Debt Collection Improvement Act of 1996: Department of
Agriculture Faces Challenges Implementing Certain Key Provisions
(05-DEC-01, GAO-02-277T).
This testimony discusses debt collection initiatives of two major
components of the Department of Agriculture--the Rural Housing
Service (RHS) and the Farm Service Agency (FSA). Congress passed
the Debt Collection Improvement Act of 1996 which requires
agencies to (1) notify the Department of the Treasury of debts
delinquent over 180 days for purposes of administrative offset
against any amounts that might otherwise be due, and (2) refer
such debts to Treasury for centralized collection action. To
facilitate debt collection, the act authorizes agencies to
administratively garnish the wages of delinquent debtors on a
governmentwide basis. The majority of reported debt delinquent
over 180 days are being excluded by agencies from referral
requirements by exclusions allowed by the act or by Treasury.
Agency implementation of the act would have to improve if the
debt collection benefits were to be more fully realized. The
Financial Management Service is making steady progress in
collecting delinquent federal non-tax debt through the Treasury
Offset Program, a mandatory governmentwide debt collection
program that compares delinquent debtor data to federal payment
data. Agriculture and other agencies still have not utilized
administrative wage garnishment to collect delinquent non-tax
debt even though experts have testified that it can be an
extremely powerful debt collection tool. If the government is
going to make significant progress in collecting the billions of
dollars of delinquent non-tax debt, expedient and effective
implementation of the debt collection provisions of the act must
be given a high priority by agencies.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-277T
ACCNO: A02537
TITLE: Debt Collection Improvement Act of 1996: Department of
Agriculture Faces Challenges Implementing Certain Key Provisions
DATE: 12/05/2001
SUBJECT: Debt collection
Delinquent loans
Interagency relations
Reporting requirements
FSA Program Loan Accounting System
Treasury Offset Program
Farm Loan Program Information Delivery
System
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GAO-02-277T
Testimony Before the Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, Committee on Government Reform,
House of Representatives
United States General Accounting Office
GAO For Release on Delivery Expected at 10 a. m. Wednesday, December 5, 2001
DEBT COLLECTION
IMPROVEMENT ACT OF 1996
Department of Agriculture Faces Challenges Implementing Certain Key
Provisions
Statement of Gary T. Engel Director, Financial Management and Assurance
GAO- 02- 277T
Page 1 GAO- 02- 277T
Mr. Chairman and Members of the Subcommittee: I appreciate the opportunity
to be here today to discuss debt collection initiatives of two major
components of the Department of Agriculture- the Rural Housing Service (RHS)
and the Farm Service Agency (FSA). As you well know, collecting delinquent
debt has historically presented major challenges for federal agencies. It is
with this backdrop that the Congress, with a key role played by this
Subcommittee, passed the Debt Collection Improvement Act of 1996 (DCIA).
Among other things, DCIA requires agencies to (1) notify the Department of
the Treasury (Treasury) of debts delinquent over 180 days for purposes of
administrative offset against any amounts that might otherwise be due to
those persons or entities, and (2) refer such debts to Treasury for
centralized collection action known as cross- servicing. In addition, to
facilitate debt collection, the act authorizes agencies to administratively
garnish the wages of delinquent debtors.
While my testimony today is limited primarily to our work related to RHS and
FSA, our audit results are based on a larger body of work, on which I
testified before this Subcommittee on October 10, 2001. 1 That work assessed
the progress of selected agencies in referring debt for administrative
offset and cross- servicing and in implementing certain other key provisions
of DCIA- administrative wage garnishment (AWG) and the debtor bar provision.
In preparation for this testimony, we reviewed the Department of
Agriculture?s (Agriculture) response to this Subcommittee?s October 16,
2001, letter containing questions concerning the agencies? progress in
referring delinquent debt to Treasury?s Financial Management Service (FMS)
and mitigating any barriers to complete and timely referrals. This updating
work was done in accordance with U. S. generally accepted government
auditing standards.
