[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
WHAT IS THE FEDERAL GOVERNMENT DOING TO COLLECT THE BILLIONS OF DOLLARS 
                    IN DELINQUENT DEBTS IT IS OWED?

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      INFORMATION, AND TECHNOLOGY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 15, 1999

                               __________

                           Serial No. 106-98

                               __________

       Printed for the use of the Committee on Government Reform



  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
63-309 CC                   WASHINGTON : 2000




                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
JOHN T. DOOLITTLE, California            (Independent)
HELEN CHENOWETH, Idaho


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

   Subcommittee on Government Management, Information, and Technology

                   STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois               JIM TURNER, Texas
THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
DOUG OSE, California                 PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin                 CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
                         Randy Kaplan, Counsel
                    Matt Ryan, Senior Policy Advisor
                     Grant Newman, Staff Assistant
                     Faith Weiss, Minority Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 15, 1999....................................     1
Statement of:
    Hammond, Donald, Fiscal Assistant Secretary, U.S. Department 
      of the Treasury; and Richard Gregg, Commissioner of 
      Financial Management Services, U.S. Department of the 
      Treasury...................................................    10
    Pestka, Thomas J., Director, Debt Collection Service, U.S. 
      Department of Education; Sally Thompson, Chief Financial 
      Officer, U.S. Department of Agriculture; Richard M. Guyer, 
      Director, Fiscal Policy Division; Saul Ramirez, Deputy 
      Secretary, U.S. Department of Housing and Urban 
      Development; David Gibbons, Director, Office of Budget; and 
      Victoria L. Bateman, Comptroller, Federal Housing 
      Administration.............................................    47
Letters, statements, et cetera, submitted for the record by:
    Gregg, Richard, Commissioner of Financial Management 
      Services, U.S. Department of the Treasury:
        Information concerning referrals.........................    45
        Prepared statement of....................................    23
    Hammond, Donald, Fiscal Assistant Secretary, U.S. Department 
      of the Treasury, prepared statement of.....................    13
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     4
    Pestka, Thomas J., Director, Debt Collection Service, U.S. 
      Department of Education, prepared statement of.............    50
    Ramirez, Saul, Deputy Secretary, U.S. Department of Housing 
      and Urban Development, prepared statement of...............    67
    Thompson, Sally, Chief Financial Officer, U.S. Department of 
      Agriculture, prepared statement of.........................    61
    Turner, Hon. Jim, a Representative in Congress from the State 
      of Texas, prepared statement of............................     7
    Walden, Hon. Greg, a Representative in Congress from the 
      State of Oregon, prepared statement of.....................     8



WHAT IS THE FEDERAL GOVERNMENT DOING TO COLLECT THE BILLIONS OF DOLLARS 
                    IN DELINQUENT DEBTS IT IS OWED?

                              ----------                              


                         TUESDAY, JUNE 15, 1999

                  House of Representatives,
Subcommittee on Government Management, Information, 
                                    and Technology,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2247, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Biggert, Walden, Ose, Turner 
and Owens.
    Staff present: J. Russell George, staff director and chief 
counsel; Randy Kaplan, counsel; Matt Ryan, senior policy 
advisor; Matthew Ebert, policy advisor; Bonnie Heald, director 
of communications; Grant Newman, staff assistant; Paul Wicker, 
Justin Schleuter, and John A. Phillips, interns; Faith Weiss, 
minority counsel; and Earley Green, minority staff assistant.
    Mr. Horn. The Subcommittee on Government Management, 
Information, and Technology will come to order. Today we will 
examine the Federal Government's attempts to collect delinquent 
debts.
    The amount of delinquent nontax-related debt owed to the 
Federal Government is staggering. At the end of fiscal year 
1998, the government was owed $60 billion in bad debt. As the 
chart illustrates, that's chart 1, more than $46 billion of 
this amount had been delinquent for over 180 days.
    Today's hearing is about financial responsibility. In many 
instances the Federal Government is the lender of last resort. 
However, this does not discharge a loan recipient's obligation 
to repay the debt to the taxpayers. The fact that there is a 
large amount of bad debt suggests that many Federal loan 
recipients are not taking this responsibility seriously. The 
fact that the majority of this debt is more than 180 days 
overdue suggests that too many agencies and departments in the 
executive branch of our government are not acting as quickly as 
they should to collect these debts.
    The majority of this outstanding debt is unpaid student 
loans from programs administered by the Department of 
Education. The total value of the student loan portfolio is 
$153 billion, all invested for a good cause, but there's a 
commitment there to return what was loaned. Of this amount, $27 
billion is in default, $18.2 billion of which is more than 180 
days overdue.
    There are a variety of other programs with large amounts of 
unpaid debts. The Department of Agriculture, for example, 
administers credit programs that have given rise to more than 
$6 billion in delinquent debts. The Department of Housing and 
Urban Development and the Small Business Administration are 
each owed more than $2 billion in overdue loans.
    To combat this problem, the Debt Collection Improvement Act 
was signed into law in 1996. This law authorized a number of 
programs and created a variety of tools designed to improve the 
Federal Government's dismal record in collecting delinquent 
debts. The act centralized responsibility for debt collection 
in the Department of the Treasury. Under the act, Federal 
departments and agencies are required to refer debt that is 
more than 180 days delinquent to the Department of the Treasury 
for collection.
    The Treasury Department's Financial Management Service 
operates two programs aimed at collecting this delinquent, 
nontax-related debt. Under the offset program, Federal payments 
are intercepted to satisfy delinquent debts owed to the 
government. For example, if an individual defaults on a loan 
from the Federal Government, portions of other Federal payments 
made to that individual, including salary and benefit payments, 
can be withheld to repay the debt.
    As the next chart, chart 2, shows, as of September 30, 
1998, $31.2 billion of bad debts were eligible for referral to 
the Treasury Department for collection. Of that amount, that 
$31.2 billion, of that, only $22.2 billion were actually 
referred for collection. This leaves $9 billion of eligible 
delinquent debt that is not being referred.
    The Treasury Department also operates a program, called 
cross-servicing, in which the Department can collect delinquent 
debts directly by contacting the debtor and by referring the 
debts to private collection agencies.
    As you can see from the next chart, chart 3, Federal 
departments have done a very poor job referring eligible debts 
to this Treasury program. Of the $8.1 billion in debts that 
were eligible for cross-servicing, only $2.4 billion were 
referred to that program. Delinquent loans totaling nearly $6 
billion are not being referred for cross-servicing, as was 
mandated by the Debt Collection Improvement Act of 1996.
    Two of today's witnesses represent departments that are the 
poorest performers in referring debts for cross-servicing. 
Chart 4, the Department of Housing and Urban Development has 
sent Treasury only $222 million of the $1 billion eligible for 
that collection program. Chart 5, the Department of Agriculture 
has sent Treasury a measly $5 million of the $1.3 billion 
eligible for that collection program. Today we will ask why the 
departments are not using these collection processes to reclaim 
the billions of dollars owed to the taxpayers.
    Over the past two Congresses, this subcommittee has held a 
series of hearings focusing on debt collection and the 
implementation and compliance with the Debt Collection 
Improvement Act. At a June 5, 1998, subcommittee hearing, we 
learned that despite the tens of millions of dollars allocated 
to operate the debt collection program, total collections 
amounted to little more than $2 million, which is disgraceful, 
frankly. At that hearing we also learned that the Treasury 
Department was struggling to implement a computer system that 
would increase the types of Federal payments that could be 
intercepted to satisfy delinquent debts. The Treasury 
Department ultimately scrapped a $5 million system that failed 
to meet expectations.
    In January 1999, the Financial Management Service 
successfully merged its Treasury offset program with the tax 
refund offset program, which was previously administered by the 
Internal Revenue Service. By adding tax refunds to the types of 
Federal payments that can be intercepted, the Financial 
Management Service has been able to increase the amount of 
delinquent debt collected.
    Chart 6, total collections to date, however, remain only a 
fraction of the total amount of overdue debt owed to the 
Federal Government. We must ensure that all eligible Federal 
payments, including salary and benefit payments, are 
incorporated into the offset system. Federal departments and 
agencies must also make every effort to see that eligible 
delinquent debt is referred to the Treasury Department in a 
timely manner.
    We welcome witnesses from several Federal agencies to 
discuss debt collection and the implementation of the Debt 
Collection Improvement Act.
    And before we lead to the witnesses, I would ask the 
gentleman from Texas, the ranking member, Mr. Turner, for his 
opening statement.
    [The prepared statement of Hon. Stephen Horn follows:]

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    Mr. Turner. Thank you, Mr. Chairman.
    First, I want to commend you for your leadership in the 
area of Federal debt collection. Your persistence in trying to 
recover for the taxpayer sums rightfully owed to the government 
and to the taxpayers of this country is commendable.
    I want to also mention the hard work that Congresswoman 
Carolyn Maloney has put in on this issue since the time that 
she held the position that I now hold as ranking member of this 
subcommittee.
    As a result of your collective efforts and the efforts of 
many people who are gathered here in this room today, the 
Federal Government is beginning to reap the benefits of a more 
centralized debt collection system. Within the last 2 years, 
the Federal Government centralized debt collection activities 
at the Financial Management Service have begun to work more 
efficiently. For example, the centralized Financial Management 
Service has grown--collections have grown from $1.7 million in 
fiscal year 1997 to $2.5 billion in fiscal year 1999 after the 
tax refund offset system merged with the Treasury 
administrative offset system.
    Clearly, there have been significant improvement in our 
debt collection efforts. As we know, however, there are many 
challenges still facing us and many agencies still have debt 
that can be referred to the Financial Management Service for 
collection.
    With that, I want to reserve the balance of my time, Mr. 
Chairman, so that Mrs. Maloney, when she arrives, will have the 
opportunity to make a statement on this issue.
    Mr. Horn. Fine. We're delighted.
    [The prepared statements of Hon. Jim Turner and Hon. Greg 
Walden follow:]

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    Mr. Horn. Let us begin then with the first panel of 
witnesses. We have on panel one, Donald Hammond, the Fiscal 
Assistant Secretary, U.S. Department of the Treasury; and 
Richard Gregg, the Commissioner of Financial Management 
Services of the U.S. Department of the Treasury.
    The routine here, for those that are not familiar with it, 
including the future witnesses sitting in the audience, are 
that we swear in all witnesses as they assume their chairs. 
Their full statement is automatically put into the record when 
we call on them, and we will then prefer that they will sort of 
look us in the eye and summarize their statement, and then we 
can have more opportunities for dialog on both sides of the 
aisle here in asking questions.
    So, Mr. Hammond, Mr. Gregg, if you will stand, raise your 
right hands.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note that the two witnesses have 
affirmed the oath.
    We will start with Donald Hammond, the Fiscal Assistant 
Secretary of the Treasury.

STATEMENTS OF DONALD HAMMOND, FISCAL ASSISTANT SECRETARY, U.S. 
DEPARTMENT OF THE TREASURY; AND RICHARD GREGG, COMMISSIONER OF 
 FINANCIAL MANAGEMENT SERVICES, U.S. DEPARTMENT OF THE TREASURY

