Debt Collection Improvement Act of 1996: Department of		 
Agriculture's Rural Housing Service Has Not Yet Fully Implemented
Certain Key Provisions (28-FEB-02, GAO-02-308). 		 
                                                                 
The Debt Collection Improvement Act of 1996 seeks to maximize the
collection of billions of dollars of nontax delinquent debt owed 
to the federal government. The act requires agencies to  refer	 
eligible debts delinquent more than 180 days to the Department of
the Treasury for payment offset and to Treasury or a		 
Treasury-designated debt collection center for cross-servicing.  
The Treasury Offset Program, includes the offset of benefit	 
payments, vendor payments, and tax refunds. Cross-servicing	 
involves locating debtors, issuing demand letters, and referring 
debts to private collection agencies. The Rural Housing Service  
(RHS) has initiatives to ensure the timely referral of all	 
delinquent debt. However, the agency's failure to make the act a 
priority has left key provisions of the legislation unimplemented
and severely reduced collection opportunities. The agency had	 
referred no direct single-family housing (SFH) loans to the	 
Financial Management Service for cross-servicing. Three major	 
factors delayed implementation. First, RHS's loan-servicing	 
system had not incorporated key features necessary to implement  
the act's referral provisions. Second, RHS did not refer any	 
debts for cross-servicing while pursuing an exemption from	 
Treasury. Third, amounts reported as delinquent and eligible for 
consideration for referral were materially understated. RHS had  
not kept the documentation needed to independently verify the	 
accuracy and validity of the exclusion amounts in its certified  
fiscal year 2000 year-end report. Accordingly, GAO was unable to 
determine whether RHS had appropriately excluded $182 million of 
delinquent loans from referral for offset and for cross servicing
as of September 2000.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-308 					        
    ACCNO:   A02839						        
  TITLE:     Debt Collection Improvement Act of 1996: Department of   
Agriculture's Rural Housing Service Has Not Yet Fully Implemented
Certain Key Provisions						 
     DATE:   02/28/2002 
  SUBJECT:   Debt collection					 
	     Delinquent loans					 
	     Internal controls					 
	     Performance measures				 
	     Reporting requirements				 
	     Treasury Offset Program				 

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GAO-02-308
     
United States General Accounting Office

GAO Report to the Chairman, Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, Committee on Government Reform,
House of Representatives

February 2002

DEBT COLLECTION IMPROVEMENT ACT OF 1996

Department of Agriculture's Rural Housing Service Has Not Yet Fully
Implemented Certain Key Provisions

                                      a

GAO-02-308

Contents

Letter

Results in Brief
Background
Objectives, Scope, and Methodology
RHS Has Referred a Minimal Amount of Delinquent Direct SFH

Loans for Cross-Servicing
Several Obstacles Have Impeded RHS's Implementation of DCIA
Referral Requirements
RHS Did Not Maintain Documentary Support for Excluding

Delinquent Debts
Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

1 2 3 4

5

6

11 11 12 12

Appendix

Appendix I: Comments from Rural Development 16
GAO Comments 21

Table Table 1: RHS's Direct SFH Loans Delinquent as of September 30,
2000

A

United States General Accounting Office Washington, D.C. 20548

February 28, 2002

The Honorable Stephen Horn

Chairman

Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations Committee on Government Reform House of
Representatives

Dear Mr. Chairman:

On October 10, 2001, we testified before your subcommittee on selected
federal agencies' implementation of certain key provisions of the Debt
Collection Improvement Act (DCIA) of 1996.1 That testimony addressed
requirements to refer older delinquent debt to the Department of the
Treasury for offset against amounts the government might owe the debtors and
for additional collection action at Treasury's central debt-collection
facility, operated by the Financial Management Service (FMS). Our more
recent testimony, in early December 2001, focused on progress in this area
by two Department of Agriculture agencies-the Rural Housing Service (RHS)
and the Farm Service Agency (FSA).2

One of the major purposes of DCIA is to maximize collection of billions of
dollars of nontax delinquent debt owed to the federal government. Toward
this end, DCIA requires that agencies refer eligible debts delinquent more
than 180 days that they have been unable to collect to Treasury for payment
offset and to Treasury or a Treasury-designated debt collection center for
cross-servicing. Treasury performs payment offset through its Treasury
Offset Program (TOP), which includes the offset of certain benefit payments,
vendor payments, and tax refunds. Cross-servicing involves such actions as
locating debtors, issuing demand letters, and referring debts to private
collection agencies.