Today, I will discuss (1) difficulties RHS and FSA have experienced
identifying and referring eligible debts to FMS, (2) obstacles that have
hampered their prompt referral of eligible debts, and (3) whether exclusions
from referral requirements were consistent with established criteria. In
addition, my testimony will cover Agriculture?s actions and plans in context
with information dealing with the extent to which eight other large Chief
Financial Officers (CFO) Act agencies and FMS use or plan to use AWG to
collect delinquent federal non- tax debt.
1 Debt Collection Improvement Act of 1996: Agencies Face Challenges
Implementing Certain Key Provisions (GAO- 02- 61T, Oct. 10, 2001).
Page 2 GAO- 02- 277T
First, a few overall comments about DCIA implementation. We testified before
this Subcommittee in June 2000 that, although DCIA was enacted in April
1996, the act?s cross- servicing provision still had not been fully
implemented. 2 We emphasized that on a governmentwide basis, the vast
majority of reported debt delinquent over 180 days was being excluded by
agencies from referral requirements under exclusions allowed by DCIA or
Treasury. However, we cautioned that the reliability of the amounts reported
as excluded was not being independently verified. We also stressed that
agencies were not promptly referring all eligible debts to FMS. The picture
left with your Subcommittee was that agency implementation would have to
improve vastly if the debt collection benefits of DCIA were to be more fully
realized.
On the other hand, I am pleased to report that FMS, in partnership with
agencies, is making steady progress in collecting delinquent federal nontax
debt through the Treasury Offset Program (TOP). As you know, TOP is a
mandatory governmentwide debt collection program that compares delinquent
debtor data to certain federal payment data. Agencies are required to refer
eligible delinquent debt to TOP as soon as it is 180 days delinquent, but
may, at their discretion, refer it sooner. When a delinquent debtor record
matches a payment record, TOP recovers all or a portion of the delinquent
debt by offsetting some or all of the federal payment scheduled to be issued
to the debtor. During each of the last 3 years, FMS has reported collecting
over $1 billion of such debt with TOP by offsetting tax refund payments. Tax
refund offsets have been FMS? most effective means of debt collection and
collections have increased, in part, as a result of systems changes the
agency implemented. For example, the TOP system can offset against both the
primary and secondary taxpayer, where the previous tax refund system could
only offset against the primary taxpayer. In addition, the TOP system can
accept new debts or increased debt balances all during the year, whereas the
previous tax refund system could only accept them at the beginning of the
tax season.
While there has been important progress, our follow- up work at selected
agencies, including Agriculture, over the past several months has not
allayed our concerns about the priority agencies have placed on implementing
DCIA. As I will highlight today, Agriculture has not yet taken
2 Debt Collection: Treasury Faces Challenges in Implementing Its Cross-
Servicing Initiative (GAO/ T- AIMD- 00- 213, June 8, 2000).
Page 3 GAO- 02- 277T
effective actions to ensure that all eligible delinquent debt is promptly
referred to FMS for collection action. For example,
As of September 30, 2000, RHS reported that it had referred to TOP $201
million of direct single- family- housing (SFH) loans but had not referred
any amounts to FMS for cross- servicing, primarily due to systems
limitations. According to RHS officials, the agency will refer 100 to 200
loans a month to FMS until the systems limitations are rectified. Also, RHS?
reported delinquent direct SFH loans eligible for TOP might have been
understated by about $348 million because it did not report all amounts that
were due and payable.
FSA did not have an adequate process or sufficient controls to adequately
identify and report direct farm loans eligible for referral to FMS as of
September 30, 2000. In addition, a large portion of the approximately $400
million of delinquent direct farm loans that became eligible for TOP during
calendar year 2000 likely was not promptly referred because the agency
refers debts to TOP only once annually, during December. Further, FSA did
not refer co- debtors for the $934 million of delinquent farm loans
previously referred to TOP because of systems limitations that had existed
for years. Moreover, the agency had referred only $38 million of direct farm
loans to FMS for cross- servicing because it suspended crossservicing
referrals pending development and implementation of its new cross- servicing
policy. According to an Agriculture official, the first referral to FMS
under this new policy was made in September 2001.
