Farm Loan Programs: Improvements in the Loan Portfolio but	 
Continued Monitoring Needed (16-MAY-01, GAO-01-732T).		 
								 
This testimony discusses the Department of Agriculture's (USDA)  
farm loan programs, administered by the Farm Service Agency	 
(FSA). Specifically, GAO discusses (1) an overview of the	 
financial condition of FSA's farm loan portfolio as of September 
30, 2000 and (2) GAO's decision to remove the farm programs from 
its high-risk list. GAO found that FSA had more than $16.6	 
billion in outstanding farm loans as of September 30, 2000;	 
direct loans accounted for slightly more than half of this amount
and guaranteed loans for slightly less than half. Of the $16.6	 
billion, about $2.1 billion was owed by borrowers who were	 
delinquent on repaying their FSA loans. Most (87 percent) of the 
$2.1 billion was owed on direct farm loans. Although the total	 
amount due on the problem loans remains high, this financial	 
position reflects improvement in FSA's direct loan portfolio in  
recent years as well as a continuation of a relatively healthy	 
guaranteed loan portfolio. In January 2001, GAO removed FSA's	 
farm loan programs from its high-risk list. Several actions taken
by Congress and USDA, many of which GAO recommended, have had a  
significant positive impact on the operation and condition of	 
USDA's farm loan programs.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-732T					        
    ACCNO:   A01011						        
  TITLE:     Farm Loan Programs: Improvements in the Loan Portfolio   
             but Continued Monitoring Needed                                  
     DATE:   05/16/2001 
  SUBJECT:   Agricultural programs				 
	     Delinquent loans					 
	     Direct loans					 
	     Farm credit					 
	     Government guaranteed loans			 
	     Loan defaults					 
	     FSA Direct Farm Loan Program			 

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GAO-01-732T
     
Testimony Before the Committee on the Agriculture, Nutrition, and Forestry,
U. S. Senate

United States General Accounting Office

GAO For Release on Delivery Expected at 9 a. m., EDT Wednesday, May 16, 2001
FARM LOAN PROGRAMS

Improvements in the Loan Portfolio but Continued Monitoring Needed

Statement of Lawrence J. Dyckman Director, Natural Resources and Environment

GAO- 01- 732T

Page 1 GAO- 01- 732T Farm Loan Programs

Mr. Chairman and Members of the Committee: Thank you for the opportunity to
testify on the U. S. Department of Agriculture?s (USDA) farm loan programs.
Our testimony today is based on reports that we have issued over the past
decade, the most recent of which are our January 10, 2001, report entitled
Farm Service Agency: Updated Status of the Multibillion- Dollar Farm Loan
Portfolio

(GAO- 01- 202) and our January 2001 report entitled Major Management
Challenges and Program Risks: Department of Agriculture (GAO- 01- 242). As
you know, within USDA, the Farm Service Agency (FSA) is responsible for
administering USDA?s farm loan programs.

Our testimony today focuses on two areas covered in our reports: (1) an
overview of the financial condition of FSA?s farm loan portfolio as of
September 30, 2000, and (2) our decision to remove the farm programs from
our high- risk list. In summary:

 FSA had more than $16.6 billion in outstanding farm loans as of September
30, 2000; direct loans accounted for slightly more than half of this amount
and guaranteed loans for slightly less than half. Of the $16.6 billion,
about $2.1 billion was owed by borrowers who were delinquent on repaying
their FSA loans. Most (87 percent) of the $2.1 billion was owed on direct
farm loans. Although the total amount due on the problem loans remains high,
this financial position reflects improvement in FSA?s direct farm loan
portfolio in recent years as well as a continuation of a relatively healthy
guaranteed farm loan portfolio.

 In January 2001, we removed the farm loan programs from our high- risk
list. We did so because the financial condition of the programs had improved
since we first designated the programs as high- risk in 1990 and because
actions taken by the Congress and USDA, many of which we recommended, have
had a significant positive impact on the operation and condition of USDA?s
farm loan programs. Specifically, since the end of fiscal year 1995, the
amount of outstanding principal owed by borrowers who were delinquent on
their direct loans and the percentage of debt owed by such borrowers
declined each year- from $4.6 billion, or about 41 percent of the
outstanding principal, in fiscal year 1995 to $1.8 billion, or about 21
percent of the outstanding principal, in fiscal year 2000. While we have
removed the farm loan programs from our high- risk list, USDA and the
Congress need to continue to monitor its performance over time.

