Debt Collection Improvement Act of 1996: Department of		 
Agriculture's Farm Service Agency Has Not Yet Fully Implemented  
Certain Key Provisions (29-MAR-02, GAO-02-463). 		 
                                                                 
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 Farm Service Agency	 
(FSA) 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 has severely reduced opportunities for collection. FSA lacks 
effective procedures and controls to identify and promptly refer 
eligible delinquent debts to Treasury for collection action. GAO 
identified several obstacles to FSA's establishment and 	 
implementation of an effective and complete debt-referral	 
process. In the four states with the highest dollar amounts of	 
federal dept excluded from the Treasury Offset Program, GAO	 
reviewed FSA's use of exclusions from referral requirements	 
because of bankruptcy, forbearance/appeals, foreclosure and	 
Department of Justice litigation. GAO found that about half of	 
the exclusions in these states were inconsistent with established
criteria.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-463 					        
    ACCNO:   A02934						        
  TITLE:     Debt Collection Improvement Act of 1996: Department of   
Agriculture's Farm Service Agency Has Not Yet Fully Implemented  
Certain Key Provisions						 
     DATE:   03/29/2002 
  SUBJECT:   Debt collection					 
	     Delinquent loans					 
	     Internal controls					 
	     Performance measures				 
	     Reporting requirements				 
	     FSA Direct Farm Loan Program			 
	     FSA Program Loan Accounting System 		 
	     Treasury Offset Program				 


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GAO-02-463
     
A

Report to the Chairman, Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, Committee on Government

Reform, House of Representatives

March 2002 DEBT COLLECTION IMPROVEMENT ACT OF 1996

Department of Agriculture?s Farm Service Agency Has Not Yet Fully
Implemented Certain Key Provisions

GAO- 02- 463

Letter 1 Results in Brief 2 Background 4 Objectives, Scope, and Methodology
4 FSA Referred a Significant Amount of Direct Farm Loan Program

Loan Debt to Treasury for TOP, but Not for Cross- Servicing 6 Several
Obstacles Have Impeded FSA?s Implementation of DCIA

Referral Requirements 7 FSA Did Not Appropriately Use Exclusions from
Referral

Requirements 11 Conclusions 13 Recommendations for Executive Action 13
Agency Comments and Our Evaluation 14

Appendixes

Appendix I: Sampling Method and Results 16

Appendix II: Comments from the Farm Service Agency 18

Appendix III: GAO Contact and Staff Acknowledgments 20 Tables Table 1:
Direct FSA Farm Loan Program Loans Delinquent as of

September 30, 2000 7 Table 2: Summary of Sample Results for FSA?s Excluded
Farm Loan

Program Debt 16 Table 3: Two- Stage Probability Proportionate to Size
Cluster

Sample Results 17

Abbreviations

CNC currently not collectible DCIA Debt Collection Improvement Act of 1996
DOJ Department of Justice FSA Farm Service Agency FMS Financial Management
Service TOP Treasury Offset Program TROR Treasury Report on Receivables Due
from the Public

Lett er

March 29, 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 debts 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, on December 5, 2001, focused on progress in this area by
two Department of Agriculture agencies- the Rural Housing Service 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.

1 U. 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).

2 U. 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 FSA?s progress and to offer our
recommendations for improving the agency?s implementation of the
debtreferral 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 years 2000 and 2001 to the extent that data were
available and addressed your request for information. For this report, we

looked at whether (1) FSA was promptly referring eligible farm loan program
loans to Treasury?s FMS for collection action, (2) any obstacles were
hampering FSA from referring eligible farm loan program loans to FMS, and
(3) FSA was appropriately using exclusions from referral

requirements. Results in Brief FSA has ongoing initiatives to enhance its
capacity to timely refer all eligible delinquent debt. However, the agency?s
failure to make DCIA a

priority since its enactment in 1996 has hindered implementation of key
provisions of the act and severely reduced opportunities for collection as
contemplated by DCIA. As of September 30, 2000, FSA reported that it had
referred about $934 million of delinquent direct farm loan program loans to
TOP for offset and that it had excluded approximately $732 million of
delinquent direct farm loan program loans from referral to TOP. However, FSA
reported that it had referred only $38 million of the approximately $114
million of debt it reported as eligible for referral to FMS for
crossservicing.