1U.S. General Accounting Office, Debt Collection Improvement Act of 1996:
Agencies Face Challenges Implementing Certain Key Provisions, GAO-02-61T
(Washington, D.C.: Oct. 10, 2001).

2U.S. General Accounting Office, Debt Collection Improvement Act of 1996:
Department of Agriculture Faces Challenges Implementing Certain Key
Provisions, GAO-02-277T (Washington, D.C.: Dec. 5, 2001).

The purpose of this report is to expand on the information provided in our
December 2001 testimony regarding RHS's progress and to offer our
recommendations for improving the agency's implementation of the
debt-referral provisions of DCIA. As you know, our prior reports have shown
that agencies have been slow to implement the referral requirements of
DCIA.3 Our testimonies referred to above offered an overview of agencies'
progress during fiscal year 2000 and fiscal year 2001 to the extent that
data were available and addressed your request for information. For this
report, we looked at whether (1) RHS was promptly referring eligible
single-family housing (SFH) loans to Treasury's FMS for collection action,
(2) any obstacles were hampering RHS from referring eligible SFH loans to
FMS, and (3) RHS was appropriately using exclusions from referral
requirements.

Results in Brief RHS has ongoing initiatives to enhance its capacity to
timely refer all delinquent debt. However, the agency's failure to make DCIA
a priority since its enactment in 1996 has left key provisions of the act
not yet implemented and severely reduced opportunities for collection as
contemplated by DCIA. As of September 30, 2000, RHS reported that it had
referred about $201 million of delinquent direct SFH loans to TOP for
offset. The agency had referred virtually no direct SFH loans to FMS for
cross-servicing, however.

We identified three major factors that were delaying implementation of an
effective and complete debt-referral process. First, RHS's loan-servicing
system had not been modified to incorporate certain key features needed to
effectively implement the referral provisions in DCIA. Because of these
limitations, the system could not identify eligible loans for referral for
cross-servicing. Second, RHS did not refer any debts for cross-servicing
while pursuing an exemption from Treasury. Although Treasury discouraged the
exemption request and ultimately rejected it, RHS referred no delinquent
direct SFH loans for cross-servicing for the extended period during which
Treasury considered the request. Third, our work showed that amounts
reported as delinquent and therefore eligible for consideration for referral
were materially understated. In particular, RHS

3U.S. General Accounting Office, Debt Collection: Treasury Faces Challenges
in Implementing Its Cross-Servicing Initiative, GAO/AIMD-00-234 (Washington,
D.C.: Aug. 4, 2000), and U.S. General Accounting Office, Medicare: HCFA
Could Do More to Identify and Collect Overpayments, GAO/HEHS/AIMD-00-304
(Washington, D.C.: Sept. 7, 2000).

had included only the delinquent installment portion of direct SFH loans on
reports to Treasury rather than the entire loan balance, which under RHS
policy becomes due and payable when an installment payment on a direct SFH
loan is delinquent more than 90 days. RHS also had not taken steps to
recognize the losses that it paid on SFH loans to guaranteed lenders as
federal debt and could not apply DCIA debt collection remedies to them.

Regarding the accuracy of delinquent loan balances excluded from referral,
RHS had not retained the necessary documentation to enable independent
verification of the accuracy and validity of the exclusion amounts in RHS's
certified fiscal year 2000 year-end report. Accordingly, we were unable to
determine whether RHS had appropriately excluded about $182 million of
delinquent SFH loans from referral for offset through TOP and for
cross-servicing as of September 2000.

We are recommending that RHS take several actions to enhance the scope and
improve the timeliness of referrals of delinquent debt under DCIA.

Agriculture's Rural Development mission area, which includes RHS, stated in
its comments on the report that RHS had implemented or was in the process of
implementing three of the four recommendations in this report. Rural
Development disagreed with our recommendation to report the entire
accelerated balance of delinquent direct SFH loans to FMS as delinquent
debt, and, absent any allowable exclusions, as debt eligible for referral to
FMS for collection action. In support of its position, Rural Development
stated that the inclusion of only the delinquent portion of collateralized
installment loans is consistent with industry standards and reporting the
entire amount accelerated would not represent the amount legally
collectible, and would distort actual risk. Rural Development's response is
not consistent with either RHS's own governing debt collection policy and
practices or Treasury's instructions to federal agencies for reporting
accelerated debt balances on the Treasury Report on Receivables Due from the
Public (TROR).