RHS and FSA have not referred to FMS for collection action any losses on
their guaranteed SFH and farm loans, respectively, even though through
September 30, 2000, they have experienced losses of about $132 million and
about $293 million, respectively, on such loans since the enactment of DCIA.
Also, Agriculture and other agencies still have not utilized AWG as
authorized by DCIA to collect delinquent non- tax debt even though experts
have testified before this Subcommittee that AWG can potentially be an
extremely powerful debt collection tool.
As stated in my testimony on October 10, 2001, 3 if the government is going
to make significant progress in collecting the billions of dollars of
3 GAO- 02- 61T, Oct. 10, 2001.
Page 4 GAO- 02- 277T
delinquent non- tax debt, expedient and effective implementation of the debt
collection provisions of DCIA must be given a high priority by agencies.
This has not been the case at the agencies we reviewed. In many cases, the
agencies continue to show extended milestones for needed corrective actions
years in the future, even though substantial amounts of eligible delinquent
debt have still not been referred.
RHS administers a direct SFH loan program to help low- income individuals or
households purchase homes in rural areas. As of September 30, 2000- the most
recent fiscal year end for which agency- certified reporting exists for
Agriculture- RHS reported having about $17 billion outstanding in direct SFH
loans. As shown in table 1, RHS reported $383 million of direct SFH loans
over 180 days delinquent, including debts classified as Currently Not
Collectible (CNC) on its Treasury Report on Receivables Due From the Public
(TROR) as of September 30, 2000. 4
Table 1: RHS? Direct SFH Delinquent Loans as of September 30, 2000 Debt
amounts (in millions of dollars)
Debts more than 180 days delinquent, including debts in CNC $383 Less:
exclusions allowed by DCIA a 182 Debts eligible for Treasury offset 201
Debts referred to Treasury for offset 201 Debts referred to Treasury for
cross- servicing 0 a Exclusions were for bankruptcy, forbearance/ appeals,
and foreclosure.
Source: TROR fourth quarter 2000 (September 30, 2000).
RHS excluded $182 million of this delinquent debt from referral to FMS for
TOP and cross- servicing. In addition, RHS had not referred any debts to FMS
for cross- servicing as of September 30, 2000, based, in part, on an
exemption proposal which RHS stated, in its TROR as of the same date, had
been approved by Treasury. However, Treasury officials told us that Treasury
never approved a proposal to exempt RHS loans from crossservicing.
Accordingly, opportunities to collect these loans through Treasury?s cross-
servicing program are being missed.
4 CNC debts are debts the agency has written off for accounting purposes but
has not discharged. Collection action can still be taken on such debts. RHS?
Direct SingleFamily-
Housing Loan Program
Page 5 GAO- 02- 277T
DCIA requires federal agencies to refer all legally enforceable and eligible
non- tax debts that are more than 180 days delinquent to Treasury for
collection through administrative offset and cross- servicing. We found that
RHS did not maintain supporting documentation for direct SFH loans it
excluded from such referral as of September 30, 2000. Consequently, we were
not able to determine whether the agency?s exclusion of $182 million of
delinquent debt was based on relevant legislative and regulatory criteria.
FMS officials told us that it is their expectation that agencies would
retain the applicable data needed to justify not referring delinquent debt
for collection action. Further, the Comptroller General?s Standards for
Internal Controls in the Federal Government states that all transactions and
other significant events need to be clearly documented and that the
documentation should be readily available for examination. 5
According to RHS officials, since implementing a new automated centralized
loan servicing system in fiscal year 1997, RHS has been unable to readily
identify direct SFH loans that are eligible for referral to FMS for cross-
servicing. Essentially, the system does not contain sufficient data to
differentiate loans eligible for cross- servicing from those that are not.
