOME Program.
    My testimony on our investigative work builds upon prior 
OIG testimony in June of this year, which related to audit 
findings, internal controls, and administration of the HOME 
Program.
    Over the past 3 years, we have opened 51 investigations 
based on allegations of fraud in the HOME Program. Subjects of 
our investigations have included executive directors of 
community development departments and nonprofit entities, 
elected officials, construction companies, employees, 
contractors, developers, and investment companies.
    Typically, our HOME Program cases involve fraud schemes 
associated with embezzlement of funds, bribery, theft, false 
billing, and kickbacks. The Office of Investigations works 
closely with our many law enforcement partners in most of our 
cases, including investigations involving the HOME Program. Our 
relationships with State and local law enforcement entities, 
the FBI, the IRS, and other Federal agencies help to leverage 
our investigative resources.
    Many of our HOME cases are initiated based on information 
received from confidential informants. Often, these are 
contractors or developers who feel that they should have gotten 
contracts received by others or have come forward to reveal 
bid-rigging kickbacks.
    We also receive referrals from our Office of Audit and the 
Department itself. Typical charges in HOME cases involve 
conspiracy, bribery, tax violation, wire and mail fraud, 
embezzlement, money laundering, false statements, and theft of 
government funds.
    Since October of 2008, our criminal investigations have 
resulted in 21 convictions of individuals who used HOME funds 
for their own personal gain. It is clear that the penalties 
received by these wrongdoers represent the seriousness with 
which these cases are handled.
    Additionally, the impact on local jurisdictions which are 
victims of HOME fraud can be significant in terms of the loss 
of limited rehabilitation funds to a local community.
    In addition to these convictions, we routinely refer 
individuals indicted or convicted of any HUD program fraud to 
the Departmental Enforcement Center for administrative actions. 
We maintain a well-established rapport with the Departmental 
Enforcement Center and work closely with them to facilitate 
timely and thorough referrals for administrative action to 
mitigate further wrongful use of program dollars.
    We feel that removing these bad actors from participating 
in the HOME and other government programs is imperative to 
protecting important taxpayer dollars. It also sends a strong 
message to the others in the industry that this type of 
fraudulent activity will not be tolerated.
    O.I. believes that HOME is an important program which 
provides affordable housing to low-income Americans. Given the 
current economic and housing crisis in our country, the need 
for affordable housing may never have been greater than in 
these tumultuous times. With this crisis comes fraudulent 
activity to compete against the good work of how HOME funds are 
to be used for their intended purposes.
    Since our investigative work focuses on areas of high risk 
and egregious actions in the program, our cases highlight areas 
where improvements need to be made, especially in the area of 
monitoring.
    O.I. believes that increased monitoring would have a 
deterrent effect on fraud in HUD's HOME Program. We look 
forward to working with the Department and the Congress in 
addressing ways to improve the effectiveness of this vital 
program.
    I want to thank you for this opportunity to speak to you 
today about our investigations in the HOME Program. I am happy 
to answer any questions you may have. Thank you.
    [The prepared statement of Mr. McCarty can be found on page 
80 of the appendix.]
    Chairwoman Biggert. Thank you, Mr. McCarty.
    Mr. Donohue, you are recognized for 5 minutes.

TESTIMONY OF KENNETH M. DONOHUE, FORMER INSPECTOR GENERAL, U.S. 
          DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Donohue. Thank you very much, Chairman Neugebauer, 
Chairwoman Biggert, Ranking Member Capuano, and Ranking Member 
Gutierrez. I am Kenneth M. Donohue, former Inspector General of 
HUD, and principal at the Resident Group firm. I am no stranger 
to this committee, and it is great to come back and get a 
chance to talk to you all with my 9 years of experience at the 
I.G.'s office.
    I am also delighted to have my colleague John McCarty join 
me. John was the Head of Investigations while I was the 
Inspector General and he holds a very important position at 
this time.
    It is rare that the Inspector General gets a chance to come 
back and speak on this type of activity, but I am delighted to 
do so. I would be remiss if I didn't recognize the former 
colleagues that I served with for 9 years and the great job 
they did in many of these investigations.
    My mission was independent, objective reporting to the 
Secretary and Congress for the purpose of supporting a positive 
change in integrity, efficiency, and effectiveness of HUD 
programs. That was my mandate and I took that very seriously.
    During my time, as John indicated, the number of 
investigations--we did 60 audits relating to the HOME Programs. 
By the way, when we were doing this, you might recall we had an 
enormous amount of mandated congressional oversight involving 
the redevelopment of Lower Manhattan after the 9/11 disaster. 
We had oversight of FHA and Ginnie Mae, the affected Gulf 
States via Hurricanes Wilma, Katrina, and Rita. And, quite 
frankly, you can imagine the amount of activity that was going 
on certainly with the mortgage-fraud activity.
    During my tenure, I was proactive. I had a proactive sense 
of urgency in everything I did. And my position was zero 
tolerance with those wrongdoers who might attempt to commit 
fraud and abuse their authority. I would often express my 
concerns to the Department. And the Department would receive 
that in a very formal sort of way. And the fact of the matter 
is, I expressed my concern about recapturing current and future 
funds due to compliance.
    I further expressed my concerns about compliance, controls, 
and information systems relating to the HOME Program.
    Of those 60 audits, on 12 separate cases, HUD came to us 
and asked me to address their concerns with regard to some of 
these programs. And in fact, I directed audits to be completed 
on those very 12 cases.
    The Secretary often expressed the importance of HOME 
Programs, based on his positive experience that he had 
involving his New York practice.
    The answer and sum up is the fact aggressive monitoring in 
my estimation has to occur with the sub-grantees on these 
programs. HUD had 42 local field offices with enormous 
undertaking to oversee these programs. Unfortunately, there 
were frequent incidences of noncompliance and, as John had 
recorded, criminal fraud, particularly in the sub-grantee 
level.
    The HUD information systems were self-reporting. And I was 
pleased to hear most recently the Assistant Secretary speaking 
in the June-July hearing where they said they are addressing 
such issues, as well.
    Yes, it is true that the Inspector General--there is never 
enough compliance and oversight to satisfy such programs that 
distribute precious tax dollars. I do, however, believe there 
is needed balance between program efficiency and oversight to 
be applied collectively between the programs and these 
oversight agencies.
    I believe, after 35 years in Federal law enforcement, that 
without an effective compliance and monitoring practice, we 
unfortunately encourage those wrongdoers, some we saw today, 
who would seize upon the system and use Federal funds for 
unintended purposes--their own self-gain, as stated in several 
examples in these hearings.
    Criminal cases like this could be considered anomalies, or 
are they a pattern of behavior?
    In my experience, I think when we don't have effective 
monitoring, we in fact encourage those people who would take 
the big step and get involved in criminal activity. And I think 
we owe it to ensure that we have aggressive compliance.
    I am pleased with the comments the Assistant Secretary made 
in June and the fact that I look forward to those aggressive 
actions that they are planning on following up and I think may 
very well might have occurred since that time.
    It is primarily to compliance responsibilities on local 
grant levels. HUD and Congress might consider reforming the 
legislation to expand the role and responsibilities of HUD to 
ensure a more active compliance program.
    I enjoyed a very positive relationship with the 
Department's enforcement center and Jim Beaudette. Past 
Secretaries have often talked to me about the role and the 
placement of the enforcement center within HUD's structure.
    In my opinion, over those 9 years, I felt they did not have 
adequate resources and the question of an independent role in 
addressing matters not only just for the grant activities but 
the sub-grantees as well.
    As stated earlier, an effective Inspector General must be 
diligent, encouraging, and at times insisting on strong 
oversight and transparency within government programs.
    The practice of monitoring State and local government 
entities is paramount, as discussed today. And such programs do 
exist and are available.
    One such example is following the 9/11 disaster in New 
York, where the importance of New York City and New York State 
went back and hired monitors, recognized monitors to go back 
and look at real-time issues to see, in fact, whether grantees 
or the sub-grantees were, in fact, doing things 
inappropriately.
    Chairwoman Biggert. If the gentleman could conclude?
    Mr. Donohue. Yes.
    Finally, I am at a disadvantage of knowing the constructive 
changes made by the HUD in the past year or so, but I do look 
forward to their continuation. Thank you.
    [The prepared statement of Mr. Donohue can be found on page 
72 of the appendix.]
    Chairwoman Biggert. Thank you.
    Mr. Beaudette, you are recognized for 5 minutes.

STATEMENT OF JAMES M. BEAUDETTE, DEPUTY DIRECTOR, DEPARTMENTAL 
ENFORCEMENT CENTER, OFFICE OF GENERAL COUNSEL, U.S. DEPARTMENT 
                OF HOUSING AND URBAN DEVELOPMENT

    Mr. Beaudette. Thank you.
    Chairmen Neugebauer and Biggert, Ranking Members Capuano 
and Gutierrez, and members of the subcommittees, thank you for 
inviting me to testify about efforts by HUD to prevent and 
combat fraud against government programs, including HOME.