    Mr. Hammond. Thank you, Mr. Chairman.
    Mr. Chairman and Ranking Member Turner, thank you for the 
opportunity to discuss the Department of the Treasury's 
progress in implementing the Debt Collection Improvement Act of 
1996.
    Chairman Horn, your continued support and strong interest 
in our efforts to carry out this important program has been of 
great value to us, and I would like to reiterate our firm 
commitment to the successful implementation of the DCIA, along 
with its continued support from the highest levels within the 
Treasury Department.
    Today I will discuss some of the program's more significant 
recent accomplishments and a few challenges that lie ahead. To 
collect the debts referred by the program agencies, Treasury's 
Financial Management Service applies a variety of debt 
collection tools, including administrative offset, tax refund 
offset, cross-servicing, private collection agencies, credit 
bureau reporting, and referrals to the Department of Justice.
    Collectively, administrative offset and tax refund offset 
comprise the offset program. Offset is a program whereby 
Federal payments are reduced or ``offset'' to satisfy a payment 
recipient's overdue Federal debt.
    Cross-servicing is a program consisting of a variety of 
collection tools which include Treasury demand letters, 
telephone calls to debtors and the use of 1 or more of the 12 
private collection agencies on governmentwide contract.
    In close consultation with Federal agencies over the last 
several months, FMS has updated its evaluation of the Federal 
Government's debt portfolio eligible for referral to Treasury 
for offset and cross-servicing. This analysis is a followup to 
the Price Waterhouse study completed last year which revealed 
that over 47 percent of the government's delinquent debt was 
more than 4 years old.
    Based on industry standards and private sector 
benchmarking, Price Waterhouse determined that once the debt 
collection program is fully implemented, FMS could expect to 
collect between $864 million and $1 billion annually.
    Although much work remains to complete the full 
implementation of the program, FMS has made significant 
progress in increasing collections above the highest Price 
Waterhouse estimates, in large measure due to the increased 
collections that we've experienced from the tax refund offset 
program.
    This year's analysis revealed that as of the end of fiscal 
year 1998, $60 billion in nontax delinquent debt was held by 
the respective agencies and owed to the Federal Government, 
compared to $51.9 billion for fiscal year 1997; and $46.4 
billion of that total is more than 180 days delinquent, 
compared to the comparable figure of $47.2 billion for fiscal 
year 1997. As a result of exemptions and other requirements of 
the DCIA, of the $46.4 billion of debt that is more than 180 
days delinquent, $31.2 billion is eligible for referral to 
Treasury for offset, and $8.1 billion is eligible for referral 
to Treasury for cross-servicing. To date, $22.5 billion, or 72 
percent, has been referred for offset and $2.3 billion, or 28 
percent, has been referred for cross-servicing.
    During the past year, one of the most important 
accomplishments was the merger of the tax refund offset program 
with the Treasury offset program. The merger, which was 
implemented in January 1999, streamlined and improved overall 
operations.
    As a result of the tremendous teamwork between FMS, IRS, 
and the Federal Reserve system, the new system is showing 
dramatic results. Calendar year tax refund offset collections 
as of May 26, 1999, totaled more than $2.4 billion, an increase 
of $643 million over last year's figures. The increase reflects 
collections of nontax Federal debt over--increased over $414 
million, and an increase in child support collections of an 
additional $230 million over where we were last year.
    Treasury also plays an important role in collecting 
delinquent child support obligations owed to or being enforced 
by States and territories. Delinquent child support obligations 
currently are matched against tax refund payments and at the 
State's option against vendor payments and OPM retirement 
payments.
    As of the end of May, more than $1.2 billion in tax refund 
offsets have been collected for child support this calendar 
year, exceeding total collections for all of 1998. Our 
challenge over the next year is to increase the number of 
States that fully participate in the administrative offset 
program.
    We have also made tremendous headway in putting in place 
the regulatory framework necessary to facilitate implementation 
of the DCIA. This past year, FMS has published 10 regulations, 
including all regulations necessary to fully implement the 
offset program.
    Finally, I would like to briefly mention the great strides 
made to strengthen the relationships with the various Federal 
agencies. This has been a significant point of emphasis at FMS. 
As of April 30, 1999, agencies have referred approximately 63 
percent of the debt that is eligible for offset in cross-
servicing. To increase referrals and further strengthen agency 
compliance, FMS has implemented an outreach effort designed to 
assist more than 50 agencies in analyzing their debt eligible 
for transfer for offset and/or cross-servicing.
    This past year, we focused our attention on the successful 
merger of the Treasury offset program with the tax refund 
offset program and making the needed improvements to the tax 
refund offset process due to the importance of this program for 
overall collections. With this effort complete, we are now 
channeling our efforts to the expansion of the administrative 
offset program, to include State income tax debt, Federal tax 
levy and additional payment streams.
    Although we clearly have much left to do, we have made 
significant, measurable progress in fulfilling our 
responsibilities under the DCIA, including a comprehensive 
regulatory framework, a common tax refund offset and Treasury 
offset system, increased child support referrals and 
collections and successful establishment of the cross-servicing 
program, including implementation of the private collection 
agencies.
    In light of future system enhancements, new program 
developments and agency outreach efforts, which Commissioner 
Gregg will discuss in greater detail in his testimony, we fully 
expect this upward trend in collections and referrals to 
continue leading to a vibrant debt collection program at FMS 
which will serve all Federal agencies.
    [The prepared statement of Mr. Hammond follows:]