FSA lacks effective procedures and controls to identify and promptly refer
eligible delinquent debts to Treasury for collection action. We identified
the following obstacles to FSA?s establishment and implementation of an
effective and complete debt- referral process:

 The agency?s automated system lacked the capacity to distinguish
deficiency judgment debts, which are eligible for referral to TOP, from
types of judgment debts that are not eligible for referral. The agency
therefore excluded all judgment debts from referral and missed 3 U. 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 Medicare: HCFA Could Do More to
Identify and Collect Overpayments,

GAO/ HEHS/ AIMD- 00- 304 (Washington, D. C.: Sept. 7, 2000).

opportunities to collect delinquent deficiency judgment debts through TOP.

 Although the vast majority of farm loan program loans have codebtors,
FSA?s automated system could not accommodate information on codebtors.
Because of this limitation, which the agency has recognized since 1986, FSA
did not pursue collection from codebtors or report their names and taxpayer
identification numbers to FMS for collection action

and consequently missed opportunities to collect eligible delinquent debts
through TOP.

 Staff in FSA field offices did not routinely update the eligibility status
of delinquent debts in the agency?s loan- accounting system. As a result,
the system could not accurately identify loans eligible for referral, and
FSA could not provide accurate debt information to Treasury, which not only
distorts the Treasury Report on Receivables Due from the Public (TROR) for
debt management and credit purposes, but also distorts key financial
indicators such as receivables, total delinquencies, and loan loss data. In
addition, failure to process closed- out debts delays the

agency?s reporting of those amounts to the Internal Revenue Service as
income to the debtor.

 FSA temporarily suspended referral of delinquent debts to FMS for cross-
servicing while developing guidelines to implement a new agency policy that
limited cross- servicing referrals to debts delinquent less than 6 years.

 Even though loans became delinquent relatively evenly throughout the year,
FSA referred delinquent debts to FMS for TOP only once annually, which
delayed some referrals and may have reduced FMS?s ability to collect on
delinquent farm loan program debts.

 FSA did not have policies and procedures in place to recognize its losses
on guaranteed farm loan program loans as federal debt and therefore did not
apply DCIA debt collection remedies to those losses. Regarding the
appropriateness of FSA?s use of exclusions from referral requirements, we
reviewed the exclusions from referral to TOP because of bankruptcy,
forbearance/ appeals, foreclosure, and Department of Justice

(DOJ) litigation made by a sample of field offices in the four states with
the highest dollar amounts of debt excluded from referral to TOP. Based on
our review, we estimated that approximately half of the exclusions in these
four states were inconsistent with established criteria for excluding debts
in bankruptcy, forbearance/ appeals, foreclosure, and DOJ litigation.

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

The administrator of FSA stated in comments on this report that FSA
generally agreed with our findings and recommendations but took issue with
our portrayal of FSA?s efforts to collect delinquent debts and our estimate
of the percentage of loans that FSA inappropriately excluded from referral
requirements. We continue to maintain that FSA did not make

compliance with DCIA a priority and therefore missed collection
opportunities. We also affirm the validity of the estimated error rate for
exclusions from referral requirements included in our report. FSA stated

that it has developed an action plan to implement the remaining DCIA
provisions referred to in our report by December 31, 2002. Additional
details on FSA?s comments and our evaluation are included in the Agency

Comments and Our Evaluation section of this report. Background FSA was
established in 1994 during the reorganization of the Department of
Agriculture and operates through a network of field offices located across

the United States. The agency provides a variety of services, including
providing financial assistance to new or disadvantaged farmers and ranchers
who are unable to obtain commercial credit at reasonable rates and terms.