Although RHS plans system enhancements for the third quarter of fiscal year
2002, which the agency believes will facilitate loan identification for
cross- servicing, RHS officials advised us that relatively few referrals to
FMS will likely be made in the near term. While we were performing our
fieldwork, RHS began an interim process to manually identify such loans
eligible for cross- servicing. According to RHS? debt referral plan, because
the interim process is tedious and labor intensive, only about 100 to 200
loans were to be referred per month to Treasury, beginning in May 2001. RHS
officials said that all direct SFH loans eligible for TOP will have to be
reviewed for cross- servicing eligibility. RHS reported 23,032 direct SFH
loans eligible for TOP as of September 30, 2000. The agency intends to refer
about 30 percent of eligible direct SFH loans for cross- servicing in fiscal
year 2002.
According to RHS officials, nothing had been done prior to our review to
manually identify delinquent direct SFH loans for referral to FMS for cross-
servicing because the agency had requested a Treasury exemption
5 Standards for Internal Control in the Federal Government (GAO/ AIMD- 00-
21. 3. 1, Nov. 1999). Support for Not Referring
a Significant Amount of Delinquent Direct SFH Loans Not Maintained
Systems Limitations Hampered Referral Activity
Exemption Request Denied
Page 6 GAO- 02- 277T
from cross- servicing for direct loans made under the SFH loan program. RHS
had requested that it be allowed to continue to internally service the loans
for up to 1 year after liquidation of the collateral, which, in some cases,
could be years after the loans became delinquent. Treasury officials told us
that Treasury had not approved the request, either formally or informally,
and stated that Treasury discouraged RHS from making the request, which was
not submitted to Treasury until November 2000. Treasury formally denied RHS?
exemption request for the direct SFH loan program on May 14, 2001. The
declination was based, in part, on the fact that similar loans were being
referred for cross- servicing by other agencies and RHS had not identified
any new or unique collection tools applicable to direct SFH loans.
When a debtor becomes delinquent 91 days on an installment payment for a
direct SFH loan, RHS notifies the debtor via certified mail that the entire
debt balance is accelerated and is due and payable. As shown in table 1, RHS
reported $201 million of direct SFH loans as eligible for TOP as of
September 30, 2000. However, this amount may have been understated by about
$348 million because it only included the delinquent installment portion of
the loans. According to FMS, the entire accelerated balance of the debt
should be reported as delinquent and, absent any exclusions allowed by DCIA
or Treasury, should be reported as eligible for referral to FMS for
collection as well.
FSA provides, among other things, temporary credit to farmers and ranchers
who are high- risk borrowers and are unable to obtain commercial credit at
reasonable rates and terms. FSA reported having about $8.7 billion in direct
farm loans as of September 30, 2000, and as shown in table 2, the agency
reported about $1.7 billion of direct farm loans over 180 days delinquent,
including debts in CNC status as of September 30, 2000. RHS May Have
Significantly Understated Direct SFH Loans Eligible for Referral
FSA? s Direct Farm Loan Program
Page 7 GAO- 02- 277T
Table 2: FSA?s Delinquent Direct Farm Loans as of September 30, 2000 Debt
amounts (in millions of dollars)
Debts more than 180 days delinquent, including debts in CNC $1,666 Less:
exclusions allowed by DCIA a 732 Debts eligible for Treasury offset b 934
Debts referred to Treasury for offset 934 Debts referred to Treasury for
cross- servicing 38 a The vast majority of the reported exclusions were for
bankruptcy, forbearance/ appeals, foreclosure, and Department of Justice
(DOJ)/ litigation. b In addition, other exclusions from referrals to FMS for
cross- servicing, including internal offset, were
reported by FSA as of September 30, 2000. Source: TROR fourth quarter 2000
(September 30, 2000).
FSA excluded substantial amounts of this debt from referral to FMS for TOP
and cross- servicing. In addition, FSA officials told us that only $38
million was referred to FMS for cross- servicing as of September 30, 2000,
because FSA suspended all cross- servicing referrals in April 2000 pending
development and implementation of new cross- servicing guidelines for the
agency.
