Debt Collection Improvement Act of 1996: Agencies Face Challenges
Implementing Certain Key Provisions (10-OCT-01, GAO-02-61T).	 
								 
It is essential that the government not only make and guarantee  
creditworthy loans, but also put effective practices in place to 
collect amounts owed. The Debt Collection Improvement Act of	 
1996, was intended to maximize collection of billions of dollars 
of non-tax delinquent debt owed to the government by requiring	 
agencies to (1) notify the Department of Treasury of debts	 
delinquent over 180 days for purposes of administrative offset	 
and, (2) refer such debts to Treasury for centralized collection 
action known as cross-servicing. To facilitate debt collection,  
the act also authorizes agencies to administratively garnish the 
wages of delinquent debtors and bars delinquent debtors from	 
receiving federal financial assistance in the form of certain	 
loans, loan insurance, or loan guarantees until they resolve	 
their delinquencies. This report discusses selected agencies and 
focuses on (1) difficulties they experienced in identifying and  
referring eligible debts to Treasury's Financial Management	 
Service or a Treasury designated debt collection center, (2)	 
obstacles to prompt referral of eligible debts, and (3) whether  
exclusions from referral requirements were consistent with	 
established criteria.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-61T 					        
    ACCNO:   A02231						        
  TITLE:     Debt Collection Improvement Act of 1996: Agencies Face   
Challenges Implementing Certain Key Provisions			 
     DATE:   10/10/2001 
  SUBJECT:   Debt collection					 
	     Delinquent loans					 
	     Wage garnishments					 
	     HUD Credit Alert Interactive Voice 		 
	     Response System					 
								 
	     Treasury Offset Program				 
	     Medicare Program					 
	     Direct Single Family Housing Loan			 
	     Program						 
								 
	     FSA Program Loan Accounting System 		 
	     Farm Loan Program Information Delivery		 
	     System						 
								 
	     FMS Barring Delinquent Debtors Program		 

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GAO-02-61T
     
A

Test i mony Before the Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, Committee on Government Reform,
House of Representatives

For Release on Delivery Expected at 10 a. m. DEBT COLLECTION Wednesday,
October 10, 2001 IMPROVEMENT ACT OF

1996 Agencies Face Challenges Implementing Certain Key Provisions

Statement of Gary T. Engel Director, Financial Management and Assurance

GAO- 02- 61T

A

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today
to discuss our work on selected agencies? implementation of certain key
provisions of the Debt Collection Improvement Act of 1996 (DCIA). Agencies
have long had problems in managing credit programs and collecting non- tax
debts. As such, it is essential that the government not only make and
guarantee creditworthy loans, but also put effective practices in place to
collect amounts that are owed. In this light, the DCIA, which was developed
under the leadership of

this Subcommittee, was intended, among other things, to maximize collection
of billions of dollars of non- tax delinquent debt owed to the government by
requiring agencies to (1) notify Treasury of debts delinquent over 180 days
for purposes of administrative offset and (2) refer such debts to Treasury
for centralized collection action known as cross- servicing. Moreover, to
facilitate debt collection, the act also authorizes agencies to

administratively garnish the wages of delinquent debtors and bars delinquent
debtors from receiving federal financial assistance in the form of certain
loans, loan insurance, or loan guarantees until they resolve their
delinquencies. My testimony today will cover selected agencies and focus on
(1) difficulties they have experienced identifying and referring eligible
debts to Treasury?s Financial Management Service (FMS) or a Treasury

designated debt collection center, (2) obstacles that have hampered prompt
referral of eligible debts, and (3) whether exclusions from referral
requirements were consistent with established criteria. Based on

information reported to Treasury on debt referrals, exclusions, and other
data, we focused our review on major programs at the Department of
Agriculture?s (USDA) Rural Housing Service (RHS) and Farm Service Agency
(FSA) and the Department of Health and Human Service?s (HHS)

Centers for Medicare & Medicaid Services (CMS). 1 In addition, our review
covered the extent to which nine large Chief Financial Officers (CFO) Act
agencies use or plan to use administrative wage garnishment (AWG) to

1 On June 14, 2001, the Secretary of HHS changed the name of the Health Care
Financing Administration to the Centers for Medicare & Medicaid Services.

collect delinquent federal non- tax debt. 2 It also covered the advantages
and disadvantages of using national credit reporting agencies, the Treasury
Offset Program?s (TOP) database, and HUD?s Credit Alert Interactive Voice
Response System (CAIVRS) to promptly identify delinquent federal debtors

for the purpose of denying them federal financial assistance. Let me first
make a few overall comments about implementation of the DCIA. We testified
before this Subcommittee in June 2000 that, although the DCIA was enacted in
April 1996, FMS was still the only governmentwide debt collection center,
and that it had not yet fully implemented the act?s cross- servicing
provision. 3 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 the 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 the DCIA were to be more fully realized.

I am pleased to report that FMS is making progress in collecting delinquent
federal non- tax debt through TOP. As you know, TOP is a mandatory
governmentwide debt collection program that compares delinquent debtor data
to certain federal payment data. 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

2 The nine CFO Act agencies we included in our review are USDA, the
Department of Education, the Department of Energy, the Environmental
Protection Agency (EPA), HHS, the Department of Housing and Urban
Development (HUD), the Small Business Administration (SBA), the Social
Security Administration (SSA), and the Department of Veterans Affairs (VA).
These agencies reported holding over 90 percent of the total delinquent debt
amounts reported by the 24 CFO Act agencies on their respective Treasury
Report on Receivables Due From the Public (TROR) as of September 30, 2000. 3
Debt Collection: Treasury Faces Challenges in Implementing Its Cross-
Servicing Initiative (GAO/ T- AIMD- 00- 213, June 8, 2000).

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 over the past several months has not allayed our
concerns about

the priority agencies have placed on implementing the DCIA. As I will
highlight today, the agencies we reviewed have not taken effective actions
to ensure that all eligible delinquent debt is promptly referred to FMS or a
Treasury designated debt collection center for collection action. For
example,

 As of September 30, 2000, RHS had reported that it referred to TOP $201
million of direct single family housing loans but had not referred any
amounts to FMS for cross- servicing primarily due to systems limitations.
Also, RHS? reported delinquent direct single family housing loans eligible
for TOP may 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 was not likely 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 to
FMS for cross- servicing because it suspended cross- servicing referrals
pending development and

implementation of its new cross- servicing policy.

 RHS and FSA have not referred to FMS for collection action any losses on
their guaranteed single family housing and farm loans, respectively, even
though they have experienced losses of about $132 million and about $293
million, respectively, on such loans since the enactment of the DCIA.