Background RHS is a component of Rural Development, a mission area within
Agriculture that was created when the department was reorganized in 1994.
RHS provides a wide array of housing services to rural residents and often
offers more favorable loan terms and conditions than other federal housing
programs. The agency delivers services through an extensive network of field
offices. In September 1997, Rural Development completed a conversion of its
direct SFH loan servicing from a dispersed nationwide

network of more than 2,000 field offices to Agriculture's new Central
Servicing Center. The center is responsible for servicing the department's
entire direct SFH loan portfolio, which totaled about $17 billion at the
close of fiscal year 2000.

Through its SFH programs, RHS provides highly subsidized direct loans to
rural households with very low and low incomes, guaranteed loans to
households with low and moderate incomes, and grants and direct loans for
housing repairs to households with very low incomes.4 Under the guaranteed
SFH loan program, RHS agrees to reimburse approved private lenders for up to
90 percent of the principal advanced to a borrower in the event the borrower
defaults. In recent years, RHS's guaranteed SFH loan program has expanded,
with the reported outstanding principal due on the guaranteed SFH loan
portfolio increasing from about $3 billion in fiscal year 1996 to more than
$10 billion at the end of fiscal year 2000.

Objectives, Scope, and Methodology

Our objectives were to determine whether (1) RHS was promptly referring
eligible SFH loans to FMS for collection action, (2) any obstacles were
hampering RHS from referring eligible SFH loans to FMS, and (3) RHS was
appropriately using exclusions from referral requirements.

To determine whether RHS is promptly referring eligible SFH loans to FMS for
collection action, we interviewed officials responsible for identifying
eligible SFH loans and referring them to FMS. We also reviewed pertinent
policies, procedures, and reports related to RHS loan referrals, including
Treasury instructions for preparing the TROR and RHS internal delinquency
reports. To determine whether any obstacles were hampering RHS from
referring eligible SFH loans, we interviewed RHS officials and obtained and
reviewed relevant documents, including the agency's debt-referral schedule
and Agriculture's request to Treasury to exempt delinquent SFH loans from
referral for cross-servicing for up to a year after liquidation of
collateral. We also reviewed responses to questions about RHS's debt
collection practices that you submitted to the deputy secretary of
agriculture in October 2001. We used information from the responses to
clarify or augment our report, where appropriate.

4Very-low-income households have incomes at or below 50 percent of their
area's median income; low-income households have incomes above 50 percent
and at or below 80 percent of their area's median income; and
moderate-income households have incomes above 80 percent and at or below 115
percent of their area's median income.

A scope limitation prevented us from determining whether RHS's exclusions of
about $182 million of direct SFH loans from referral requirements were
appropriate. RHS officials told us that the agency did not retain supporting
documentation (a list of individual loans, including loan amounts, for each
exclusion category) for the $182 million of direct SFH loans excluded from
referral to FMS. Without such documentation, we could not independently
verify that amounts excluded for forbearance or appeals, bankruptcy, and
foreclosure were accurate or met established criteria.

We conducted our review from November 2000 through October 2001 in
accordance with U.S. generally accepted government auditing standards. We
did not independently verify the reliability of certain information that RHS
provided to us (e.g., debts more than 180 days delinquent and debts
classified as currently not collectible (CNC)5 and information in RHS's
loan-accounting and loan-servicing systems).

We requested written comments on a draft of this report from the secretary
of agriculture or her designated representative. Rural Development provided
Agriculture's response and Rural Development's letter is reprinted in
appendix I.

RHS Has Referred a Minimal Amount of Delinquent Direct SFH Loans for
Cross-Servicing

Since the passage of DCIA in April 1996, RHS has referred a minimal amount
of direct SFH loans to FMS for cross-servicing. As of September 30, 2000,
RHS reported about $383 million of direct SFH loans delinquent more than 180
days. Because of a software deficiency that prevented automated
identification of direct SFH loans eligible for cross-servicing and an
agency plan to obtain an exemption from referring direct SFH loans for
cross-servicing, RHS had referred virtually no delinquent SFH loans for
cross-servicing as of September 30, 2000. However, as of the same date, RHS
reported having referred about $201 million of direct SFH loans to FMS for
TOP.

5CNC debts are  debts the agency has written off for accounting purposes but
has not discharged. Collection action can still be taken on such debts.

    Table 1: RHS's Direct SFH Loans Delinquent as of September 30, 2000

Loan amounts (in millions of dollars)

Loans  more than  180 days  delinquent, including  loans $383  classified as
currently not collectible (CNC)

Less: exclusions allowed by DCIAa

Loans eligible for TOP

Loans referred to FMS for TOP

Loans referred to FMS for cross-servicing

aExclusions were for bankruptcy, forbearance/appeals, and foreclosure.