    I am the Deputy Director of HUD's Departmental Enforcement 
Center, or DEC, in HUD's Office of General Counsel. The DEC is 
responsible for the Department's suspension and debarment 
program and other civil enforcement actions against individuals 
who violate HUD rules and commit fraud.
    My career has been devoted to law enforcement and related 
anti-fraud efforts. I served for 9 years in HUD's Office of 
Inspector General, where my work involved virtually all HUD 
programs, including HOME.
    I also worked for 16 years for the U.S. Border Patrol in 
anti-fraud enforcement at the Department of the Interior.
    Throughout the course of my career, I am not aware of any 
fraud by any HUD or other Federal official in connection with 
the HOME Program. Overall, in my experience, there has been 
relatively little fraud by private individuals or more rarely 
by State or local officials with respect to HOME funds.
    I agree with Assistant Inspector General Jim Heist's 
testimony that there is a very good relationship between the 
OIG and HOME, that the program's Administration is probably 
better than most and that HUD has been very responsive in the 
last couple of years and agreed with OIG audits 95 percent of 
the time about HOME.
    The vast majority of people involved with HOME and other 
Federal programs and private institutions are honest and 
trustworthy. Unfortunately, dishonest and greedy people do 
exist. We strongly condemn fraudulent activity relating to HUD 
programs and place a high priority on preventing, uncovering, 
and punishing such activity.
    But attempted fraud relating to funds provided under HOME 
and other programs, just as in private institutions like banks, 
has sometimes occurred and will continue. This is just as true 
with respect to non-Block Grant as well as with Block Grant 
Programs.
    A key anti-fraud component is aggressive enforcement. That 
is a HUD focus. Secretary Donovan and others have made it clear 
that there is zero tolerance for fraud.
    Just last week, the DEC suspended a contractor who was 
recently indicted for fraudulently obtaining HOME funds from 
Lewiston, Maine, starting in 2005.
    The working relationship between OIG and HUD ensures that 
we can begin debarment or other actions against a violator as 
soon as possible. Another important approach is improved 
monitoring and oversight. A congressionally created Block Grant 
Program like HOME, by definition, involves local control and 
implementation.
    With some 30,000 HOME projects at any time, it would 
require significant additional funding to enable HUD to conduct 
day-to-day monitoring of each of these projects.
    But HUD recognizes its fiduciary responsibility as a 
steward of taxpayer funds. A critical part of that is 
monitoring State and local government grantees and referring 
suspected problems to the OIG for more investigation.
    In my experience, this is exactly the approach taken by HUD 
with respect to HOME. Within the last few years in particular, 
HUD has improved HOME monitoring and oversight such as through 
the additional reports that Assistant Secretary Marquez 
testified about in June.
    In addition, HUD has been working since 2009 on revisions 
to the HOME regulations that are designed in part to improve 
accountability and performance.
    Although the improvements are in the final stages of review 
by OMB, the Acting Inspector General concluded in a letter to 
Senators Murray and Collins, after an OIG review of the 
proposed rule changes in August, that they should help ensure 
the timely completion of future program activities and 
strengthen HUD's future enforcement authority.
    HUD is also making key enhancements to the IDIS system to 
ensure better project reporting, tracking, including more 
financial and project risk mitigation controls.
    In short, it is unfortunately likely that attempted fraud 
by private developers and others will continue with respect to 
HOME funds as with virtually any government program or private 
activity.
    In my opinion, based on a career in anti-fraud efforts, 
however, it is incorrect to single out HOME as being 
particularly susceptible to fraud. To the contrary, based on my 
experience at the DEC and OIG, HUD continues to take important 
steps to improve monitoring, oversight, and enforcement that 
can prevent and combat fraud with respect to HOME and other 
programs.
    Thank you again for the opportunity to testify. I would be 
pleased to answer any questions.
    [The prepared statement of Deputy Director Beaudette can be 
found on page 68 of the appendix.]
    Chairwoman Biggert. Thank you, Mr. Beaudette. Mr. 
Handelman, you are recognized for 5 minutes.

  TESTIMONY OF ETHAN HANDELMAN, VICE PRESIDENT FOR POLICY AND 
             ADVOCACY, NATIONAL HOUSING CONFERENCE

    Mr. Handelman. Thank you very much. My name is Ethan 
Handelman, and I am the vice president for policy and advocacy 
at the National Housing Conference. I am grateful to all the 
members of the committee for inviting me here to testify. I 
hope that, as part of the discussion of the need for strong 
regulatory and financial controls, we can remember the central 
work of the HOME Program in creating affordable housing.
    Since 1931, the National Housing Conference has been 
dedicated to ensuring safe, decent, and affordable housing for 
all in America. We are a nonpartisan, nonprofit group that 
brings together a diverse membership of housing stakeholders, 
including tenant advocates, mortgage bankers, nonprofit and 
for-profit homebuilders, property managers, policy 
practitioners, REALTORS, equity investors and more; all of 
whom share a commitment to balanced housing policy.
    Some of our members administer HOME funds or work on 
projects that receive HOME funds, but most do not. We all, 
however, support the important work HOME does as part of our 
national commitment to safe, decent, and affordable housing for 
all in America.
    The first way HOME does that is simply by creating 
affordable housing. For 20 years, this Federal Block Grant 
Program has provided critical funding to State and local 
governments exclusively to provide affordable housing for low-
income families.
    Over 1 million units have been produced, including those 
for new homebuyers, some for owner-occupied rehabilitations, 
and some for rental housing units.
    Above and beyond those units created, over 240,000 tenants 
have received direct rental assistance to make private market 
apartments more affordable.
    Second, HOME leverages other resources. For every HOME 
dollar expended, $3.94 in other public and private investment 
has been leveraged, resulting in more than $80 billion in other 
funding for affordable housing since the program began.
    As just one example, the county of Orange in New York since 
1992 has leveraged over $350 million in other funds using less 
than $16 million in HOME funds to construct and preserve 
affordable housing, often in properties with just a few 
apartments, sometimes in larger developments.
    In particular, HOME dollars are often the early money 
necessary to get projects off the ground, while private 
lenders, equity investors, low-income housing tax credit 
allocations and other resources come together.
    Third, HOME creates jobs. HOME funds frequently provide 
essential gap financing for low-income housing tax credit 
properties. Those developments create jobs.
    In the first year, construction of a typical 100-unit 
property results in 116 jobs, about half of which are in the 
construction sector. Other HOME Program activities, such as the 
development and renovation of owner-occupied homes also produce 
employment. Now more than ever, such jobs are essential.
    Fourth, HOME sustained projects during the downturn. The 
recession and financial crisis disrupted real estate 
development across the country. In a survey of homebuilders 
from the beginning of this year, 45 percent reported placing 
multifamily projects on hold, and 60 percent reported placing 
single family projects on hold until the financing climate gets 
better.
    Housing starts and completions have slowed dramatically as 
a result of the crisis by as much as 75 percent nationally from 
the height in 2005 to the bottom in 2010. HOME-funded projects, 
however, outperformed the broader real estate market. In June, 
HUD reported that only 2.5 percent of 28,000 active projects 
were delayed. So, against the backdrop of disrupted real estate 
markets, HOME projects stand out for completion.
    Fifth, HOME reaches many communities. The flexibility of 
the HOME Program provides urban, rural, and suburban 
communities across the country with the ability to both produce 
and rehabilitate single-family homes, many for new homeowners, 
while also providing and rehabilitating rental housing from 
low- to extremely low-income families.
    In addition, the HOME Program provides critical resources 
for housing persons with special needs including the homeless, 
disabled veterans, and persons with HIV/AIDS. I share as one 
example the Silver Star Apartments project in Battle Creek, 
Michigan, which used HOME funds as both first mortgage loan and 
gap financing to create 75 apartments on the campus of a VA 
hospital, allowing homeless veterans: one, to be housed; and 
two, to have access to the medical care they need.
    Lastly, HOME empowers State and local governments. Local 
communities can target the flexible HOME funds to the 
particular needs of their communities and housing market. HUD 
provides the essential oversight function, making sure that 
communities follow program requirements, verifying project 
completion, and when necessary bringing enforcement action to 
recapture funds.
    HUD's enforcement is strong, and must continue to ensure 
the continued success of HOME. The HOME Program is a proven 
solution that is part of our national commitment to creating 
housing opportunities for all Americans.
    Thank you again for the opportunity to be here, and I am 
glad to answer questions.
    [The prepared statement of Mr. Handelman can be found on 
page 77 of the appendix.]
    Chairwoman Biggert. Thank you, Mr. Handelman.
    We will now recognize Members for 5 minutes each to ask 
questions. And we will begin with the gentleman from Illinois.
    Mr. Dold is recognized for 5 minutes.
    Mr. Dold. Thank you, Madam Chairwoman. And I certainly 
appreciate the opportunity to ask some questions.