 CMS reported $4. 3 billion of Medicare debt eligible for referral for
collection action as of September 30, 2000, that had not been referred.
Although CMS referred about $1. 5 billion of this debt for collection action
through August 2001, the agency made the vast majority of the referrals late
in the year due to debt referral system problems, delays in

issuing referral guidance to its contractors, and a lack of monitoring of
contractor referrals. Moreover, agencies still have not utilized AWG as
authorized by the 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. 4 Finally, at the present time,
neither credit bureau reports, the TOP database, nor CAIVRS provides a
comprehensive

information source for federal credit agencies to use to identify all
delinquent debtors for the purpose of denying federal financial assistance.
Therefore, the effectiveness of the DCIA debtor bar provision is limited.
Simply stated, if the government is going to make significant progress in
collecting the billions of dollars of delinquent non- tax debt and
preventing delinquent debtors from obtaining additional federal financial
assistance, the debt collection provisions of the DCIA must be given a high
priority by agencies. This has not been the case at the agencies we reviewed
as in

many cases the agencies are showing needed corrective actions years in the
future even though substantial amounts of eligible delinquent debt have not
been referred. We performed our work primarily at RHS, FSA, and CMS. We
conducted interviews with agency officials responsible for the
identification and referral of eligible delinquent debts to FMS or a
Treasury designated debt collection center and reviewed pertinent policies,
procedures, and reports related to such debt referrals. We statistically
selected and determined

whether loans that FSA had excluded from referral to FMS for collection
action as of September 30, 2000, were consistent with established criteria
dealing with bankruptcy, forbearance/ appeals, foreclosure, and referral to
the Department of Justice (DOJ) for litigation. RHS was not able to provide

supporting documentation for certain loans it excluded from referral to FMS
for collection action as of September 30, 2000. This scope limitation
prevented us from determining whether such exclusions were consistent with
established criteria. As agreed to with staff of this Subcommittee, we did
not perform detailed testing on debts that had been excluded by CMS from
referral for collection action because of ongoing work in this area being
performed by HHS? Office of Inspector General. We did not

4 Education has been garnishing wages of certain delinquent debtors since
1993 under separate authority from that granted by the DCIA (Section 488A of
the Higher Education Act of 1965, as amended, 20 U. S. C. 1095a).

independently verify the reliability of certain information provided to us
by RHS, FSA, and CMS (e. g., debts reported as over 180 days delinquent). In
addition, we surveyed nine large CFO Act agencies on their use and planned
use of AWG and their debt reporting practices. Although we discussed with
agency officials certain responses provided on the surveys, we did not
independently verify the reliability of all the information that was
provided. In addition, we conducted interviews with officials from

several national credit reporting agencies and HUD regarding credit bureau
reports and CAIVRS, respectively.

We also conducted interviews with FMS officials and officials of Treasury?s
designated debt collection center at HHS and reviewed pertinent documents
provided by these officials regarding agency debt referral practices. We
performed our work in accordance with generally accepted

government auditing standards from November 2000 to September 2001. RHS?
Direct Single RHS administers a Direct Single Family Housing (SFH) Loan
Program to Family Housing Loan help low- income individuals or households
purchase homes in rural areas.

As of September 30, 2000, RHS reported having about $17 billion Program

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 TROR as of September
30, 2000. 5

5 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: RHS? Direct Single Family Housing Loans Debt amounts (in millions
of dollars)

Debts over 180 days delinquent including debts in CNC $383 Less: exclusions
allowed by DCIA a 182 Debt eligible for Treasury offset 201 Debt referred
for offset 201 Debt referred 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.

Support for Not Referring a The DCIA requires federal agencies to refer all
legally enforceable and

Significant Amount of eligible non- tax debts that are more than 180 days
delinquent to Treasury for collection through administrative offset and
cross- servicing. 6 We found Delinquent Direct SFH

that RHS did not maintain supporting documentation for direct SFH loans
Loans Not Maintained

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. Furthermore, the Comptroller General?s Standards for
Internal Controls in the Federal Government states that all transactions 6
Federal agencies may, at their discretion, refer valid, legally enforceable
debts for administrative offset and cross- servicing that are less than 180
days delinquent.

and other significant events need to be clearly documented and that the
documentation should be readily available for examination. 7 Systems
Limitations According to RHS officials, since implementing a new automated
Hampered Referral Activity

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- 200
loans will 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 to cross- servicing in fiscal
year 2002.

Exemption Request Denied According to RHS officials, nothing had been done
prior to our review to manually identify delinquent direct SFH loans for
referral to FMS for crossservicing because the agency had requested a
Treasury exemption 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 7 Standards
for Internal Control in the Federal Government (GAO/ AIMD- 00- 21.3. 1, Nov.
1999).

identified any new or unique collection tools applicable to direct SFH
loans.

RHS May Have Significantly When a debtor becomes delinquent 91 days on an
installment payment for a Understated Direct SFH

direct SFH loan, RHS notifies the debtor via certified mail that the entire
Loans Eligible for Referral 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 the DCIA or Treasury, should be reported as eligible for referral
to FMS for collection as well. FSA? s Direct Farm FSA provides, among other
things, temporary credit to farmers and Loan Program

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 as of September 30, 2000.

Tabl e 2: FSA?s Direct Farm Loans Debt amounts (in millions of

dollars)

Debts over 180 days delinquent including debts in CNC $1, 666 Less:
exclusions allowed by DCIA a 732 Debt eligible for Treasury offset b 934
Debt referred for offset 934 Debt referred for cross- servicing 38 a The
vast majority of the reported exclusions were for bankruptcy, forbearance/
appeals, foreclosure, and 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. Effective Process and

FSA did not have a process or sufficient controls in place to adequately
Controls Lacking for identify direct farm loans eligible for referral to
FMS. Certain types of Determining Eligibility for debts were automatically
excluded from referral without any review for

Referral of Direct Farm eligibility. In other cases, FSA?s Program Loan
Accounting System did not contain information from the detailed loan files
located at the FSA field Loans 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 DOJ/
litigation totaled about $694 million, or about 95 percent of the $732
million that was excluded from referral to FMS for TOP and crossservicing.
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 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 located 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. 8 Based
on the results of our sample, we estimate that about 575, or approximately
one- half of the excluded loans in the 4 selected states, had been
inappropriately placed in exclusion categories by FSA as of September 30,
2000. 9 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.

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 loans 8
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. 9 We estimate that 48. 5 percent plus or minus 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.

receivables and delinquent loans, failure to process loan write- offs delays
reporting closed- out debt amounts to the Internal Revenue Service (IRS) as
income to the debtor. 10

Referrals of Direct Farm As previously mentioned, only $38 million of direct
farm loans were Loans for Cross- Servicing

reported by FSA as having been referred for cross- servicing because the
Suspended

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 in the process of reviewing loans at over
1,000 FSA field offices to determine eligibility for referral to Treasury
under the new policy. FSA plans to resume referrals to FMS for cross-
servicing by the end of calendar year 2001. According to FSA officials, FSA
decided to adopt the new policy because they 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 the

DOJ for litigation, collection can still be attempted through other debt
collection tools such as referral to private collection agencies. Co-
Debtors Not Referred for

Even though FSA reported having referred $934 million of direct farm loans
TOP

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 a 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 10
The Federal Claims Collection Standards-- which were last updated in
November 2000-- and OMB in its Circular A- 129 both require agencies, in
most cases, to report closed- out debt

amounts to the IRS as income to the debtor.

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.

Eligible Debt Not Promptly According to data provided by FSA officials,
about $400 million of new Referred to TOP 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. 11 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.

RHS and FSA Have Not Since the DCIA was enacted in April 1996, RHS and FSA
have also missed

Referred Losses on opportunities to potentially collect millions of dollars
related to losses on guaranteed loans. As of September 30, 2000, neither RHS
nor FSA treated

Guaranteed Loans to such losses resulting from the SFH Program and the Farm
Loan Program,

FMS 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.

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, and RHS has
paid out losses of about $132 million on the guaranteed

11 GAO/ T- AIMD- 00- 213, June 8, 2000.

SFH program since fiscal year 1996. The outstanding principal due on
guaranteed farm loans was about $8 billion as of September 30, 2000, and FSA
has paid out about $293 million in losses since fiscal year 1996.