FSA loans available to farmers and ranchers include direct or guaranteed
ownership loans and direct or guaranteed operating loans. Direct ownership
loans are for buying farm real estate and making capital

improvements. Direct operating loans, which are made to beginning farmers
and ranchers who are unable to qualify for guaranteed operating loans, are
for the purchase of items to help daily farm operations. Guaranteed farm
loan program loans are for the same purposes as direct farm loan program
loans, but they are made by private third- party lenders and are guaranteed
by FSA for up to 95 percent of the principal loan amount.

Objectives, Scope, and Our objectives were to determine whether (1) FSA was
promptly referring

Methodology eligible farm loan program loans to FMS for collection action,
(2) any obstacles were hampering FSA from referring farm loan program loans
to FMS, and (3) FSA was appropriately using exclusions from referral

requirements.

To address these objectives, we interviewed officials from FSA to obtain an
understanding of the FSA referral process and any obstacles that were
hampering the referral of eligible debts. We reviewed FSA?s policies and
procedures on debt referrals and examined the agency?s current and

planned efforts to refer eligible delinquent debts. We obtained and analyzed
the TROR for the fourth quarter of fiscal year 2000, which was the most
recent year- end report available at the completion of our fieldwork, 4 and
other financial reports prepared by FSA, and held discussions with FSA
officials to determine whether the agency was appropriately using

exclusions from referral requirements. In addition, we reviewed responses to
questions about FSA?s debt collection practices that you submitted to the
deputy secretary of agriculture in October 2001 and used information from
the responses to clarify or augment our report, where appropriate.

To determine whether FSA?s use of exclusions from referral requirements was
appropriate, we used statistical sampling techniques to select 15 FSA field
offices from the four states with the highest dollar amounts of reported
debt excluded from TOP as of September 30, 2000. Using electronic and hard-
copy files obtained from Agriculture, we reviewed all 263 loans from the 15
selected offices that were more than 180 days delinquent and had been
reported as excluded from referral to FMS as of September 30, 2000, for
bankruptcy, forbearance/ appeals, foreclosure, and DOJ litigation. (Appendix
I contains additional information on the sampling method and the results.)
Based on the results of our review, we estimated the percentage of loans
inappropriately excluded as of September 30, 2000, in the four states from
which the sample offices were drawn. Because we found numerous errors in the
exclusion categories we tested, we did not test other reported exclusions
from referral to FMS for cross- servicing, such as internal offset. 5

We did not review FSA?s process for identifying and referring debts to
Treasury for cross- servicing because the agency had suspended all such
referrals in April 2000 pending development of guidelines to implement a

4 The most recent year- end TROR should contain the most reliable
information available because Treasury requires that agency chief financial
officers (or their designees) certify year- end data as accurate. 5 Loans
eligible for referral to FMS for TOP may not be eligible for referral to FMS
for crossservicing. Additional exclusion categories apply to referrals for
cross- servicing. Loans being offset internally and certain loans with
collateral, for example, are eligible for referral to TOP but not for cross-
servicing.

new referral policy. FSA issued the new guidelines in July 2001 and,
according to an Agriculture official, the first referral to FMS under this
new policy was made in September 2001. We did not review implementation of
FSA?s new guidelines, since the procedures were implemented near the

completion of our fieldwork. 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 FSA provided to us, such as debts more than 180
days delinquent and debts classified as currently not collectible (CNC) 6
and information in FSA?s loanaccounting

and loan- servicing systems. We requested written comments on a draft of
this report from the secretary of agriculture or her designated
representative. The written response from the administrator of FSA is
reprinted in appendix II.

