(Adds EPA comment in paragraph 9)

* VW's Horn says cheating was not a corporate decision

* Horn apologizes for VW's use of defeat devices

* Congressman skeptical cheating was not widely known at VW

* EPA expects proposals from VW next week on fixing cars

By David Morgan and Timothy Gardner

WASHINGTON, Oct 8 (Reuters) - Volkswagen AG's U.S. chief executive blamed "individuals" for using software to cheat on diesel emissions at a House hearing on Thursday as lawmakers attacked federal environmental regulators for failing to catch the fraud for years.

Michael Horn, head of Volkswagen Americas, testified before a House of Representatives oversight and investigations panel about the emissions scandal that has chopped more than a third of the company's market value and sent tremors through the global auto industry.

Volkswagen's use of defeat devices, software that evaded U.S. tests for emissions harmful to human health, was not a corporate decision, but something a few employees engineered, Horn said under oath.

"This was a couple of software engineers who put this in for whatever reason," Horn said about the software code inserted into diesel cars since 2009. Volkswagen used different defeat devices in Europe and the United States, Horn said, as emissions standards are different in the two regions.

"Some people have made the wrong decisions in order to get away with something," Horn said when asked by lawmakers if Volkswagen cheated with defeat devices because it was cheaper than using special injection systems to cut emissions.

Lawmakers slammed an Environmental Protection Agency official who testified after Horn for not catching Volkswagen. Representative Michael Burgess, a Texas Republican, questioned the size of EPA's annual budget, noting that the cheating was uncovered by a West Virginia University study that had a budget of less than $70,000.

"I'm not going to blame our budget for the fact that we missed this cheating," replied the EPA's Christopher Grundler, who said his transportation and air quality office has an annual budget of roughly $100 million. "I do think we do a very good job of setting priorities."

Burgess replied: "With all due respect, just looking at the situation, I think the American people ought to ask that we fire you and hire West Virginia University to do our work."

Volkswagen is expected next week to provide U.S. and California regulators with a preliminary attempt at a software fix for the defeat devices it installed in 2012-2014 Passats, the U.S. Environmental Protection Agency said on Thursday.

SUED IN TEXAS, RAIDED IN GERMANY

The German automaker has suspended 10 senior managers, including three top engineers, as part of its internal investigation. The scandal, the biggest business crisis in Volkswagen's 78-year history, has also forced the ouster of long-time CEO Martin Winterkorn.

German prosecutors raided Volkswagen's headquarters and other offices earlier on Thursday, as part of their investigation into whether the company also cheated tests in Europe.

Volkswagen said it was supporting the investigation and had handed over a "comprehensive" range of documents.

The internal inquiry has found employees began to install defeat devices after realizing a costly new engine would fail U.S. emissions standards, according to sources. Company investigators have found no evidence against the engineers.

Also on Thursday, the state of Texas sued Volkswagen over the marketing of supposedly clean diesel vehicles, alleging the company violated a state law prohibiting deceptive trade practices.

Representative Chris Collins, a Republican from New York, said at the House hearing he categorically rejected Horn's statement that using defeat devices was not a corporate decision.

"Either your entire organization is incompetent when it comes to trying to come up with intellectual property, and I don't believe that for a second, or they are complicit at the highest levels in a massive cover-up that continues today," Collins said.

Volkswagen, even after hearing in the spring of 2014 about an independent study that showed emissions irregularities in two of its diesel cars, told U.S. air regulators for about a year that the higher emissions data was the result of technical problems with the tests.

Horn said the company told regulators only on Sept. 3 that it was using defeat devices and that before then he had no understanding of what they were.

Horn, sitting alone before the committee with folded hands and a furrowed brow, apologized to lawmakers for Volkswagen's using defeat devices, and pledged to cooperate with the committee. But he offered little new, saying the company's external investigation remains at a preliminary stage.

THE FIX

Owners of 2009 to 2015 Volkswagen diesel cars have more questions than answers about their vehicles and many have joined lawsuits against the company. Horn said fixing the vehicles will take years and require approval from regulators. A small number of cars are expected to need only a software fix.

Most of the cars would require more extensive changes including possible installation of urea tanks that neutralize harmful emissions and particulates.

Volkswagen is working to obtain conditional approval from EPA and California regulators to begin software fixes in January on some of the 482,000 cars that had defeat devices. Another group of the cars will require fixes that would begin no earlier than mid-2016. But there was no date for fixing the 325,000 oldest "Generation One" cars that need the most repair.

The EPA's Grundler told lawmakers he expects Volkswagen to provide options for fixing the cars as early as next week.

Representative Frank Pallone, a New Jersey Democrat, said Horn's statements did not give him "much confidence that we're going to see these vehicles get fixed."

Pallone pressed EPA air enforcement director Phillip Brooks on whether individuals at Volkswagen or the company itself could face criminal charges. "It would be unfair for me to say much more about what the end result might be," Brooks said.

"But it's a possibility?" Pallone asked.

"Certainly," Brooks answered.

(Additional reporting by Andreas Cremer in Berlin, Barbara Lewis in Brussels and David Ingram in New York; Editing by Matthew Lewis)

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