FSA did not have a process or sufficient controls in place to adequately
identify direct farm loans eligible for referral to FMS. Certain types of
debts were automatically excluded from referral without any review for
eligibility. In other cases, FSA?s Program Loan Accounting System did not
contain information from the detailed loan files located at the FSA field
offices that would be key to determining eligibility for referral. In
addition, FSA did not have any monitoring or review procedures in place to
help ensure that FSA personnel routinely updated the detailed debt files.
Consequently, amounts of direct farm loans FSA reported to Treasury as
eligible for referral were not accurate.
Excluded amounts for bankruptcy, forbearance/ appeals, foreclosure, and
Department of Justice (DOJ)/ litigation totaled about $694 million, or about
95 percent of the $732 million that was excluded from referral to FMS for
TOP and cross- servicing. Of this amount, $295 million was for DOJ/
litigation and was comprised of judgment debts. According to FSA officials,
deficiency judgments- court judgments requiring payment of a sum certain to
the United States- are eligible for TOP and should be referred to FMS.
However, FSA?s Finance Office in St. Louis automatically excluded all
judgment debts for direct farm loans from referral to FMS Effective Process
and
Controls Lacking for Determining Eligibility for Referral of Direct Farm
Loans
Page 8 GAO- 02- 277T
because automated system limitations precluded staff from identifying
deficiency judgments. Our inquiries caused FSA officials to initiate a
special project in May 2001 to identify all deficiency judgment debts for
direct farm loans so that such debts could be referred to FMS.
Determinations as to whether direct farm loans are in bankruptcy,
forbearance/ appeals, or foreclosure and, therefore, excluded from referral
to FMS, are made by FSA personnel in numerous FSA field offices across the
country. Personnel in the FSA field offices we visited did not routinely
update the eligibility status of farm loans in FSA?s Program Loan Accounting
System, as was evident by the selected excluded loans we reviewed. Using
statistical sampling, we selected and reviewed supporting documents to
determine whether farm loans that selected FSA field offices in California,
Louisiana, Oklahoma, and Texas had excluded from referral to FMS were
consistent with established criteria dealing with bankruptcy, forbearance/
appeals, foreclosure, and DOJ/ litigation. 6 Based on the results of our
sample, we estimate that about 575, or approximately one- half of the
excluded loans in the four selected states, had been inappropriately placed
in exclusion categories by FSA as of September 30, 2000. 7 Because of these
numerous errors, we did not test other reported exclusions from referral to
FMS for cross- servicing, such as loans being internally offset.
One of the most frequently identified inappropriate exclusions pertained to
amounts discharged in bankruptcy, which should not have been included in
delinquent debt. Fifty- two bankruptcies that we reviewed as part of our
sample had been discharged in bankruptcy court prior to September 30, 2000.
In fact, many had been discharged several years prior to that date. For
example, one loan with a balance due of about $325,000 was reported as a
delinquent debt over 180 days and excluded from referral requirements
because of bankruptcy. However, a review of the loan file at the FSA field
office showed that a bankruptcy court discharged the debt in 1986 and,
therefore, the debt should not have been included in either the delinquent
debt or exclusion amounts reported to Treasury as of September 30, 2000.
6 Field offices in these four states serviced about $272 million, or about
39 percent, of the total debts excluded from referral to FMS as of September
30, 2000, for bankruptcy, forbearance/ appeals, foreclosure, or DOJ/
litigation.
7 We estimate that 48. 5 percent + 15. 7 percent of the population were
inappropriately reported as exclusions from referral to TOP. When projecting
these errors to the population of 1,187 loans, we are 95 percent confident
that the errors in the population are between 389 and 761 loans.
Page 9 GAO- 02- 277T
According to Farm Loan Managers in some of the FSA field offices we visited,
they have not written off many direct farm loans discharged in bankruptcy
because making new loans has been a higher- priority use of their resources.