FSA Referred a As of September 30, 2000, FSA reported having about $8.7
billion in direct Significant Amount of

farm loan program loans. As shown in table 1, the agency reported about $1.
7 billion of direct farm loan program loans more than 180 days Direct Farm
Loan

delinquent, including debts classified as CNC, as of September 30, 2000. Of
Program Loan Debt to this amount, FSA reported referring about $934 million
to TOP and Treasury for TOP, but

excluding about $732 million from referral to TOP. FSA reported that it had
referred only $38 million of loans to FMS for cross- servicing as of Not for
Cross- Servicing September 30, 2000. It is FSA?s policy to refer delinquent
loans for crossservicing only if collateral has been liquidated and a
deficiency remains. In addition, as discussed in more detail later in this
report, FSA suspended cross- servicing referrals from April 2000 until
September 2001 while it developed and implemented a new cross- servicing
referral policy.

6 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.

Table 1: Direct FSA Farm Loan Program Loans Delinquent as of September 30,
2000 Loan amounts (in millions of dollars)

Loans more than 180 days delinquent, including loans $1, 666

classified as CNC Less: exclusions allowed by DCIA a 732 Loans eligible for
TOP b 934 Loans referred to FMS for TOP 934 Loans referred to FMS for cross-
servicing 38 a The vast majority of the reported exclusions, $694 million,
were for bankruptcy, forbearance/ appeals, foreclosure, and DOJ litigation.

b In addition to loans excluded from referral to TOP, FSA reported other
exclusions from referral to FMS for cross- servicing, including loans
eligible for internal offset, as of September 30, 2000. Source: Treasury
Report on Receivables Due from the Public for fourth quarter 2000 (September
30, 2000).

Several Obstacles Have Since DCIA?s enactment, several obstacles have
impeded FSA?s

Impeded FSA?s implementation of the act?s referral requirements. Loan system
limitations have resulted in the automatic exclusion of certain types of
debts without

Implementation of any review for eligibility and the inability to pursue
collection from

DCIA Referral codebtors through TOP. FSA?s failure to ensure that field
offices routinely

Requirements updated the status of delinquent loans has led to inappropriate
exclusions

from referral and inaccurate reporting of delinquent and eligible debt
amounts to Treasury. A change in referral policy led to a suspension of all
delinquent loan referrals to FMS for cross- servicing. FSA?s policy of
referring delinquent debt to FMS only once a year resulted in delayed
referrals and may have reduced collections. Finally, FSA did not take action
until recently to recognize losses on guaranteed farm loan program loans as
nontax federal debt. According to FSA, until certain steps, such as

software implementation, are completed, FSA cannot use the collection tools
provided under DCIA to pursue collection directly from debtors on guaranteed
farm loan program loans.

FSA Excluded Deficiency Of the $694 million of debt reported by FSA as
excluded from referral for Judgment Debts from

bankruptcy, forbearance/ appeals, foreclosure, and DOJ litigation, about
Referral Because of System $295 million consists of judgment debts,
including deficiency judgments, which are court judgments requiring payment
of a sum certain to the Limitations United States. 7 According to FSA
officials, deficiency judgments- unlike some other types of judgment debts-
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 loan program loans from referral to FMS because of automated system
limitations. Although the system does contain information indicating which
debts are judgment debts, it cannot currently accommodate information on
subcategories of judgment debts. Therefore, FSA staff cannot use the
agency?s automated system to identify deficiency judgments for referral. On
account of our inquiries, FSA officials initiated a special project in May
2001 to manually

identify all deficiency judgment debts for direct farm loan program loans so
that such debts could be referred to FMS.

FSA Cannot Report Even though FSA reported having referred $934 million of
direct farm loan Codebtor Information to program loans to FMS for TOP as of
September 30, 2000, the agency has FMS Because of System

lost and continues to lose opportunities to maximize collections on these
Limitations loans because it does not report information on codebtors to
FMS.