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    Mr. Horn. Mr. Gregg.
    Mr. Gregg. Mr. Chairman and distinguished members of the 
subcommittee, good morning. I am pleased to report the progress 
made by the Financial Management Service in implementing the 
Debt Collection Improvement Act of 1996.
    First, I would like to thank the chairman and Ranking 
Member Turner for your continued support and encouragement; and 
I welcome this opportunity to provide an update on our progress 
in implementing the DCIA.
    Our most significant accomplishment and certainly our most 
challenging task was the successful merger of the tax refund 
offset and the Treasury offset programs.
    Mr. Chairman, in April 1996, in your remarks on the House 
floor in support of the DCIA, you described the intent of 
Congress that ``FMS should perform both the tax refund offset 
and the administrative offset programs and that by merging 
these two programs the Department of Treasury would streamline 
and improve its operations.'' Based on this guidance and the 
anticipated benefits of the merger, this undertaking was given 
top priority by Treasury.
    Originally, FMS and IRS planned to merge the two programs 
in January 1998 in time for the 1998 tax filing season. Instead 
of a full merger in 1998, IRS and FMS jointly developed a 1-
year transition plan with a revised merger date of January 
1999.
    Following an incredible display of teamwork among IRS, the 
Federal Reserve, and FMS, and much hard work, the merger was 
successfully completed and the first offsets began on January 
18, 1999.
    Although that was only 5 months ago, the fruits of our 
labor are already evident. Total tax refund offset collections 
for calendar year 1999 through May 26th of this year are almost 
$2.5 billion already $643 million more than the amount 
collected in the same period in 1998 and already far exceeding 
the $2.028 billion collected for all of 1998.
    Tax refund offsets have two components, Federal nontax and 
child support collections. As of May 26th, child support 
collections from tax refund offsets totaled more than $1.2 
billion, an increase of more than $230 million over the same 
period in 1998; and Federal nontax collections also totaled 
over $1.2 billion, an increase of more than $414 million over 
the same period in the previous year.
    Notable progress has been made in the area of cross-
servicing. As of April 30, 1999, cross-servicing collections, 
fiscal year to date, totaled $11.6 million, an increase of $8.3 
million over the same period last year. When debts are referred 
for cross-servicing, FMS sends a demand letter on Treasury 
letterhead, followed by a phone call to the debtor. Since its 
inception, FMS has brought in $13.3 million in collections and 
$55.6 million in repayment agreements.
    If these collection efforts are unsuccessful, then at 30 
days the debt is referred to 1 of the 12 private collection 
agencies [PCAs]. To insure that an appropriate balance is 
maintained between the aggressive pursuant of collections and 
the fair and equitable treatment of debtors, FMS monitors each 
PCA. Although the PCA contract has only been in place for a 
little more than a year, there have been no substantiated 
debtor complaints and collections have been steadily 
increasing.
    In February 1999, PCA collections exceeded $1 million in 1 
month for the first time. Collections for March and April 1999, 
increased to $1.3 million and $1.7 million respectively. As of 
April 30, 1999, PCAs were responsible for $6.9 million of the 
$11.6 million collected through cross-servicing so far in 
fiscal 1999. In addition, repayment agreements totaling more 
than $23 million have been established through the collection 
efforts of the PCAs.
    Now, I would like to discuss some of the enhancements that 
FMS is making to strengthen the use of current collection tools 
and increase future collections.
    Administrative offset is one of the areas where FMS has 
placed considerable emphasis. We have successfully expanded the 
TOP system to be able to handle the increased volume of debts 
and payments as the administrative offset program continues to 
grow.
    Significant groundwork has been laid in 1999 to increase 
the number of payments and the debt types that are included in 
the offset program. In 2000, FMS will implement SSA benefit 
offset and expanded Federal salary offset. Implementation of 
these initiatives will significantly increase the volume of 
payments eligible for offset.
    FMS also remains firmly committed to increasing debt 
referrals to TOP and continues to work with the Federal 
creditor agencies to assist them in fully complying with the 
DCIA.
    FMS is also working in conjunction with State governments 
to make the tax refund offset program available to the States 
to collect delinquent State income tax debt as required by the 
Internal Revenue Service Restructuring and Reform Act of 1998. 
Changes will be made to the Treasury offset program so that the 
State income tax debt program will be available in January 
2000.
    In addition, FMS is working with the IRS to implement the 
continuous tax levy program. This was authorized by the 
Taxpayer Relief Act of 1997. Under this authority, delinquent 
tax debts are matched against eligible Federal payments and the 
levy of 15 percent is assessed until the debt is collected. 
Initially, IRS will refer approximately 5 million delinquent 
tax debts to FMS for collection. Tax levy is targeted for 
implementation in the summer of 2000.
    In order to improve the government's debt portfolio and 
encourage Federal agencies to refer their debt to Treasury, FMS 
is working with creditor agencies to help them analyze their 
debt and better manage their debt portfolios. As part of this 
effort, we are identifying and resolving any barriers to refer 
eligible debts to Treasury, establishing agency referral 
schedules, developing a compliance plan and tracking mechanism, 
and working with the agencies to assess the value and 
collectability of delinquent nontax debt.
    As evidenced by the numbers, FMS has come a long way since 
the enactment of the DCIA. While much remains to be done, we 
are pleased with what has been accomplished so far.
    Mr. Chairman and Ranking Member Turner, this concludes my 
remarks. I would be happy to answer any questions that you may 
have. Thank you.
    Mr. Horn. Well, thank you very much, Commissioner.
    [The prepared statement of Mr. Gregg follows:]
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    Mr. Horn. We are going to have questions 10 minutes per 
individual. There's Mr. Turner and myself. We will have one or 
two show up. This is a very complicated issue, and it's going 
to take us each 10 minutes to get involved with some of the 
questions.
    We appreciate very much what the Treasury is trying to do 
in terms of the various departments, but I would like to see 
where we are and where we might be because we had, at the time 
the Debt Collection Improvement Act became law, which Mrs. 
Maloney and I worked on together, only $2 billion of 
approximately $8 billion of debt eligible for cross-servicing 
referral for collection.
    Now, in light of the referral record, what efforts are 
being undertaken by your particular agency, to Mr. Gregg, to 
encourage agencies to refer their debts? Give me a feel for who 
the most reluctant agencies are to turn it over and what do you 
think the reason for not turning it over is.
    Mr. Gregg. One of the things that we've been doing for the 
last year, and we put a lot of emphasis on this, is to make 
sure we understand if there are any hurdles in having more 
cross-servicing debt referred to us. Another thing we've done 
is to work to simplify the automated systems.
    Initially, I think there were some hurdles. We had a 
different system for the offset program and a different system 
for cross-servicing and that made it somewhat difficult for 
some of the agencies to come in. It wasn't a really streamlined 
process. We have worked to simplify and improve those systems. 
I think that has helped. I don't think we have barriers there 
any more.
    The other thing we've done is work hard with each of the 
agencies. Recently we've had commitments from many of the 
agencies on how they plan to improve over the next year, and 
that's something that we have certainly been encouraging. I 
think it has the attention of the agencies, and we're making 
some progress.
    Mr. Horn. Have you ever had the situation where the 
Secretary of the Treasury picked up the telephone and called 
one of the recalcitrant Cabinet secretaries in this area, who 
probably doesn't even know what's going on in some of these 
areas. Has anybody in Treasury, either the Secretary, Under 
Secretary, said, ``hey, what's going on over there fellows? You 
know, we've got a program here. We would like to look good.''
    Mr. Hammond. There certainly have been instances where the 
Under Secretary, especially when Under Secretary Hawke was in 
that position, has made personal phone calls to key agency 
officials to discuss compliance with the debt collection 
program. The Secretary has shown a very keen interest in the 
overall management of this program.
    But I think what we have tried to do is establish very 
strong working relationships with the agencies and involve very 
high-level political support where necessary.
    I might add that Deputy Secretary Summers is particularly 
interested in the debt collection program and has a special 
focus on child support.
    Mr. Horn. I'm delighted to hear that. I know Secretary 
Rubin was one of the few secretaries that cared a lot about the 
administration of these programs.
    Now, Under Secretary Hawke is still in this role?
    Mr. Hammond. No, Under Secretary Hawke has moved on to be 
the Comptroller of the Currency at Treasury, and the new Under 
Secretary, Gary Gensler, is very committed as well to the debt 
collection program.
    Mr. Horn. Well, I'm glad to hear it, and we look forward to 
working with both of the new appointees.
    I guess I need to know some of the reasons, in your 
judgment--we will ask the agencies, obviously--as to why 
they're not referring it. What do you think is the reason for 
that?
    Mr. Gregg. As I said before, I think partly it had been 
systems in the cross-servicing area, and I think we've worked 
through that. I think in other cases it's just trying to sit 
back and figure out what's best for a particular program. Some 
of these are very complicated. And unlike the offset program 
where it runs through and is matched against payments, cross-
servicing is turning it over to FMS for collection.
    I think in some cases there have been some complications 
with the debt and trying to figure out whether or not that's 
the best thing for the program.
    I think a third thing is that agencies have been in some 
cases reluctant to say that they can't do it as well as FMS can 
do it. And that's something that I think that we've largely 
overcome, but it's been a bit slower than I would have liked.
    Mr. Horn. If I were an agency head, I would be so delighted 
that you're collecting the debts I couldn't tell you how 
delighted I'd be.
    Now, if I were an agency head I would try not to be the 
heavy, and you know if you're in agriculture, you want to help 
farmers. I understand that. I've been a farmer. It's a tough 
existence.
    No. 2, if you're over in HUD, you want to not sit down on 
somebody and squash them. You would like somebody else to face 
up to getting the debt collected.
    Now is that a motive here or what? Or are you just too 
charitable to your fellow agencies?
    Mr. Gregg. I think if you look at the increase that we've 
had in the offset program, that would tend to suggest that 
certainly there's a wish to protect constituents because those 
debts are also being collected.
    I think on the cross-servicing, again, in some cases there 
is concern that it is done right, and we've certainly found 
this past year in the tax refund offset program that it is 
heavy lifting to deal with all of the phone calls that we have 
received over this past year--in handling the calls and doing a 
good job.
    I think in some cases agencies want to make sure that we do 
that right, and that's fair. We've received over 1.5 million 
telephone calls through our Birmingham debt collection center 
since the beginning of this fiscal year primarily as a result 
of tax refund offset. And we have to be prepared, and I think 
we are, to handle those calls and everything else that goes 
along with the program and do a good job.
    Mr. Horn. Well, that's commendable.
    Mr. Secretary, how many of those debt programs depend upon 
recapturing the debts so they can then give further loans? Is 
there any situation where the more you can bring back in loans 
you've already put out and get them to pay it off, you could 
then recycle them? Certainly with some of the student aid funds 
and universities where you have had that experiment, it depends 
on collection to help the next wave through.
    Mr. Hammond. Right. There are some programs, in essence, 
that work like a resolving fund where, in essence, the payment 
activity is necessary to fund it, but I think primarily what 
you find is that the impact of delinquencies and nonrepayment 
affects the subsidy rate under credit reform. And, therefore, 
it becomes a factor in the size of next year's program as you 
look at the amount of appropriation necessary to support the 
program.
    Obviously, the higher level of delinquencies that you have 
and lack of repayment, the higher the subsidy amount and more 
appropriation is needed. In today's environment that is a very 
real issue as far as managing the program as appropriations 
become more and more difficult to obtain.
    Mr. Horn. Well, just thinking along that line, it would 
seem to me that unless there's an incentive to get that debt so 
the next group of people can be eligible and have money 
available that maybe we ought to just tighten up at this end.
    Now, I realize a lot of these subject matter authorization 
committees are really parts of the department, not necessarily 
the oversight agency, to be charitable about it. I would think 
maybe that's an incentive if we can get somebody to face up to 
that. If you don't collect the debt, you don't get more money, 
but collect the debt, you will have the money.
    Mr. Hammond. Yes, I think it's obviously a very difficult 
and also a very complicated issue as you look at guaranteed 
programs versus direct funding type of situations where there 
may be no upfront outlay of Federal funds but there certainly 
is a commitment of Federal credit. I think as people walk 
through the framework of Federal credit reform, it gives a real 
opportunity to take a hard look at the costs of these programs 
and reflect delinquencies and repayment within the overall 
appropriation.
    But I really think every program certainly has unique 
characteristics that you would want to look at before you put 
some sort of overall rule in place in that regard.
    Mr. Horn. Let me ask you, Commissioner Gregg. Have we 
established performance goals for the rate of collection of 
referred debt within FMS?
    Mr. Gregg. Yes, we have, Mr. Chairman. As Don alluded to 
earlier, actually we have exceeded it as a result of the 
increase that we've had in the tax refund offset collections 
this year, and that's good. On the other hand, we need to 
continue to make sure that program works properly, given the 
huge amounts. But that doesn't mean that we're pausing because 
of the need to deal with more cross-servicing activity and to 
have more debt referred so that they can go get into our 
collection stream and then to the PCAs and also to do more with 
the administrative offset program, and we're certainly focused 
on doing just that.
    Mr. Horn. Do you feel that your performance goals are being 
achieved? And, if not, what else do you need to do?
    Mr. Gregg. Overall, what we did is set a dollar performance 
goal; and we have, in fact, exceeded that this year and even 
next year's goal. But we need to get down to doing more with 
bringing in the administrative offset program. And to do that 
what we envisioned for the next year is to bring in some 
additional major payment streams like additional salary 
payments. We are doing some of that now, but we need to expand 
that, and we also need to include benefit payments as part of 
the offset program.
    On the other hand, we will also be working to increase the 
amount of the debts that are eligible. We have two major 
additions that will be coming in next year, the State tax debt 
that will begin with five States, beginning in January of next 
year; and we have the tax levy, which is a very large program, 
and working with IRS we're planning to implement that in the 
summer of 2000.
    Mr. Horn. Thank you.
    Eleven minutes for the ranking member to ask questions, Mr. 
Turner of Texas.
    Mr. Turner. Thank you, Mr. Chairman.
    Just to followup, Commissioner, regarding the tax levy debt 
program. You mentioned earlier that the way that works is you 
had a 15 percent--describe how that program will work.
    Mr. Gregg. It's been around for a long time, and it wasn't 
part of the Debt Collection Improvement Act. But what we will 
do is to work with the IRS, and they will certify to us that 
these tax debts are due and that the taxpayer has received 
notice that they are delinquent. They will then refer those 
debts to us.
    And I think the original plan is to begin with consumer 
debt totaling roughly 5 million debts and refer that to us for 
collection. We will then match that against the payments that 
we make, whether it's salary or benefit payments, and impose a 
15 percent levy, on the payments until the amount that's due is 
collected.
    Mr. Turner. It's a one-time 15 percent?
    Mr. Gregg. Yes.
    Mr. Turner. One area I wanted to spend a little bit of time 
on, I don't know which one to ask you, but I wanted to get a 
full description of your experience with the private collection 
agencies. And perhaps it would be helpful for you first just to 
describe what that--your relationship is with the private 
collection agencies, what kind of contract you have, what kind 
of reimbursement does it provide for the private agency.
    And then in your earlier comments, Commissioner, you made 
some reference to a referral time to the private collection 
agency after 30 days, and I was a little unclear on how that 
worked. That seemed like a pretty short period of time before 
you turned it over to a private collection agency. But if you 
would, describe your experience, how that works and whether you 
think it's a good thing or not.
    Mr. Gregg. The use of private collection agencies was 
strongly encouraged by this subcommittee, and we have made a 
very effective use of them. The contract is a 1-year contract 
with three 1-year options for renewal. The way that it works is 
in the cross-servicing areas, what we wanted to do is, looking 
at debt collection as a whole, make the best use and best 
return for the American taxpayer.
    If debts are referred to us from the creditor agencies, we, 
within FMS, work that debt for 30 days. That isn't very long 
but sometimes, as Congresswoman Maloney pointed out on numerous 
occasions, just getting a letter on Treasury letterhead helped, 
and, in fact, it has helped.
    We work that debt. We basically contact the debtor and try 
to give them a call. We also send the letter out. And if we're 
unsuccessful within the 30-day time period, then we pass that 
on to the private collection agencies; and in many cases we 
have been successful.
    We've collected, since we started this a little over a year 
ago, about $13.3 million within our Birmingham office where we 
have an office that handles this for us and another $56 million 
in repayment agreements. Again that's within FMS. At that 
point, it goes to the PCAs.
    Mr. Turner. Tell me why the 30 days. It does seem like 
that's an awful--you write a letter, you make a phone call, and 
if the payment hasn't shown up in your office in 30 days from 
what, from the date you initially began the effort?
    Mr. Gregg. Yes.
    Mr. Turner. Which is the issuance of the letter?
    Mr. Gregg. I think the reason is that we wanted to make 
maximum use of private sector organizations that do this for a 
living and have a lot of expertise. So we have a contract with 
12 PCAs who are in fact expert at this and so we wanted to have 
an opportunity to make one more effort from the government to 
collect. But if we're unsuccessful, we turn it over to them 
fairly quickly, and 30 days is quick.
    Mr. Turner. So if you send the letter on day 1, you made a 
phone call on day 7, and you don't receive any payment on day 
30, you turn it over to the private collection agency. And what 
if on day 32 you get a check in the mail from the debtor? Who 
gets credit for the receipt of the payment?
    Mr. Gregg. My attorneys may correct me on this, but I think 
in that case it would come back to FMS, and we would, ``take 
credit for it.'' The contract with the PCAs is a performance-
based contract. They receive 23 percent of what they collect.
    And, also, there's a provision in there for a 2 percent 
bonus depending on how well they do, and all the debts are 
referred to the PCAs based on a calculation that distributes 
the debt randomly to the PCAs, so that no one gets any 
favoritism on what's referred to them. It's based on a formula.
    The debt is then worked by the PCAs, and to accept that 
collections are made, then it goes into the government.
    Mr. Turner. So the standard fee is 23 percent, plus a 2 
percent bonus?
    Mr. Gregg. Yes, and not all the PCAs get the bonus. It 
again is based on performance.
    Mr. Turner. Is there a standard measure of performance that 
makes the PCAs eligible for the 2 percent or is that a 
negotiated thing with each of the PCAs?
    Mr. Gregg. It's standard, and it's based on a combination 
of criteria. And they're all aware of what the standard is, and 
I think they get monthly reports on how well they're doing.
    Mr. Turner. And do you have enough experience with the PCAs 
now to be able to distinguish the ones that seem to be doing a 