In addition, FSA did not provide sufficient oversight to help ensure that
field office personnel adequately tracked the status of discharged
bankruptcies and updated the loan files and debt records in the Program Loan
Accounting System. Also, it is important to note that delays in promptly
writing off discharged bankruptcies not only distort the TROR for debt
management and credit policy purposes, but also distort key financial
indicators such as receivables, total delinquencies, and loan loss data.
This makes the information misleading for budget and management decisions
and oversight. Aside from erroneously inflating reported receivables and
delinquent loans, failure to process loan write- offs delays reporting
closed- out debt amounts to the Internal Revenue Service as income to the
debtor. 8
As previously mentioned, only $38 million of direct farm loans were reported
by FSA as having been referred for cross- servicing because the agency
suspended such referrals in April 2000 pending development and
implementation of a new policy to refer to FMS for cross- servicing only
debts where the 6- year statute of limitations has not expired. FSA issued
revised guidelines in July 2001 to incorporate the 6- year statute of
limitations, and the agency is now reviewing loans at over 1,000 FSA field
offices to determine eligibility for referral to Treasury under the new
policy. According to an Agriculture official, the first referral to FMS
under this new policy was made in September 2001.
According to FSA officials, FSA decided to adopt the new policy because it
believed that FMS informed them that accounts for which the 6- year statute
of limitations had expired should not be referred for crossservicing.
However, FMS officials told us that FMS had not provided such guidance to
FSA. FMS officials emphasized that FMS will accept debts that are older than
6 years because, although the debts cannot be referred to DOJ for
litigation, collection can still be attempted through other debt collection
tools such as referral to private collection agencies.
8 The Federal Claims Collection Standards- which were last updated in
November 2000- and OMB Circular A- 129 both require agencies, in most cases,
to report closed- out debt amounts to the Internal Revenue Service as income
to the debtor. Referrals of Direct Farm
Loans for Cross- Servicing Suspended
Page 10 GAO- 02- 277T
Even though FSA reported having referred $934 million of direct farm loans
to FMS for TOP as of September 30, 2000, the agency has lost and continues
to lose opportunities for maximizing collections on this debt because it
does not refer co- debtors. According to FSA officials, the vast majority of
direct farm loans have co- debtors, who are also liable for loan repayment.
However, FSA?s automated loan system cannot record more than one debtor
because the system modifications necessary to accept Taxpayer Identification
Numbers (TINs) for multiple debtors have not been made. According to an FSA
official, the need to have co- debtor information in the system to
facilitate debt collection was initially determined in 1986. However, we
were told that to date, higher- priority systems projects have precluded FSA
from completing the necessary systems enhancements to allow the system to
accept more than one TIN per debt. In other words, although FSA recognized
years ago the need to take action, the agency has not considered this to be
a high enough priority. According to FSA officials, FSA has now incorporated
this requirement in the new Farm Loan Program Information Delivery System
scheduled for implementation in fiscal year 2005.
According to data provided by FSA officials, about $400 million of new
delinquent debt became eligible for TOP during calendar year 2000. Although
FSA officials stated that the debts became eligible relatively evenly
throughout the year, debts eligible for TOP are referred by FSA only once
annually, during December. Consequently, a large portion of the $400 million
of debt likely was not promptly referred when it became eligible. As we have
previously testified, industry statistics have shown that the likelihood of
recovering amounts owed decreases dramatically with the age of delinquency
of the debt. 9 Thus, the old adage that ?time is money? is very relevant for
referrals of debts to FMS for collection action. FSA officials told us that
the agency agrees that quarterly referrals could enhance possible collection
of delinquent debts by getting them to Treasury earlier and has plans to
start a quarterly referral process in fiscal year 2003.