FSA?s farm loan programs are intended to provide temporary financial
assistance for the nation?s farmers and ranchers who are unable to obtain
Background

Page 2 GAO- 01- 732T Farm Loan Programs

commercial credit at reasonable rates and terms. FSA provides various types
of both direct and guaranteed farm loans. Direct farm ownership loans can be
used to buy farm real estate and make capital improvements. Guaranteed farm
ownership loans are made for the same purposes and for refinancing existing
debts. Also, direct farm operating loans can be used to buy feed, seed,
fertilizer, livestock, and farm equipment; pay family living expenses; and,
subject to certain restrictions, refinance existing debts. Guaranteed farm
operating loans are made for the same purposes but without restriction on
refinancing existing debts. Additionally, direct loans include emergency
disaster loans which are made to farmers and ranchers whose operations have
been substantially damaged by adverse weather or other natural disasters. 1

In operating the farm loan programs, FSA faces the conflicting tasks of (1)
providing high- risk borrowers with temporary credit so that can stay in
farming until they are able to secure commercial credit and (2) ensuring
that the taxpayers? investment is protected. When a borrower does not repay
his or her direct farm loans, FSA has various tools to resolve the
delinquency, including (1) restructuring the loans, which may include
reducing (writing down) some of the outstanding debt so that the borrower
can continue in farming; (2) allowing a borrower who does not qualify for
restructuring to pay an amount that is based on the value of collateral
security, which is less than the outstanding debt and results in FSA?s
forgiving (writing off) the balance; and (3) reaching a final resolution of
the debt that may or may not include a payment by the borrower, which also
results in forgiving the debt. When a borrower defaults on a guaranteed loan
and a commercial lender incurs a loss, FSA reimburses the lender for the
guaranteed portion of the loss. FSA?s losses on direct and guaranteed loans
totaled about $486 million during fiscal year 2000, about 88 percent of
which involved losses on direct farm loans.

1 The Consolidated Farm and Rural Development Act, as amended (P. L. 87-
128, Aug. 8, 1961), is the basic authority for the farm loan programs.

Page 3 GAO- 01- 732T Farm Loan Programs

The outstanding principal owed on FSA?s direct and guaranteed farm loans
totaled more than $16. 6 billion as of September 30, 2000. Direct loans
accounted for about $8.7 billion of the total amount, and guaranteed loans
accounted for almost $8 billion. Borrowers who were delinquent owed slightly
more than $1.8 billion, or 20.9 percent, of the outstanding direct loan debt
and about $282 million, or 3.5 percent, of the outstanding guaranteed loan
debt. 2 Both the total outstanding principal owed on direct farm loans and
the amount owed by borrowers who were delinquent were lower at the end of
fiscal year 2000 than at the end of fiscal year 1999. Also, while the total
outstanding principal owed on guaranteed farm loans was higher at the end
fiscal year 2000 than at the end of fiscal year 1999, the amount owed by
borrowers who were delinquent was lower. (See table 1.)

Table 1: Outstanding Principal and Amount Owed by Delinquent Borrowers,
Direct and Guaranteed Farm Loans, September 30, 2000

Dollars in millions

Outstanding principal Owed by delinquent borrowers Percentage owed by
delinquent borrowers a

Loan program Amount Number of

borrowers Amount Number of borrowers Percentage of

debt Percentage of borrowers

Direct loans $8,659.0 96,887 $1,812.4 13,930 20.9 14.4 Guaranteed loans
7,967.1 40,679 281.9 1, 863 3.5 4. 6

Total b $16,626.1 137,566 $2,094.2 15,793 12.6 11.5

a Percentages are based on whole numbers. b The total number of borrowers
includes some borrowers who are counted more than once because they have
both direct and guaranteed loans. Also, the total amount owed by delinquent
borrowers does not add because of rounding.

Note: The percent of borrowers who were delinquent on direct loans declined
from 23.5 percent to 20.9 percent over fiscal year 2000, and the direct loan
losses of $427 million were FSA?s least in over 10 years.

Source: GAO?s analysis of information in FSA?s farm loan automated
databases.

All types of direct and guaranteed farm loans had outstanding principal owed
by delinquent borrowers at the end of fiscal year 2000, while some types
accounted for much more problem debt than others. Of the direct loans, for
example, natural disaster emergency loans accounted for the highest amount
of principal owed by borrowers who were delinquent-

2 If a borrower was delinquent on any farm loan, the principal on all farm
loans held by the borrower was totaled to calculate the amount owed by the
delinquent borrower. FSA?s Farm Loan

Portfolio Has Improved but Still Contains Many Delinquent Loans

Page 4 GAO- 01- 732T Farm Loan Programs

about $811 million; 44.1 percent of the outstanding principal on these
emergency loans was owed by delinquent borrowers. 3 Farm operating loans
were second in terms of the amount of principal owed by delinquent
borrowers-$ 569.4 million; 20 percent of the outstanding principal on these
loans was owed by delinquent borrowers. Of the guaranteed loans, farm
operating loans accounted for the highest amount owed by delinquent
borrowers, more than $165 million; 3. 8 percent of the outstanding principal
on farm operating loans was owed by delinquent borrowers. Guaranteed farm
ownership loans had about $115 million, or 3.2 percent of the outstanding
principal owed by delinquent borrowers. (See table 2.)