Source: Treasury Report on Receivables Due from the Public for fourth
quarter 2000 (September 30, 2000).

Beginning in April 2001, RHS began manually referring a small number of
direct SFH loans-approximately 100 a month-to FMS for cross-servicing.
However, this effort, discussed in more detail later in this report, is an
extremely limited measure and results in referrals of only a small fraction
of the agency's eligible delinquent SFH loans.

Several Obstacles Have Impeded RHS's Implementation of DCIA Referral
Requirements

Since DCIA's enactment, several obstacles have seriously impeded RHS's
implementation of the act's referral requirements. Because of a software
deficiency that has existed since fiscal year 1997, Agriculture's automated
loan-servicing system cannot identify loans that are eligible and should be
referred for cross-servicing. As a result, RHS referred virtually no direct
SFH loans to FMS for cross-servicing through September 30, 2000, and only
minor amounts through September 30, 2001. An additional obstacle was RHS's
application for-and unrealistic expectation of receiving-an exemption from
Treasury that would have allowed the agency to delay referring direct SFH
loans to FMS for cross-servicing for up to a year after liquidation of a
loan's collateral. Based on its expectation that the exemption request would
be approved on an after-the-fact basis, RHS classified all of its delinquent
direct SFH loans as excluded from referral requirements in its September 30,
2000, TROR. Finally, RHS understated loan amounts that are eligible for
referral in two respects. First, the agency included in its reporting of
delinquent debts only the delinquent portions of installment loans rather
than the total unpaid loan balances as required by Treasury. Second, RHS did
not take action until recently to recognize losses on guaranteed SFH loans
as nontax federal debt. Until these steps

are completed,  RHS cannot use  the collection tools provided  under DCIA to
pursue collection directly from debtors on guaranteed SFH loans.

System Limitations Hampered Identification and Referral of Loans for
Cross-Servicing

During fiscal years 1996 and 1997, RHS converted its loan-servicing system,
which serviced a portfolio of more than 700,000 direct SFH loans, from a
decentralized servicing network of more than 2,000 field offices to a
single, automated loan-servicing location-Agriculture's Central Servicing
Center. The main automated system is a commercial off-the-shelf
loan-servicing system that required modification if it was to perform the
unique functions associated with the direct SFH loan program, such as
identifying direct SFH loans eligible for cross-servicing. If the system is
to perform this function, it must, for example, be capable of determining
the status of any collateral, because all collateral must be liquidated
prior to a loan's referral to FMS for cross-servicing. According to RHS
officials, RHS has been unable since the conversion to readily identify
direct SFH loans that are eligible for referral to FMS for cross-servicing
because the necessary software was not completed prior to conversion. RHS
nevertheless completed the conversion in fiscal year 1997 because the agency
did not want to delay implementation of the new system. RHS plans to
complete the system software in April 2002 and has stated that the software
modifications will facilitate identification of loans for cross-servicing.

In April 2001, while we were performing our fieldwork, RHS began an interim
process to manually identify direct SFH loans eligible for cross-servicing.
Agency officials advised us, however, that relatively few referrals for
cross-servicing are likely to be made before completion of the software
because the interim manual process is tedious and labor-intensive. According
to RHS's debt-referral schedule, only about 100 to 200 loans are to be
referred each month, and as of September 30, 2001, the agency had referred
599 direct SFH loans to FMS for cross-servicing. The current manual process
creates an overwhelming challenge for the agency because of the large volume
of loans potentially eligible for cross-servicing. RHS officials said that
all direct SFH loans eligible for TOP will have to be reviewed for
cross-servicing eligibility. As of September 30, 2000, RHS had referred
23,032 direct SFH loans to FMS for TOP. According to RHS's debt-referral
plan as of the completion of our fieldwork, the agency intends to refer
about 30 percent of eligible direct SFH loans to FMS for cross-servicing in
fiscal year 2002. The 30 percent referral level takes into account the
increased rate of referrals RHS expects will result from the planned April
2002 completion of loan-servicing software that will permit automated
identification of direct SFH loans eligible for cross-servicing.

RHS Delayed Direct SFH Loan Referrals while Seeking an Exemption

RHS made no attempts prior to April 2001 to manually identify and refer
direct SFH loans eligible for cross-servicing. According to agency
officials, RHS did not attempt manual identification because the agency was
in the process of requesting an exemption from Treasury that would allow it
to service direct and guaranteed SFH loans internally for up to 1 year after
liquidation of collateral. Liquidation could, in some cases, occur years
after a loan became delinquent.