good job from those that are not?
    Mr. Gregg. There are certainly some that have done quite a 
bit better than others. And I'm not sure exactly why that is, 
but it has been noticeable.
    Mr. Turner. And do you have discretion to then shift the 
referrals to the more successful PCAs, or are you doing that?
    Mr. Gregg. Under the contract, we continue referring with 
the exception of the bonus, based on what the contract provides 
and the criteria for that. I think at the time when we extend 
the contracts, that will have to be something that we look at, 
to see what approach we want to take going forward.
    I might add one other comment, Mr. Turner. At FMS, we've 
spent a considerable amount of resources and time making sure 
that the right levels of performance are provided by the PCAs 
in terms of how they treat the individuals, and I must say that 
they've done very well. We have the ability to monitor phone 
calls, and we track that very carefully. We did that from the 
very beginning of the program. And at least from my 
perspective, the handling of the debt is being done very well 
by the PCAs, and I'm certainly satisfied with the use of them.
    Mr. Hammond. If I might just add to that, just from a 
departmental standpoint, we certainly would become aware of 
high volumes of complaint activity, and I can't remember the 
last time I saw a congressional or a constituent letter 
reflecting on a complaint dealing with a private collection 
agency in their approach under the debt collection program. I 
think it's gone as smoothly as one could certainly have 
imagined.
    Mr. Turner. How long a contract does the PCA have with you?
    Mr. Gregg. I believe it is a 1-year contract with three 1-
year options for renewal.
    Mr. Hammond. Yes, three 1-year renewal options at the end.
    Mr. Turner. And so your agreement with all of them that you 
contract with is that your referrals of the debt will be random 
so that no agency gets any preference over what referral they 
get?
    Mr. Hammond. The mix of the debt is random. The percentage 
of the amount of debt that you get after the initial period 
starts to be based on performance. So what you find is that 
there's no preference given for one type of debt over another. 
That is always a random assignment. But as you become better at 
collecting debt, you get a higher percentage of the overall 
referral.
    Mr. Turner. So if your performance is good, you will get 
more referrals. If your performance is not, you may drop off 
the map in terms of business?
    Mr. Hammond. They all continue to get referrals but top 
performers get more.
    Mr. Turner. How do you become eligible for the 2 percent 
bonus?
    Mr. Gregg. Again, there are criteria that are based 
strictly on performance. I think there are four or five 
elements of that and that's known to the PCAs and we provide 
them information. So there should be no surprises.
    Mr. Hammond. My understanding, it's mathematical--as Dick 
had mentioned. It's an actual computation based on performance 
and a weighting of factors.
    Mr. Turner. OK. Thank you, Mr. Chairman.
    Mr. Horn. Well, thank you very much. That's a very good 
line of questioning.
    I now, without objection, will yield to the gentleman from 
Oregon, Mr. Walden. We always try to accommodate Members' 
situations. He's got to be in three places over the next 20 
minutes. So go ahead.
    Mr. Walden. Thank you, Mr. Chairman.
    Mr. Horn. And his statement will be after Mr. Turner's 
opening statement in the record.
    Mr. Walden. Thank you very much, Mr. Chairman. And thank 
you to members of the subcommittee as well for that.
    This is an issue that I have developed some interest in 
since coming to Congress. Having been a small business owner 
for 13 years, I have watched on that arena of the issue as 
well.
    Mr. Chairman, I want to thank you for your ongoing 
leadership in Federal debt collection issues. I think I can 
speak for all Americans in placing my appreciation for your 
pursuit of responsible debt collection policies.
    I would like to speak for a moment about the importance of 
insuring Federal agencies create incentives for debt collection 
contractors to obtain voluntary payments from the debtors 
before instituting involuntary collection actions such as wage 
garnishment or litigation against that debtor. I understand the 
importance of taking those steps as well.
    I say this because, under the Department of Education 
contract, for example, a contractor has a greater incentive to 
collect a debt through involuntary administrative wage 
desistement procedures rather than through the voluntary 
payments from the debtor. This is because the methodology used 
by the Department of Education to evaluate the performance of 
its contractors, allocate accounts among contractors and paid 
bonuses is weighted in favor of wage garnishment and 
deemphasizes voluntary collections.
    The preparation of cases for litigation is also given 
substantial weight. As the gentleman from California and I have 
discussed, I would like to see the Department of Education 
alter its approach to give voluntary collections greater 
emphasis over coercive methods. In my view, the performance of 
the debt collection contractor in achieving net-back 
collections for the government should receive a higher 
percentage than 75 percent or so of the weighting and 
evaluation methodology, and the preparation of cases for 
litigation or wage garnishment should receive no more than 20 
or 25 percent defined.
    These reforms would help the Federal Government I think do 
a better job of collecting its debts in an efficient and 
voluntary manner. I look forward to working with the chairman 
and the administration, members of the minority of this 
committee to continue addressing these issues and making 
Federal debt collection more voluntary and more effective.
    Thank you, Mr. Chairman. And if either of the witnesses 
would like to address those issues or not.
    Mr. Horn. Would you want to respond to that?
    Mr. Hammond. I would be happy to begin.
    First, well, we do have--under the private collection 
agency contract is value awarded for voluntary payment 
agreements, and our experience to date has shown that they've 
been used quite extensively. In fact, at this point we have two 
to one voluntary repayment agreements from the PCA side to 
actual collections through the collection actions themselves.
    But perhaps even more significantly, during that 30-day 
period before debts are referred to the private collection 
agencies, we found that we've entered into, as Dick mentioned, 
$56 million worth of voluntary repayment agreements, taking the 
debt completely off the table and then eliminating it from 
referral to the PCA at this point.
    So while we've collected about $23 million both between our 
own center and through the PCAs in actual debt collection 
actions, we have an additional $80 million in voluntary 
repayment agreements. It's obviously a very important part of 
our program.
    One of the features we offer as part of that is the 
capability for them to enter into what we call a debit 
relationship where, in essence, the payment is paid out of 
their checking account on a recurring basis every month. Once 
they set up the agreement, then they really don't have to worry 
about it anymore. And we've had some good success with that as 
well.
    Mr. Walden. Mr. Gregg.
    Mr. Gregg. The only other comment I would make, and this 
varies from creditor agencies to creditor agencies, but in some 
cases they actually give us some discretion to settle at less 
than 100 cents on the dollar. Depending on the circumstances, 
such as the age of debts. So we have some discretion there 
again with the view toward trying to get what makes most sense 
to the government done as opposed to saying, well, this is what 
you owe and this is what you've got to pay.
    Mr. Walden. Thanks, Mr. Chairman. That's the point I would 
make, is that the extent that--voluntary agreements--sometimes 
I found in my own business in 13 years, you can go a long way 
if you can sit down and sometimes settle these things without 
going through the formalized collection process, and sometimes 
even if you get the judgment, it's worthless, frankly.
    Now, the Treasury Department has a little more power than 
the average small business in making those judgments work out, 
but clearly it seems to me that if we can incent companies to 
do those voluntary approaches through how their contracts work, 
as opposed to just rewarding litigation more, I think we would 
all benefit more. That's the point I wanted to make.
    Thank you, Mr. Chairman.
    Mr. Horn. Thank you very much.
    I now yield 11 minutes to the gentlewoman from Illinois, 
Mrs. Biggert, the vice chairman of the subcommittee.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Both of you in your testimony talked about child support, 
and I would like to go into that a little bit more.
    I think that having served in the Illinois Legislature and 
havng seen the problems that we had with trying to collect, it 
seems like you made great strides in this past year in debt 
collection, and I wondered how it worked in combination with 
the States. If you could just go over the process a little bit?
    Mr. Hammond. Let me give you a quick overview. I would be 
happy to walk through how we interact.
    The States deal with the Health and Human Services 
Department's Office of Child Support Enforcement and through 
that mechanism refer debts to HHS which, in turn, refers them 
to us, noting what programs they want to participate in. By HHS 
regulation, all States are required to submit their child 
support delinquencies for tax refund offset and States have the 
option but are not required to send their child support debts 
in for other administrative offset collection through the 
offset program.
    So our system actually differentiates by the type of 
payment going through, whether or not an eligible child support 
debt can be offset, for example, from a tax refund or 
alternatively from a Federal salary payment. And that type of 
differentiation goes on within the system itself.
    We currently obviously have all 50 States participating in 
the tax refund offset program, and that's been a very active 
program for a number of years, but just with the enhancements 
this year alone, we've collected an additional $230 million 
over what we did the last year.
    Mrs. Biggert. What do you mean by--what enhancements have 
been possible?
    Mr. Hammond. For example, we now match both Social Security 
numbers on a joint tax return, whereas previously the system 
only looked for the primary Social Security number. So, in 
essence, by--people had the opportunity, I think, to avoid the 
tax refund offset by switching the order or sequencing on the 
return. That no longer is the circumstance.
    In addition, we allow for more active debt management of 
the file. It used to be for tax refund offset you had to submit 
one file by a certain date, and that was the file you were left 
with for the season. You're now allowed to weekly update that 
file and bring in additional debts, and we found that that 
flexibility has allowed us to bring in more information as 
well.
    Mrs. Biggert. In your statement, you said that the 
challenge over the next year is to increase the number of 
States that fully participate in the administrative offset----
    Mr. Hammond. Right.
    Mrs. Biggert [continuing]. Components. About how many 
States really do fully participate right now?
    Mr. Hammond. Right now we have 22 States that are 
participating in the administrative offset program. It's a very 
difficult program for us to bring up, and so it has gone a 
little slower than we would have liked.
    Primarily, the complexity comes from the fact that child 
support has been a very active debt collection field for some 
time. So, for example, when we bring a Federal retiree's 
Federal retirement payment into the offset program, that 
retirement payment already may be garnished at the State level. 
We have to make sure that for those obligations that where 
there's already an existing garnishment that we don't come in 
and offset again, in essence collecting the same debt twice. 
We've had to go through and redesign our systems to be able to 
accommodate that.
    We're now in a position to do that. And as we get more and 
more payment streams brought into the Federal offset system, 
then what we will have is more and more additional State 
interests in participating.
    Mrs. Biggert. It seems that so much of the problem is that 
States have not been able to find somebody. But if you can find 
them through the tax return, then the next year does the State 
then--do they notify where this person is so that they can 
pursue them, so you might get that double payment?
    Mr. Hammond. I would have to defer to HHS. But I believe 
that HHS does a very active job of both checking residences off 
the tax files, as well as they now have the data base of new 
hires that they've been developing which allows them to 
basically--allows them to track people based on changes in 
employment.
    And from that circumstance, if someone were to frequently 
change jobs to avoid paying child support obligations, the new 
hire data base in essence facilitates that capability for HHS 
to find them.
    Mrs. Biggert. So there really is interaction between the 
States--I know we pass bills that we could go into the State 
and have the ability to send the letters in to collect theirs. 
So really that might not even be so necessary now that there 
seems to be the national----
    Mr. Hammond. Well, I think this is a program where the more 
effort that you can bring to bear on the collection of the 
child support, the more success you have. It's very complicated 
because of the interstate aspects of it and people with a high 
level of mobility. I think the more cooperation you have and 
the more resources available to deal with this--because it 
certainly is a very large national issue.
    Mrs. Biggert. When a debt is collected, is there a 
deduction or a fee? Since it's not a private agency doing that, 
is there a fee for that?
    Mr. Hammond. There is a--what we call an offset fee or a 
transaction fee, which is deducted from the amount collected 
and then, depending upon the nature of the debt, can either be 
added on to the debt that's outstanding or can be paid, you 
know, just from the collection that--before it's passed 
through.
    It's a flat dollar fee for the offset program, and I 
believe it's currently about $6 an offset--I'm sorry, about 
$7.50.
    Mrs. Biggert. So that would be monthly?
    Mr. Hammond. If someone were a retiree and, for example, 
you were offsetting, let's say, $100 a month out of someone's 
retirement payment, then each month there would be a $7.50 
charge.
    One of the things that we've been looking at is how to deal 
with recurring payments for something like that, a child 
support debt, where the debt may be large and you're going to 
see an ongoing series of offsets.
    Mrs. Biggert. How would that compare to a private agency?
    Mr. Hammond. I would suspect it's dramatically cheaper, but 
it's not really a fair comparison, because I'm not sure any 
private agency really has the same type of offset capability 
given the stream of payments that we have available to us.
    Mrs. Biggert. OK. Then according to the Treasury's fiscal 
year 1998 accountability report, the Department of Education 
and the HHS were granted waivers from a Debt Collection 
Improvement Act cross-servicing provision.
    Mr. Hammond. Right.
    Mrs. Biggert. And, in addition, the December 1996, Federal 
Debt Collection Center Designation Policy Procedures and 
Standards states that, after 1 year, Treasury will review the 
agency's debt collection operations to determine whether the 
continuation of the waiver is warranted.
    When will the review take place for education and HHS?
    Mr. Gregg. I'm not sure exactly. Both of those were 
authorized fairly recently, I believe. But we are committed to 
review those.
    I must also say that in the approach that we've taken in 
granting those authorizations for debt collections status we've 
been pretty careful with them. And I think in the case of HHS, 
it was for a specific category of debts; and for Education, it 
was based on their overall performance.
    But we've had requests from other agencies, and we've 
looked at those pretty hard with the view of whether or not in 
our view it made sense to authorize them as debt collection 
centers, even for their own debts, because of the opportunities 
for some of the programs that we have. So we've taken a fairly 
stringent view on authorizing those.
    Mrs. Biggert. But HHS was granted a waiver for servicing 
their own debts and yet denied a governmentwide debt collection 
center designation?
    Mr. Gregg. Yes, that's correct.
    Mrs. Biggert. Why was that?
    Mr. Gregg. I think it was not for all of their debts 
either, I don't believe. But it was for some category. And it 
was based on our view of their knowledge of the program and we 
thought it would be better for debt collection as a whole, 
rather than sending that to us. But we didn't feel that they 
necessarily had the expertise governmentwide to do that and so 
we denied them for a broader cross-servicing.
    Mrs. Biggert. Thank you. I yield back the balance of my 
time.
    Mr. Horn. Thank you very much.
    The gentleman from Texas, Mr. Turner, 10 minutes.
    Mr. Turner. Thank you, Mr. Chairman.
    Can a private child support collection agency that 
operates, many of them, in our States, can they access your 
offset program after they've gotten a judgment or some kind of 
court order?
    Mr. Hammond. The short answer would be no. I assume when 
you say private you're talking about the situations where 
they've contracted with the State in essence to collect or take 
more aggressive action within the State for the State-
administered child support obligations.
    The offset program, those same debts, depending upon how 
the State allocates them, could in fact be in the offset 
program, but they would not be to the credit of the 
subcontractor or the contractor for the State. It would simply 
be collected on behalf of the State through the offset program. 
But you can have concurrent debt collection activities taking 
place. That's why it's very important to have systems that are 
robust enough to update the status of the debt on a regular 
basis, because people do pay or, in addition, there may be 
additional judgments in making the debt even larger. But you 
want to have that information as current as possible in the 
system.
    Mr. Turner. So the State operating a child support 
collection activity has access to the offset program, but a 
private agency does not?
    Mr. Hammond. Well, the private agency--I guess I'm a little 
bit confused. If the State were, for example, to have sold its 
delinquent child support obligations, I'm not sure if any 
States are in a position to do that, then they would not--in 
that circumstance, they would not have access to the offset 
program, because they would be privately held.
    If, on the other hand, those debts were still considered 
debts administered by the State, whether the State had 
contracted out the work to, you know, similar to our contract 
with private collection agencies, then referral into the offset 
program through HHS would still be available.
    Mr. Turner. I guess what I need to have you comment on, 
what's the public policy reason for making the distinction--
obviously, you have a lot of leverage with the offset program 
in collecting child support. Would it be advisable from a 
public policy vantage point to allow further collections of 
child support through the offset program?
    Mr. Hammond. It actually raises some very difficult policy 
issues, surprisingly, having to do with access to confidential 
tax information. There are some very strict requirements on the 
IRS, in addition to, anyone else who handles taxpayer 
information. And since the primary source of child support 
collections through the offset program are tax refund offsets, 
there are some very difficult issues related to sharing 
information related to--in essence, someone's tax status at the 
same time that collection action is being taken by a private 
debt collector.
    IRS works very diligently with HHS on trying to deal with 
these issues, but as more and more States contract out their 
child support activity, the issues get more and more 
complicated.
    Mr. Turner. If a private child support collection agency 
gets an order for garnishment of wages, they obviously can 
collect somebody's who is earning a salary. Is there any way 
under current law that they can get the income tax refund that 
may be due to the debtor?
    Mr. Hammond. If the private collection agency is acting on 
behalf of the State, I believe that they can participate 
through the offset program fully. If--and I realize this is a 
distinction I'm having a little trouble with this morning, to 
be honest with you, is knowing who actually owns that debt, and 
I think there's a fact pattern here as to whether, if the debt 
is owned by the private collection agency, they do not have the 
same rights as coming in and participating at the Federal law 
as if the debt is still owned by the State, even though it may 
be being serviced by a private collection agency.
    So I think there's a level of legal distinctions here that 
I would have to understand more fully before I could probably 
answer the question. We could certainly get more information 
and provide you a followup answer after the hearing.
    Mr. Turner. Commissioner, do you have any thoughts on this 
subject?
    Mr. Gregg. I think Don covered it about as well as I could. 
Really, when debts are referred to us for child support, we 
deal really with HHS. And I don't fully understand how much of 
that is coming in through State agencies and how much is coming 
in from private collection agencies. We will have to look into 
that and get back to you.
    Mr. Horn. Without objection, your answer will be inserted 
at this point in the record.
    [The information referred to follows:]