Table 2: Outstanding Direct and Guaranteed Farm Loans and Portion Owed by
Delinquent Borrowers as of September 30, 2000, by Loan Type

Dollars in millions Outstanding principal Owed by delinquent borrowers

Loan type Amount Percentage of total Amount Percentage

of total Percentage owed

by delinquent borrowers Direct loans

Ownership $3,482.4 40.2 $135.7 7. 5 3.9 Operating 2, 846.9 32.9 569.4 31.4
20.0 Natural disaster 1,838.8 21.2 810.8 44.7 44.1 Other a 490.9 5. 7 296.5
16.4 60.4

Total $8,659.0 100.0 $1,812.4 100.0 20.9 Guaranteed loans

Ownership $3,581.9 45.0 $114.9 40.8 3. 2 Operating 4, 380.7 55.0 165.4 58.7
3. 8 Other b 4.5 0. 1 1.5 0. 5 34.2

Total $7,967.1 100.0 $281.9 100.0 3. 5

Note: percentages are based on whole numbers. Also, totals may not add
because of rounding. a Other direct loans are economic emergency and
recreation loans, which FSA no longer makes, and soil and water loans. b
Other guaranteed loans are economic emergency loans, which FSA no longer
guarantees.

Source: GAO?s analysis of information in FSA?s farm loan automated
databases.

3 Natural disaster emergency loans are inherently riskier than the other
types of farm loans that FSA makes because they are made to help farmers
recover from losses rather than to generate new income.

Page 5 GAO- 01- 732T Farm Loan Programs

In January 2001, we removed the farm loan program from our high- risk list
because (1) the financial condition of the program had improved and (2)
there had been improvements in lending and servicing policies that were
intended to reduce the risks associated with the farm loan programs. A
decade earlier, in 1990, we had identified FSA?s farm loan programs as high-
risk because of significant program problems primarily with the direct
loans. As we had reported in the 1980s, the farm loan programs had
experienced a high rate of defaults on repayments: billions of dollars of
losses had occurred and were likely to occur, and the Department had evolved
into a continuous source of subsidized credit for thousands of borrowers.
These problems occurred because of program policies- some of which were
congressionally directed- that contributed to financial risks and because
the Department?s field office officials failed to comply with existing loan
and property management standards. For example, the program?s policies
allowed borrowers who defaulted and caused losses on past farm loans to
obtain new loans and allowed borrowers to obtain new direct loans for
operating expenses without demonstrating their ability to pay their existing
debt. Also, field offices lending officials approved loans on the basis of
unrealistic estimates of production, income, and expenses and often failed
to verify borrowers? existing debts.

Since the mid- 1990s, USDA has addressed management problems, such as the
quality controls over loan- making and servicing, and various pieces of
legislation have had a significant impact on the operation of FSA?s farm
loan programs. Specifically, the 1996 Farm Bill made a variety of changes to
the lending and servicing policies of FSA that were intended to reduce the
risks associated with the farm loan programs. In particular, the 1996 Farm
Bill included provisions that (1) prohibit borrowers who are delinquent on
FSA direct or guaranteed farm loans from obtaining additional direct farm
operating loans, (2) generally prohibit borrowers whose past defaults
resulted in loan losses from obtaining new direct or guaranteed farm loans
(although an exception provides that a direct or guaranteed farm operating
loan for paying annual farm or ranch operating expenses may be made to a
borrower whose restructuring resulted in forgiving debt), and (3) limit
borrowers to one instance of debt forgiveness on direct loans.

The 1996 Farm Bill also requires borrowers to have or agree to obtain hazard
insurance on the property that they acquire with farm ownership and
operating loans, and requires applicants, as a condition for getting an
emergency disaster loan, to have had hazard insurance on property that was
damaged or destroyed. In addition, the 1996 Farm Bill provided direction for
many other aspects of FSA?s basic lending mission. For Farm Loan Programs

Remain Vulnerable to Loss, but High- Risk Status Is No Longer Merited

Page 6 GAO- 01- 732T Farm Loan Programs

example, the 1996 Farm Bill limited the length of time that FSA loan
assistance is available by providing that borrowers can receive direct farm
ownership loans during a 10- year period that starts when they first obtain
farm ownership loans and that borrowers can obtain direct farm operating
loans during a total of 7 years, which may be consecutive or nonconsecutive
years. The 1996 Farm Bill also enhanced the potential for direct loan
borrowers to obtain conventional credit by allowing a 95- percent guarantee
on loans made by commercial lenders to refinance the existing direct loans
that the borrowers have, up from the previous limit of 90 percent.