Treasury officials told us that the department had informal discussions with
Agriculture officials concerning the planned request. They said Treasury
discouraged Agriculture from submitting a formal request because Treasury
did not believe an exemption was warranted. Nevertheless, Agriculture
submitted a formal request for an exemption on behalf of RHS in November
2000. Although Treasury officials stated that the department had never
formally or informally approved the request, RHS reported in its September
30, 2000, TROR that Treasury had approved the request. In the TROR, RHS
classified all eligible direct SFH loans as exempted by Treasury from
cross-servicing.

Treasury issued a formal denial of the exemption request on May 14, 2001.
The denial was based in part on the fact that other agencies with similar
delinquent loans were referring the loans for cross-servicing and that RHS
had not identified any new or unique collection tools applicable to its SFH
loans that would justify different treatment. RHS officials said that they
contacted Treasury in January 2001 to acknowledge that the statement
regarding the approval of the exemption request in the September 30, 2000,
TROR was incorrect. However, in subsequent quarterly TROR submissions
through June 30, 2001, RHS continued to report significant direct SFH loan
amounts as exempted by Treasury from cross-servicing.

RHS Did Not Consider the RHS did not consider the full range of debt that
should have been subject to

Full Range of Debt for DCIA DCIA referral requirements in two important
areas. First, RHS reported as delinquent debt only the delinquent portion of
installment loans rather than the total unpaid loan balances. Second, RHS
did not take the necessary steps to recognize losses on guaranteed SFH loans
as nontax federal debt and therefore did not report them and could not
attempt to collect on them using tools authorized by DCIA.

RHS Did Not Report Accelerated Loan Balances as Delinquent Debt

When a direct SFH installment loan becomes more than 90 days delinquent, RHS
notifies the debtor by certified mail that the entire loan balance is
accelerated and that the full outstanding loan balance is due and payable.
The notice also stipulates RHS's intent to foreclose on the loan unless the
agency receives full payment of the indebtedness within 30 days of the date
of the letter. According to instructions for preparing the TROR that
Treasury provided to all agencies subject to DCIA requirements, the entire
amount of the debt is to be recorded as delinquent if any part of it has
been delinquent more than 180 days, provided the debtor has been notified
that the entire amount is due (or accelerated). Absent any exclusions
allowed by DCIA or Treasury, Treasury's instructions call for agencies to
report the entire unpaid loan amount as eligible for referral for collection
action.

However, RHS reports only the delinquent installment portion of the loans as
delinquent in its TROR and does not report the accelerated loan balances as
delinquent debt. Similarly, RHS reports only the delinquent installment
portion as eligible for referral to TOP. RHS officials said they do not
believe it is appropriate to refer more than the delinquent portion of
direct SFH loans to FMS. They said they are concerned that if RHS referred
amounts greater than the delinquent installments before liquidation of
collateral at foreclosure, the agency would risk collecting amounts in
excess of those due from borrowers. This situation should not arise,
however, because DCIA allows any debt to be temporarily excluded from
referral if its collateral is being liquidated as part of foreclosure
proceedings. Therefore, under its practices and Treasury's requirements, RHS
should report all amounts due and payable and refer them to FMS for
collection action unless the loans are in foreclosure or meet other
exclusion criteria.

As previously stated, at the end of fiscal year 2000, RHS reported that
about $383 million of direct SFH loans were more than 180 days delinquent
and that approximately $201 million of the loans were eligible for and had
been referred for offset through TOP. Based on our review of RHS's internal
delinquency records, by not including accelerated loan balances RHS may have
understated delinquent direct SFH loan amounts reported to Treasury by about
$849 million and direct SFH loan amounts eligible for offset through TOP by
about $348 million. Underreporting delinquencies distorts the TROR for debt
management and credit policy purposes. It also distorts key governmentwide
financial indicators, including total delinquencies outstanding, on which
the president, the Congress, and the Office of Management and Budget rely to
make important budget and management decisions. In addition, by
underreporting direct SFH loan amounts eligible

for referral for offset through TOP, RHS is forgoing opportunities to
maximize the collection of delinquent debt.