In January 1999 and June 2000, USDA?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 as well as implementation of policies and procedures to promptly
refer eligible amounts to Treasury for collection action is critical.

CMS? Medicare Most of CMS? debts stem from overpayments made by its 55
claims Program

administration contractors to Medicare providers and beneficiaries under 2
programs-- Part A, Hospital Insurance, and Part B, Supplemental Insurance.
Because of the ongoing business relationship with providers, the contractors
are able to collect most Medicare debt by offsetting subsequent Medicare
payments. However, for debts for which offset is not accomplished, the
unpaid balances not collected within 180 days delinquent are subject to the
debt referral requirements of the DCIA.

As shown in table 3, CMS reported that about $6.4 billion of delinquent
Medicare debt was eligible for referral for collection action as of
September 30, 2000.

Tabl e 3: CMS? Medicare Debts Debt amounts (in millions of dollars)

Debts over 180 days delinquent including debts in CNC $6, 604 Plus: other a
(unfiled cost reports) 1,591 Less: bankruptcy, appeals, litigation 1,809
Debt eligible for referral for collection action 6, 386 Debt referred for
collection action 2, 046 a Certain Medicare institutional providers (MIPs)
are paid interim amounts throughout the year based on historical service to
Medicare beneficiaries. These MIPs are required to file cost reports each
year that show actual costs incurred to provide Medicare services so that
CMS can determine whether the MIPs have been overpaid or underpaid. MIPs
that do not submit cost reports owe CMS the entire amount they received from
the agency during the year. Because CMS does not recognize amounts
associated with unfiled cost reports greater than 180 days delinquent as
receivables for financial reporting purposes, it adds such amounts to the
debts over 180 days delinquent that are reported on the TROR.

Source: Medicare Trust Fund TROR for fourth quarter 2000 (September 30,
2000).

Of the $6.4 billion of debt eligible for referral, CMS reported that about
$4. 3 billion of debt had not been referred to Treasury or a Treasury
designated debt collection center. 12 Non- Medicare Secondary Payer (MSP)
debt, which is primarily related to cost report audits, comprised about $2.
6 billion of the debt not referred. The remainder was comprised of MSP debt,
which occurs when Medicare pays for a service that subsequently is
determined to be the responsibility of another payer. 13 CMS? goal was to
refer $2 billion of such debt in fiscal year 2001 and the remainder in
fiscal year 2002. According to documents provided by HHS? Program Support
Center (PSC), a Treasury designated debt collection center, 14 CMS has
referred to the PSC about $1. 5 billion in fiscal year 2001

12 Based on our review of CMS? TROR as of September 30, 2000, all of the $4.
3 billion of eligible debt that had not been referred was reported as
eligible for referral to TOP. In addition, of the $6. 4 billion, CMS
reported that about $3 billion was eligible for referral to FMS for cross-
servicing and about $1. 8 billion of such debt had not been referred.

13 MSP debts include certain cases in which beneficiaries (1) have other
health insurance coverage provided by their employer or their spouse?s
employer, (2) have occupational injuries or illnesses that would be covered
by workers? compensation, or (3) have injuries which are covered by
liability insurance or a settlement arising from an accident.

14 In 1999, Treasury designated the PSC a debt collection center for MSP
debts and unfiled cost report debts.

through August 31, 2001. However, for reasons we will discuss, the vast
majority of these referrals were not made until late in the fiscal year.

In September 2000, we reported that CMS had not fully implemented the DCIA.
CMS had implemented pilot projects to begin referring Medicare debts
delinquent over 180 days to the PSC. 15 Five contractors participated in the
non- MSP pilot project and 15 contractors in the MSP pilot project. Under
the pilot projects, the contractors were responsible for sending DCIA intent
letters to debtors up to 6 years delinquent indicating that nonpayment would
result in referral of the debt to a Treasury designated debt collection
center. Once referred, the PSC was then responsible for

reporting the debts to FMS for TOP and referring certain debts for
crossservicing. However, we reported that under these pilot projects,
contractors referred only large- dollar- value, aged Medicare debts while
leaving out a large amount of debt. In addition, we reported that collection
prospects for large- dollar- value aged debts are much less than for newer
debts involving smaller amounts. Thus, we recommended that CMS

immediately refer all Medicare debts to the PSC as soon as they become over
180 days delinquent and were determined to be eligible, and refer the
backlog of eligible debt as quickly as possible.

Suspension of Debt Referral Although CMS experienced some success in
referring non- MSP debts to the System Hampered Referrals

PSC under its non- MSP pilot project, problems with its debt referral system
of Non- MSP Debts

and late guidance to contractors on debt referral thwarted efforts to refer
such debt. Almost all of the $2 billion of debt that had been referred to
the PSC as of September 30, 2000, was comprised of such debts. However,

about $2.6 billion in non- MSP debt had not been referred. CMS? referrals of
non- MSP debt were limited during the first 9 months of fiscal year 2001
mainly because the agency suspended the debt referral system in

November 2000. A CMS official responsible for non- MSP debt referrals stated
that the agency suspended the debt referral system to identify and correct
numerous discrepancies found in the system?s data (e. g., duplicate debts,
differences in debt amounts between debt tracking systems, and debt referral
systems) and the placement of additional edits in the system so that these
types of errors would not occur in the future. CMS resumed referring non-
MSP debts to the PSC through the debt referral system in June 2001.

15 Medicare: HCFA Could Do More to Identify and Collect Overpayments (GAO/
HEHS/ AIMD- 00- 304, Sept. 7, 2000).

CMS? suspension of its debt referral system operations not only limited the
five contractors that participated in the non- MSP pilot from referring
debts to the PSC but also significantly delayed CMS from bringing all of its

contractors into its debt referral program. In addition, late guidance to
contractors also contributed to delayed referrals. Initially, CMS intended
to have all of its contractors referring non- MSP debts to the PSC by
October 2000. However, the agency did not issue program memoranda to each of
its contractors providing them updated instructions for identifying and
referring non- MSP debts to the PSC until April 2001.

In its guidance, in response to our recommendation in September 2000, CMS
expanded the criteria for referring non- MSP debts to include Part B as well
as Part A debts and lowered the referral threshold from $600 to $25.
Subsequent to making the debt referral system operational and expanding

the referral requirements to all contractors, CMS referred, through August
31, 2001, about $1. 4 billion of non- MSP debts to the PSC.

CMS officials stated that the limited amount of non- MSP debt referrals
through the first 9 months of the fiscal year was not a significant concern
to them because they have a goal of $2 billion of referrals for fiscal year
2001, and they intend to meet that goal by the end of the fiscal year. A CMS

official recently informed us that this fiscal year goal was met. However,
as previously mentioned, the prompt referral of delinquent debts is critical
because the likelihood of recovering amounts owed decreases dramatically
with the age of delinquency of the debts. Several Factors Contributed

CMS? eligible MSP debt totaled about $1. 8 billion, which was about 40 to
Little Progress in percent of the approximately $4.3 billion of Medicare
debt that had not

Referring MSP Debts been referred for collection as of September 30, 2000.
Although CMS began referring MSP debts to the PSC in March 2000, the PSC?s
records indicate that CMS had referred only about $51 million, or 3 percent,
as of August 31,

2001. This is particularly troubling since CMS was taking no other active
collection actions on these debts. 16 Limited contractor efforts, coupled
with inadequate monitoring of contractor performance by CMS, contributed to
the slow progress in referring MSP debts. None of the three large
contractors we reviewed that 16 For most MSP debts, contractors were only
required to send initial demand letters to the employer and/ or insurance
company and follow up on any inquiries from them.

