[Congressional Record Volume 140, Number 136 (Monday, September 26, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: September 26, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
          STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

      By Mr. CHAFEE (for himself and Mr. Durenberger):
  S. 2460. A bill to extend for an additional 2 years the period during 
which Medicare select policies may be issued; to the Committee on 
Finance.


                extension of the medicare select program

 Mr. CHAFEE. Mr. President, I am pleased to join with Senator 
Durenberger today in introducing legislation to extend for 2 years the 
Medicare Select Program.
  Based on legislation which I introduced in 1990, Medicare select is a 
demonstration project operating in 15 States with more than 400,000 
participants. Under this program, Medicare beneficiaries have the 
option to purchase Medicare supplemental insurance policies--often 
referred to as Medigap policies--through managed care networks.
  The program has been a huge success. Recent data show that Medicare 
beneficiaries who purchase Medicare select products pay premiums which 
are 10 to 37 percent less expensive than traditional Medigap products. 
Moreover, consumer satisfaction with these products is extremely high. 
Of the top 15 Medigap products ranked by Consumer Reports in its August 
1994 issue, 8 were Medicare select policies. Unfortunately, under 
current law, Medicare select carriers will have to halt enrollment on 
December 31, 1994.
  Almost all the major health care reform plans introduced during this 
session of Congress included provisions to expand the Medicare Select 
Program to all 50 States. Unfortunately, health care reform is 
beginning to look like a long shot. Therefore, at the very least, we 
should enact legislation which will allow the current 15 State 
demonstration project, which has been such a success, to continue. This 
bill will do just that, and I urge my colleagues to support it.
                                 ______

      By Mr. JOHNSTON:
  S. 2461. A bill to amend the Energy Policy and Conservation Act to 
manage the strategic petroleum reserve more effectively, and for other 
purposes; to the Committee on Energy and Natural Resources.


             energy policy and conservation act amendments

 Mr. JOHNSTON. Mr. President, the purpose of this bill is to 
amend the Energy Policy and Conservation Act to extend the President's 
basic authorities for dealing with energy emergencies. The authority of 
the President to maintain, manage and withdraw oil from our strategic 
petroleum reserves expires on September 30, 1994. In addition, key 
authorities essential for the United States to meet its obligations 
under programs of the International Energy Agency also expire on 
September 30, 1994. We need to extend these authorities before Congress 
adjourns. This legislation provides extensions of those authorities 
through June 30, 1996.
                                 ______

      By Mr. COHEN:
  S. 2462. A bill to amend section 1956 of title 18, United States Code 
to include equity skimming as a predicate offense, to amend section 
1516 of title 18, United States Code to curtail delays in the 
performance of audits, and for other purposes; to the Committee on 
Banking, Housing, and Urban Affairs.


               legislation to prevent ``equity skimming''

 Mr. COHEN. Mr. President, confidence in the Federal 
Government's ability to use scarce Federal resources wisely is quite 
low. Examples of wasteful and fraudulent spending confronts us whenever 
we pick up the newspaper or turn on the television.
  As the ranking member of the Governmental Affairs Subcommittee on 
Oversight, I have investigated a disturbing number of instances of 
fraud.
  In recent months, I have been looking at the Department of Housing 
and Urban Development's [HUD] subsidy and mortgage insurance programs. 
This investigation has focused on an outrageous practice known as 
equity skimming.
  Equity skimming is the term used to describe a particular type of 
housing fraud. It occurs when an owner of HUD-insured projects take 
money intended to be used to pay the mortgage and provide maintenance 
and upkeep of the project and divert it for his or her own use. This 
diversion of funds causes the owner to default on their mortgage, 
forcing HUD--which guaranteed the loans--to pay the private lender the 
balance of the mortgage. At this point, HUD assumes the mortgage and 
the owner is required to make mortgage payments to HUD. Regrettably, 
however, the owner often continues to divert funds for personal use 
rather than meet mortgage and other expenses. As a result, these 
projects often fall into disrepair, forcing the tenants to endure 
intolerable living conditions.
  The term ``equity skimming'' is somewhat of a misnomer in that the 
actual equity that the owner invests in the project is relatively small 
compared to the amount skimmed by the owner.
  The HUD IG estimates that equity skimming has cost taxpayers 
approximately $6 billion to date. HUD has approximately 20,000 total 
projects in its insured mortgage portfolio, totalling over $40 billion. 
HUD holds another $10 billion in mortgages already in default. An 
additional $10 billion worth of HUD-insured mortgages are estimated to 
be at risk of default and in fiscal year 1993 alone HUD paid $965 
million in multifamily housing mortgage insurance claims to private 
lenders. While not all of these mortgages are in default because of 
equity skimming, I concur with HUD's IG that a significant amount of 
the defaults are a result of equity skimming.
  The tragedy of this fraud goes beyond the waste of taxpayer dollars. 
As a result of equity skimming, tenants have been forced to live in 
horrible conditions because needed repairs go unattended to. At the 
same time, the owners of these projects live the high life while HUD is 
stuck with the cost of insuring the mortgage and rehabilitating the 
deteriorated project.
  Let me give a couple of examples of how this shoddy practice has 
worked.
  In upstate New York, partners in a nursing home claimed to be broke 
and failed to make payments on a $5.1 million HUD-insured mortgage. 
While they were defaulting on the mortgage and sticking the taxpayers 
with the bill, the partners used various guises to divert some $500,000 
to personal use and paid themselves another $1.7 million in fees for 
unverified services. While these partners were lining their own 
pockets, nursing home residents were going without appropriate care.
  Another case of equity skimming involved a company in Texas, which 
managed approximately 86 HUD insured and/or subsidized multifamily 
projects. Results of a HUD IG audit revealed that $19.6 million of the 
expenses were either ineligible or questionable because of insufficient 
support or evidence. The management company inadequately documented 
$1.2 million in maintenance expenses and lacked documentation of some 
$5.6 million in contracting expenses. The management company also 
diverted $500,000 in project funds. The projects deteriorated at the 
expense of HUD, the taxpayers and the tenants who lived in seriously 
substandard housing. Due to the management company's lack of 
cooperation with HUD's auditors, HUD was unable to identify all the 
diversions and unsupported expenses.
  In yet another case of equity skimming, the owner of four projects in 
Tennessee, diverted some $4.7 million for personal benefit after 
defaulting on the HUD-insured mortgages. The owner also diverted almost 
$800,000 to his wife rather than pay the mortgage. $1.2 million was 
diverted to other companies operated by the owner. The owner also used 
another $1 million to pay another loan.