RHS Did Not Refer Losses on Guaranteed SFH loans-as well as related
losses-have been significant

Guaranteed SFH Loans to since the enactment of DCIA in 1996. In recent
years, the program has

Treasury for Collection expanded, with the reported outstanding principal
due on the guaranteed SFH loan portfolio increasing from about $3 billion in
fiscal year 1996 to more than $10 billion at the end of fiscal year 2000.
The reported amount paid out in losses over the same period rose from about
$3.2 million in fiscal year 1996 to about $60.5 million in fiscal year 2000.

Since DCIA was enacted in 1996, none of the approximately $132 million in
such losses on RHS's guaranteed SFH loan program have been referred to FMS
for collection action. According to RHS officials, the agency could not
pursue recovery from the debtor or utilize DCIA debt-collection tools
because under the SFH guaranteed loan program, no contract existed between
the debtor and RHS. As a result, the agency did not recognize the losses
that it paid to guaranteed lenders as federal debt and could not apply DCIA
debt-collection remedies to them.

In January 1999, Agriculture's Office of Inspector General (OIG) reported
that RHS was not referring its losses on guaranteed SFH loans to FMS for
collection. At that time, the OIG identified the need for RHS to recognize
the losses as federal debts and begin referring them to FMS for collection.
However, as of September 30, 2000, RHS still had no policies and procedures
to recognize losses on guaranteed SFH loans as federal debts and to refer
such debts to FMS for TOP and cross-servicing. As a result, RHS has missed
opportunities to collect millions of dollars the agency has paid to lenders
to cover guaranteed losses.

RHS officials told us that the agency is now working with Agriculture's
Office of General Counsel and OIG to amend program regulations and has
recently initiated action to develop policies for future referral of losses
on guaranteed SFH loans to FMS for collection action. However, RHS's efforts
to make necessary regulatory changes and modifications to lender agreements
are still under way and have yet to be implemented. Therefore, RHS continues
to miss opportunities to collect from borrowers the amounts it has paid to
cover losses on guaranteed SFH loans. Because the size of the guaranteed SFH
loan program and related losses are significant and growing, it is critical
that RHS promptly complete development and begin implementation of policies
and procedures to refer eligible guaranteed SFH loan debts to FMS for
collection action.

RHS Did Not Maintain Documentary Support for Excluding Delinquent Debts

DCIA permits debts to be excluded from referral for cross-servicing and
offset if they are in forbearance, under appeal, in litigation at the
Department of Justice, in bankruptcy, or in foreclosure. In August 2000, we
reported that governmentwide, agencies were excluding from referral the vast
majority of debts reported delinquent more than 180 days under DCIA or
Treasury exclusion criteria. We cautioned that the reliability of the
amounts reported as excluded needed to be independently verified on a
periodic basis.6

FMS officials said that they expect agencies to retain applicable
information to justify exclusions of debt from referral. In addition, 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.7

When we attempted to verify RHS's reported exclusions from referral as of
September 30, 2000, RHS officials told us that supporting documentation (a
list of individual loans and loan amounts that were excluded in each
exclusion category) for the $182 million of direct SFH loans excluded from
referral for offset through TOP had not been saved. In addition, the chief
of the financial accounting branch said she was not aware of any requirement
to retain such data. Because we had no information on which individual loans
had been excluded, we were unable to determine whether the agency's reported
exclusions for bankruptcy, forbearance/appeals, and foreclosure met relevant
legislative and regulatory criteria.

Conclusions Through its failure to comply fully with DCIA debt collection
requirements, RHS continues to miss opportunities to maximize collection on
delinquent SFH loans. Although more than 5 years have passed since DCIA's
enactment, RHS has referred a minimal amount of its direct SFH loans for
cross-servicing and has yet to refer any losses on its growing guaranteed
SFH loan program. RHS has identified and referred direct SFH loans eligible
for TOP but significantly understated loan amounts eligible for

6GAO/AIMD-00-234.

7 U.S. General  Accounting  Office,  Standards for  Internal Control  in the
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1999), p. 15.

referral by not including accelerated direct SFH loan balances. RHS also did
not take the steps necessary to recognize losses on guaranteed SFH loans as
federal debt subject to the provisions of DCIA. In addition, RHS's failure
to retain a listing of specific loans and loan amounts excluded from
referral for offset through TOP effectively eliminates the possibility of
independent verification of excluded debt-a critical internal control
technique.

Recommendations for Executive Action

To improve RHS's compliance with DCIA, we recommend that the secretary of
agriculture direct the administrator of RHS to take the following actions:

* Work together with FMS to resolve any inconsistencies between RHS's
reporting of delinquent debts on its TROR and Treasury's instructions for
such reporting. Absent any modifications to Treasury's instructions for
preparing the TROR, report the entire accelerated balance of delinquent
direct SFH loans to FMS as delinquent debt and, absent any allowable
exclusions, as debt eligible for referral to FMS for collection action.