According to FSA officials, the vast majority of direct farm loan program
loans have codebtors, who are also liable for loan repayment, but FSA?s
automated loan system cannot record more than one taxpayer identification
number for each loan. Because taxpayer identification numbers are required
for referrals to FMS for TOP, FSA cannot refer codebtors on farm loan
program loans to FMS. An FSA official said that the agency first recognized
the need to have codebtor information in the

system in 1986 to facilitate debt collection but that higher- priority
systems projects have precluded FSA from completing the necessary
enhancements to allow the system to accept more than one taxpayer
identification number per debt. FSA was planning to incorporate this
modification in the new Farm Loan Program Information System scheduled for
implementation in fiscal year 2005, but during the December 5, 2001,
testimony before your subcommittee, the agency committed to make the change
by December 2002.

7 A deficiency is the remaining indebtedness after foreclosure and after all
collateral has been sold.

FSA Did Not Routinely FSA field offices across the country make
determinations as to whether

Update Referral Eligibility direct farm loan program loans are in
bankruptcy, forbearance/ appeals, or Status of Direct Farm Loan

foreclosure and therefore should be excluded from referral to FMS. The
Program Loans

status of these loans changes over time, and information on the loans must
be updated as changes occur if exclusion determinations are to be
continuously accurate. Our review of selected excluded loans indicated that
personnel in the FSA field offices we visited did not routinely update the
eligibility status of farm loan program loans in FSA?s Program Loan
Accounting System. Without up- to- date information on loan status, the
system cannot accurately identify which loans are eligible for referral.

One of the most frequently identified inappropriate exclusions pertained to
amounts that had been discharged in bankruptcy, which should not have been
included in delinquent debt. Farm loan managers in some of the FSA field
offices we visited said they had not closed out many direct farm loan
program 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.

Delays in promptly closing out discharged bankruptcy debts 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. The information is therefore misleading for budget and management
decisions and oversight. Aside from erroneously inflating reported loans
receivable and delinquent loan amounts, failure to process closed- out debts
delays the agency?s reporting of those amounts to the Internal Revenue
Service as income to the debtor. 8

FSA Temporarily Suspended FSA suspended cross- servicing referrals in April
2000 pending development Cross- Servicing Referrals

of guidelines implementing a new policy to refer only debts less than 6
years delinquent to FMS for cross- servicing. According to agency officials,
FSA adopted the new policy in response to discussions they had with
Agriculture?s Office of the General Counsel that addressed a conflict 8 The
Federal Claims Collection Standards, which were last updated in November
2000, and

Office of Management and Budget 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.

between Farm Loan Program regulations and FMS policy. These officials stated
that the Office of the General Counsel decided that FSA must adhere to Farm
Loan Program regulations, which specify a 6- year delinquency limit for
cross- servicing referrals, despite the fact that, according to FMS

officials, FMS accepts debts for cross- servicing that are more than 6 years
delinquent.

In July 2001, FSA issued revised guidelines to implement the new policy and
is now reviewing loans at more than a thousand FSA field offices to
determine the loans? eligibility for referral under the new policy.
According to an Agriculture official, FSA made the first referral under the
new policy in September 2001. Agency officials told us they eventually plan
to make cross- servicing referrals quarterly but will refer delinquent loans
more frequently until the backlog resulting from the referral suspension is
cleared.

Some Delinquent Loans According to data provided by FSA officials, about
$400 million of new Were Not Referred Promptly

delinquent debt became eligible for TOP during calendar year 2000. FSA
Because FSA Refers Debts

officials stated that the debts became eligible relatively evenly throughout
to TOP Only Once a Year

the year, but the agency refers debts eligible for TOP 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 on delinquent debt decreases dramatically as the

age of the debt increases. 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 collection of delinquent debts and is working on automated system

modifications to refer debts quarterly to TOP. FSA plans to have a quarterly
referral process ready for implementation in August 2002.

9 U. S. General Accounting Office, Debt Collection: Treasury Faces
Challenges in Implementing Its Cross- Servicing Initiative, GAO/ T- AIMD-
00- 213 (Washington, D. C.: June 8, 2000).