    According to the Office of Child Support Enforcement 
(OCSE), it does not receive information from its state agencies 
as to whether referrals are processed through the state or a 
private collection agency. All referrals are received by OCSE 
through a single point of entry and are not distinguished by 
the criteria requested.

    Mr. Horn. If I might ask one question following on this.
    When we got into this bill in 1996, I had long discussions 
with the IRS. And when I said ``since you aren't organized to 
collect, why don't you use private bill collectors?'' Well, 
privacy was the answer. And I don't see that. Because all we're 
asking is that you tell me what they owe the U.S. Government 
and then give them the address and let them get the debt. And, 
if there's a problem on their taxes or anything like that, 
fine, you then refer them to the experts in the IRS if it's an 
income tax situation.
    Now, I don't know what is so complicated about that. 
There's a debt owed, knock on the door, try to get them into a 
payment plan. And you don't have to get into the details or the 
tax collector doesn't have to know that. All they know is the 
final amount owed the Federal Government. What's wrong with 
that statement?
    Mr. Hammond. Not being an attorney, I'm sure I won't give 
it all the justice that it deserves. But the IRS has a 
provision in the Internal Revenue Code, section 6103, which has 
to do with the release and handling of confidential taxpayer 
information. How that provision is interpreted and applied is 
something that tends to be extremely more complicated than it 
might initially appear on its face.
    That is something that is administered by the attorneys 
over at the Internal Revenue Service; and they have, and 
rightfully so, given that it carries personal penalties 
attached to the release of that information, been very 
conservative and judicious in how they interpret it, that 
language.
    Mr. Horn. Well, I just wonder, once it gets into your 
process, it's a debt of the United States. They don't have to 
know whether the taxes are paid or anything else. And they 
don't really know that. It's a debt.
    Mr. Hammond. And for most debt streams that works exactly 
like that. Unfortunately, with child support, there are 
different treatments of the collected debt. If it's offset 
against a tax refund payment, it gets a different allocation 
structure. So it has to actually be identified within the 
output as to whether or not it came from a tax refund or say a 
Federal salary payment, and that adds another level of 
complexity to the actual collection of child support 
obligations.
    Child support may, just as an aside, may be the single most 
complicated program that I've come across in a long time as far 
as the different rules and allocation structures. It even 
depends whether or not the debt is owed by the delinquent 
parent directly or whether or not the State-administered TANF 
benefits in the interim in which case then the State is titled 
to reclaim before the family. And there's a very complicated 
allocation and categorization process attached to it.
    Mr. Turner. I guess that's how we first got into Federal 
involvement. Collecting child support was the justification 
offset, the welfare payments being made to the custodial 
parent. But it does seem to be worthwhile at least explore the 
idea of giving a custodial parent access to our system of 
offsets for tax payments, whether they be a welfare mother or 
be a nonwelfare mother.
    Mr. Hammond. I believe most custodial parents--most States 
offer custodial parents the opportunity to bring judgments into 
the State system by paying a processing fee and then have it 
included in the amount referred by the State to HHS.
    From our standpoint, we wouldn't necessarily see that 
distinction, but the State when they got the collections back 
would know where to allocate the various payments back.
    Mr. Turner. Let me turn to another subject.
    I notice that one of the departments that has not yet made 
referrals to you of delinquent debt is the Department of 
Defense. What are the complexities involved with Department of 
Defense debts? I've been told there's about $1.4 billion in 
delinquent debts that is eligible for cross-servicing and $900 
million that's eligible for offset. What's the explanation from 
your vantage point of the lack of progress in working with the 
Department of Defense?
    Mr. Hammond. I believe it's a couplefold; and, like 
anything involving the Department of Defense, it's somewhat 
complicated. But I believe it can really be boiled down to an 
issue of primarily those debts, as I understand it, are 
contract-related obligations and therefore have to be viewed in 
the overall administration of the contract. They may in many 
cases be, for example, contract overpayments or claims related 
to contract nonperformance.
    And then, in addition, the capability of interfacing with 
the Department of Defense's systems to allow for the effective 
referral of that information is, of course, always an issue.
    Mr. Turner. Commissioner, do you have any comments on it?
    Mr. Gregg. I think in the cross-servicing area, there's a 
sizable amount that we're talking about with the Department of 
Defense right now on whether or not that is actually eligible 
to be referred to us for cross-servicing. We hope to have an 
answer to that before too long. But it's a significant amount; 
and depending on how that is finally resolved, these figures 
will either look a lot better or they will look as they are 
right now.
    Mr. Turner. All right. Thank you, Mr. Chairman.
    Mr. Horn. Do you have any more questions? Feel free.
    Mr. Turner. No, I'm fine.
    Mr. Horn. Mrs. Biggert, do you have any other questions?
    Mrs. Biggert. No.
    Mr. Horn. I have one last question. The rest, if you don't 
mind, we will submit to you and you can answer them at your 
leisure.
    The last question is this. Under the Debt Collection 
Improvement Act of 1996, it required that there would be a 
report no later than April 1999, on a one-time basis to 
Congress on the collection services provided by the Treasury 
and the other entities collecting on behalf of the Federal 
agencies. When do you expect to provide the report to Congress?
    Mr. Hammond. That report is currently going through 
clearance at the Treasury Department. I would like to say that 
was the most efficient process in the world. Sometimes it can 
take a little longer than we would all hope. We would expect to 
have it to you very shortly.
    Mr. Horn. We understand that.
    Well, we thank you. You've been excellent witnesses. I 
think we've learned a lot this morning as to what is happening 
in the process, and we appreciate you coming.
    Mr. Gregg. Thank you, Mr. Chairman.
    Mr. Horn. Thank you very much.
    Mr. Hammond. Thank you.
    Mr. Horn. Now, we will ask panel two to come forward: Mr. 
Thomas Pestka, the Director of Debt Collection Service, the 
U.S. Department of Education; Sally Thompson, Chief Financial 
Officer, U.S. Department of Agriculture; and she's accompanied 
by Richard M. Guyer, the Director of the Fiscal Policy 
Division. Saul Ramirez, Deputy Secretary, U.S. Department of 
Health and Human Services; accompanied by David Gibbons, 
Director of Office of Budget, and Victoria L. Bateman, 
Comptroller, Federal Housing Administration.
    So if all of the ones I named will stand and see if we can 
get them around the table here or sit right behind the 
principals.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note six heads have shaken 
positively.
    OK. Thank you for coming; and we will start with Mr. 
Pestka, the Director of Debt Collection Service for the U.S. 
Department of Education.
    Mr. Pestka.

   STATEMENTS OF THOMAS J. PESTKA, DIRECTOR, DEBT COLLECTION 
 SERVICE, U.S. DEPARTMENT OF EDUCATION; SALLY THOMPSON, CHIEF 
 FINANCIAL OFFICER, U.S. DEPARTMENT OF AGRICULTURE; RICHARD M. 
 GUYER, DIRECTOR, FISCAL POLICY DIVISION; SAUL RAMIREZ, DEPUTY 
 SECRETARY, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; 
  DAVID GIBBONS, DIRECTOR, OFFICE OF BUDGET; AND VICTORIA L. 
      BATEMAN, COMPTROLLER, FEDERAL HOUSING ADMINISTRATION

    Mr. Pestka. Mr. Chairman and members of the subcommittee, 
I'm pleased to be here today to discuss with you the 
implementation of the Debt Collection Improvement Act of 1996 
by the Department of Education. The Department has undertaken a 
broad range of activities to continually improve collection 
efforts in the Office of Student Financial Assistance, Debt 
Collection Service.
    We are committed to expanding our efforts. Last year, in 
recognition of our performance, the Department of the Treasury 
granted the Office of Student Financial Assistance a waiver to 
service its own student loan debts--as a debt collection 
center.
    Also last year, the Office of Student Financial Assistance 
was designated the government's first performance-based 
organization. Under the performance-based organization, we 
expect continued refinement of our debt collection efforts and 
the realization of greater operating efficiencies as new 
authorities are implemented.
    One performance-based organization priority will be to 
enhance collaborative efforts with schools, guaranty agencies 
and lenders to reduce the likelihood of default by borrowers in 
both the guaranteed and direct student loan programs. Efforts 
will also be made to emulate best in business practices by the 
private sector to improve our understanding of our portfolio 
and begin tailoring our collection efforts, recognizing the 
varying needs of different portfolio segments.
    The Department of Education has been the primary source of 
federally funded student loans. Students have received about 
$300 billion in loans since the enactment of the Higher 
Education Act of 1965. The vast majority of student loan 
borrowers have repaid or are currently repaying their loans. 
However, some borrowers default on their loans.
    Our challenge is to collect as much as possible on 
defaulted student loans. The challenge is considerable because 
student loans are inherently risky. Creditworthiness is not a 
prerequisite for student loan eligibility. The government and 
private lenders are left with no collateral in the event of 
default. Student loan borrowers frequently relocate after 
having left school. This creates a problem with servicing and 
collecting student loans.
    The Department has undertaken many initiatives to improve 
collections on defaulted loans. From the late 1970's through 
the 1990's, the Department implemented a number of collection 
mechanisms that were subsequently required of all agencies by 
the Debt Collection Improvement Act.
    I would like to highlight some of our recent collection 
efforts. For Treasury's 1999 offset year, the Department and 
the student loan guaranty agencies referred $16 billion in 
past-due receivables to Treasury for offset. For the first 8 
months of fiscal year 1999, the Department's offsets are 
approaching $700 million. This represents the most successful 
year ever by the Department. Treasury offsets have totaled $1.8 
billion since fiscal year 1997.
    Since 1979, the Debt Collection Service continued to expand 
its partnerships with private collection agencies. Partnering 
with private collection agencies has been one of our most 
successful initiatives. We now have 17 private collection 
agencies under contract. Our most recent contract has several 
performance-based evaluation measures.
    Since fiscal year 1997, private collection agencies have 
generated $405 million in collections. The Debt Collection 
Service also recognizes significant collections from accounts 
that are serviced by our regional services in partnership with 
our public inquiry contractors. These collections totaled $242 
million since fiscal 1997.
    Administrative wage garnishment has become an effective 
tool in performing our collections on student loans. We began 
using it 4 years ago. About 100,000 defaulted loans are now in 
garnishment status. In order to maximize the effectiveness of 
wage garnishment, we want to continue to work with Congress to 
develop legislation as proposed in the President's budget that 
would provide access to other Federal data bases, such as the 
National Directory of New Hires for borrower employment 
information. We believe such access will allow us to expand the 
use of wage garnishment and ultimately generate significantly 
greater collections for the government.
    The Department of Education has analyzed defaulted student 
loan sales over the past 10 years and has found that defaulted 
student loan sales are not in the Department's fiscal interest.
    During the past year, the Department let an advisory 
contract through GSA's new financial asset services contract. 
The financial advisors spent several months evaluating our 
collection strategies. The most interesting proposal involves 
expanding student loan collection recoveries through highly 
specialized servicing arrangements. The Department and the Debt 
Collection Service are presently evaluating this proposal.
    There continues to be an interest in the Department of 
Education to enable defaulted borrowers to begin making 
repayments through a variety of flexibility repayment options. 
The consolidation and rehabilitation loan programs were 
instituted to meet these objectives. The private collection 
agencies have been instrumental in assisting student loan 
borrowers to reschedule over $1 billion in defaulted 
indebtedness over the past 5 fiscal years.
    This concludes my remarks. I would be glad to answer any 
questions.
    Mr. Horn. You don't have to conclude it just because the 
red light went on. We allow--you are probably--if that's your 
conclusion, you're the most efficient witness we've ever had. 
Either that or the clock is crazy, which is possible.
    Mr. Pestka. I timed this thing several times last night, 
and I have a summary, but it's superfluous.
    Mr. Horn. OK. Fine.
    [The prepared statement of Mr. Pestka follows:]
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    Mr. Horn. We now have the distinguished Chief Financial 
Officer of the Department of Agriculture, Sally Thompson.
    Thank you for appearing again.
    Ms. Thompson. Mr. Chairman and members of the subcommittee, 
thank you very much for inviting me here to share with you some 
of the perspective and the progress that the Department of 
Agriculture have made in trying to implement the Debt 
Collection Act.
    Mr. Chairman, I would especially like to thank you for the 
attention that you have focused on helping the Federal agencies 
to improve their debt collection. And I assure you that Under 
Secretary Dan Glickman's leadership we are making significant 
progress to improve our debt collection and trying to get a 
clean opinion on our financial statements.
    I would like to give you just a brief overview of our loan 
portfolio and then give you some perspective on the activities 
that we've had with the Treasury offset program with write-
offs, with tools that we're using and end with some of the 
issues around cross-servicing.
    As you know, our mission is to serve the underserved in 
rural America through farm loans, through utility loans, 
through rural--trying to find affordable housing. Our three 
biggest loan portfolios are in rural housing, with about $30 
billion; in rural utilities, with about $40 billion; and then 
our farm loans, not only in rural America, but also with our 
farm credit--foreign credit to foreign countries.
    In addition to that, we have about a $20 billion guaranteed 
loan portfolio as well. All of that adds together for about 
$100 billion in our total loan portfolio, or about 38 percent 
of all nontax debt for the Federal Government.
    So you can see it's imperative that we get our house in 
order so that not only that USDA gets a clean opinion, so that 
the Federal Government can also get a clean opinion.
    However, as I look at the Federal debt and the delinquency, 
the Federal Government has about a 22 percent delinquency rate, 
where the Department of Agriculture has about 6 percent. But 
that 6 percent, as you mentioned in your opening comments, 
represents about $6 billion of delinquent debt. However, $4.4 
billion of that is not eligible for either offset or for cross-
servicing, because they're either foreign debt, in foreclosure, 
in bankruptcy, in litigation, or at Treasury. However, that 
does leave $1.6 billion in delinquent debt that is available 
for the offset program.
    Of that, I'm pleased to be able to tell you that we have 
referred that offset program, $1.3 billion of it, but that does 
leave $300 million, and while on a $100 billion loan portfolio, 
that's a very small percentage, to the average taxpayer, that's 
a lot of money. And we're working very hard. We improved what 
we were turning over for offset in fiscal year 1998 by 65 
percent, and then so far for fiscal year 1999 we've improved 
that another 22 percent. So, as I said, the Secretary and 
certainly all of the people involved with the loan portfolios 
in the Department of Agriculture are working very hard; and we 
will continue to work hard for the rest of this fiscal year and 
for fiscal year 2000 to get to as close to 100 percent as we 
can.
    In addition to that, of course, we're using many of the 
tools that the Treasury mentioned in their testimony. We're at 
a 99 percent compliance with taxpayer identification numbers, 
which, when the loan is made, which means if it does go 
delinquent, it does become part of that 6 percent, it's much 
easier to track.
    We're also turning them all over, all of the debt, to the 
credit bureaus, so that also there's a record of those. We're 
using civil monetary penalties, and we are also using the 
private collection agencies now that some of the barriers, the 
legislative barriers, have been lifted for us.
    We are in the process of implementing in the next few 
months the salary offset and wage garnishments as well for 
tools.
    Another tool that we have used since 1996 is in reporting 
all write-offs to the IRS we have reported $2.5 billion; and 
what this does, as you know, is to create what's called a 
1099(c), which is in effect income to the borrower for forgiven 
debt. This is very important because the borrower cannot get 
additional credit until this debt has been satisfied, and some 
of the effect that we have seen on that is that they are paying 
off some of the debts so they can get some of the new loans 
that have been available.
    And then, of course, we're also using the borrowing of--
borrowing of delinquent debt, which means we will not give a 
loan to a debtor that has an outstanding delinquent debt unless 
it's in the case of food stamps or emergencies.
    I will close by just very quickly talking about the cross-
servicing. We have $1.3 billion that was eligible for cross-
servicing. However, over 50 percent of that represents food 
stamps, and the detail of that belongs at the State.
    However, the changes in the systems that Treasury has made 
just recently that they mentioned to you will allow the 
computers to talk to each other, which means we're hoping to be 
80 percent compliant with cross-servicing in fiscal year 2000.
    Hopefully, we're through the year 2000 glitch, the Y2K, 
getting our computers up to date, Treasury's computers up to 
date. The States are working on that, and so we're looking 
forward to fiscal year 2000 when we can become at least 80 
percent compliant with cross-servicing.
    So you can see we've been working very hard at this. We are 
making progress. There's still work to be done. But, again, I 
can assure you that USDA is providing a very high priority to 
this and that Secretary Glickman is behind this 100 percent.
    Thank you very much, Mr. Chairman.
    Mr. Horn. Give him my best. One of my favorite presiders 
over the House when he was here.
    [The prepared statement of Ms. Thompson follows:]