participated in the MSP pilot project promptly identified all eligible MSP
debts and/ or referred those debts to the PSC. 17 For example, one
contractor held $255 million of Part A MSP debt over 180 days delinquent as
of September 30, 2000. This contractor reported initiating the

identification and referral process for only about $33 million, or about 13
percent, of this debt. The contractor official responsible for MSP debts
stated that the contractor was under the impression that it needed to only
make two file queries in February 2000 covering debts incurred from March

1997 through August 1998 to fulfill its requirements under the pilot
project. However, CMS documentation indicated that the pilot project was to
cover all MSP debts that were no more than 6 years old and CMS officials
responsible for MSP debts stated that they had never instructed the
contractor to limit its file queries. Another contractor held about $61
million of Part A MSP debt over 180 days delinquent as of September 30,
2000. The contractor official responsible for MSP debts stated that the
contractor believed that the MSP pilot project ended in August 2000, and as
such did not perform any reviews of its MSP debt portfolio to identify
additional MSP debts to refer between September 2000 and December 2000.
Moreover, the contractor?s

records indicated that about $6. 2 million, or approximately 48 percent, of
the $12.8 million of debts for which it had sent DCIA intent letters prior
to September 2000 had not been referred to the PSC. The contractor official

responsible for MSP debts could not readily provide an explanation for why
these debts had not been referred for collection action.

In addition, CMS did not develop and implement policies and procedures for
monitoring the contractors? referral of MSP debts. Consequently, CMS did not
monitor the extent to which contractors referred specific MSP debts to the
PSC and did not identify specific contractors, such as those mentioned
above, that were not identifying and referring all eligible debts so that it
could take prompt corrective action. The Comptroller General?s

Standards for Internal Control in the Federal Government states that 17 We
reviewed the debt referral processes at four of the larger Medicare
contractors. The Medicare contractors were selected based on the size of
their debt portfolios and their participation in the pilot projects. The
contractors we reviewed had $2. 8 billion of debt, representing about 39
percent of all debts at the contractors. Three of the four contractors
participated in the pilot project for MSP debts and two of the four
contractors participated in the pilot project for non- MSP debts. The three
contractors we reviewed that participated in the pilot project for MSP debts
combined held about $357 million of Part A MSP debts or about 37 percent of
the total Part A MSP debts over 180 days delinquent at CMS as of September
30, 2000.

internal control should be designed to assure that ongoing monitoring occurs
in the course of normal operations. It should be performed continually and
ingrained in the agency?s operations. 18

Some Action Taken to Get In May 2001, CMS issued a Program Memorandum to
each of its MSP Debt Referrals Back on

contractors that required them to identify delinquent MSP debts and refer
Track the debts to the PSC. Although issued 8 months after our September
2000 recommendation to do so, CMS expanded the criteria for selecting MSP

debts for referral to include Medicare Part B debts, as well as Part A
debts. The required dollar threshold for referral will be reduced in phases
from $5000 to $25 so that the contractors will eliminate the backlog of
higher dollar debt as well as refer the current debts so that another
backlog is not created. The CMS Branch Manager stated that the memorandum
was not issued sooner, in part, because CMS had to respond to contractor
concerns

about needing additional funding to automate their respective debt referral
processes. However, the manager stated that after much consideration, CMS
concluded that referrals could be done manually and that seeking additional
funding for such referrals would likely cause further delays in referring
MSP debts to the PSC.

In response to our work, CMS officials stated that they began to review MSP
debt referrals at selected contractors. In addition, the CMS Branch Manager
for MSP stated that the 10 CMS regional offices would in the future assume a
more active role in ensuring that the contractors promptly

refer eligible MSP debts to the PSC. However, CMS has not yet formalized a
written strategy that includes precisely how contractor monitoring will be
performed.

CMS Missed Opportunities Missing information has also slowed collection
efforts. According to a PSC to Collect Certain MSP official, a recent
evaluation on PSC?s performance in collecting certain Debts Through TOP
types of debt found that only $13. 9 million, or less than 40 percent, of
the $36 million of MSP debt CMS contractors referred to the PSC in fiscal
year 2000 could be sent to TOP. Other debts could not be sent to TOP for

collection because they lacked TINS. TINS are necessary for FMS to match
delinquent debts with federal payments to be offset. 18 GAO/ AIMD- 00- 21.
3. 1.

According to PSC and CMS officials responsible for debt collection, no
written requirements were in place to help ensure that the Medicare
contractors, the PSC, or the PSC?s private collection agency obtained TINs

for all MSP debts referred for collection. The PSC official stated that the
PSC began to send letters to the debtors in August 2001 requesting TINs so
that the debts can be referred to TOP and are also discussing with CMS

officials how to effectively obtain TINs for MSP debts in the future. Lack
of Complete and

CMS will need to effectively monitor the debt referral practices of its 55
Accurate Debt Information

contractors to help ensure that all eligible Medicare debts are promptly
Hampers CMS? Debt

identified and referred for collection, but it lacks a centralized database
for Referral Monitoring

all MSP debts at its various contractors. Therefore, the agency cannot
effectively monitor the extent to which its various contractors promptly
identify and refer the debts to the PSC for collection. Although CMS is in
the process of developing a system that is to include a database of all MSP
debts, CMS plans to phase the system in at the contractors, and the system
is not scheduled to be fully implemented until fiscal year 2007.

In addition, CMS has identified problems with its contractors maintaining
accurate debt information in its non- MSP debt tracking system, which is
critical for monitoring contractor debt referral practices. CMS performed
Contractor Performance Evaluations (CPEs) on 25 contractors and found that
19 of the contractors were not adequately updating information in the
agency?s debt tracking system for non- MSP debt. For five of these
contractors, CMS considered the problems to be significant enough to require
a written performance improvement plan.

Our work at the two selected contractors involved in the non- MSP pilot
project corroborated CMS? own findings. During the non- MSP pilot project,
CMS periodically sent the two pilot contractors we reviewed a listing of
eligible debts from the agency?s debt tracking system for possible referral
to the PSC. Of the $1.3 billion of debt CMS selected in its debt listings
for the two non- MSP pilot project contractors we reviewed, the contractors?
personnel determined that $289 million, or about 23 percent, was actually
ineligible for referral due to bankruptcy, appeals, or fraud. In addition,
at

one of the two non- MSP pilot project contractors we reviewed, we identified
$21 million of debt misclassified as bankruptcy on the debt tracking system
and therefore excluded from the referral requirements.

Because these debts were actually dismissed from the bankruptcy proceedings,
they should have been reported as debt eligible for referral. 19 It is also
important to note that CMS? systems for debt tracking do not

currently have the capability to provide information as to whether its
contractors are promptly entering non- MSP debts into the debt referral
system after they mail intent letters. We noted at one of the two non- MSP
pilot project contractors we reviewed that CMS did not identify $5. 2
million of debts that were pending referral for at least 9 months. In
response to our work, CMS officials stated that they are in the process of
modifying the

debt tracking system so such monitoring will be done in the future.
Moreover, because CMS? Medicare debt comprises a significant portion of
delinquent debt governmentwide, such debt must be reported accurately if the
governmentwide debt information is to be useful to the President, the

Congress, and OMB in determining the direction of federal debt management
and credit policy. The eligible debt amounts reported by CMS to Treasury as
of September 30, 2000, were not reliable. As previously discussed, certain
contractors did not update their debt tracking systems

for non- MSP debts. These tracking systems are the same ones used by CMS in
determining the exclusion amounts for bankruptcy and appeals. In addition,
CMS inappropriately excluded $149 million of non- MSP debts that had been
referred to CMS regional offices for collection. 20 Also, CMS officials
stated that CMS did not report any exclusion amounts for MSP debts. We noted
that certain MSP debts were involved in litigation but no exclusions for
litigation were included for such debts in the report to

Treasury. In response to our work, CMS officials stated that CMS no longer
reports the debts referred to regional offices as exclusions and is in the
process of identifying and reporting exclusion amounts for MSP debts.