FSA Did Not Refer Losses Guaranteed farm loan program loans- as well as
related losses- have been on Guaranteed Farm Loan significant since the
enactment of DCIA in 1996. The outstanding principal Program Loans to
Treasury due on guaranteed farm loan program loans was about $8 billion as
of for Collection Action September 30, 2000; as of that date, FSA had paid
out about $293 million in losses on guaranteed farm loan program loans since
fiscal year 1996.

Since DCIA?s enactment, FSA has referred none of its losses on guaranteed
farm loan program loans to FMS for collection action. According to FSA
officials, the agency could not pursue recovery from guaranteed farm loan
program debtors or use DCIA debt collection tools because under the
guaranteed farm loan program, no contract existed between these debtors and
FSA. As a result, the agency did not recognize the losses that it paid to
guaranteed lenders as federal debt and did not apply DCIA debt collection

remedies to them. In June 2000, Agriculture?s Office of Inspector General
reported that FSA was not referring its losses on guaranteed farm loan
program loans to FMS for collection and identified the need for FSA to
recognize the losses as federal debts and begin referring them to FMS for
collection action. However, as of September 30, 2000, FSA still had no
policies and procedures to recognize losses on guaranteed farm loan program
loans as federal debts and to refer such debts to FMS for TOP and cross-
servicing. As a result, FSA has missed opportunities to collect millions of
dollars that

the agency has paid to lenders to cover guaranteed losses. FSA officials
told us that the agency has revised the loan application forms applicable to
guaranteed loans made after July 20, 2001, to include a section specifying
that amounts FSA pays to a lender as a result of a loss on a guaranteed loan
constitute a federal debt. FSA expects that software needed to implement the
revisions to the Guaranteed Loan Accounting

System should be completed around mid- 2002 and in place before any loss
claims are paid on guaranteed loans made after July 20, 2001.

FSA Did Not As of September 30, 2000, FSA had excluded $732 million of
delinquent Appropriately Use loans from referral to FMS for TOP. FSA cited
bankruptcy,

forbearance/ appeals, foreclosure, and DOJ litigation as the reasons for
Exclusions from

about $694 million, or 95 percent, of these exclusions. About $295 million
Referral Requirements

of the exclusions were judgment debts. As we noted earlier, FSA excluded all
judgment debts from referral because of automated system limitations,
despite the fact that deficiency judgment debts are eligible for referral.
We

also noted that we found exclusion errors caused by FSA?s failure to ensure
that loan status was routinely updated. As a result of inappropriate
exclusions and exclusion errors, FSA failed to maximize its collection of
delinquent loans and provided inaccurate TROR data to federal agencies that
rely on such information for policy and oversight purposes. Using
statistical sampling, we selected 15 FSA field offices in California,
Louisiana, Oklahoma, and Texas- the four states with the highest dollar
amounts of debt excluded from TOP. We reviewed supporting documents for all
263 loans from these offices that were more than 180 days delinquent and had
been excluded from referral to FMS as of September 30, 2000, to determine
the extent to which exclusions in the four states were consistent

with established criteria for excluding loans in bankruptcy, forbearance/
appeals, foreclosure, and DOJ litigation. 10 Based on the results of our
review, we estimate that as of September 30, 2000, FSA had inappropriately
placed about 575 loans, or approximately half the excluded loans in the four
selected states, in exclusion categories. 11 As part of our sample, we
reviewed supporting documents for 52 bankruptcies that had been discharged
before September 30, 2000. In fact, many had been discharged several years
before that date. For example, one loan with a

balance due of about $325,000 was reported as more than 180 days delinquent
and had been excluded from referral because of bankruptcy. Our review of the
loan file at the FSA field office showed that a bankruptcy court had
discharged the debt in 1986. Therefore, the debt should not have been
included in either the delinquent debt amount or exclusion amount reported
to Treasury as of September 30, 2000.

Because of the large number of errors we found in the bankruptcy,
forbearance/ appeals, foreclosure, and DOJ litigation exclusion categories,
we did not test other reported exclusions from referral to FMS for
crossservicing, such as loans being internally offset.