    And thank you all for being here. We had an interesting 
first panel. And I think really the goal of this hearing is to 
try and find out where we can make things better.
    Obviously, the intended result is to make sure that the 
HOME Program has the dollars that stretch further for the 
intended beneficiaries and for the American taxpayer. And 
unfortunately, we see dollars that are mismanaged, not just in 
the HOME Program, but across the sector and throughout the 
entire government.
    Our job in the oversight is to try to get that right, 
because if HUD doesn't get it right, then beneficiaries suffer 
by not receiving the intended benefits and also making the 
American taxpayer more reluctant to fund additional programs, 
which we do believe are important.
    So, Mr. Beaudette, one thing that I just wanted to go at 
first is, we look at--according to the Washington Post, we had 
700 projects in a sample of about 5,100 multifamily projects 
that were undeveloped, indefinitely delayed or abandoned. This 
represents about 14 percent of the multifamily projects that 
were susceptible to waste, fraud, and abuse. Can you talk to me 
about this 14 percent, especially in light of what you had 
mentioned in your testimony about a zero tolerance policy for 
fraud?
    In fact, let me back up just 1 more second, because I do 
want to get a better understanding of how you are aware of the 
fraud in your role.
    Mr. Beaudette. In my particular role it is after the fact. 
It is coming from the I.G.'s office to the DEC (Departmental 
Enforcement Center).
    Mr. Dold. So, the I.G.'s office is giving you that 
information. I am just trying to--in layman's terms, the 
Departmental Enforcement Center, you investigate whether a 
person who has already committed fraud or broken HUD rules 
should be barred from receiving HUD money?
    Mr. Beaudette. That is incorrect.
    Mr. Dold. Okay. Can you tell me about--
    Mr. Beaudette. The Departmental Enforcement Center handles 
the suspension or debarment of individuals who do business with 
HUD.
    Mr. Dold. Okay. In the scope of the hearing that we are 
having here today--I am just trying to get a better handle. You 
are the best person in terms of HUD to be here to be answering 
the questions about fraud and abuse?
    Mr. Beaudette. From HUD, I probably am, yes.
    Mr. Dold. Okay. Can you go back then, and we talked about 
the 700 cases, the 14 percent and the zero tolerance policy. 
Can you focus on that for us a little bit because we are 
interested in terms of how do we make it better--because 14 
percent, to me, does that sound like a bigger number or a 
smaller number?
    Mr. Beaudette. That sounds like a smaller number.
    Mr. Dold. Fourteen percent of waste, fraud, and abuse is 
small. Okay? Please elaborate.
    Mr. Beaudette. I don't think it is a good number. I believe 
it is a smaller number.
    Mr. Dold. Smaller than what?
    Mr. Beaudette. Smaller than 15 percent.
    Mr. Dold. Okay. Historically, it is smaller than 17 percent 
as well. It is certainly greater than 13 percent. I am glad we 
don't have to go down this path.
    But what I am interested in is, it is certainly from my 
perspective as a taxpayer, as someone who is over here trying 
to do some oversight, 14 percent when you have--correct me if I 
am wrong--a zero tolerance policy, not a 14 percent tolerance 
policy. So, am I correct in thinking that it is the zero 
tolerance policy or 14 percent tolerance policy?
    Mr. Beaudette. There is a zero percent tolerance policy. 
There is no evidence of fraud in this particular 14 percent we 
are talking about.
    Mr. Dold. Okay. In the 14 percent that I am specifically 
referring to, we have monies that have gone out there in the 
programs that have not been spent. We have vacant lots. So, I 
guess I am having a difficult time saying there is not fraud 
involved with that.
    Mr. Beaudette. I am not aware of it myself.
    Mr. Dold. Okay. Is there anybody that we should be talking 
to at HUD who would be aware of those?
    Mr. Beaudette. I am sorry?
    Mr. Dold. Is there anybody at HUD who would be aware of 
those?
    Mr. Beaudette. Actually, the Deputy Assistant Secretary is 
with me today, who could speak to the program aspect of it.
    Mr. Dold. Madam Chairwoman? I don't want to mess up your 
panel, but I would be happy to just try to find out if there is 
someone more appropriate to speak with.
    With just a short period of time, we will let you sit down, 
Mr. Beaudette. We will go to another thought.
    And Mr. Donohue, based on your years as Inspector General, 
can you please describe your greatest concern about oversight 
or lack thereof? Because I am sure I am confident that 
regardless of the Administration, we have had problems with 
regard to oversight.
    We want to make sure that it gets stronger and better for 
the future. Can you talk to me about what your greatest problem 
was in the past and what will fix it?
    Mr. Donohue. Quite frankly, I transcend Administrations in 
my capacity as Inspector General. And I might say that the 
Secretaries, all of the Secretaries I served under were 
sensitive to the issue of oversight and monitoring all the 
programs.
    HUD by itself has systemic problems, I believe, in a lot of 
different programs as far as exposure to fraud. That is why my 
office is so engaged, as I indicated in my testimony.
    But to answer your questions specifically, I think the key 
here comes down to is that when these formula grants go back 
out, the issue, the key issue on most of these activities is at 
the sub-grantee level. And until you get to that sub-grantee 
level, you really don't really know or find out necessarily as 
to what might be going on wrong.
    And we rely upon--as an Inspector General we rely upon, as 
Mr. McCarty indicated, the support of other Federal agencies, 
good stewards, colleagues within these housing programs and HUD 
programs to sort of give us the tips, let us know, hotlines or 
whatever else to come back. And we investigate those on a case-
by-case basis, with the exception of my audits.
    I did 60 audits. That is a significant number. Audits are 
due in the HOME Program, and there is good reason to do so.
    Chairwoman Biggert. The gentleman's time has expired.
    Mr. Dold. Thank you.
    Chairwoman Biggert. Just as a reminder, we have an orderly 
process for witnesses. And so, we will continue.
    The gentleman from Massachusetts is recognized for 5 
minutes.
    Mr. Capuano. Thank you, Madam Chairwoman.
    Thank you, gentlemen, for being here. Were you all here for 
the earlier panel to listen? Do you agree that it was probably 
a very good point that when someone is being audited, they 
should not be allowed to select the portion of their portfolio 
to get audited? Does anybody disagree with that statement? Did 
anybody here have anything else substantive that you learned 
that you didn't know before you walked into the room, relative 
to the auditing HUD or anybody else does? The answer is no, 
right? It was a nice show, but you didn't learn anything.
    Mr. Donohue. Sir, I think my standpoint is--being an I.G., 
I think it was very informative to hear. Anytime I hear 
criminal wrongdoers speak to that, the issues of how they do 
that and collect their fraud and do their fraud--
    Mr. Capuano. Did you hear anything today that was unique or 
something you hadn't heard before?
    Mr. Donohue. You know, in 35 years, I have probably heard 
it all.
    Mr. Capuano. That is what I figured. I didn't hear anything 
here that I haven't heard before, and I haven't been doing it 
that long. So, I mean, though it was fun, I don't see why we--I 
would have rather gone right to this panel. I think you 
gentlemen have more to offer to the things we really want to do 
than we just did.
    And I would like to know specifically--not today, but I 
would ask each of you in writing, as soon as you can--I would 
like specific recommendations about what you think we should be 
doing to increase and enhance the oversight of the HOME 
Program.
    There is nothing that I wouldn't be open to. But, at the 
same time, though it is very interesting to hear we should have 
more, I need to hear specific proposals, as I am sure you all 
respect.
    So when you get a chance--this isn't the time or place--I 
would appreciate more specificity as to either what we could 
have HUD do under current law or, if you think we should be 
changing the law to, say, something, suggest that as well 
because I would be more than happy to do that.
    I guess I would also like to ask--Mr. Beaudette, in his 
testimony, said there was, in his estimation, very little fraud 
in the HOME Program.
    Mr. McCarty, would you generally agree with that?
    And, again, that is not no fraud. Every program has 
something. Would you agree with the general statement?
    Mr. McCarty. Generally, like Mr. Donohue said, any fraud is 
too much fraud.
    Mr. Capuano. I agree with that.
    Mr. McCarty. So I think, from what we have seen over the 
last 3 years, the numbers I gave you, that is what we have been 
provided to work with.
    Mr. Capuano. Fair enough.
    Mr. McCarty. Not knowing what is out there is what troubles 
us.
    Mr. Capuano. That is always the trouble.
    And I guess the other question that I really want to know 
is, during your term, Mr. McCarty--and I will ask you the same 
thing in a minute, Mr. Donohue and Mr. Beaudette--when you go 
to HUD with proposals, do they generally accept your 
proposals--not proposals but suggestions on how to improve 
something?
    Do they generally accept those suggestions and implement 
your suggestions?
    Mr. McCarty. I think my colleague, Jim Heist, testified in 
June that the Department's HOME Program has been very receptive 
to our audits.
    Mr. Capuano. Yes, he did, but I want to know if you agree 
with him.
    Mr. McCarty. I think so. Yes, sir.