Problems Noted In CMS? Finally, although CMS has issued Program Memoranda to
each of its Debt Referral Strategy contractors instructing them to refer
non- MSP and MSP debts, we

19 The contractor did not update its internal systems for $8 million of
these debts and thus was not pursuing any collection action on these debts
after the dismissal. For the remaining $13 million, the contractor was
pursuing collection action but did not properly update the tracking system.

20 Prior to the DCIA referral process, contractors were required to transfer
receivables to the regional offices for collection.

identified the following issues relating to the agency?s current debt
referral strategy.

 CMS chose as its first priority the referral of about $500 million of
eligible non- MSP debts stemming from unfiled cost reports. CMS? Technical
Advisor for debt collection stated that CMS focused on these

debts because they involved high dollar amounts. However, the priority
placed on referring such debts does not appear to coincide with prospects
for collecting the debts, as the historical collection rate associated with
such debt has been almost nonexistent. For example, of the $547 million of
unfiled cost report debt that was referred through

fiscal year 2000, the PSC collected only about $9, 000. This low collection
rate is due, in part, to the fact that such debt is often adjusted downward
significantly, or even eliminated, upon submission of a cost report by the
provider. 21

 In February 2001, CMS issued guidance to its contractors to methodically
terminate collection action or close out MSP debts delinquent more than 6
years and 3 months. 22 Because CMS will close out these debts, they will not
be reported to FMS for TOP, which is FMS? most effective debt collection
tool. 23 The CMS branch manager for MSP

stated that she was not aware of any assessment performed to determine the
expected dollar amount of the closed- out debts. CMS had already approved
about $86 million of MSP debts for close- out at the contractors we
reviewed. About $85 million of these debts were less than 10 years
delinquent, and thus could still be referred to PSC for

21 Although unfiled cost report debts are referred to TOP, the main goal of
the PSC and its private collection agency for these types of debts is to
resolve them by getting the providers to submit cost reports. If the PSC or
its private collection agency is successful, the cost report is sent to CMS
to determine if a Medicare overpayment actually exists. 22 CMS officials
stated that the 6- year, 3- month criterion was chosen because debts could
not be litigated by DOJ for collection action beyond 6 years. 23 According
to documents provided by Treasury, it has collected over $1 billion of
federal non- tax debt during each of the last 3 calendar years through TOP
by offsetting tax refund payments. This by far is more than that collected
by any other of FMS? debt collection tools. In addition, Treasury has found
that the collection rate for the small amount of MSP debt

that has been reported to TOP is about 10. 5 percent, which is higher than
the average rate of TOP collections.

reporting to TOP. 24 The CMS branch manager for MSP stated that collection
efforts on older debts are not cost effective. However, CMS officials could
not provide any documentation to support the assertion that it was not cost
effective to attempt to collect older MSP debts with TOP.  The Federal
Claims Collection Standards-- which were last updated in

November 2000-- and OMB in its Circular No. A- 129 require agencies, in most
cases, to report closed- out debt amounts to the IRS as income to the
debtor. CMS has not yet established a process, including providing
authorization to the PSC, to report closed- out MSP debt amounts to the IRS.
CMS officials stated that CMS and its Office of General Counsel are
currently discussing the reporting of closed- out MSP debts to the IRS.

In addition, while the recently issued Program Memoranda cover referral
requirements for most of CMS? Medicare debts, the memoranda did not cover
all Medicare debts including the following types.  MSP Liability: MSP
liability debts cover accidents, malpractice, and other non- Group Health
Plan debts where Medicare is not the primary

payer.  Part A Claims Adjustments: Part A claims receivables are created by
an adjustment of a previously paid claim. Some reasons for claims
adjustments are duplicate processing of charges and/ or claims, payment of
noncovered items and services, or incorrect billing. These debts are not
tracked on the CMS debt tracking system. These debts are generally offset
from subsequent Medicare payments, and thus no further collection action is
needed. However, there are no requirements for Medicare contractors to
perform any other collection action on these debts, such as the issuance of
a demand letter, should subsequent Medicare payments not be available for
offset.

CMS was not able to provide a dollar amount for such types of debts over 180
days delinquent. However, as of September 30, 2000, we found that the four
contractors we reviewed held about $9.6 million of MSP liability debts and
$10.7 million of debt related to Part A claims adjustments. CMS

24 Except for certain types of debts, 31 U. S. C. 3716( e)( 1) provides that
administrative offset is available for claims that have not been outstanding
for more than 10 years. 31 C. F. R. 285.2 (d)( 1), provides that TOP is
available to collect non- tax debts referred within 10 years after the
agency?s right of action accrued.

officials stated that CMS intends to refer MSP liability debts as well as
Part A claims adjustments to the PSC in the future. Most Agencies Have

The DCIA authorizes both federal agencies that administer programs that Not
Used AWG to 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 Collect Delinquent

percent of a debtor?s disposable pay until the debt is fully recovered. 25
Debt None of the nine CFO Act agencies we surveyed used AWG as authorized by
the DCIA to collect delinquent non- tax debt as of the date of completion

of our fieldwork, over 5 years after the DCIA went into effect. Together
these agencies reported holding about $40 billion of delinquent non- tax
debt as of September 30, 2000, including $23 billion in consumer debt, 26
which is typically comprised of debts by individuals, many of whom are

employed. 27 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 identified
various reasons for the delay in implementing AWG,

including the need to focus priorities on the mandatory provisions of the
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 the DCIA, that AWG can be an extremely powerful debt collection tool, as
the mere threat of AWG is often enough to motivate debtor repayment.

Treasury?s Role in AWG Treasury issued regulations for AWG in May 1998 and
agency guidance for issuing wage garnishment orders in November 1998 and
February 1999. 25 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. 26 The
agencies held over $25 billion in debts classified as CNC, which was 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. 27 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.

The regulations are silent regarding when agencies can initiate AWG in the
collection cycle. According to these regulations, prior to initiating AWG,
an agency must give the debtor 30 days notice that includes, among other

things, an opportunity to receive a hearing concerning the existence or
amount of the debt or the terms of the proposed repayment schedule under the
garnishment order. In addition, the regulations specify that agencies must
issue garnishment orders to employers within specified timeframes that
depend on whether the debtor responded to the notice in a timely manner. 28
Of course, before garnishment orders can be sent, the debtor?s

employer must be identified and located. According to FMS, it has been
working with its private collection agency (PCA) contractors to incorporate
AWG into its cross- servicing program. On April 26, 2001, the PCAs were
provided with the AWG PCA Operations & Procedures Manual, and in May 2001,
the PCAs received the contract modification, which authorizes them to begin
to use AWG once they sign

and return the modification. Under FMS? procedures, the PCAs will be
responsible for locating the debtor?s employer if not already identified;
requesting FMS? approval to send AWG notices to debtors; and obtaining
garnishment orders, signed by FMS, to send to employers. FMS has

requested all agencies that refer debts for cross- servicing to formally
authorize FMS to use AWG as part of cross- servicing. Future Implementation
of

Although none of the nine CFO Act agencies we surveyed were using AWG AWG by
Federal Agencies

as authorized by the DCIA, all these agencies except EPA told us that they
intend to implement this debt collection tool within the next 5 years. EPA
stated that it is unsure whether it will implement AWG because most of its
debts are commercial debts and the current volume of individual debts does
not support using AWG. 29 Education, HHS, SBA, and SSA indicated

that they plan to implement AWG themselves, while USDA, Energy, HUD, and VA
indicated that they plan to rely solely on FMS to implement AWG as 28
According to Treasury regulations, the agency shall send a withholding order
to the debtor?s employer within 30 days after the debtor fails to make a
timely request for a hearing (i. e., within 15 business days after the
mailing of the notice), or, if a timely request for a hearing is made by the
debtor, within 30 days after a final decision is made by the agency to
proceed with garnishment.