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    Mr. Horn. Mr. Ramirez, glad to have you here, Mr. 
Secretary.
    Mr. Ramirez. It's good to be here, sir. Thank you very 
much.
    Mr. Horn. Remember you're under oath when you say it's good 
to be here.
    Mr. Ramirez. Absolutely.
    Good morning, to you, sir, and Ranking Member Turner and 
the rest of the distinguished members of the subcommittee.
    On behalf of Secretary Cuomo and the Department, I 
appreciate the opportunity to come before you and report on 
HUD's implementation of the Debt Collection Improvement Act.
    In order to give you a better perspective of the 
Department's debt collection initiatives and its implementation 
of the DCIA, I would like to first present a description of the 
Department's overall debt portfolio as of September 30, 1998. 
I'm proud to say that was the first year that we've got an 
unqualified opinion on our financial statements for the 
Department of Housing and Urban Development.
    Our total receivables due the Department as of September 
30th, totaled $13.9 billion. The largest portion of total 
receivables related to old debts from our elderly and disabled 
section 202 direct loan program. However, it is primarily our 
FHA single family, multifamily and title I debt that comprises 
the bulk of our delinquent debt.
    I would like to draw your attention to exhibit A which has 
a couple of charts, as the next few comments I make will be 
referring to said chart. In fact, it will show the total amount 
of debt which was eligible for referral to the Treasury for 
administrative offset and for cross-servicing.
    This exhibit shows a total debt eligible for referral to 
the Treasury for offset amounting to $300 million as of 
September 30, 1998, and that $240 million of this amount, or 80 
percent of what was eligible, was actually referred.
    The $300 million reported as eligible for offset excludes 
$645 million, which represents accelerated FHA multifamily debt 
delinquent over 180 days. This accelerated debt should not have 
been included in the information reported to Treasury as of 
September 1998, as we erroneously reported the total unpaid 
balance instead of just the amount that was delinquent over 180 
days.
    Second, we added another column to this chart, the 
intergovernmental and nonprofit debt, to reflect debt that 
should be excluded from what was eligible for Treasury offset 
and cross-servicing. About $314 million or, 88 percent of the 
$358 million amount in this category, related to defaults in 
portfolios of issuers by Ginnie Mae and backed securities; and 
the entire defaulted portfolio, consisting of mortgages issued 
or guaranteed by FHA or VA, is collectible from these agencies 
and therefore not referred to Treasury for offset and cross-
servicing.
    Regarding the FHA multifamily in foreclosure figure of $255 
million, and this is the top chart on exhibit A, we refer to 
$123.5 million as actually in foreclosure, and the remaining 
$131 million will either go to foreclosure or will be sold. We 
excluded the latter $131 million from referral eligibility 
because of the unique ``non-recourse'' feature of FHA's 
multifamily mortgage loans. The government may not go after 
personal assets of the borrowers for these multifamily mortgage 
loans, and therefore it would be a zero sum gain to refer them 
to Treasury.
    Finally, exhibit A's bottom chart shows $123 million, or 45 
percent, of the $274 million eligible was referred to Treasury 
for cross-servicing. I might add that of the $151 million not 
referred, $109 was referred as of March 31st, thus bringing it 
up to 85 percent as a proportion of eligible debt that was 
referred to them. As a result, as mentioned by our colleagues 
at Treasury, of the automated system enhancements that have 
allowed us now to communicate with each other more effectively, 
our cross-servicing referral backlog for title I notes have 
been cleared substantially.
    Now I would like to focus my comments on what we have done 
to substantially comply with the major provisions of the DCIA. 
FHA manages credit risk using a variety of means. One is to 
require that all borrowers have acceptable credit history, 
sufficient assets to close the mortgage loan and sufficient 
income to repay the mortgage, all per traditional underwriting 
methods. In addition, FHA has approved an automated 
underwriting system that now assigns an approval rating based 
on the borrower's characteristics, such as credit score, debt-
to-income ratio, loan-to-value ratio; and, as a result, this 
method has been demonstrated to prove much more effective in 
controlling credit risk and enhancing traditional underwriting 
methods.
    HUD has developed a new consumer protection measure to 
reduce the number of families who default on FHA-insured 
mortgages and to remove poorly performing lenders from the FHA 
program. Under this initiative, which we call our Credit Watch, 
we identify lenders with an above-average number of defaults 
and foreclosures involving FHA-insured mortgages.
    We've also addressed the administrative offset and cross-
servicing provisions of the act by referring debt to Treasury 
for offset and cross-servicing when appropriate. We refer all 
new cases that meet this criteria by having a constant dialog 
with Treasury to refer said eligible delinquent debts.
    In the past, we have successfully used the asset sales 
program that has made us the leader in the Federal Government 
in this area. And we're in the process of designing and 
implementing and enhancing a new asset disposition program to 
comply with the new statutory requirements.
    We've also pioneered the use of the Credit Alert 
Interactive Voice Response System, a prescreening tool to bar 
individuals who owe the government money from obtaining new 
government loans or guarantees.
    The Taxpayer Identification Number Implementation Report 
and Certification for fiscal year 1998 shows that HUD has 
included the taxpayer ID numbers on certified payment vouchers 
for 99.8 percent of all payees. We expect 100 percent 
compliance by the end of December 1999.
    I am pleased to close my report to the subcommittee by 
saying that the work that we've done, in conjunction with 
Treasury, has truly met the spirit and the intent of the Debt 
Collection Improvement Act.
    HUD considers this efficient management of debt collection 
and its process an important part of executing our public trust 
function. We look forward to enhancing that function with 
Treasury and with the guidance of this subcommittee and 
continuing to work in these efforts.
    I would be glad to answer any questions that you may have 
or other committee members may have. Thank you very much.
    Mr. Horn. Thank you, Mr. Secretary.
    [The prepared statement of Mr. Ramirez follows:]