9 GAO/ T- AIMD- 00- 213, June 8, 2000. Co- Debtors Not Referred
for TOP Eligible Debt Not Promptly Referred to TOP
Page 11 GAO- 02- 277T
Since DCIA was enacted in April 1996, RHS and FSA have also missed
opportunities to potentially collect millions of dollars related to losses
on guaranteed loans. As of September 30, 2000, neither RHS nor FSA treated
such losses resulting from the SFH program and the Farm Loan Program,
respectively, as non- tax federal debts. Consequently, neither agency had
policies and procedures in place to refer such losses to Treasury for
collection through FMS? TOP or cross- servicing programs.
According to RHS and FSA officials and reports provided by the agencies,
guaranteed SFH loans and farm loans, as well as related losses, have been
significant since the inception of the guaranteed programs. The RHS
guaranteed SFH program has been expanding in recent years. The outstanding
principal due on the guaranteed SFH portfolio grew from about $3 billion in
fiscal year 1996 to over $10 billion as of September 30, 2000. Through
September 30, 2000, RHS had paid out losses of about $132 million on the
guaranteed SFH program since fiscal year 1996. The outstanding principal due
on guaranteed farm loans was about $8 billion as of September 30, 2000.
Through September 30, 2000, FSA had paid out about $293 million in losses
since fiscal year 1996.
In January 1999 and June 2000, Agriculture?s Office of Inspector General
(OIG) first reported that RHS? and FSA?s guaranteed losses, respectively,
were not being referred to Treasury for collection. The OIG recommended that
both agencies recognize the losses as federal debt and begin referring such
debt to FMS for collection.
Although RHS has recently initiated action to begin developing policies for
referring losses on guaranteed loans to FMS for collection action in the
future, its efforts to make necessary regulatory and policy changes have not
been fully completed, resulting in continuing missed opportunities to
potentially collect losses on guaranteed loans. FSA, on the other hand, has
recently initiated action to begin implementing new policies for referring
losses on all new guaranteed loans to FMS for collection action. Because
these guaranteed loan programs are significant to RHS and FSA, the agencies?
development and implementation of policies and procedures to promptly refer
eligible amounts to Treasury for collection action are critical. RHS and FSA
Have
Not Referred Losses on Guaranteed Loans to FMS
Page 12 GAO- 02- 277T
DCIA authorizes both federal agencies that administer programs that give
rise to delinquent non- tax debts and federal agencies that pursue recovery
of such debts, such as FMS, to administratively garnish up to 15 percent of
a debtor?s disposable pay until the debt is fully recovered. 10 Agriculture
and the other eight CFO Act agencies we surveyed had not yet used AWG as
authorized by DCIA to collect delinquent non- tax debt as of the date of
completion of our fieldwork, over 5 years after DCIA went into effect. Eight
of these nine agencies, including Agriculture, have expressed the intent to
implement AWG to varying degrees over the next 5 years. Given the possible
added collection leverage afforded through the availability and use of AWG,
timely implementation would seem prudent. As of September 30, 2000, the
eight agencies we surveyed that intend to implement AWG reported holding a
total of about $23 billion in consumer debt, 11 which typically consists of
debts by individuals, many of whom are employed. 12 This is not to imply
that AWG could be used to collect all such consumer debt because
circumstances such as bankruptcy or appeals could limit the application of
this debt collection tool.
Agencies, including Agriculture, identified various reasons for the delay in
implementing AWG, including the need to focus priorities on the mandatory
provisions of DCIA and develop the required regulations or administrative
hearing procedures to implement AWG. This is disappointing in light of the
large population in the country?s labor force and the fact that debt
collection experts testified before this Subcommittee in 1995, prior to the
enactment of DCIA, that AWG can be an extremely powerful debt collection
tool, as the mere threat of AWG is often enough to motivate debtor
repayment.
10 Disposable pay means that part of the debtor?s compensation (including,
but not limited to, salary, bonuses, commissions, and vacation pay) from an
employer remaining after the deduction of health insurance premiums and any
amounts required by law to be withheld.
11 The agencies held over $25 billion in debts classified as CNC, which were
not broken out by consumer and commercial debts on the agencies? TRORs.