29 EPA?s commercial debts are comprised of debts issued under the Superfund
program that provides federal clean- up authority and funds to address
problems posed by abandoned or uncontrolled hazardous waste sites.

part of cross- servicing, including identifying the debtors? employers and
sending notices and garnishment orders. 30 According to agency responses to
our survey and follow- up discussions

with agency officials, HHS plans to implement AWG under the DCIA authority
by the end of the calendar year 2001, SBA after March 2002, Energy after
April 2002, Education during fiscal year 2002, and SSA in fiscal year 2003.
The other three agencies we surveyed that are planning to implement AWG had
not established specific dates for implementing AWG. Of the nine agencies we
surveyed, only HUD, SBA, and SSA had a written plan for implementing AWG.
SSA provided a written implementation plan for AWG that addresses the major
milestones that must be accomplished as well as a project scope agreement
that outlines how the process will work.

Our review of the other plans provided by HUD and SBA showed that they
represented little more than a general timeline for AWG implementation
rather than a clear description and strategy for how the agency will
actually perform AWG or when AWG will be fully implemented. For example, the
two plans do not include the types of debts that will be subject to AWG or
the policies and procedures for administering AWG. Further, none of the
plans identified the processes the agencies will use to conduct hearings.
Consequently, it is not clear when these agencies will be able to fully
incorporate AWG into their debt collection processes.

Education Has Successfully Education has been garnishing wages of certain
delinquent debtors since

Used Wage Garnishment 1993 under separate authority from that granted by the
DCIA. 31 Under this Under Separate Authority

authority, Education may garnish debtors? wages up to 10 percent of
disposable pay to collect defaulted student loans. According to Education,
since the agency started garnishing wages, the collection of defaulted
student loans has increased dramatically, and the agency has reported using
wage garnishment to collect over $306 million of principal and interest on
defaulted student loans for fiscal year 1997 through March 2001.

Education uses its PCAs to perform collection activities, which include
locating debtors and their employers. However, Education directly sends

30 Education and HHS stated that they would authorize FMS to perform AWG for
certain debts referred for cross- servicing, while SBA and SSA stated that
debts referred for crossservicing would be eligible for AWG.

31 Section 488A of the Higher Education Act of 1965, as amended, 20 U. S. C.
1095a.

the official garnishment documents and orders to the employers. In 1999,
authority to access the National Directory of New Hires (NDNH), which is
maintained by HHS? Office of Child Support Enforcement (OCSE), was expanded
from delinquent child support debt to also include defaulted

student loans. 32 The NDNH includes information from state and/ or federal
agencies on employers? new hires, quarterly wages, and unemployment
insurance. 33 Education officials stated that, going forward under the DCIA,
no changes are planned regarding when AWG is initiated during the collection
cycle and that Education will continue to send garnishment orders to
employers. 34 The officials also stated that prior to implementing AWG under
the DCIA, Education must, among other things, publish a

public notice. Certain Factors Could Limit

Although FMS? incorporation of AWG into the cross- servicing program FMS?
Use of AWG would undoubtedly improve its collection success and make the FMS
collection program more comprehensive, certain factors could limit its use.
First, all delinquent debt reported by agencies as eligible for cross-
servicing is not currently being promptly referred to FMS. Second, as of the
date of completion of our fieldwork, none of the nine CFO Act agencies we
surveyed had given FMS authorization to use AWG as part of crossservicing.

Although debt referred for cross- servicing was not reported to Treasury
separately by consumer and commercial debt, the four agencies of the nine
CFO Act agencies we surveyed that plan to rely exclusively on FMS for AWG
implementation (i. e., USDA, Energy, HUD, and VA) 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. 35 32 Section 453 of the Social Security Act, as amended, 42 USC 653(
j). 33 The purpose of the NDNH is to provide a national repository of
employment and unemployment insurance information that will enable State
Child Support Enforcement IVD agencies to be more effective in locating
noncustodial parents; establishing child support orders; and enforcing child
support orders, especially across state lines. 34 Certain administrative
debts that total less than one- half of 1 percent of Education?s total
delinquent debt amount will be eligible for AWG at FMS through cross-
servicing. 35 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.

As discussed previously, the USDA agencies we reviewed, RHS and FSA, have
not identified and promptly sent debts to FMS for cross- 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.

Moreover, agencies relying on FMS to conduct AWG must first authorize FMS to
perform AWG as part of its cross- servicing program after establishing the
required hearing procedures and publishing the required regulations. As of
the date of completion of our fieldwork, according to FMS, only two small
agencies not included in our review, the Railroad

Retirement Board and the James Madison Foundation, have provided FMS the
authority to use AWG as part of cross- servicing. In addition, although most
agencies support the use of AWG, according to FMS, the agencies are

concerned about being able to handle the hearings that debtors may request.
It is important to note, however, that the DCIA does not require hearing
officials to be independent of the agency and certain agencies can

provide hearing services for a fee. For example, VA provides hearing
services to other federal agencies on federal salary offset for about $100
per hearing and, according to a VA official, the agency anticipates a
similar fee to provide AWG hearings. Moreover, Education?s experience for
defaulted student loan debt is that relatively few debtors request a hearing

compared to the number of AWG notices sent. 36 36 In fiscal year 2000,
Education issued 90, 658 Notices of Intent and only 8, 921 debtors, or about
9.8 percent, requested a hearing.

Comprehensive Current law bars certain delinquent federal non- tax debtors
from obtaining

federal financial assistance in the form of federal loans, loan insurance,
or Information Source loan guarantees until the debtor resolves the
delinquency. 37 This debtor bar For Denying Federal

provision does not expire as the debt ages, and it applies even if the
Financial Assistance Is creditor agency has suspended or terminated
collection activity on the debt. 38 Thus, it can be used to bar such
assistance for indefinite periods. Lacking For purposes of denying federal
financial assistance, a debt is in delinquent status if it has not been paid
within 90 days of the payment due date. 39 During the hearing on DCIA
implementation held by this Subcommittee in

June 2000, concerns were raised that there were federal non- tax debtors who
were delinquent on more than one federal debt. To help ensure that federal
financial assistance is denied to delinquent debtors as required by

the DCIA, federal credit agencies must have access to delinquent debtor
information that (1) includes all debtors delinquent 90 days or more on
federal non- tax debts, and (2) is maintained and updated until the
delinquency is resolved under Treasury regulations. Although credit 37
Section 3720B of title 31, United States Code, as amended by Section 845( a)
of the

Agriculture Appropriations Act, FY 2001, Public Law No. 106- 387 (2000),
bars delinquent federal non- tax debtors from obtaining federal financial
assistance in the form of federal loans, loan insurance, or loan guarantees,
except for disaster loans or a marketing loan or a loan deficiency payment
under subtitle C of the Agricultural Market Transition Act. According to
Treasury regulations, for the purpose of denying federal financial
assistance, a

person?s delinquent debt is resolved only if the person (1) pays or
otherwise satisfies the delinquent debt in full; (2) pays the delinquent
debt in part if the creditor agency accepts such part payment as a
compromise in lieu of payment in full; (3) cures the delinquency under terms
acceptable to the creditor agency in that the person pays any overdue
payments, plus all interest, penalties, late charges, and administrative
charges assessed by the creditor agency as a result of the delinquency; or
(4) enters into a written repayment agreement with the creditor agency to
pay the debt, in whole or in part, under terms and conditions acceptable to
the creditor agency.