    Mr. Capuano. Mr. Donohue, would you agree with that, in 
your estimation, that HUD has been open to suggestions from the 
I.G. when you were there?
    Mr. Donohue. Not only do I believe all the Secretaries are 
quite sensitive to the issue of appropriate monitoring, making 
sure the monitoring goes--
    Mr. Capuano. So when you made a suggestion, they would try 
to implement it. Mr. Beaudette, have you found that to be true 
as well?
    Mr. Beaudette. Absolutely.
    Mr. Capuano. So that, as people find new ways to do it and 
they go to suggest it, in general, the people at HUD, not just 
this Administration but past Administrations--they are good 
people trying to do the right thing. And if somebody comes up 
with a good idea, they do it. Is that a fair estimate of what 
you just said?
    I guess the other thing is, have there been any times when 
you have suggested, Mr. McCarty, that you really need to do 
this; it is an important issue--not details, but an important 
issue; you really need to do this to enhance your oversight, 
that HUD has said no, we won't do it; we refuse to do it?
    Mr. McCarty. We have been asking them for awhile to do more 
monitoring, to implement a real-time surprise monitoring system 
that was mentioned earlier here. And that started back when I 
was Assistant Inspector General for Investigations, for the 
most part right after 9/11, where it was successful, but we--
    Mr. Capuano. And they said, no, they won't do it?
    Mr. McCarty. I think they tried to implement it in other 
ways.
    Mr. Capuano. But they haven't said no?
    Mr. McCarty. No, sir.
    Mr. Capuano. Mr. Donohue, did you have the experience of 
them saying no to you?
    Mr. Donohue. I have presented in the past with regard to my 
past years as monitoring--that I put in my written testimony--
to be applied in New York. It is a very effective program, but 
what it does is it gets down, a monitoring practice, to the 
sub-grantee level. And to me, that is the key to make this 
monitoring effective.
    Mr. Capuano. Have you suggested that to HUD, and they said 
no, when you were the I.G.?
    Mr. Donohue. I have made suggestions to HUD in past years, 
and they weren't carried out.
    Mr. Capuano. Mr. Beaudette, have you had that experience, 
where you have made suggestions to HUD and they said no?
    Mr. Beaudette. No, I have not. And I think, given the 
resources to do so, HUD would love to enhance their monitoring 
program.
    Mr. Capuano. Mr. Donohue, in your testimony, which I 
actually appreciated very much, I just want to read one 
sentence back to you: ``As stated earlier, an effective 
Inspector General must be diligent and encouraging and at times 
insisting on strong oversight and transparency with any 
government.''
    I think that is a wonderful statement. Did you insist that 
your proposals be adopted?
    Mr. Donohue. Sir, if you knew me for 9 years, I insist 
quite a bit about the actions on these, my concerns. And I 
would make it very vocal, whether it is this matter or mortgage 
fraud or whatever else. Yes, I did.
    Mr. Capuano. I guess I don't--what is the difference 
between suggesting and insisting?
    Mr. Donohue. I am sorry?
    Mr. Capuano. What is the difference, then, between 
suggesting and insisting?
    Mr. Donohue. It is probably synonymous, probably the same 
thing.
    Mr. Capuano. Fair enough. Thank you very much.
    And I look forward to your written comments on specificity 
because I would like to follow up on them. Thank you.
    Chairwoman Biggert. Thank you, Mr. Capuano.
    I think that we are here to really look at the future and 
how we can solve any of the problems both from the first panel 
and from the second panel.
    And with that, I would recognize the gentleman from Ohio, 
Mr. Stivers, for 5 minutes.
    Mr. Stivers. Thank you, Madam Chairwoman. I would like to 
thank the Chairs of the two subcommittees for calling this 
hearing. I would also like to thank these witnesses from panel 
two, as well as the witnesses from panel one, for your time, 
because we all want to make the Program much more accountable 
and root out waste, fraud, and abuse.
    My first question is for Mr. McCarty. Were you here for the 
first panel in which Mr. Renacci, the gentleman from Ohio, 
asked about internal controls, specifically random inspections, 
multiple bids, and taking the lowest bid?
    Mr. McCarty. Yes, sir, I was.
    Mr. Stivers. Has your organization, as Inspector General, 
ever recommended these steps to HUD for the HOME Program?
    Mr. McCarty. I am certain we have through our audits, yes, 
sir.
    Mr. Stivers. So to follow up on the gentleman's question 
from Massachusetts, while you have recommended them, they have 
not been adopted. Is that correct?
    Mr. McCarty. I am not certain I could answer that right 
now, sir.
    Mr. Stivers. It sure appears they have not been adopted, I 
guess we will--
    Mr. McCarty. At that sub-grantee level, probably not.
    Mr. Stivers. At the sub-grantee level.
    Next, another question for Mr. McCarty about the 
information systems--because you brought up those in your 
testimony a bit.
    So the way the information system works today is grantees 
and sub-grantees can go in and change numbers at any point in 
the system. So it is really hard for the computer system to 
have a reconcilable audit trail that you can use in your 
investigations. Is that correct?
    Mr. McCarty. Yes, sir. That is what our audits have shown. 
And I think Mr. Truax testified to that also.
    Mr. Stivers. He did. Has the Inspector General's Department 
ever suggested that HUD fix that?
    Mr. McCarty. Yes, sir, we have.
    Mr. Stivers. Okay. Again, and I know Mr. Capuano, the 
gentleman from Massachusetts, asked about specific actions. It 
sounds like we have four specific actions already. I appreciate 
you answering those questions.
    The next question is for Mr. Donohue. You suggested in your 
testimony some real-time monitoring fixes that HUD should adopt 
for the HOME Program. Can you quickly elaborate, knowing that 
we have 2 minutes and 50 seconds left, on specifically what 
those are?
    Mr. Donohue. Right. The one I saw most effective was 
implemented in New York and is currently in play with regard to 
redevelopment of Lower Manhattan.
    And what happens is, in effect, in concert with the grant 
recipient and the Inspector General, they hire a reputable 
monitor that goes back and, real-time, a la carte, real-time, 
goes back and looks at the disbursement of funds. It could be 
any matter that they ask upon. But the person goes on site at a 
sub-grantee level. Their reimbursement for those costs are 
provided for within the administrative cost of the grant.
    Mr. Stivers. Great, thank you.
    Mr. Beaudette, you talked about how you had never seen an 
issue when HUD didn't adopt the recommendations from the 
Inspector General's office. Have you heard about the four 
recommendations that I just talked about with Mr. McCarty?
    And I won't get to the second one with Mr. Donohue yet. Is 
this the first time you have ever heard of those four 
recommendations?
    Mr. Beaudette. In this kind of setting, yes, in that the--
    Mr. Stivers. In any setting, really. I am just curious if 
you have read them in a report, if you have seen them as a 
requirement?
    This is the first time you have ever heard about these four 
ideas for fixing--
    Mr. Beaudette. I believe these four ideas are in place. I 
don't know if that was from the Inspector General's office. But 
I believe the auditing standards are--
    Mr. Stivers. So there are random inspections where the 
grantees and sub-grantees don't pick the programs now?
    Mr. Beaudette. I believe so. Don't quote me on the random 
inspection.
    Mr. Stivers. And the grantees and sub-grantees can no 
longer update the system on their own?
    Mr. Beaudette. I don't know that.
    Mr. Stivers. Okay.
    Mr. Beaudette. Actually, I thought you were referring to 
the internal controls and--
    Mr. Stivers. The first three were the internal controls. 
The fourth is the systems issue. And so, you are saying all 
four of those issues are fixed. I will follow up with your 
office in writing on that. But I really appreciate--I would 
love to get a full report. That is what we are here for today.
    The last question is for Mr. Handelman. And I will just 
follow up on something that I think Mr. Dold asked. He talked 
about 14 percent of fraud. And let us assume for a second--I 
don't know if that is the right number. Let us assume there is 
14 percent fraud, waste, and abuse. Because if you spend money 
on something, even if it is not fraud and they don't build the 
stuff they are supposed to build, it might not be fraud but it 
is at least waste.
    If there is 14 percent fraud and waste in this program that 
you and I agree is an important program, what is the impact on 
this important program?
    Mr. Handelman. You and I certainly agree that this is an 
important program. I understand that you have asked me to 
hypothetically assume the 14 percent number. I will say, for 
the benefit of the committee, we looked at the numbers produced 
by The Washington Post, were unable to replicate them, and The 
Post did not release its analysis. So I have no confidence in 
that number.
    Mr. Stivers. If there is that kind of waste, is it bad for 
the program?
    Mr. Handelman. Yes.
    Mr. Stivers. Okay. That is really what I was looking for 
is, we all want to agree--when we agree there is a worthy 
program, we want the money in that program to be spent wisely 
and efficiently. I think my time has expired. Thank you--
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from Missouri, Mr. Cleaver, is recognized for 
5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    Mr. McCarty, we had the two individuals on earlier, and 
both of them appear to be headed toward serving time in prison 
for what they did. So that means the system worked. Does that 
mean the system worked?