Although CNC debts are written off by the agencies for accounting purposes,
AWG could be applicable to significant amounts of such debts.
12 Consumer debt is more likely to be subject to AWG because the debtor is
often an individual who is employed. Certain commercial debts could involve
individual debtors, guarantors, or co- debtors, and AWG may be applicable to
such debtors. Agriculture and Most
Other Agencies Have Not Used AWG to Collect Delinquent Debt
Page 13 GAO- 02- 277T
In responding to our survey, Agriculture said it would rely exclusively on
FMS to implement AWG as part of cross- servicing, including identifying the
debtors? employers and sending notices and garnishment orders. At the time
of the completion of our fieldwork, Agriculture had not established specific
dates for implementing AWG and was among the five surveyed agencies
intending to implement AWG that did not have a written implementation plan.
Agriculture subsequently stated that it planned to implement AWG during
fiscal year 2002. Given the extent of agency or contractor effort needed to
carefully administer such processes, we believe agencies will need fairly
detailed implementation plans. These plans should include a clear
description of and strategy for how the agency will actually perform AWG and
when AWG will be fully implemented. The plans should cover the types of
debts subject to AWG and the policies and procedures for administering AWG.
Also, agencies should identify the processes they will use to conduct
hearings for debtor appeals. Consequently, it is not presently clear when
Agriculture will be able to fully incorporate AWG into its debt collection
processes.
FMS has been working with its private collection agency contractors to
incorporate AWG into its cross- servicing program. Although FMS?
incorporation of AWG into the cross- servicing program would undoubtedly
improve collection success and make the FMS collection program more
comprehensive, certain factors could limit its use. An important
consideration is that much of the delinquent debt reported by agencies as
eligible for cross- servicing is not currently being promptly referred to
FMS. For example, the four agencies we surveyed that plan to rely
exclusively on FMS for AWG implementation, including Agriculture, together
reported having referred only $288 million of about $690 million of all
types of debt that were reported as eligible for cross- servicing as of
September 30, 2000. 13
Although implementation of AWG under DCIA is still largely in its infancy,
the extent to which the larger CFO Act agencies, such as Agriculture, refer
all eligible delinquent debt in a timely manner will be a major factor in
FMS? ability to make AWG fully successful. As discussed previously, RHS and
FSA have not identified and promptly sent debts to FMS for cross
13 According to FMS? Performance Summary Report for July 2001, only 63
percent of debt reported by federal agencies as eligible for cross-
servicing governmentwide as of September 30, 2000, had been referred to FMS.
Agriculture?s
Implementation of AWG Certain Factors Could Limit FMS? Use of AWG
Page 14 GAO- 02- 277T
servicing. Consequently, if AWG were to have been attempted using only those
delinquent debts reported as referred for cross- servicing for fiscal year
2000, substantial amounts of delinquent debt would not have been subject to
this debt collection tool.
The ability to efficiently handle requests for hearings will also be
important. FMS has assigned responsibility for holding AWG hearings to the
agencies that use AWG as a collection tool- whether in- house, through FMS,
or both. Therefore, these agencies need to develop and acquire the capacity
to manage the hearings process expediently.
In summary, as we have discussed, Agriculture, along with other agencies,
has not demonstrated a sense of urgency in integrating certain provisions of
DCIA into its debt collection processes. Challenges lie ahead for
Agriculture to successfully implement such provisions of the act. As a
result, until these provisions are fully implemented, Agriculture will
continue to miss opportunities to collect millions of dollars of delinquent
federal non- tax debt. To assist in addressing such challenges, we will be
separately providing recommended actions to Agriculture.
Mr. Chairman, this concludes my prepared statement. I would be pleased to
respond to any questions you or other Members of the Subcommittee may have.
For information about this testimony, please contact Gary T. Engel at (202)
512- 3406. Major contributors to this testimony include Arthur W. Brouk,
Richard T. Cambosos, Michael S. LaForge, and Kenneth R. Rupar. Contacts and
Acknowledgments
(191020)
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