38 According to Treasury regulations, for the purpose of denying federal
financial assistance, a debt is not in delinquent status if (1) the person
seeking federal financial assistance has been released by the creditor
agency from any obligation to pay the debt, or there has been

a determination that such person does not owe or does not have to pay the
debt; (2) the debtor is the subject of, or has been discharged in, a
bankruptcy proceeding, and if applicable, the person is current on any court
authorized repayment plan; or (3) the existence of the debt or the
delinquency of the debt is being challenged under an ongoing administrative
appeal and the appeal was filed by the debtor in a timely manner. 39
Treasury has established 90 days delinquent as the trigger for denying
federal financial

assistance because it (1) allows sufficient time for debts to be referred to
credit bureaus, and (2) is consistent with standard lending practices which
classify a loan as nonperforming at 90 days past due.

bureau reports, FMS? TOP database, and CAIVRS each contains certain
information on delinquent federal non- tax debtors, for reasons we will
discuss, none of them currently provides such all- inclusive and permanent
data that could serve as an adequate data source for successfully barring
future financial assistance to those currently delinquent or who did not
meet their obligations in the past. In general, the constraints relate to
scope of reporting, adequacy of the data for this purpose, and the fact that
data are subject to being routinely purged from these data sources after a

specified number of years. In view of these constraints, we continue to be
concerned about delinquent federal non- tax debtors obtaining federal
financial assistance.

Credit Bureau Reports The DCIA requires federal agencies to report consumer
and commercial non- tax debts to credit bureaus. 40 Related Treasury
guidance states that federal agencies should report consumer debts monthly
and commercial debts quarterly. Credit bureau reports include critical
information for the debtor bar provision, including the number of days a
debt is delinquent and whether the debtor is involved in bankruptcy. 41 As
such, credit bureau reports are a relatively good information source for
identifying certain delinquent federal non- tax debtors. However, the
information that credit bureaus are currently able to provide is limited for
the purpose of denying

federal financial assistance because (1) certain agencies do not report all
non- tax debt that is 90 days delinquent, which is the trigger associated
with the bar provision; and (2) by law, certain adverse credit information
can be

retained and reported by credit bureaus for only 7 years. In response to our
survey of nine CFO Act agencies, which together reported holding about $40
billion of delinquent non- tax debt as of September 30, 2000, eight of the
nine agencies indicated that they did not report to credit bureaus about $9.
8 billion of their delinquent debt. Over $5. 2 billion of the debt was not
reported to credit bureaus because it is exempted from the credit bureau
reporting requirement by statute;

however, this is Medicare debt, and it is subject to the delinquent debtor
40 31 U. S. C. 3711( e). 41 As previously mentioned, according to Treasury
regulations, a debt is not delinquent for purposes of denying federal
financial assistance if the debtor is the subject of, or has been discharged
in, a bankruptcy proceeding.

bar provision. 42 In addition, about $3. 4 billion is not reported because
the debts are guaranteed loans made by USDA?s Commodity Credit Corporation
to foreign governments. Agency officials stated that reporting foreign debt
to credit bureaus would serve no useful purpose and,

therefore, would not be cost effective. Other reasons cited by the agencies
for not reporting delinquent debt included (1) lack of automated capability
or system limitations to report to credit bureaus and (2) the validity of
the debt could not be firmly established. Seven of the nine CFO Act agencies
we surveyed indicated that they rely on FMS to actually report certain debts
to credit bureaus as part of crossservicing. 43 However, we noted that, as
of September 30, 2000, these seven agencies together reported about $1.4
billion of debt eligible for crossservicing

but had referred only about $330 million to FMS. Consequently, a significant
amount of delinquent debt is not likely being captured by credit bureaus,
which limits federal credit agencies? use of credit bureau reports to
identify delinquent federal non- tax debtors for the purpose of denying

federal financial assistance. The problem with relying on FMS to report
delinquent debts to credit bureaus as part of cross- servicing is that the
debts would typically not be reported until well beyond the 90- day
delinquency trigger for denying federal financial assistance. Agencies are
not required to refer eligible debts to FMS for cross- servicing until they
are delinquent over 180 days. Once FMS receives the debts, in order to give
debtors notice of credit bureau reporting and an additional opportunity to
repay their debts, FMS

waits at least 30 days for commercial debts and 60 days for consumer debts
before reporting these debts to credit bureaus. Based on the reported debt
referral practices of the seven agencies we surveyed that indicated they

rely on FMS to report certain debts to credit bureaus, debts would seldom,
if ever, be referred to FMS for cross- servicing in sufficient time for FMS
to report the debts to credit bureaus at 90 days delinquent. Moreover, as

discussed previously, we have testified before this Subcommittee that many
debts at FMS for cross- servicing were delinquent over 4 years when they
were initially referred by federal agencies.

42 Medicare debt is exempted by 31 U. S. C. 3701( d) from the credit bureau
reporting requirements imposed by 31 U. S. C. 3711( e). However, Section
3701( d) does not exclude Medicare debt from the debtor bar provision in 31
U. S. C. 3720B. 43 Two of the nine agencies we surveyed responded that they
do not rely on Treasury?s crossservicing for reporting any of their debts to
credit bureaus.

Aside from the fact that not all delinquent federal non- tax debts are
reported to credit bureaus, it is important to note that, under the Fair
Credit Reporting Act, adverse credit information for consumer debts can
generally only be reported by credit bureaus for up to 7 years. Therefore,
credit agencies cannot rely on such reports to identify debtors with older
delinquent consumer debts for the purpose of denying federal financial
assistance. Further, we noted that one of the nine agencies we surveyed

indicated that it requests the removal of certain debtors from credit
bureaus when the agency discharges debts, even though discharged debts do
not meet Treasury?s criteria for debt resolution for the purpose of denying
federal financial assistance. FMS? TOP Database FMS? TOP database is
currently not available to agencies to identify delinquent debtors for the
purpose of denying federal financial assistance. FMS is designing a new
Internet- based program, known as the Barring

Delinquent Debtors Program, to assist agencies in identifying delinquent
debtors. The program will allow agencies to initiate a search of the TOP
database to determine whether applicants for direct or guaranteed loans owe
delinquent federal non- tax debt. Currently, FMS anticipates that the new
program will be implemented during fiscal year 2002. Various legal and
technical issues may influence implementation of the Barring Delinquent
Debtors Program, including making the data available to (1) appropriate
agency personnel and (2) authorized private lending

institutions involved in federal lending activities, while maintaining
systems and data security. Ostensibly, the TOP database could provide
federal credit agencies with pertinent information about delinquent debtors
for the purpose of denying federal financial assistance. The TOP database
includes the date delinquency began for each debt; therefore, the number of
days a debt is delinquent can be readily determined. In addition, FMS allows
agencies to continually update their debt information in the TOP database.
The TOP database?s downside as an information source for identifying all
delinquent federal non- tax debtors for the purpose of denying federal
financial assistance is that a significant amount of delinquent debt
eligible for TOP is not promptly reported to FMS. Specifically, as of
September 30,