    Mr. McCarty. It means the criminal justice system worked.
    Mr. Cleaver. Yes.
    Mr. McCarty. Yes.
    Mr. Cleaver. When people do that, what is supposed to 
happen? A combination of whistleblowers and good investigatory 
work done by the U.S. attorney, the I.G., all of that played 
into catching people who were committing fraud in the HOME 
Program. Is that correct?
    Mr. McCarty. Yes, sir.
    Mr. Cleaver. Okay. So if the system is working, and people 
get into the system, like the gentleman who was here earlier, 
who said he didn't go into the program to commit a crime, and 
the people who hired him didn't see that. No human being can 
see into somebody else's mind and soul. So they hired him.
    What else can we do? You try to hire the best people you 
can. And when people commit a crime, they get caught. What else 
do we do?
    Mr. McCarty. Speaking for law enforcement, we like to get 
the word out through fraud awareness briefings. We want to make 
sure that we have an ear to the ground for the people who are 
running the programs and possibly manipulating them.
    Those who are confronted with opportunities of fraud, it is 
done out of desperation, greed. And where we can reach those 
people before that happens, in prevention rather than in 
enforcement, we are all better off.
    Mr. Cleaver. Yes. The human condition would be as such that 
we can't stop people from doing wrong. Correct?
    Mr. McCarty. Correct.
    Mr. Cleaver. And so all we can do is try to minimize it, 
and then punish people when they do so, so that others might be 
hesitant or reluctant to do the same.
    Mr. McCarty. Yes, sir.
    Mr. Cleaver. Mr. Donohue?
    Mr. Donohue. Yes, sir. I want to go back to your reference 
of the two people. I think what I would--how I would phrase 
that is, in those two cases, the system worked perfectly. The 
system, the environment we deal is the ones we don't know about 
or the ones we don't--and I think as Mr. McCarty has 
specifically stated, that I think, in Federal law enforcement, 
a key issue is prevention.
    And I think how you prevent that--I have seen this in the 
mortgage fraud world--is that how you prevent that is having 
strong requirements, good oversight compliance and monitoring. 
So I think you can't have one without the other to be 
effective.
    Mr. Cleaver. So one of the most significant steps we can 
take now would be to cut funds from the HOME Program?
    Mr. Donohue. Are you asking me that?
    Mr. Cleaver. Yes.
    Mr. Donohue. I am not suggesting that at all.
    Mr. Cleaver. No, I know you didn't.
    Mr. Donohue. Oh.
    Mr. Cleaver. I am asking, does it make sense now to--
because we have a problem, let us cut the budget in the HOME 
Program, which probably would result in cutting people who 
would be in a position to do some of the monitoring. Do any of 
you disagree with what I just said?
    Did any of you understand what I just said?
    [laughter]
    Mr. Beaudette. I don't think the idea is to shut down HOME. 
I think the idea is to provide a deterrence to where an 
individual is relatively confident that if he defrauds the 
program, he is going to get caught. And not to mimic Mr. 
McCarty, but pursuing that sort of angle is going to be the 
best possible route to take.
    Mr. Cleaver. Sir?
    Mr. Handelman. I would further agree that shutting down 
HOME is not the answer to this problem.
    Mr. Cleaver. Yes. I think anytime we start talking about a 
program like this--sometimes people think, okay, we had a 
problem there, so let us eliminate the program. I never will 
forget--we had a problem with somebody misusing their access to 
the Pages here in Congress a short time ago. And so there were 
people who said, ``Let us cut out the Page Program,'' instead 
of saying, ``Let us cut out Congress.'' But the point that I 
think is important is that when there is a problem, we always 
decide, let us cut something, instead of trying to figure out 
ways to strengthen the system so that fraud becomes 
increasingly difficult to commit.
    Do all four of you agree with me?
    Does anybody disagree?
    Thank you, Madam Chairwoman.
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from Texas, Mr. Neugebauer?
    Chairman Neugebauer. Yes, I thank the chairwoman.
    Mr. McCarty, does HUD track whether funds are used for the 
intended purposes--in other words, if I received a grant of 
HOME funds for 100 units, but only built 60, does HUD have a 
way of tracking whether I built 60 or 100 units?
    Mr. McCarty. I don't think I would be able to answer that, 
sir. It would be a program question, how they run the program, 
how they track it.
    Chairman Neugebauer. Let me ask you a question. I want to 
use an example up here. It is hard to see that, but that is a 
kind of a model that somebody did of a project that was going 
to be built here in the Washington, D.C., area. It was supposed 
to be 106 units, which was in--$6.8 million was spent.
    The next slide is actually the property. And as you can 
see, some of the units were built in the back, but this 
property has been like this for 2 years. So do you think it 
would be appropriate for HUD to have some knowledge that, if 
they extended a grant for 106 units, they got 106 units?
    Mr. McCarty. Yes, sir, I do. But I think, in your example, 
real-time surprise monitoring would pick something like that up 
immediately.
    Chairman Neugebauer. Yes. But today, does a system exist at 
HUD where they could pull up that project and determine whether 
that was 106 or 40 or 30 units built?
    Mr. McCarty. I am not certain about that, sir, how IDIS 
might draw that up.
    Chairman Neugebauer. But you would agree they should have a 
system like that?
    Mr. McCarty. Yes, sir.
    Chairman Neugebauer. Yes. And I want to go back to this 
computer system, where the recipients can manipulate that data. 
Would you agree that is not good internal control, that people 
who are receiving the money can go in and make entries into the 
records?
    Mr. McCarty. No, that should never happen. There has to be 
some control.
    Chairman Neugebauer. Because I was thinking, if I was using 
this analogy, it would be like me being able to log in to my--I 
do online banking, because I don't get the chance to go to the 
bank a lot; not that I have a lot in the bank to do anything 
with.
    But I was just thinking, if I could go into the bank, for 
example, and erase the checks and keep the deposits, it would 
be a good thing for me, wouldn't it?
    Mr. McCarty. Certainly.
    Chairman Neugebauer. Yes. And I kind of relate that to this 
system that is in place at HUD now, is that basically they can 
go in--and one of the examples that we have seen is, we saw 
examples where projects were closed when we brought those to 
HUD's attention. Then, they were mysteriously reopened.
    Now, how would that happen? How would projects that were in 
the system that said they are closed, but all of a sudden we 
bring it to HUD's attention, and all of a sudden they--when we 
go back and look in those records again, then they are open 
again. How does that happen?
    Mr. McCarty. --the data.
    Chairman Neugebauer. And that is probably not good, is it?
    Mr. McCarty. No, that is not good. There needs to be 
transparency built into all the data.
    Chairman Neugebauer. Because my credit card company, if I 
do a number of different transactions that are out of my usual 
pattern, they call me up. And sometimes, they cut my credit 
card off. They will say, we suspect something is going on.
    Should HUD have systems to be able to track--that we keep--
that we are making disbursements for a project and it seems 
irregular?
    Mr. McCarty. I believe IDIS is supposed to do that in this 
particular program.
    Chairman Neugebauer. But do you believe it is operating in 
an effective way?
    Mr. McCarty. No, sir, I do not.
    Chairman Neugebauer. Yes. And so I think that the question 
here--we have been talking about suggestions. One of the things 
that--and I heard both of you say that, hey, when we say 
something to the Secretary or to the people in the 
organization, they are receptive to it.
    But, there is--sometimes, my wife asks me to empty the 
trash. I am receptive to it, but I don't always empty the 
trash. And there is a penalty for that, by the way, as well.
    I don't think anybody is questioning whether these people 
are receptive. I think what we are talking about here, I think, 
is a very serious issue, is that being receptive and putting in 
place these internal controls to keep this from happening in 
the future are important. And this is just one example. We have 
other examples where when we pulled up the records, we went out 
and found vacant lots.
    Some people say, we may not have given you the right 
address. I think it would be appropriate for HUD to at least 
have the correct address for where they are spending millions 
of dollars. Wouldn't you agree?
    Mr. McCarty. Yes, sir.
    Chairman Neugebauer. Yes. I think some folks wanted to 
discredit some of the first panel witnesses. I think they 
painted a picture that is not a pretty picture. And that is a 
picture that inside the system today, the taxpayers' money may 
not--we may not be the best stewards of it.
    It is my job; it is your job; it is HUD's job to make sure 
that when we take money from taxpayers to use for other 
purposes, that we be good stewards of that. And I would hope 
the panel would agree with that. And so I think where we have 
it, we have some work to do.
    And I would hope that--from this hearing today, I would 
hope that the Secretary and others understand that we intend 
for this to stop. And we are trying to send a message here that 
we need to fix this.
    I thank the Chair.
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from Texas, Mr. Green, is recognized for 5 
minutes.
    Mr. Green. Thank you very much, Madam Chairwoman. And I 
thank you for allowing me to be a part of the subcommittee.