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    Mr. Horn. We will begin with Mrs. Biggert. I yield 10 
minutes to the gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Most of my questions probably go to Mr. Pestka. One of my 
involvements during this Congress is in the Bipartisan Results 
Caucus, and the Results Caucus is dedicated to improving 
government by working with the Federal departments and agencies 
to eliminate waste, fraud, and mismanagement. The caucus works 
with agencies and departments that have been deemed at high 
risk by the General Accounting Office.
    One of the programs that has been listed is the Student 
Financial Aid Program. So as part of my work with this caucus, 
I will be focusing on this Department, and I look forward to 
working with you and your staff to remove this program from the 
high-risk list. So I do have a few questions to ask.
    And, again, in my role in the Illinois General Assembly, I 
did deal with the Student Assistance Commission, and I can 
remember when there was a changeover from the banks actually 
doing the loan program to the Federal Government. As I recall, 
it must have been, what, 199----
    Mr. Pestka. 1995.
    Mrs. Biggert. 1995. And there was some consternation there 
that the government was taking over something that the banks 
had been quite successful doing. I don't know--I assume that 
you were here then.
    Mr. Pestka. I was here then. I've been here for a while.
    Mr. Horn. Sitting there before this committee.
    Mrs. Biggert. Yes. Since I wasn't here, I don't know the 
background of that. But have you found that to be effective?
    Mr. Pestka. The new program has actually made the bank 
program more efficient, I think. What we see now is a great 
deal of competition in the form of good customer service to the 
students by the banks and by the Department. So I think it has 
worked out in favor of the students.
    Mrs. Biggert. Has there been less default on the loans?
    Mr. Pestka. I don't think so. We projected that the direct 
loan program would be--since the terms and conditions to the 
student are the same as in the guaranteed program, we projected 
that defaults would be about the same, and our projections have 
turned out to be true.
    Mrs. Biggert. Has there been an increase in the number of 
loans?
    Mr. Pestka. Loan volume has increased dramatically in the 
1990's. We're lending in the neighborhood in both programs 
combined in excess of $40 billion per year.
    Mrs. Biggert. Are there--how many students are turned down 
for a loan program?
    Mr. Pestka. Turned down? None. Students aren't turned down. 
Student loans are virtually an entitlement. As long as you're 
attending an eligible institution and go through the process, 
you receive your loans.
    Mrs. Biggert. That hasn't changed?
    Mr. Pestka. No.
    Mrs. Biggert. OK. But you are using the private collection 
agencies then to be an effective debt tool, a collection tool?
    Mr. Pestka. Yes. We do at the Department, and you will find 
that the guarantee agencies in the Federal Family Education 
Loan Program also use private collection agencies.
    Mrs. Biggert. So you have--what--18 private collection 
agencies right now?
    Mr. Pestka. Right now, we have 17 under contract.
    Mrs. Biggert. And what performance measures does the 
Department use to evaluate the effectiveness of these 
contractors?
    Mr. Pestka. We look at dollars collected, No. 1. We give 50 
percent weight to dollars collected that could be--for the most 
part voluntary payments. Then we look at litigation, we look at 
wage garnishment, and we also look at administrative 
resolutions, since some of these debts should be forgiven and 
not collected. There are provisions in the Higher Education Act 
for loan forgiveness, and we pay the contractors to administer 
the closeout of those loans. So we strike a balance.
    We also look at customer service, and we close accounts 
based on all of these measures. We do a triennial placement to 
collection agencies. And the best way to describe our program 
is, we run a horse race between the collection agencies, and a 
new race starts every 4 months, so the collection agency on the 
bottom can bring themselves up and get up on top if they work 
hard enough.
    Mrs. Biggert. Within the contract, is a fee set that might 
differ from contractor to contractor?
    Mr. Pestka. They bid their fees, and they are slightly 
different, but roughly they average about 23 percent.
    Mrs. Biggert. Do you have any evaluation from the student 
who might have been contacted by the collection agency? Is 
there a followup in how they were approached to collect the 
debt?
    Mr. Pestka. We collect complaints, and we're one of the 
rating factors, and we do take accounts away from collection 
agencies if there are complaints, and that weighting factor is 
in their evaluation process. So we do look at customer 
complaints very carefully.
    Mrs. Biggert. Would there be any suggestions that you would 
have for changing the way that this is done?
    Mr. Pestka. The overall approach to collections or the use 
of private collection agencies?
    Mrs. Biggert. Well, first of all, overall use and then by 
the private collection agencies.
    Mr. Pestka. Yeah--the overall approach to collections--
we're trying to collect the most dollars at the lowest costs. 
So we're always looking for new ways to do the work. Some of 
the collection agencies in this room might--representatives in 
this room might understand that we're always try to drive those 
collection agency commissions down.
    And student lending, the students are responsible for 
paying the collection agency's fee, so the benefit is to the 
student borrower.
    But, overall, we're looking for an approach where we could 
combine a lot of our efforts and achieve the same revenue 
stream or achieve a greater revenue stream at lower costs. And 
that's one of the things that the GSA contractor that I spoke 
of that was looking at for us on our behalf and will be 
exploring new and different ways to do collections. We might 
try a pilot program in the future to explore some of these 
alternatives.
    Mrs. Biggert. About how long does it take a student to pay 
off a loan--10 years, 15 years?
    Mr. Pestka. The standard repayment term is 10 years, but we 
have--with greater student debt now, we have extended repayment 
plans that could go as long as 30 years.
    Mrs. Biggert. Thank you.
    Then for Mr. Ramirez, if I might.
    Mr. Ramirez. Yes, ma'am.
    Mrs. Biggert. In 1994 through September 1997, the 
Department had sales of multifamily loans and sales of single 
family loans, and I guess it amounted to 13 sales and you sold 
1,093 multifamily and 98,640 single family loans, which 
resulted in quite a good saving of $2.2 billion budget. Why did 
you choose to discontinue these sales?
    Mr. Ramirez. There was a period in which we evaluated the 
entire portfolio of our multifamily operation. In fact, we're 
in the process of, for the first time in the history of the 
Department and as a result of our 1996 HUD 2020 reform effort 
brought to bear by Secretary Cuomo, going out and inspecting 
the physical condition all of these properties, as well as for 
financial soundness to get a better handle on our investments 
and/or subsidies in these properties.
    There was a period in which they were discontinued. We are 
working to reinstate the loan sale program for our multifamily 
mortgage loan operation, now that we've got--and already 
referring to our Enforcement Center--those projects that are 
deficient. And, they work either to reinstate them, because 
many times these loans are better to be reinstated and less 
costly to us then going through the whole foreclosure process 
and sale--but in instances where the property is in poor 
condition or it has been abandoned or is in accelerated 
delinquency, we do institute foreclosure process. We have a 
couple of hundred already that are being worked on around the 
country by our Enforcement Center. We see that growing as we 
continue through our reform and actual execution of our 
efforts.
    Mrs. Biggert. Would that be true of the single family 
loans?
    Mr. Ramirez. The single family loans, what we have done 
there is, we have now gone to a single contractor form of 
disposition in our sales. We just put our contracts into effect 
around the country; and, as a result, we anticipate creating 
greater efficiencies in that regard and creating a higher 
return when we do have to go to foreclosure, recognizing that 
we are helping some of the most low and moderate income 
families that have moved into homeownership. So, we make every 
effort first to try to remedy their delinquency, but if that 
does not work, we do move into foreclosure.
    Mrs. Biggert. Thank you.
    Thank you, Mr. Chairman.
    Mr. Horn. Thank you. And I now yield 10 minutes to the 
gentleman from New York, Mr. Owens.
    Mr. Owens. Thank you, Mr. Chairman.
    I do recall a hearing we had a few years ago that certainly 
aroused my interests in the whole debt collection process. I 
was particularly concerned at that time about the Farmers Home 
Loan Mortgages.
    I understand that the name of that has been changed. Is 
that still under--is it included in your figures here?
    Ms. Thompson. Yes, it is, sir.
    Mr. Owens. What is it called now?
    Ms. Thompson. FSA, Farmers Service Agency. And it's about 
$7 billion of farm loans, and that includes also some foreign 
debt as well.
    Mr. Owens. At this point it's $7 billion, the total 
outstanding loans for that thing?
    Ms. Thompson. Yes.
    Mr. Owens. I recall the figure $14 billion in delinquencies 
at the hearing previously. Were the figures wrong at that time 
or has there been a drastic change in the new methods of 
collection?
    Ms. Thompson. We did write off, you know, everything that 
was over the 18--2 years.
    Mr. Owens. Can you explain the term write-off? What is a 
write-off?
    Ms. Thompson. OK. A write-off means that--while we're still 
carrying it on the books, it's no longer collectable. We then 
have turned it over to the IRS who has create what had they 
call a 1099(c), which means that it's income to the borrower 
which must be paid back before they can get an additional loan 
with the Federal Government.
    Mr. Owens. Can you give me the amount of the write-offs in 
the last few years?
    Ms. Thompson. Since 1996, about $2.5 billion.
    Mr. Owens. $2.5 billion was written off?
    Ms. Thompson. Yes.
    Mr. Owens. How about in the last 5 years?
    Ms. Thompson. I don't have the number. I can give it to 
you.
    Mr. Owens. The figure $14 was very--really, it's not 
something that sticks out in my mind.
    Ms. Thompson. I don't know where the number $14 billion has 
come from. I don't know what year you are talking about. I can 
get that you.
    Mr. Owens. Do you have any idea how much has been 
outstanding in Farmers Home Loan Mortgages at given moment in 
the last 20 years?
    Ms. Thompson. In the last 20 years? No, but I would be glad 
to get you a complete reconciliation and go back as far as you 
would like.
    Mr. Horn. Without objection. It would be put in the record 
at this point.
    Ms. Thompson. In how much? Are you just interested in the 
farm loans? I can get you the whole portfolio.
    Mr. Owens. At that time we had a big chart, much more 
detailed information than we have here. I suppose in my files 
it is somewhere, but it just struck me that there was a 
tremendous amount of outstanding loans and delinquent loans in 
the Farmer Home Loan Mortgages, and overall the amount of 
outstanding delinquencies for the Department of Agriculture was 
much higher than it is here.
    So what else--you had write-offs in other areas in addition 
to the Farmers Home Loan Mortgages? These other categories have 
write-offs, too, in addition to Farmer Home Loan Mortgages? 
These other catagories have write-offs, too?
    Ms. Thompson. No. I think what probably is also in that $14 
billion number, but I will certainly reconcile it, was what is 
now in the rural housing area. We split that out. And in the 
rural housing, we have about a $30 billion loan portfolio. Now, 
when you take----
    Mr. Owens. How much of that has been written off recently?
    Ms. Thompson. That $2.5 billion is a total since 1996 for 
all of our loans in all of our portfolios.
    Now, I can get you the breakdown of that in a schedule to 
reconcile that. And I will go back before the Department was 
reorganized to reconcile that $14 billion number to show you 
how it got split between housing and farm loans.
    Right now, if you look at the net, that's a gross number, 
but when you put the interest rate and the subsidy rate in that 
in terms of the housing, it's about $20 billion. You know, in 
other words, it goes from 30 to 20, when you look at the net. 
If I look at what we have loaned since 1991 when the Debt 
Collection Act came in, in housing it's been about $7.4 
billion.
    So I would have to go back, as I said, to pull out those 
numbers and reconcile it before the reorganization. I would be 
more than happy to do that.
    Mr. Horn. And that would be by Department internal unit, 
right?
    Ms. Thompson. Yes.
    Mr. Horn. OK. So the rural utility service would be one of 
those units?
    Ms. Thompson. Yes, they would be.
    Mr. Horn. OK.
    Ms. Thompson. And they're together. If you take the water 
and the waste and telephone, electric, all combined together, 
it is about a $30 billion portfolio.
    Mr. Owens. In this $40 billion portfolio, are there limits 
in what an individual entity can borrow? Are there large 
entities there? You say rural housing, you think of families. 
Are we talking about corporations and large industries who 
borrow large amounts of money?
    Ms. Thompson. No, most of that is in individual families. 
We do have some multifamily in there.
    But, oh, yes, as I started out by conversation, we serve 
the underserved; and we're only there where the private sector 
isn't. And most of our borrowers, in fact, all of them, are low 
to moderate income. The interest rate on them is determined by 
their actual tax returns that they have filed with us, and they 
file those every year with us as well as the IRS.
    Mr. Owens. Hasn't your outstanding loan portfolio increased 
a great deal in the last 5 years?
    Ms. Thompson. In some of the emergency loan area, yes, 
where we've had floods.
    Mr. Owens. Not the rural housing though?
    Ms. Thompson. Not in the rural housing. Some of the 
guarantee has increased in the rural housing, and that's 
probably----
    Mr. Owens. Guaranteed?
    Ms. Thompson. Guaranteed loans, which says we aren't making 
the direct loan. The lender makes the direct loan like the 
bank. But, like FHA, we guarantee a portion of it.
    Mr. Owens. How many delinquencies and what percentage of 
delinquencies would you have with the guaranteed program?
    Ms. Thompson. Well, since in that guaranteed loan portfolio 
we've only made $3 billion since 1991, our delinquency is less 
than 6 percent.
    Mr. Owens. Now, at the hearing previously, there was a 
description of the process by which loans are handled, and 
there were credit committees consisting of nonstaff people in 
various parts of the country. A credit committee had to pass on 
a loan. Is that still the process where you have these credit 
committees consisting of lay people, locally appointed people 
who do that?
    Ms. Thompson. In some types of loans, yes.
    Mr. Owens. Do those credit committees determine when a loan 
is delinquent? Can you--when is a loan delinquent? What is 
delinquency?
    Ms. Thompson. Delinquency is when you miss 30 days and 
you----
    Mr. Owens. Only 30 days.
    Ms. Thompson [continuing]. And miss a payment. Now, in some 
of the farm loans--yes, sir, on the housing loans that is the 
case. Some of the way the loan documents are written, like on 
the farm loans, payments are only due once a year.
    Mr. Owens. They're not delinquent unless you miss--your 
yearly payment comes due and you miss it, that's a whole year?
    Ms. Thompson. If you think about a farm loan where the 
income comes in when you sell your crop----
    Mr. Owens. Sure.
    Ms. Thompson [continuing]. So the loans are set up that 
that's when the payment is due.
    Mr. Owens. Who passes on information that a loan is 
delinquent? Are there lay committees followed in that, too? 
Does a committee determine when somebody is delinquent or is 
that strictly a staff automatic process?
    Ms. Thompson. Actually, we have a very sophisticated 
computer center out in St. Louis and all of that information is 
in that computer system. And we have a large loan servicing 
staff out there, and every payment is entered into the system, 
and we have a history----
    Mr. Owens. Local lay committees cannot intervene in the 
system and hold back----
    Ms. Thompson. No, they cannot.
    Mr. Owens [continuing]. And hold back the level of 
delinquency on any loan?
    Ms. Thompson. No, I won't say that doesn't ever happen, but 
that isn't the process in place. There's always a case that 
sometimes that may happen, but the loan payments go into a 
central place now.
    Mr. Owens. One of the revelations that I'm remembering is 
that there are a number of millionaires, people who had 
considerable amounts of money who were delinquent and large 
amounts of money, and they also sat on committees that made 
decisions. And some of those people who were delinquent was 