We concluded that these actions have helped generate continued improvements
in the portfolio in recent years. As of September 30, 2000, delinquent
borrowers held more that $1.8 billion (about 21 percent) of the outstanding
principal on direct loans. This compares with about $2.1 billion (23.5
percent) in September 1999, $2.4 billion (over 26 percent) in September
1998, and, $4.6 billion (about 41 percent) in September 1995. As figure 1
shows, the outstanding principal and the amounts owed by delinquent
borrowers on direct farm loans have declined each year since the end of
fiscal year 1995 and the enactment of the 1996 Farm Bill.

Page 7 GAO- 01- 732T Farm Loan Programs

Figure 1: Outstanding Principal and Amount Owed by Borrowers Who Were
Delinquent on Direct Farm Loans, End of Fiscal Years 1995 Through 2000

Note: The percentage of outstanding principal owed by delinquent borrowers
was as follows: 40.7 percent in 1995, 34.2 percent in 1996, 28. 2 percent in
1997, 26. 4 percent in 1998, 23. 5 percent in 1999, and 20.9 percent in
2000.

Source: GAO?s analysis of information in FSA?s farm loan automated
databases.

In addition, as figure 2 shows, while the total outstanding principal owed
on guaranteed farm loans has risen since 1995, the amount owed by borrowers
who were delinquent on guaranteed farm loans has remained relatively steady.

Page 8 GAO- 01- 732T Farm Loan Programs

Figure 2: Outstanding Principal and Amount Owed by Borrowers Who Were
Delinquent on Guaranteed Farm Loans, End of Fiscal Years 1995 Through 2000

Note: The amount and percentage of outstanding principal owed by delinquent
borrowers were as follows: $218 million, or 3.7 percent, in 1995; $280
million, or 4.4 percent, in 1996; $300 million, or 4.6 percent, in 1997;
$325 million, or 5.0 percent, in 1998; $363 million, or 5. 0 percent, in
1999; and $282 million, or 3. 5 percent, in 2000.

Source: GAO?s analysis of information in FSA?s farm loan automated
databases.

We believe that the improvements in part reflect actions that the Congress
and USDA have taken to address the underlying causes of the programs? past
weaknesses.

Although the programs? high- risk designation has been removed, we believe
that USDA and the Congress need to continue monitoring the loan portfolio
and the effects of the lending and servicing reforms, as well as any future
legislation, to ensure that improvements in the financial integrity of the
farm loan programs continue. This is particularly important since more
recent legislation has eased some lending restrictions that had been put in
place by the 1996 Farm Bill. First, Public Law 105- 277 (Oct. 21, 1998)
provides additional exceptions to the 1996 Farm Bill?s general

Page 9 GAO- 01- 732T Farm Loan Programs

prohibition of new loans to borrowers who caused FSA to incur loan losses.
Specifically, this act provides that a guarantee is only prohibited on a
loan to a borrower who caused loan losses (1) after April 4, 1996, the date
of the 1996 Farm Bill or (2) on more than three occasions on or before the
date of the 1996 Farm Bill. The act continued allowing direct and guaranteed
farm operating loans to restructured borrowers and also allows such loans to
borrowers who are current on payments under confirmed bankruptcy
reorganization plans. In addition, the act allows an emergency disaster loan
to be made to a borrower who (1) caused not more than one loan loss on or
before the date of the 1996 Farm Bill and (2) has not caused a loss after
the date of the 1996 Farm Bill. Furthermore, the act specifies that an
emergency disaster loan cannot be denied to a borrower who does not have
sufficient collateral to secure the loan if the borrower can show the
ability to repay the loan. Second, Public Law 106- 31 (May 21, 1999) removed
a loan- making provision that said that applicants for guaranteed loans
needed to show that their expected income would be sufficient to repay their
loans and also provide a margin to fund the replacement of capital items,
such as a tractor, should that become necessary. Third, Public Law 106- 224
specified that the limitation on the number of years in which borrowers can
receive farm operating loans- 7 years for direct loans and a total of 15
years for direct and guaranteed loans- would not be in effect from the date
of enactment (June 22, 2000) and until January 2003. Fourth, under Public
Law 106- 387 (Oct. 28, 2000) an emergency disaster loan can be made to a
poultry farmer to cover the loss of a chicken house on which the farmer did
not have hazard insurance at the time of the loss if certain conditions are
met. Since these provisions increase the risk of losses, their effects will
need close monitoring so that adjustments can be made if the integrity of
the loan programs comes under pressure.

Mr. Chairman, this concludes our formal statement. If you or other Members
of the Committee have any questions, we will be pleased to respond to them.

Page 10 GAO- 01- 732T Farm Loan Programs Contact and Acknowledgment

For future contacts regarding this testimony, please contact Lawrence J.
Dyckman on (202) 512- 3841. Individuals making key contributions to this
testimony and/ or to the reports on which it was based include Charles M.
Adams and Patrick J. Sweeney.

(360087)
*** End of document. ***