10 Field offices in these four states serviced about $272 million, or about
39 percent, of the total debts excluded by FSA from referral to FMS as of
September 30, 2000, for bankruptcy, forbearance/ appeals, foreclosure, or
DOJ litigation.

11 We estimate that 48. 5 percent + 15. 7 percent of the population were
inappropriately reported as exclusions from referral to TOP. Projecting the
errors in the sample to the population of 1,187 loans, we are 95 percent
confident that the errors in the population are from 389 to 761 loans.

Conclusions Although DCIA was enacted in 1996, FSA continues to face major
obstacles to complying fully with the act. FSA lacks sufficient processes
and controls to adequately identify and promptly refer all direct farm loan

program loans eligible for referral to FMS. Automated system limitations,
which have existed for years and have delayed FSA?s compliance with the act,
have still not been corrected, even though they have prevented referral and
potential collection of substantial amounts of eligible delinquent debt. The
failure of FSA field offices to routinely update delinquent loan information
has led to erroneous exclusions from referral and inaccurate reporting of
debt to Treasury. FSA?s policy of referring debts to TOP only once a year
has allowed debts to age unnecessarily and has likely reduced

their collectibility. FSA has only recently taken action to establish
procedures to refer losses on guaranteed loans to FMS; therefore,
opportunities to collect on losses of about $300 million since DCIA was
enacted may have already been lost. If FSA is to make significant progress

in collecting on millions of dollars of delinquent farm loan program loans,
the agency must give higher priority to fully complying with the debt
collection provisions of DCIA.

Recommendations for To improve FSA?s compliance with DCIA, we recommend that
the secretary

Executive Action of agriculture direct the administrator of FSA to take the
following actions:

 Develop and implement automated system enhancements to make the Program
Loan Accounting System capable of identifying all judgment debts eligible
for referral to FMS for collection action. In the interim, continue with the
manual project to identify judgment debts eligible for referral to FMS.

 Monitor planned system enhancements to the Program Loan Accounting System
to ensure that capacity to record and use codebtor information is available
and implemented by December 2002.

 Develop and implement oversight procedures to ensure that FSA field
offices timely and routinely update the Program Loan Accounting System to
accurately reflect the status of delinquent debts. Aside from requirements
for database integrity, this is critical to determining allowable collection
action, including whether debts are eligible for

referral to FMS for collection action.

 Develop and implement oversight procedures to ensure that all debts
discharged through bankruptcy are promptly closed out and reported to the
Internal Revenue Service as income to the debtor in accordance

with the Federal Claims Collection Standards and Office of Management and
Budget Circular A- 129.

 Monitor effective completion of the planned automated system modifications
to refer eligible debt to TOP on a quarterly, rather than annual, basis by
August 2002.

 Monitor planned system enhancements to the Guaranteed Loan Accounting
System to ensure that the software is completed that is needed to implement
the revisions to the loan application forms to

establish guaranteed loan losses as federal debt.

 Once guaranteed loan losses are established as federal debt and are deemed
eligible for referral to FMS, timely refer such debt to FMS for collection
action in accordance with DCIA.

Agency Comments and In written comments on a draft of this report, the
administrator of FSA

Our Evaluation generally agreed with our findings and recommendations. The
administrator stated that FSA has developed an aggressive action plan to

implement the remaining DCIA provisions mentioned in our report by December
31, 2002. FSA?s letter is reprinted in appendix II. While FSA agreed with
our finding that it had inappropriately placed several loans in various
exclusion categories allowed by DCIA, it disagreed with our estimated error
rate of about 50 percent in the sample population of 1,187 loans. FSA stated
that its own internal review of 967 loans in the four states that were
included in our review resulted in an error rate of

35. 7 percent. Our sample was statistically selected and resulted in a valid
projected error rate of about 50 percent for the states covered by our test
work. To substantiate our work for each error identified during our testing,
we asked