getting additional loans. What is the practice now? If you're 
declared delinquent or if you're written off, is there any way 
you can continue to get any kind of loan from the Department of 
Agriculture?
    Ms. Thompson. No, sir. The only time that you would be 
eligible for a loan once your loan is either written off or 
it's been turned over to Treasury, which means that it's 180 
days delinquent, would be in an emergency situation. With that 
emergency package that was just passed in the last session of 
Congress where we had some floods and some national disasters 
and some of the freezing weathers in the Dakotas and then, of 
course, some of the farm prices, we have waived some--because 
the legislation put it that way, we have waived some of those 
stands where we said we would not give a delinquent borrower 
additional funds.
    We also waived that in the case of food stamps. A large 
part of our portfolio also includes food stamps.
    Mr. Owens. So the credit loan committees, are they changed 
with every political administration? Are they appointed by a 
process that sheers them from politics?
    Ms. Thompson. The whole process obviously has been changed, 
both with the Debt Collection Act--that puts some things pretty 
black and white out there. Also, under Secretary Glickman's 
leadership, we have certainly tightened up the loopholes. 
We've--and certainly improved our computer systems. We have a 
ways to go. I would certainly tell you that.
    Mr. Owens. Are the committees appointed by county, State or 
what jurisdiction?
    Ms. Thompson. Well, again, it depends upon the type of the 
loan that you're talking about. Farm loans are with the county. 
If you remember, we have a large group that are not Federal 
employees, but they're actually county employees in the county 
offices that are taking the loan applications and processing 
them.
    Mr. Owens. Just one last question. I just wanted to make 
certain that these committees have minimum influence now----
    Ms. Thompson. Yes.
    Mr. Owens [continuing]. On the debt collection process and 
the delinquency process and that is----
    Ms. Thompson. That's right.
    Mr. Owens. That's what I was trying to establish.
    Ms. Thompson. The bank collection process is severely 
limited.
    Mr. Horn. Thank you. Those are good questions, and we look 
forward to your entry into this point. And, without objection, 
it's in.
    Ms. Thompson. Thank you, Mr. Chairman.
    Mr. Horn. The gentleman from California, Mr. Ose, 10 
minutes.
    Mr. Ose. Thank you, Mr. Chairman.
    I think my questions are primarily related to exhibit A on 
Mr. Ramirez's documentation.
    Mr. Ramirez. Yes, sir.
    Mr. Ose. If I understand the testimony correctly, we have 
loans outstanding that are directly made in some cases? We have 
loans outstanding where we provide the insurance?
    Mr. Ramirez. Guarantees.
    Mr. Ose. Guarantees. We have nonrecourse loans. We have 
recourse loans. We do have recourse loans.
    Mr. Ramirez. Yes, yes, we do, yes, sir.
    Mr. Ose. OK. And the single family--I always like to go 
where the big numbers are----
    Mr. Ramirez. Sure.
    Mr. Ose [continuing]. Where they just have a big impact, 
where there's a big number. And the four that come to mind 
under this exhibit are the single family, multifamily, title I 
and the Ginnie Mae mortgage-backed securities, if I understand 
your acronym correctly.
    Mr. Ramirez. That is correct, sir.
    Mr. Ose. The multifamily loans--having been in the real 
estate business, those are typically made to partnerships and 
the like where you're dealing with a general partner who has 
for a 15-year term, for instance, consented to provide market 
rate or below housing for a certain percentage of the units in 
the project.
    I've got to tell you, $1 billion worth of delinquent debt 
in that category, with a quarter billion in foreclosure, I 
mean, that's going to get my attention. And I'm trying to 
figure out, again having been in the business of real estate 
and understanding how you structure partnerships and the debt 
that you use to create your projects, how is it that we 
accelerate or reduce the duration of the delinquency and get to 
the foreclosure so that we can recover the money that we've got 
outstanding and use in the second or third or fourth project 
somewhere else?
    Mr. Ramirez. First, let me refer back to--I'm sorry.
    Mr. Ose. I'm looking for a legislative remedy. Is there 
some tool that we can give you that accelerates that, having 
the borrower going in default and then having to mess around 
with it?
    Mr. Ramirez. I would ask our FHA Commissioner to make a 
more specific recommendation to you as to the type of 
legislative relief that we could seek in that regard.
    I did want to clarify the billion dollars number of over 
180 days, that's $645--almost $646 million of that is total 
loan value. That was shown as accelerated----
    Mr. Ose. Correct.
    Mr. Ramirez [continuing]. And not the debt itself. 
Recognizing that, that all of these units are providing housing 
to some of the most low and moderate income families out in our 
country, we make every effort to try and reinstate by working 
with the property owners.
    As I mentioned in my earlier comments, some of the things 
that we've done--borrowing led to legislative relief--is 
tighten up our inspection process by inspecting our entire 
portfolio both for physical and financial condition, and then 
finding where properties have been abandoned. If there is an 
accelerated deterioration of the property or an acceleration of 
the delinquency, they're now sent to an enforcement center that 
can accelerate that foreclosure process under our guidelines or 
work toward remedying the situation and bringing it current, 
bringing in a new general partner, a voluntary relinquishing of 
assets and such. In the past, that didn't happen.
    Mr. Ose. That is where I wanted to get to. From my 
experience dealing with low and very low income housing, 
typically those loans are made at a severely discounted rate 
from the market. And I must admit, I find it interesting, at 
the least, when the borrower comes back and then testifies or 
writes that at the discounted rate they cannot make the 
mortgage payment and, as a consequence, they have to have a 
renegotiation, blah, blah, blah.
    What I would argue for is, as the lender, having made that 
loan for the specific purpose of encouraging someone to enter 
into a contract to provide low or very low income housing, that 
we get a little more ruthless relative to those borrowers and 
say, no, we're going to go ahead and move with foreclosure, 
because what we're concerned about is you deferring maintenance 
to preserve your returns on capital and the like or entering 
into some side agreements where tenants have to pay you cash 
for an extra bonus to stay in the place.
    If the purpose of the housing in the program is to--excuse 
me, if the purpose of the program is to create the housing and 
the borrowers comes back and says after the fact that the deal 
is unsatisfactory, that's not my problem. And I've got to 
tell--that's just not my problem.
    And what I'm trying to get to is a clear understanding that 
in instances where it is pure business, I mean, this is a 
business proposition----
    Mr. Ramirez. Sure, absolutely.
    Mr. Ose [continuing]. From the other side, from the 
borrower's standpoint, why are we granting any forbearance or 
relief or extensions whatsoever when, in fact, we have the 
ability to take those properties and run them for the purpose 
that we've funded them?
    Mr. Ramirez. You're right. You're absolutely correct and on 
the mark with recognizing that, on the borrower's side, it is a 
business transaction.
    There is another factor that comes into play, and that is 
the residence and making sure that that particular complex or 
project is not lost and, as a result, reduce the availability 
of where there is already a scare market for low and moderate 
income families.
    To give you an example of what we've done over the last 
several years, we actually were up to about 2,300 properties in 
the multifamily category that were Secretary--held mortgages, 
in essence. We've reduced that to a little over 1,100 and, as a 
result, have reduced unpaid balances and kept units out in the 
market by a total of $5 billion as a result of us being more 
aggressive on the business side.
    What slows that down at times is making sure that on the 
ground we're not creating a situation that will result in 
putting families out of housing as a result of our aggressive 
tactic in trying to deal with bad borrowers.
    So I would just conclude by saying that I will be glad to 
refer your initial to the FHA Commissioner question as to 
whether there is any additional legislative relief that could 
be provided to us to help deal more expeditiously with the 
unscrupulous borrowers and property owners that are out there 
and property owners more expeditiously to the Commissioner and 
I will be glad to send you a response, sir.
    Mr. Ose. I'm not suggesting they're unscrupulous. I'm 
saying they made a deal, and they can't live with it, and it's 
not my problem.
    Mr. Ramirez. Somewhere, I will tell you, as a result of us 
coming out and inspecting these properties, we have found the 
exception, a small percentage, but some that are in there 
examining the operation.
    Mr. Ose. Mr. Chairman, if I could, I will submit that in 
writing to the committee.
    Mr. Ramirez. I will be glad to get that to you, sir.
    Mr. Horn. Since everybody has had 10 minutes except me, I 
will only ask two questions of this panel, and all the rest of 
them will be sent to them.
    Mr. Ose. Mine's still green.
    Mr. Horn. Go ahead. We're having a lunch with the Secretary 
of the Treasury, too. So we ought to go.
    Mr. Ose. Mr. Chairman, I will yield the balance of my time 
to you.
    Mr. Horn. We have a vote coming up. So go ahead if you 
would.
    Mr. Ose. My second question has to do with the single 
family thing, the HUD single family, either guarantees or 
direct loans.
    I have purchased property that HUD owned by virtue of 
foreclosure or transfer from a borrower. I've paid--I mean, 
I've availed myself of the 2 percent discount for cash and all 
of that sort of stuff. The problem that I found on each of 
those structures is that when I went in to actually take 
possession of the property--the structures, by and large, were 
unoccupied for 9 to 12 months. The heating and air conditioning 
had been turned off. Some of the walls had warped. The doors 
had warped. The floors had warped. We had rodent infestations. 
And I've got to tell you, I mean I guarantee you, I flat 
guarantee you that the second time I bought a HUD property, I 
discounted what I was willing to offer it to reflect those 
flaws in the acquisition process.
    And it gets me back to my point about the multifamily. Is 
there some way, legislatively, we can give you the remedy to 
shorten the duration between possession by virtue of transfer 
from a lender under the insurance--under an insurance claim or 
outright default and foreclosure? Is there some way to shorten 
that duration legislatively so that we get these properties 
back on the market?
    Mr. Ramirez. Well, again, on the legislative piece itself, 
I will be referring to the Commissioner, and then I will be 
responding in writing to the committee.
    One thing that we have done administratively to help 
accelerate the disposition of these properties that we do take 
over is that we've now contracted the disposition or the 
management and marketing of these properties. One of the 
problems that we had was when we took over that the properties 
sat in disrepair for several months, longer than the industry 
standard to turn around a sale. And so we've incentivized it 
with a management and marketing contract with several 
contractors around the country to handle that.
    We're into, I guess, the third month of that contract that 
was finally executed. We're starting to see results. We 
anticipate a quicker disposition of the property, a higher rate 
of return as a result of not creating an opportunity for 
additional discounting on those properties and preserve more of 
our investment in those properties as a result of the 
foreclosure, Congressman.
    Mr. Ose. I thank the chairman.
    Mr. Horn. I thank you for that helpful line of questioning. 
That gets down to a lot of substance.
    Let me just raise a few questions here, and then all the 
rest are going downtown. And from both the Democratic and 
Republican sides--and I have about 20 more I could ask. So 
you're all under oath in answering those questions, and thank 
you for your helpfulness if you will do that.
    But, Ms. Thompson, I do want to ask you this. In your 
testimony you stated that only $1.6 billion of agriculture's $6 
billion of delinquent debt is eligible to be referred to the 
Treasury for collection. I guess I'm asking how much of this 
difference is attributable to loans made or guaranteed under 
programs administered by the rural utility service.
    Ms. Thompson. Well, that's a good question. I remember last 
year in my testimony when I was here we were talking about 15 
properties that were of particular interest to you in the rural 
electric ones, and so I got you a very specific update on 
those. And most of those were under----
    Mr. Horn. You might get that microphone a little closer.
    Ms. Thompson. Most of those were under a lot of the nuclear 
power plants, cooperative; and I'm pleased to tell you that, 
without any restructuring, we have 11 of the 15 that are 
improving in their payment. They aren't quite current yet, but 
they are catching up. Two of them we did restructure but 
without any write-off to them. One is--we have two that we 
merged so that they could afford to make payments, and then we 
have one in bankruptcy.
    But of the 15 that you're particularly concerned about--so 
those dollars that were related to those 15 are in that 4.4. I 
will get you the specific dollar amount on those.
    Mr. Horn. OK. Have discussions been held within the 
Department on an exemption for the rural utility service from 
the Debt Collection Improvement Act? Any discussions been held 
like that?
    Ms. Thompson. There are some, yes, and we have a proposal 
at Treasury right now. We've got the three entities that are 
involved with these, Justice Department, the Treasury and the 
Department of Agriculture, and they're all sitting down, and 
there's a proposal on the table to exempt some of those. And 
they're going to work that out together, and then they will 
sign a letter, all three of them, to you.
    Mr. Horn. I guess I would ask, what's the basis and status 
for the exemption? Is Rural Utility Service covering up 
something?
    Ms. Thompson. No, sir, it's not. And we talked about some 
complications, Treasury did. Whether you're talking about DOT 
or child support, well, in these rural utilities and electrics 
out there in rural America, there's some real complicated 
issues. A lot of them are particularly--this will be increased 
as the competition increases for rural--you know, you open up 
for utility companies, but nobody wants to go to my little town 
in Colby, KS, you know, to provide electricity. It's just not 
profitable. So you've got some of those.
    Mr. Horn. I'm all for Colby, KS, just as I am for San Juan 
Bautista, CA, where I grew up on a farm.
    Ms. Thompson. Right.
    Mr. Horn. But I guess I would ask, what was the predecessor 
name of the rural utility service?
    Ms. Thompson. You know, I've been there a year----
    Mr. Horn. Was it Rural Electrification?
    Ms. Thompson. Rural Electric, yes, yes.
    Mr. Horn. I assume Rural Utilities took over what Rural 
Electrification was. It was a very needed program when I grew 
up in the 1930's in the Depression.
    But, what got me into this whole debt collection thing was 
my outrage when they had given a loan to a person I believe in 
Sonoma, CA, several million dollars, he defaulted on the loan. 
He moved to Santa Barbara, CA, one of my favorite cities. We 
would all like to live there if we could afford it. He then 
goes back, they give him another loan, I think it was a 7-story 
office building, and he also had his mansion there.
    Now, farmers, I want to help. I knew what it is to grow up 
on a farm. And I'm not keen on people that are looking for 
things to do when they've done all the farmers and, you know, 
60 Minutes from time to time has had loans for ski lifts and 
everything out of this group, and I think we have a little 
problem there.
    So, I hope they're not going to be exempted from that 
exception, because the whole purpose of this was to get the 
debts collected and my outrage at millions lost.
    With that, I'm going to have to adjourn the meeting.
    I would like to thank the staff in the meantime: Russell 
George, the staff director, chief counsel; to my immediate 
left, Randy Kaplan, our counsel; Matt Ryan, senior policy 
advisor; Matthew Ebert, policy advisor; Bonnie Heald, director 
of communications; in the corner, our staff assistant, Grant 
Newman; and Paul Wicker, intern; and Justin Schlueter, intern; 
and John Phillips, intern.
    And we have for the minority, Faith Weiss, minority 
counsel; and Earley Green, minority staff assistant, and Cindy 
Sebo as court reporter.
    With that, we are adjourned; and we can vote.
    [Whereupon, at 12:17 p.m., the subcommittee was adjourned.]

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