    And I thank the witnesses for appearing. I just want to 
make a comment about the witnesses that testified previously. I 
think that persons who commit crimes should be caught. I think 
they should be appropriately prosecuted. And I think that they 
should be appropriately punished.
    So, I think that I speak for everybody on the committee 
when I say this. I rarely will take an opportunity to say I 
speak for everybody. But it is my belief that the committee 
would as a whole, with unanimous consent, agree that this is 
the case.
    My concerns with reference to them have little to do with 
their credibility as much as it has to do with the fact that 
they are criminals. I don't participate in oversight hearings 
as much as I would like to because this is not my subcommittee. 
But as such, once we start setting this precedent of bringing 
the criminals in to act as experts. I guess at some point, 
Madoff will come in, and we will try to find out how we can 
better strengthen the SEC to make sure that we can prevent 
crimes from occurring. And if there is anybody who is an expert 
on how to defraud folks, probably Madoff may be one. I don't 
know how he gets qualified. I am sure the process that we use 
to qualify these folks would probably work with him as well.
    And I had a concern about just the specific thing that was 
being called to our attention about the three bids. It makes 
sense to get three. It makes sense that it might help. But it 
also makes sense to me that a determined criminal will find a 
way to manipulate the system.
    And these people, whether they admit it or not, are 
criminals. And whether they admit it or not, they may have 
found other ways to manipulate the system to their advantage. 
Criminals do this. That is why they are criminals, I guess, 
because they do these types of dastardly things.
    So, now to the gentlemen with HUD, I just want to make sure 
that you are on the record. And you may have said this. My 
assumption is that you want to catch all the criminals that you 
can if they are trying to defraud HUD in some way. Is this a 
fair statement?
    Mr. McCarty. Yes, sir.
    Mr. Green. Okay. And you are willing to change rules and 
make reasonable adjustments so that you will be in a position 
to prevent crimes from occurring. Is that a fair statement?
    Mr. McCarty. The rules need to prevent crimes from 
occurring.
    Mr. Green. Yes. So you are not--HUD is not trying to in 
some way declare that you have a perfect system that needs no 
adjustments, are you?
    Mr. McCarty. I can't speak for HUD, but I know that they 
don't have a perfect system--
    Mr. Green. Okay. Let me ask the HUD representative.
    Mr. McCarty. Could you repeat that, please?
    Mr. Green. You are not implying that HUD has a perfect 
system, and that you can't make some adjustments, are you?
    Mr. McCarty. No.
    Mr. Green. And you want to see that criminals are caught, 
don't you?
    Mr. McCarty. Yes, we do.
    Mr. Green. And it does not offend you to know that the 
system worked and criminals were caught this time. And you 
would like to make sure that it works every time. Is that a 
fair statement?
    Mr. McCarty. That is a fair statement.
    Mr. Green. Okay. I am saying this to you and to all who are 
within viewing and earshot of this because sometimes people do 
allow these things to metamorphose from an investigation into a 
desire to end the program. And I don't--this is not something I 
am placing with any of my colleagues, but that can become the 
next hue and cry that the whole Program should be eliminated.
    Is there anyone who is of the opinion that this program 
should be eliminated because we caught two criminals who were 
trying to perform some sort of dastardly deed? Sir, do you--I 
see you moving forward. Is it Mr. Handelman? Are you of the 
opinion that the Program should be eliminated?
    Mr. Handelman. The Program is one of the strongest housing 
programs we have. We should keep it.
    Mr. Green. Okay. Does anybody think it should be 
eliminated? Okay.
    So, I want the record to reflect that all of the members of 
this panel are of the opinion that this Program should not be 
eliminated.
    And to be fair to you, you believe that if there are some 
places where we need to strengthen the regulations that we 
should do so to prevent criminals from preventing crimes. Would 
everybody agree with this? Okay.
    So, I think that the point I would like to make is I know 
how these programs benefit people. This is a good program. And 
I just don't want this to metamorphose into a later time when 
you are not here that we need to eliminate it because there was 
fraud.
    I thank all of you for appearing. And I yield back.
    Chairwoman Biggert. Thank you.
    Mr. Canseco is recognized for 5 minutes.
    Mr. Canseco. Thank you, Madam Chairwoman.
    Let me address this question to Mr. McCarty and Mr. 
Donohue, but one at a time. In your investigations into the 
HOME Program, did HUD personnel charged with oversight seem 
more concerned with achieving the mission of the HOME Program 
or ensuring that HOME Program funds were being spent correctly?
    Mr. McCarty. I believe that the HUD program people were 
concerned about both. That is their job.
    Mr. Canseco. On making sure that the funds were being 
applied correctly and at the same time making sure that the 
mission of HOME was being taken care of?
    Mr. McCarty. Yes, sir.
    Mr. Canseco. All right.
    Mr. Donohue?
    Mr. Donohue. In a manner of speaking, I agree with you. I 
think there are times as an I.G., when you are dealing with a 
Department for 9 years, that you have concerns. And you voice 
those concerns.
    But to fundamentally answer your question, I believe--
listen, I believe these people come to work to do a good job, 
and I think they are trying to help people in need. And they 
are trying to do it the best way they can. But it all comes 
down to--I mentioned this balance between oversight, 
constructive oversight and the application of the programs 
themselves. Therein lies the challenges.
    Mr. Canseco. Still to both of you, HUD relies on its 
participating jurisdictions for program management of the HOME 
Program. What policies or procedures does HUD have in place to 
verify that participants actually have adequate policies in 
place?
    Mr. McCarty. I would defer to the program on that. I don't 
know the program that well at that level.
    Mr. Canseco. Okay.
    Mr. Donohue, the same answer for you?
    Mr. Donohue. I believe the same answer would apply. You 
have to ask that question of the--
    Mr. Canseco. Mr. Beaudette, do you have--
    Mr. Beaudette. Same answer, I would have to defer to the 
program. We could get you that.
    Mr. Canseco. All right. And you, sir?
    Mr. Handelman. I am going to defer even further since I 
don't work for HUD.
    Mr. Canseco. All right. I just thought you might have an 
opinion on that.
    Mr. Handelman. Fair enough.
    Mr. Canseco. So, we have learned that the HOME Program 
database is riddled with inaccuracies. Would you say that these 
inaccuracies stem from the database being difficult to enter 
information into?
    Mr. McCarty. I don't believe so. No.
    Mr. Canseco. Mr. Donohue?
    Mr. Donohue. I will say no. My answer is that the audits 
have indicated, as you suggest. I will state, however, that I 
believe in June, Assistant Secretary Marquez did speak to 
improvements with regard to that database program. I don't know 
what the status of those are.
    Mr. Canseco. Mr. Beaudette, can you weigh in on that?
    Mr. Beaudette. I would hope it is easy to enter data into 
those. In this regard the grand tea, the State and local 
governments are the enterers of information into the Integrated 
Disbursement Information System (IDIS.) I suspect that HUD 
provides them with sufficient information to put the 
information in there.
    Mr. Canseco. What policies does HUD have in place for 
auditing its database and flagging projects for review that 
obviously need more follow-up such as those with ``address 
unknown?''
    Mr. Donohue, yes?
    Mr. Donohue. Oh, sure. And, again I am going to have to 
defer to--in that regard. If you get into these areas with me, 
I have lost any objectivity. I believe oversight is so 
paramount. My suggestion is, if it doesn't exist, I would say 
it needs to exist. But I don't know what the status of that is 
now.
    Mr. Canseco. Mr. McCarty?
    Mr. McCarty. I don't know what the status is.
    Mr. Canseco. Mr. Beaudette?
    Mr. Beaudette. Same.
    Mr. Canseco. Okay.
    I yield back the balance of my time.
    Chairwoman Biggert. Thank you.
    The gentleman from North Carolina, Mr. McHenry, is 
recognized for 5 minutes.
    Mr. McHenry. I thank the Chair.
    Mr. McCarty, how does monitoring--or lack of monitoring--
affect fraud in the HOME Program? For instance, additional site 
visits, and the fact that grantees--I guess the additional 
question is, the lack of monitoring, how does that effect 
fraud?
    And an additional question would be: Are grantees allowed 
to select which HOME projects they show and when the site 
visits occur?
    Mr. McCarty. The lack of monitoring provides an opportunity 
for fraud and criminal activity. As you heard Mr. Truax 
testify, he knew when the inspectors were coming, when the 
monitors would come. And he knew that, because of, probably, 
the lackadaisical implementation of the oversight guidelines 
that should have been applied, they allowed him to pick which 
projects would be inspected.
    Mr. McHenry. Is that commonplace?
    Mr. McCarty. We have heard that throughout our 
investigations, yes, sir.
    Mr. McHenry. Okay--so not only the scheduling of it, but 
also which sites to show?
    Mr. McCarty. The grantees have been able to manipulate the 
monitoring system, the oversight system.
    Mr. McHenry. Okay. Are there apparent rules for how this is 
done, how the site visits are done or how the monitoring--
    Mr. McCarty. Yes, sir, I believe there is a checklist that 
the monitors go through.