FSA farm loan managers to sign a statement as to whether they agreed with
the GAO sample results and conclusion that the exclusion was inappropriate.
In all but 3 of the 113 errors we identified, the managers agreed with our
conclusions and, as a result, said they planned to take action to correct
the errors. Since the FSA review was performed subsequent to our tests, we
cannot comment on the validity of FSA?s internal assessment of the reported
results. In addition, since many of the loans in our sample had been
inappropriately excluded for years, corrections made subsequent to our
testing but prior to FSA?s review would likely have resulted in a lower
error rate at the time of FSA?s work. In any case, it is important to note
that the

35. 7 percent error rate cited by FSA from its internal assessment is still
unacceptable, and we remain firm in our recommendation that FSA develop and
implement oversight procedures to ensure that FSA field offices timely and
routinely update the Program Loan Accounting System to accurately reflect
the status of delinquent debts.

FSA also took issue with our report?s reference to possible missed
collection opportunities. It stated we had not given FSA sufficient credit
for collections totaling millions of dollars of delinquent debt using
various

collection tools. Our point is that FSA?s mentioned successes could have
been much greater had it made DCIA a higher priority and thus implemented
certain key provisions much sooner. Our position remains unchanged. The
details in the body of our report demonstrate lack of adequate progress.
Most important, 5 years after the passage of DCIA, FSA

had not yet established an adequate framework or systems capacity to
effectively carry out its responsibilities for collecting large sums of
delinquent debt.

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 Farm Service Agency, 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 R. Rupar, assistant director, at (214) 777- 5714. Key
contributors to this report are listed in appendix III.

Sincerely yours, Gary T. Engel Director Financial Management and Assurance

Appendi Appendi xes x I

Sampling Method and Results We first identified the four states (Texas,
California, Louisiana, and Oklahoma) with the highest dollar amounts of debt
excluded from TOP. From the four states, we drew a multistage cluster sample
of 15 field offices (population 123) using probability proportionate to
size, a sampling method in which larger clusters (in this case, offices)
have a higher probability of being selected than smaller clusters. Our debt
population consisted of all FSA debt more than 180 days delinquent that had
been excluded from referral to Treasury as of September 30, 2000. We
reviewed all excluded debt (263) at the 15 sample offices.

Table 2 identifies the four states selected, the number of offices selected
in each state, the number of excluded debts at the selected offices in each
state, and the number of errors found at the selected offices in each state.

Table 2: Summary of Sample Results for FSA?s Excluded Farm Loan Program Debt
Number of

Number of Number of exclusion

State offices selected excluded debts errors found

California 3 103 17 Texas 6 85 59 Oklahoma 3 34 16 Louisiana 3 41 21

Tot al 15 263 113

Based on our review, we estimate that 48. 5 percent ï¿½ 15.7 percent of the
population were inappropriately excluded from Treasury referral. When
projecting these errors to the population of 1,187, we are 95 percent

confident that the errors in the population are from 389 to 761 debts. Table
3 shows the two- stage probability proportionate to size cluster sample
results.

Table 3: Two- Stage Probability Proportionate to Size Cluster Sample Results
Sample plan Stage 1

Total items in the population (for all field offices in the four states
1,187 with the highest dollar amounts of debt excluded from TOP) Total
number of primary sample units (county/ field offices with

123 debtors in the four states) Number of secondary sample units selected 15

Stage 2

Total number of items sampled in all clusters (county) a 263 a One hundred
percent of the debtors in each office selected were reviewed.

Appendi x II Comments from the Farm Service Agency

Appendi x II I GAO Contact and Staff Acknowledgments GAO Contact Kenneth R.
Rupar, (214) 777- 5714 Acknowledgments Other key contributors to this report
were Arthur W. Brouk, Sharon O.

Byrd, Richard T. Cambosos, Michael D. Chambless, Michael S. LaForge, and
Gladys E. Toro.

(191018)

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Appendix I

Appendix I Sampling Method and Results

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Appendix II

Appendix II Comments from the Farm Service Agency

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Appendix III

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