* Finalize and implement necessary regulatory changes and modifications to
lender agreements to recognize losses on guaranteed SFH loans as federal
debt and promptly refer such debt to FMS for collection action.

* Complete development of the software enhancements that will allow
automated identification of loans eligible for cross-servicing, and promptly
refer all such loans to FMS for cross-servicing.

* Maintain supporting documentation, in an appropriate level of detail that
can be made readily available for independent verification, for all SFH
debts reported and certified to Treasury as excluded from referral for
collection action. At a minimum, the documentation should include, for each
exclusion category (e.g., foreclosure), the total amount reported as
excluded on the certified TROR and a listing of the identities and dollar
amounts of the specific loans excluded.

Agency Comments and  A draft of this report was provided to the secretary of
agriculture for her or  a designee's review and comment. Agriculture's Rural
Development

Our Evaluation  mission area, which  includes RHS, provided the department's
comments.  The  following  discussion  highlights Rural  Development's  most
significant  comments  and our  evaluation.  Rural  Development's letter  is
reprinted in appendix I.

Rural Development disagreed with our findings that RHS has failed to make
DCIA a priority and delayed implementation of certain key provisions. Our
position remains unchanged. The details in the body of our report
demonstrate RHS's lack of progress. Most importantly, 5 years after the
passage of DCIA, RHS had not established an adequate framework or systems
capacity to effectively carry out its responsibilities.

Rural Development stated that the department and the agency were committed
to fully implementing the recommendations provided by GAO and that it had
already established an aggressive schedule for doing so. The agency
specifically stated that it had implemented or was in the process of
implementing three of our four recommendations. Rural Development disagreed
with our recommendation to report the entire accelerated balance of
delinquent direct SFH loans to FMS as delinquent debt consistent with
Treasury's instructions for preparing the TROR. Rural Development stated
that the inclusion of only the delinquent portion of collateralized
installment loans is consistent with industry standards for delinquency
reporting and reporting the entire amount accelerated would not represent
the amount legally collectible, and would distort actual risk of loss.

Rural Development's response is not consistent with either RHS's own
governing debt collection policy and practices or Treasury's instructions to
federal agencies for reporting accelerated debt balances on the TROR. As
stated in this report, when a direct SFH installment loan becomes more than
90 days delinquent, RHS is to notify the debtor by certified mail that the
entire loan balance is accelerated and that the full outstanding loan
balance is due and payable. The notice also stipulates RHS's intent to
foreclose on the loan unless the agency receives full payment of the
indebtedness within 30 days of the date of the letter. According to
instructions Treasury provided to all agencies subject to DCIA requirements,
the entire amount of the debt is to be recorded as delinquent if any part of
it has been delinquent more than 180 days, provided the debtor has been
notified that the entire amount is due (or accelerated). By failing to
follow instructions developed by Treasury for reporting accelerated debt
balances, RHS is forgoing opportunities to maximize the collection of
delinquent direct SFH loans.

Beyond the requirements of DCIA debt collection initiatives, RHS's
underreporting of debts that are due and payable and delinquent more than
180 days distorts the TROR for debt management and credit policy purposes.
Such underreporting distorts key governmentwide financial

indicators, including total delinquencies outstanding, on which the
president, the Congress, and OMB rely to make important budget and
management decisions. Therefore, RHS should report on the TROR all
debt amounts more than 180 days delinquent that are due and payable.

As agreed with your office, unless you announce its contents earlier, we
plan no further distribution of this report until 30 days after its issuance

date. At that time, we will send copies to the chairmen and ranking
minority members of the Senate Committee on Governmental Affairs and
the House Committee on Government Reform and to the ranking minority
member of your subcommittee. We will also provide copies to the
secretary of agriculture, the inspector general of the Department of
Agriculture, the administrator of the Rural Housing Service, and the
secretary of the treasury. We will then make copies available to others
upon request.

If you have any questions about this report, please contact me at (202) 512-
3406 or Kenneth Rupar, assistant director, at (214) 777-5714. Arthur W.
Brouk was also a key contributor to this assignment.

Sincerely yours,

Gary T. Engel
Director
Financial Management and Assurance

                                 Appendix I

                       Comments from Rural Development

Note: GAO comments supplementing those in the report text appear at the end
of this appendix.

Appendix I
Comments from Rural Development

                               See comment 1.