  Because of improper diversion of project funds, a project in Kansas, 
deteriorated leaving the tenants, who were receiving Federal rent 
subsidies, living in deplorable conditions. Apartments were roach 
infested, ceilings were falling down, and doors and windows provided 
neither security nor protection from the weather. The cost to 
rehabilitate the project came to an estimated $1.4 million on a 
property worth $1.8 million.
  Two other recent cases of equity skimming in Minnesota cost the 
Government almost $600,000. In one case, two partners collected rent 
and Government subsidies while failing to make full mortgage payments 
on their federally insured mortgages. The total cost to the taxpayers 
in this case was about $425,000. In the other case, two owners of five 
subsidized buildings collected more than $173,000 in rent while 
neglecting to make mortgage payments.
  HUD is taking some positive steps to crack down on the owners engaged 
in equity skimming. Nicholas Retsinas, the Assistant Secretary for 
Housing and Federal Housing Commissioner at HUD, testified at a recent 
governmental affairs hearing to some efforts that are under way. He 
testified that HUD is working to prevent the diversions from happening 
in the first place but if this fails, HUD intends to step up the 
efforts to recover the diverted monies. Also, the Housing Choice and 
Community Investment Act of 1994, contains some provisions to address 
the issue. Specifically, the act imposes civil money penalties against 
general partners and certain managing agents of multifamily housing 
projects for knowingly failing to properly maintain the projects in 
good condition and for failure to maintain the project. But, more needs 
to be done to effectively deter equity skimming.
  Mr. President, today I am introducing legislation that will help to 
curb equity skimming. My legislation has three parts. The first part 
would allow equity skimming to fall under provisions of the Federal 
money laundering statute. Under current law, when the Federal 
Government sues project owners who steal or misappropriate money from 
federally insured housing projects, owners are able to protect their 
ill-gotten gains by transferring these assets to other individuals or 
parties during the lengthy litigation process. Making equity skimming 
as a violation of the Federal money laundering statute will allow the 
Government to seize those assets before the owner can hide them.
  The second part would make HUD programs subject to the statute which 
makes it unlawful to obstruct Federal auditors. Unfortunately, there 
has been some question as to whether this statute applies to owners of 
low-income housing because the owners receive no direct Federal 
payment. Because the mortgages are insured and no money goes directly 
to the owner from the Government, owners are able to use the ambiguity 
in the law to stonewall Federal auditors. My bill would make clear that 
owners of housing projects financed with Government-insured mortgages 
are subject to the audit obstruction statute. Perpetrators of equity 
skimming would no longer be able to hide their books from Federal 
auditors.
  The third provision in the bill requires HUD to provide in its 
agreements with borrowers that HUD could recover from project owners 
any funds paid out by HUD as a result of equity skimming. Under this 
new provision if an owner is convicted of equity skimming, the owner 
will be responsible for HUD's entire loss. Currently, HUD is unable to 
recover any funds it used to pay off the balance of the defaulted 
mortgage even if the borrowers are found guilty of equity skimming. 
Current law limits recovery to double the amount skimmed. For example, 
if an owner defaults on a $500,000 mortgage insured by HUD because the 
owner skimmed $50,000 worth of equity, HUD would still be required to 
pay the balance of the $500,000 mortgage. The owner would be liable for 
$100,000, but escapes any additional liability for funds paid by HUD. 
My legislation would make the owner liable for any funds paid out by 
HUD as part of its insurance agreement with the lender.
  Mr. President, this legislation should go far in slamming the door on 
fraudulent owners and managers who take advantage of both taxpayers and 
tenants to line their own pockets.
  I would like to ask unanimous consent that a letter from the 
inspector general at HUD, Susan Gaffney, in support of this 
legislation, and the text of the bill be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 2462