    Mr. McHenry. Do you have issues with that checklist? Do you 
have--
    Mr. McCarty. Not if applied properly.
    Mr. McHenry. And it appears that it is not being followed 
properly.
    Mr. McCarty. Yes, sir.
    Mr. McHenry. Okay; all right. If we could put up on the 
screen, HOME.
    Mr. Beaudette, does HUD's approach to oversight in the HOME 
Program leave the door open to fraud and abuse?
    Mr. Beaudette. I believe anything pertaining to it would 
provide the opportunity. You enhance it, it decreases. You 
release it, the possibility of it goes up.
    Mr. McHenry. No, no. I am asking, does the current approach 
to oversight of the HOME Program leave the door open to fraud 
and abuse?
    Mr. Beaudette. I don't think so.
    Mr. McHenry. Okay. Then, let me show you an example.
    This is a duplex in the town I grew up in, not in my 
district, but I am in a divided county with a redistricting 
year, it will be in my new district, not in my current 
district. But, anyway, suffice it to say, I grew up, actually, 
just a couple of blocks from this house. You can see that it is 
not that old.
    That appears to be a duplex. Do you all agree? It looks 
like a duplex. If you disagree, just tell me. But, according to 
the grant information, this multi-family housing project was 
supposed to be six units. You can see it is clearly two units. 
First, I ask that your agency look into this, because this is a 
very serious discrepancy. And I would be happy to provide you 
with the exact address. But this is a big concern.
    I have a staffer who grew up in a hometown in a different 
State. She found the same thing. And this is not--we haven't 
been working full-time on this. But the fact that we found this 
is a really a bad indication for the program. And, technically, 
I would like to know how this can happen.
    Mr. Beaudette?
    Mr. Beaudette. I don't know.
    Mr. McHenry. You don't know how it could happen?
    Mr. Beaudette. No, in this specific situation, I don't 
know. I am sorry.
    Mr. McHenry. But generally, how does this happen? Because 
we have heard testimony from the first panel--there is a hue 
and cry on the other side of the aisle that we bring folks who 
are basically fraudsters in to give examples. Then, we have 
another panel who says, ``I don't know how it happens.'' You 
know?
    Mr. McCarty, do you, you know, is there--
    Mr. McCarty. It happens because there is no oversight. 
There is no one out on the street looking at it. Your staff 
went out and found this. If the Department were to go out 
there, the grantees go out there, the sub-grantees go out 
there, they will see this.
    Mr. McHenry. So is it a failure of policy or is it a 
failure of people to follow those policies?
    Mr. McCarty. I believe it is a failure of the people to get 
out there to do it.
    Mr. McHenry. Okay.
    Mr. McCarty. I think that when you have that many sub-
grantees, and you have 42 offices of HUD that do this, and they 
probably all do it different ways, I think the numbers 
overwhelm them.
    Mr. McHenry. Okay.
    Mr. Beaudette?
    Mr. Beaudette. Can we get back to you on this and give you 
specifics?
    Mr. McHenry. I would much appreciate it. And I think the 
taxpayers would appreciate it, too. I don't think the person 
who did this would appreciate being found out, but we certainly 
appreciate you doing that.
    Mr. Beaudette. Thank you very much.
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from Arizona, Mr. Huizenga--I mean, from 
Michigan. Sorry.
    Mr. Huizenga. Thank you, Madam Chairwoman. And I appreciate 
that.
    Mr. Beaudette, I am curious. How much waste, fraud, and 
abuse is present in the system? Because earlier, 14 percent was 
referenced, and staff, much like they are doing now, are 
shaking their heads and rolling their eyes and doing all those 
things and pulling faces.
    I am curious what number you are comfortable with citing?
    Mr. Beaudette. I am comfortable with zero. And I don't 
know--
    Mr. Huizenga. No, no. How much exists? Because I believe in 
the fallibility of mankind, so I know that there is some. But I 
am curious what number you would settle on, or your staff who 
are rolling their eyes behind you would settle on?
    Mr. Beaudette. I don't know how much fraud does exist.
    Mr. Huizenga. Okay. I would like to find out, then, from 
our Inspectors General what they think. But I would also like 
to know what internally you all believe is that number. So 
please feel free to get back to me on that. In fact, I insist 
that you get back to me on this.
    Do you commonly not know where and what projects you are 
funding, where they are? Is that common?
    Mr. Beaudette. Is this for me?
    Mr. Huizenga. Yes.
    Mr. Beaudette. Once again, that is a program question. And 
I can get that to you.
    Mr. Huizenga. Okay. I would like to put up an example of 
what is in my district. We just heard from my friend, Mr. 
McHenry.
    This is the address that you all provided to me, to my 
office, to this committee. This is 400 136th Avenue in Grand 
Haven. My staff went out, and this is what is at the corner.
    When that was brought up, it was like, ``Oh, no, no, no. 
Wait a minute. I guess it is the wrong city.'' The city, 
granted, is in the same county, my home county, but about 20 to 
25 miles south of there, in Holland.
    So that address I am very familiar with, because it is 
actually across the street from where my daughter takes her 
ballet lessons. That would be the headquarters of Heritage 
Home, Incorporated, the person who was doing the developing.
    Now, you all couldn't tell me where their projects were, so 
I called them. We called them and talked to them. And they 
supplied us with the three different locations. I am just 
curious why we are in that spot.
    And I know that the ranking member has asked, ``What are 
those specifics?'' I think we have started to hear a few of 
those from Mr. McCarty. What are the specific action items that 
we can do, because I fully believe that you all in HUD, when 
you are told about fraud or you discover that fraud, you pursue 
that. I have no doubts about that.
    My problem is, I don't believe there are systems in place 
to deter that fraud or that waste or that abuse of the system.
    Now, earlier, Mr. McCarty, you were talking about not 
knowing what is out there is what is troubling. That was your 
quote, and I think on page 4 of your testimony, you go into 
some of those problems.
    Mr. Beaudette, you said, after my friend, Mr. Stivers, had 
run through four different suggestions, you thought that those 
suggestions were in place.
    I don't want to put words in anybody's mouth, but Mr. 
McCarty, the look on your face at that point gave me an answer 
that contradicted that. I would like you to--if you want to 
take a moment and voice what you actually think of that.
    Mr. McCarty. Not to go into too great detail from my 
position, but Jim Heist, our Assistant Inspector General for 
audit, who testified in the June committee hearing, spoke very 
well to that, in our audit work, 60-plus audits that we have 
done, and the number of systemic problems within the controls, 
the monitoring, the oversight of the HOME Program.
    Mr. McHenry. Okay. HUD is not perfect. Our colleague from 
Texas has left. That would not be the case, I think, based on 
the context of what happened in that first panel, whether it 
was him or our friend from Illinois. They defended the internal 
systems of HUD. They defended the actions that have gone on. 
And that, to me is unconscionable, all right?
    We have an ability here to go in and change--
    Mr. Capuano. If the gentleman would yield, could he tell me 
about whom he is speaking?
    Mr. McHenry. That would be Congressman Gutierrez, who was 
talking about that, and Congressman Green.
    So it seems to me that we have some areas that we need to 
improve on. We have one side that is battling back on that. And 
we are trying to get in place here some of those control 
systems that are the simple basic things that you would do when 
I am running my little gravel company back in Michigan or 
whether you are running a major corporation like Mr. Renacci 
has done or whether you are running GM.
    You must know what your assets are, where they are, and the 
status of them. Because I can tell you, when I was doing my 
developing as well, the bank had a trust with my family for 
about 50 years of business. But guess what? They drove past 
every single one of my developments on a regular basis to make 
sure we were actually doing the work. That is ``Trust, but 
verify.'' And that is what we need.
    Thank you, Madam Chairwoman.
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from Ohio, Mr. Renacci, is recognized for 5 
minutes.
    Mr. Renacci. Thank you, Madam Chairwoman.
    I am not going to go through a lot of the internal controls 
that I already talked about. But I am a little shocked--and my 
colleague indicated that we only learned one thing. One thing 
about internal controls is one internal control does not fix 
things. It is usually when you have three or four that give you 
the opportunity to catch things.
    So even though there would be a potential of three bids, 
and maybe somebody could change or get the other person to 
change his bid, if you still do site visits, which every--I 
have done a lot of construction. Every bank I have ever worked 
with went out and did site visits.
    I have had third-party companies go out and do a reference, 
unannounced review of my projects. And I have had random 
visits.
    All of these things are part of internal controls. You 
can't pick just one thing. So here is what I learned today. 
Here is what I learned today: We have some fraud. I don't know 
what it is. And again, it sounds like none of you know what the 
number is. We talked about 14 percent. It could be 2 percent, 
or 5 percent.
    If it is $1 and we can stop it, it is a problem, because 
the taxpayers that I represent are not happy whether we waste 
$1 or $10, especially if we can catch it.