Appendix I
Comments from Rural Development

                               See comment 2.

                               See comment 3.

Appendix I
Comments from Rural Development

                               See comment 4.

                               See comment 5.

Appendix I
Comments from Rural Development

                               See comment 6.

                               See comment 7.

                                 Appendix I
                       Comments from Rural Development

The following are GAO's comments on Rural Development's letter dated January
29, 2002.

GAO Comments 1.

2.

RHS's comments misrepresent its system's ability to identify and promptly
refer eligible debts to FMS for collection purposes. As stated in this
report, RHS officials told us that RHS has been unable since converting to a
commercial off-the-shelf loan-servicing system during 1996 and 1997 to
readily identify direct SFH loans that are eligible for referral to FMS for
cross-servicing because the necessary software was not completed prior to
conversion. In order for RHS's automated system to identify direct SFH loans
eligible for cross-servicing, it must, for example, be capable of
determining the status of any collateral because, according to RHS's
requirements, all collateral must be liquidated prior to a loan's referral
to FMS for cross-servicing. It was for this reason that RHS had to initiate
an interim manual process, which RHS officials characterized as tedious and
labor-intensive, to identify direct SFH loans eligible for cross-servicing
until planned completion of loan-servicing software in April 2002 that is
intended to permit automated identification of direct SFH loans eligible for
cross-servicing.

Rural Development's contention that RHS did not proceed earlier with the
required systems enhancements needed to promptly refer eligible debts to FMS
for cross-servicing because negotiations were taking place with Treasury
over possible approval as a Debt Collection Center is not consistent with
Treasury's perspective on allowing RHS to service its own loans. As stated
in this report, according to Treasury, Treasury/FMS received a formal
request to exempt SFH loans from cross-servicing from Agriculture in
November 2000. However, prior to the submission of the formal request to
Treasury, FMS had informal discussions with Agriculture officials concerning
the request, wherein FMS did not encourage the submission of the formal
request because it was felt an exemption was not warranted. According to
Treasury officials, Treasury never approved a proposal to exempt RHS SFH
loans from cross-servicing, either formally or informally.

RHS acknowledges that the supporting documentation for the September 30,
2000, TROR was not available. Although RHS contends that the missing
documentation was a one-time event due to changes that were being
implemented in Rural Development's reporting process, we could not consider
reviewing other time periods because,

Appendix I
Comments from Rural Development

as agreed with the requester, we were asked to review exclusions as of
September 30, 2000, the most recent period as of the date of our fieldwork
for which data were certified as accurate by the agency.

We could not consider the alternative techniques suggested by Rural
Development personnel, such as study the software program logic used to
create the December 2000 TROR, because none of the suggested techniques
would result in a list of individual loans that were included in each
exclusion category as of September 30, 2000. Such a list was needed in order
for us to select a statistical sample of loans to test for the
appropriateness of exclusions that the agency certified as accurate as of
that date.

3. As stated in this report, DCIA was enacted in 1996 and through the
completion of our fieldwork, none of the approximately $132 million in
losses incurred on RHS's guaranteed SFH loan program have been referred to
FMS for TOP and cross-servicing. The agency recognizes the opportunity to
recover such losses using the remedies available through DCIA and has begun
the process to promulgate rules to recognize such losses as federal non-tax
debts. However, as of September 30, 2000, RHS still had no policies and
procedures to recognize losses on guaranteed SFH loans as federal debts and
to refer such debts to FMS for TOP and cross-servicing.

4. We did not provide an estimate of the amount of guaranteed losses that
may be recovered through TOP and cross-servicing. Rather, as stated in this
report, RHS continues to miss opportunities to collect from borrowers the
amounts it has paid to cover losses on guaranteed SFH loans. Moreover, such
lost opportunities not only involve collection through cross-servicing but
TOP as well, which, according to Rural Development in its response, involved
collections of $31 million in 2001 on debts other than guaranteed losses.

5. See our discussion in the "Agency Comments and Our Evaluation" section.

6. This example provided by Rural Development is not consistent with RHS's
procedures for accelerating direct SFH loans and Treasury's instructions for
reporting accelerated debts on the TROR. See our discussion in the "Agency
Comments and Our Evaluation" section for additional details. In view of
RHS's response on this matter, we have modified our first recommendation to
RHS to include working together

Appendix I
Comments from Rural Development

with FMS to resolve any inconsistencies between RHS's reporting of
delinquent debts on its TROR and Treasury's instructions for such reporting.

7. See comment 2.

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