2000, the nine agencies we surveyed reported referring to FMS only about $24
billion of about $28 billion of debt eligible for TOP as of September 30,
2000. It is also important to note that debts that meet the criteria for at
least one exclusion from referral to TOP, debts in foreclosure, are

nevertheless considered to be delinquent debts for the purpose of denying
federal financial assistance. Therefore, debts in foreclosure, although
delinquent debts for the debtor bar provision, would not be eligible for
referral to TOP. Six of the nine agencies we surveyed reported having
collectively about $1 billion of debts in foreclosure as of September 30,
2000. Such debts were excluded from TOP eligibility. In addition, agencies
are not required by the DCIA to report eligible debts

for administrative offset until they are over 180 days delinquent. This is
well beyond the 90- day trigger for the purpose of denying federal financial
assistance. Moreover, debt information in the TOP database lacks permanence
for the purpose of denying federal financial assistance. Generally, debt
information can be maintained in the TOP database for only up to 10

years. 44 In addition, TOP does not maintain debt information on debts that
agencies discharge because agencies are prohibited from taking further
collection action on them when they are reported to the IRS as income.
Further, we noted that four of the nine agencies we surveyed indicated that
they request the removal of certain debts from TOP when the debts are

written off. Therefore, given the lack of permanence of the non- tax debt
information in the TOP database, agencies could not rely solely on such
information to identify all debtors with certain older delinquent non- tax
debts for the purpose of denying federal financial assistance. According to
Treasury officials, Treasury does not plan to alter the type of information

currently maintained in the TOP database to include discharged debts or
debts over 10 years delinquent.

CAIVRS Currently, CAIVRS has limitations as an information source for
identifying delinquent non- tax debtors for the purpose of denying federal
financial assistance. First, agencies are not required to report delinquent
debts to CAIVRS. Only five of the nine agencies we surveyed indicated that
they report certain of their delinquent debts to CAIVRS. Specifically, these
five agencies indicated that they report to CAIVRS about $23 billion, or
about 58 percent, of the $40 billion of total delinquent debt the nine
agencies reported holding as of September 30, 2000. Second, CAIVRS contains
limited information on delinquent debts. For example, CAIVRS does not

44 The statute of limitations for administrative offset is 10 years for most
federal non- tax debt.

include the date of delinquency or the number of days the debt is
delinquent, which is critical for denying federal financial assistance under
the authority of the DCIA. Also, each agency that reports debts to CAIVRS
can use its own discretion as to how long debts stay in the system. For
example, three of the five agencies that we surveyed which report debts to
CAIVRS indicated that they remove certain debts from CAIVRS at the time

they are written off, and all five of these agencies indicated that they
remove certain debts at the time they are discharged. Delinquent Child

Another issue that may eventually have to be considered in implementing
Support Obligors

the debtor bar provision involves delinquent child support obligors. We are
not aware of any governmentwide legal authority that expressly authorizes
agencies to deny federal financial assistance in the form of loans, loan

insurance, or loan guarantees to individuals owing past- due child support.
45 However, proposed legislation, H. R. 866, the Subsidy Termination for
Overdue Payments Act of 2001, would, if enacted, generally preclude agencies
from providing federal financial assistance to an applicant without first
obtaining a self- certification that the applicant is not more than 60 days
delinquent in the payment of any child support obligation, or if so, is in
compliance with an approved repayment plan. Going forward, if an additional
means beyond self- certification is contemplated to identify delinquent
child support obligors for the purpose

of denying federal financial assistance, it is important to note that only
two of the three aforementioned information sources we reviewed-- credit
bureau reports and FMS? TOP database-- contain information on delinquent
child support obligors. In addition, a single credit bureau may not have
information for all delinquent child support obligors and, as previously

discussed, information in the TOP database is not currently available to
agencies for the purpose of denying federal financial assistance. 45 Section
4( f) of the Small Business Act, as amended, 15 U. S. C. 633( f), requires
applicants for financial assistance under the act to certify that they are
not more than 60 days delinquent in child support payments. In addition,
Executive Order No. 13019 advises federal agencies that federal financial
assistance to child support obligors subject to administrative offset should
be denied to the extent permitted by law.

All states are required to report certain delinquent child support
obligations to credit bureaus. 46 An official from HHS? OCSE told us that
none of the states have requested a waiver from this requirement. However,
OCSE has not audited the states? credit bureau reporting activities and does
not know if the states report to the large national credit bureaus, as there
is no requirement for them to do so. Based on our review of information
provided by three national consumer credit bureaus, all states are not
reporting child support obligors to all of these credit bureaus. 47
Therefore,

the accessibility of complete information on persons with delinquent child
support obligations could be limited for federal credit agencies. Also, all
states are required to participate in tax refund offset as a means of
collecting delinquent child support. On behalf of the states, OCSE sends
delinquent child support information to FMS for inclusion in the TOP
database each week. 48 According to FMS, the TOP database includes child
support debt from all 50 states. According to FMS officials, once the
Barring Delinquent Debtors Program is available to federal credit agencies
for the purpose of identifying delinquent federal non- tax debtors,
information on delinquent child support obligors in the TOP database will
also be available.

In summary, as we have discussed, agencies have not demonstrated a sense of
urgency in integrating certain provisions of the DCIA into their debt
collection processes. Many challenges lie ahead for agencies to successfully
implement such provisions of the act. As a result, until these provisions
are fully implemented, agencies will continue to miss opportunities to
collect billions of dollars of delinquent federal non- tax 46 Section 466(
a)( 7) of the Social Security Act, as amended, 42 U. S. C. 666( a) (7)
requires

states to report periodically to consumer credit bureaus the name of any
noncustodial parent who is delinquent in the payment of support and the
amount of overdue support owed. According to OCSE officials, each state sets
its own criteria for reporting thresholds.

47 We included Equifax, Experian, and Trans Union in our review of consumer
credit bureaus, and Dun & Bradstreet and Experian in our review of
commercial credit bureaus. Treasury recommends these credit bureaus in its
Memorandum of Understanding with federal agencies regarding reporting
delinquent debt for collection action.

48 According to Treasury regulations, states include delinquent child
support obligations for tax refund offset that are over $150 and delinquent
for 3 months or longer for Temporary Aid to Needy Families (TANF) and over
$500 for non- TANF. According to OCSE officials, although states are
required to update their delinquent child support information monthly, most
update more frequently because updated information enables them to
potentially collect more through offset.

debt and the risk of delinquent federal debtors obtaining additional federal
financial assistance is increased. To assist in addressing such challenges,
we will be separately providing recommended actions to the respective
agencies.

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.

Contacts and For information about this testimony, please contact Gary T.
Engel at Acknowledgments (202) 512- 3406. Major contributors to this
testimony include Arthur W. Brouk, Richard T. Cambosos, Michael D. Hansen,
Michael S. LaForge,

Kenneth R. Rupar, Linda K. Sanders, Tanisha D. Stewart, Gladys E. Toro, and
Matthew F. Valenta.

(901827) Lett er

Lett er

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