    Now, we know we are going to have issues with fraud. We 
know that. So the question is, what procedures can we put in 
place?
    I don't know what the fraud is, but I know we have some of 
that.
    Mr. McCarty, you said you opened up 51 investigations. That 
is great. But you also said that those came from confidential 
informants.
    Mr. McCarty. Some did, sir.
    Mr. Renacci. Yes, so informants are giving you the answer. 
But I think, if you had the internal controls in place, you 
wouldn't have to worry about the informants. And if the 
informants give you the answers, then the internal controls 
will also help you.
    So if you are only catching 14 percent fraud, maybe there 
is 30 percent fraud. But you have to have internal controls.
    What I have learned is I am not sure that any of you can 
tell me that we have at least four minimal internal controls in 
place. So I would like to get that answer.
    And I am going to put a house up. This is in Ohio. This 
facility was funded $212,000, I guess, through 2008. I will bet 
you that, if somebody--of one of my four internal controls, if 
somebody would have done a random visit and went out there and 
looked at that, they would have had a hard time finding 
$212,000 in funding to that house.
    So the question is not whether the program is good. We can 
talk all day as to whether the program is good. The question is 
whether we can save some dollars that can be used in that 
program to better other recipients.
    So I would ask, somehow, some way because I am leaving here 
today with this question mark: Do we have internal controls? I 
would love to hear an answer.
    Do we have multiple internal controls, not just one?
    I did hear from the witnesses before; both of those 
witnesses said, whether they are criminals or not, if these 
four internal controls were in place, they would not have done 
what they did.
    So somehow, some way, I don't want to leave this hearing 
and not get a follow up that tells me what the internal 
controls are, and how they are using them.
    Look, I understand it is a big Department, and I understand 
there are a lot of good programs going on. But the American 
people are counting on us and they are counting on you to 
implement these programs properly and to make sure the proper 
internal controls are in, not just one but all of them. Those 
are not expensive internal controls to require the recipient to 
pay for a third-party review, which could be done very simply.
    Hopefully, my colleague can say that there is another thing 
he learned. A third-party review, an inexpensive third party 
review, could stop some of this.
    So I appreciate your time, and I yield back. Thank you.
    Chairwoman Biggert. Thank you. And I recognize myself for 5 
minutes.
    Mr. Donohue, in your testimony, you said that there is a 
need in many of the HUD programs, including HOME for HUD, and 
the grantee recipients, to aggressively monitor the sub-
grantees.
    What other programs would you recommend that this committee 
review?
    Mr. Donohue. You mean programs other than HUD itself, 
ma'am?
    Chairwoman Biggert. Yes.
    Mr. Donohue. I think any grant activity, be it HUD or, for 
that matter, any other government agency--
    Chairwoman Biggert. Or any other, if you really have--
    [laughter]
    Mr. Donohue. Yes, I think any activity where a grant 
application is involved, I think it has to warrant, in my 
estimation, a monitoring practice not just with the grantee but 
at the sub-grantee level.
    I think, without that, what in effect we are doing is we 
are telling, in a sense--by not doing it aggressively, we are 
telling the grantees, we are not going to look at you. Why 
would they spend the cost to go back and monitor the sub-
grantees?
    I think, in my estimation, we can encourage wrongdoing 
rather than discouraging it, at times.
    Chairwoman Biggert. Thank you. And we certainly don't want 
to do that.
    And that leads me into--Mr. Beaudette, in your testimony, 
you state that with approximately 30,000 pending individual 
HOME projects at any time, it would require an additional 
appropriation of funds to reach the level of increased numbers 
of HUD staff to literally allow monitoring of day-to-day 
progress.
    Is there a way to--as Mr. Donohue said about--we really 
have to have the grantees and the sub-grantees--to have that 
monitored--but is there a way to have that go down so that it 
is not just HUD having to really monitor all of that?
    Mr. Beaudette. I believe--
    Chairwoman Biggert. Or do we really need more money to be 
able to make sure that there isn't fraud?
    Mr. Beaudette. I think we would probably need more funding. 
Given State and local governments nowadays, I am not sure if 
they would be ready to jump on the bandwagon to enhance their 
monitoring.
    We could certainly do it, too. It would require additional 
funding.
    Chairwoman Biggert. And that would be nice, but obviously 
we can't spend money that we don't have right now. So we really 
have to find other ways to do that.
    Mr. Handelman, would you have any--I think we all recognize 
that this is just a huge project. But it is a very important 
project. And so we want to make it--if we can help to make it 
work--better.
    Mr. Handelman. And I agree improving the effectiveness of 
the program is very important. What I would observe is that 
cost-effectiveness needs to be part of the calculation. It does 
not benefit us all collectively to spend $10 to save $1.
    So as we look at ways to improve internal controls and 
monitoring even at the sub-grantee level, which I think, 
potentially, is useful, I would hope that we do it in a cost-
effective way to maximize how much of program funding goes to 
creating affordable housing rather than enforcement.
    As Mr. Donohue observed a few moments ago, you would build 
the cost of enforcement into the grant, which necessarily means 
it is taking away from funds that would go to create housing.
    Chairwoman Biggert. Okay.
    And then, Mr. McCarty, in your testimony it appears that 
there is about 20 percent of your audits were conducted due to 
recommendations from HUD. Would that be a way--why doesn't HUD 
recommend more audits? And would that be necessary?
    Mr. McCarty. I think, since they are the ones working the 
programs and have firsthand knowledge of how they should be 
working if they are effective enough, we would encourage them 
to forward more to us that we could look at with our audit 
staff around the country.
    Chairwoman Biggert. And so that would be one way to try and 
alleviate the fraud?
    Mr. McCarty. Yes, ma'am.
    Chairwoman Biggert. Okay.
    I think I have finished my questioning. And I want to thank 
all of the witnesses for your testimony. I think it has been 
very enlightening. Thank you all.
    Mr. Capuano. Madam Chairwoman?
    Chairwoman Biggert. Yes.
    Mr. Capuano. I don't want to interrupt you. Are you 
finished?
    Madam Chairwoman, thank you.
    Madam Chairwoman, we have been here for about 3 hours now, 
and we have had four professional gentlemen who I think have 
some great and wonderful ideas and I am looking forward to 
getting on how to actually accomplish what we say we want to 
accomplish.
    But we also spent an hour-and-a-half on a dog-and-pony 
sideshow that in my opinion, wasted the time of Congress, 
wasted taxpayers' money, and gave us no light into the issues. 
These gentlemen have given us some light and hopefully will 
give us more.
    We had, even in the hearings, we had questions asked of 
these people that they couldn't possibly answer. How much fraud 
is in HUD? If they answered the question, the next question 
would have been and should be, well, if you know there is 10 
percent, 5 percent, 14 percent, 100 percent fraud, why didn't 
you stop it? It is because they don't know how much because if 
they knew it, they would have stopped it.
    And we ask these kinds of questions even if that question 
is to the wrong people on this panel. The reason I just wanted 
to have a closing statement was simply because everybody here 
wants to minimize and eliminate as much fraud as possible. No 
one likes that. I actually would argue that those of us who 
actually like the HOME Program have the most to gain by 
limiting fraud the most. I want as much money put into these 
programs as possible.
    Yet, what do we get? Pictures of pretty homes put up on the 
screen that no one knows where they are, they weren't asked 
these questions beforehand. You want to chase a particular 
issue of fraud, any Member here who has information of fraud 
should let these gentlemen know so they can do their job, chase 
them down, put more people in jail, not a problem.
    What I am simply asking is that if we really are serious 
about shutting down or limiting fraud, then we should act in a 
serious manner, talking to professionals, getting their ideas 
and implementing them to the best of our ability, and if they 
cost money, we have to have the discussion about, is it worth 
the money? Can we afford it? Where do we get it?
    Good points, good issues, but for me, I am hoping that the 
next time we do this, we do it in a more serious manner and 
leave the dog- and-pony show to some other committees. We 
haven't done that here up until now, and I regret that we went 
through this. Not the second panel; the second panel was 
useful. The first panel was a dog-and-pony show that shed no 
light, and I am looking forward to receiving some thoughtful 
information from these gentlemen so that maybe we can implement 
some serious improvements to the HUD program.
    Thank you, Madam Chairwoman; and thank you for your 
indulgence.
    Chairwoman Biggert. Thank you. Let me just say that I think 
that we want to ensure that we can help to move forward and not 
have the waste, fraud, and abuse that is there and to help HUD. 
I think that we should use any type of measure to get to the 
loopholes that we have here. And I think we are all very 
serious about this, and I think that it was a serious first 
panel to try and find out from people who have been involved in 
that.
    And so with that, I would disagree with you. But I think 
that this has been a good hearing, and I thank the witnesses. 
They are very professional, and I think that this has been a 
very professional hearing.
    The Chair notes that some Members may have additional 
questions for the panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their response in the record.
    With that, this hearing is adjourned.
    [Whereupon, at 5:42 p.m., the hearing was adjourned.]








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