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. FINDINGS.

       The Congress finds that--
       (1) the Federal Government makes available mortgage 
     insurance and other assistance to encourage investors and 
     lending institutions to provide housing to low-income 
     individuals and families;
       (2) in general, this current system functions well;
       (3) some unscrupulous owners of federally assisted housing, 
     however, have diverted Federal housing subsidies and other 
     funds to personal and other improper uses, while failing to 
     make payments on their insured mortgages or maintain the 
     assisted housing;
       (4) this practice of diverting funds, known as equity 
     skimming, has cost the Nation's taxpayers an estimated 
     $6,000,000,000; and
       (5) current law is inadequate to deter or prevent the 
     practice of equity skimming.

     SEC. 2. INCLUSION OF EQUITY SKIMMING AS A LAUNDERING OFFENSE.

       Section 1956(c)(7)(D) of title 18, United States Code, is 
     amended by inserting ``section 254 of the National Housing 
     Act (relating to equity skimming),'' before ``or any felony 
     violation of the Foreign Corrupt Practices Act''.

     SEC. 3. OBSTRUCTION OF FEDERAL AUDIT.

       Section 1516(a) of title 18, United States Code, is amended 
     by inserting ``or relating to any property that is security 
     for a mortgage note that is insured, guaranteed, acquired, or 
     held by the Secretary of the Department of Housing and Urban 
     Development pursuant to section 203, 207, 213, 220, 221, 223, 
     231, 232, 236, 238, 241, 242, 244, 608, or 810 of the 
     National Housing Act,'' after ``under a contract or 
     subcontract,''.

     SEC. 4. EFFECT OF EQUITY SKIMMING ON MORTGAGE INSURANCE.

       Section 254 of the National Housing Act (12 U.S.C. 1715z-
     19) is amended--
       (1) by inserting ``(a)'' before ``Whoever''; and
       (2) by adding at the end the following new subsection:
       ``(b) Effect of Violation.--Each contract for insurance 
     under any provision of law listed in subsection (a) shall 
     provide that if an owner, agent, manager, or other person who 
     is otherwise in custody, control, or possession of any 
     property described in subsection (a) is convicted of a 
     violation of this subsection (a), the Secretary may recover 
     from such owner, agent, manager, or other person an amount 
     equal to the sum of--
       ``(1) any benefit of insurance conferred on the mortgagee 
     by the Secretary with respect to such property; and
       ``(2) any other losses incurred by the Secretary in 
     connection with such property;
     to the extent that such benefit was conferred or loss was 
     incurred as a result of the violation.''.
                                  ____

                                        U.S. Department of Housing


                                        and Urban Development,

                               Washington, DC, September 19, 1994.
     Hon. Bill Cohen,
     U.S. Senate, Washington, DC.
       Dear Senator Cohen: I am writing to express my appreciation 
     for your efforts in combatting equity skimming in HUD 
     multifamily housing projects by promoting legislation for 
     more effective enforcement authority.
       As part of Operation Safe Home, HUD initiated an aggressive 
     proactive effort to pursue project owners who misuse project 
     operating funds through the criminal and civil courts. The 
     overall goal is to deter these major abuses that cause 
     unacceptable living conditions for low-income residents and 
     cost taxpayers millions of dollars.
       One of the keys in these efforts is to change statutes, HUD 
     regulations, and contracts with HUD program participants to 
     facilitate enforcement actions. Your efforts to improve 
     statutory authority by making equity skimming a predicate for 
     money laundering offenses, holding owners personally liable 
     for losses to the Federal Government caused by equity 
     skimming, and improving the obstruction of a Federal audit 
     provisions are significant. Such statutes will better arm HUD 
     to ensure that HUD insured multifamily housing projects and 
     maintained in a decent and safe manner for all those who rely 
     on HUD for housing.
       I and my staff would be delighted to assist in any way we 
     can. Again, thank you for your efforts in addressing these 
     important enforcement issues.
           Sincerely,
                                                    Susan Gaffney,
     Inspector General.

                          ____________________