Debt Collection: Agriculture Making Progress in Addressing Key
Challenges (13-NOV-02, GAO-03-202T).
In December 2001, GAO testified at a hearing, before the
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations, House Committee on Government
Reform, that the Department of Agriculture, primarily the Rural
Housing Service (RHS) and the Farm Service Agency (FSA), faced
challenges in implementing key provisions of the Debt Collection
Improvement Act of 1996 (DCIA). The testimony focused on RHS's
and FSA's progress in referring delinquent debt for
administrative offset and cross-servicing and Agriculture's
implementation of administrative wage garnishment (AWG). During
the hearing, Agriculture pledged to place a higher priority on
delinquent debt collection and to substantially improve its
implementation of DCIA by December 31, 2002. After the hearing,
GAO made recommendations The Subcommittee requested GAO to review
and provide an update on actions Agriculture has taken to resolve
these problems. In addition, the Subcommittee requested that GAO
report on the status of Treasury's implementation of a debt
collection improvement account, a vehicle authorized by DCIA to
give agencies financial incentives to improve their debt
collection efforts.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-202T
ACCNO: A05508
TITLE: Debt Collection: Agriculture Making Progress in
Addressing Key Challenges
DATE: 11/13/2002
SUBJECT: Debt collection
Delinquent loans
Internal controls
Noncompliance
Performance measures
Reporting requirements
FSA Program Loan Accounting System
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GAO-03-202T
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, November 13, 2002 Agriculture Making
Progress in Addressing Key Challenges
Statement of Gary T. Engel Director, Financial Management and Assurance
GAO- 03- 202T
Mr. Chairman and Members of the Subcommittee: I am pleased to be here
today to discuss the Department of Agriculture*s (Agriculture*s) actions
and plans to resolve certain implementation problems involving the Debt
Collection Improvement Act of 1996 (DCIA), and the status of the
Department of the Treasury*s (Treasury*s) use of a special financial
incentive provision of the act to encourage federal agencies to improve
their delinquent debt collection efforts. During a hearing on
Agriculture*s implementation of DCIA, which was held before this
Subcommittee on December 5, 2001, we stressed that the department*s
implementation of DCIA requirements would have to improve vastly if the
debt collection benefits of DCIA were to be more fully realized. Also
during that hearing, Agriculture officials pledged to give debt collection
higher priority and to substantially improve the department*s
implementation of the act by December 31, 2002. Subsequent to the hearing,
we made a number of recommendations to Agriculture to help it address
specific DCIA implementation problems that we identified and discussed at
the hearing. 1 It is with this backdrop that you asked us to review
actions taken by Agriculture to resolve the specific DCIA implementation
problems that
we identified and discussed. In addition, given the fact that in recent
hearings on DCIA implementation, little if any mention has been made of
the act*s financial incentive provision*s merits, you wanted to know
whether Treasury has established a fund or account to implement this
provision, and if so, which federal agencies have received payments from
the account and for what activities. Agriculture*s full implementation of
certain key provisions of DCIA is critical to overall federal nontax debt
collection. As a major federal lending agency, Agriculture continues to
hold a substantial amount of delinquent federal nontax debt. As of
September 30, 2001, Agriculture reported holding about $6.2 billion of
debt over 180 days delinquent. In DCIA, the Congress, with key leadership
and support from this Subcommittee, provided agencies, including
Agriculture, with a full array of tools to collect such delinquent debt.
Among other things, DCIA provides (1) a requirement for federal agencies
to notify Treasury of eligible debts delinquent over 180 days for purposes
of centralized administrative offset, (2) a requirement for
agencies to refer such debts to Treasury for centralized collection action
1 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).
known as cross- servicing, and (3) authorization for agencies to
administratively garnish the wages of delinquent debtors.
The primary emphasis of my testimony today is on corrective actions taken
by two major Agriculture components* Rural Development*s Rural Housing
Service (RHS) and the Farm Service Agency (FSA)* to resolve problems
associated with the identification and referral of eligible
delinquent debts to Treasury for collection action since the December 2001
hearing. I will also provide an update of Agriculture*s departmentwide
implementation of administrative wage garnishment (AWG). 2 As you recall,
we discussed Agriculture*s actions and plans for implementing AWG in
context with information dealing with the extent to which eight other
large
Chief Financial Officers (CFO) Act agencies and Treasury*s Financial
Management Service (FMS) used or planned to use AWG to collect delinquent
federal nontax debt.
Summary Today, I am pleased to report that recent actions taken by
Agriculture demonstrate that, overall, it now places a higher priority on
DCIA
implementation. RHS and FSA have made progress in addressing the problems
involving identification and referral of eligible debts to Treasury for
collection action that we identified, discussed, and for which we made
recommendations for corrective action. In addition, Agriculture is making
progress in departmentwide implementation of AWG. However, for Agriculture
and its agencies to fully address all of the DCIA implementation problems
that we identified and discussed by December 2002, or within a
reasonable period thereafter, it will take sustained commitment and
priority by top management.
2 DCIA authorizes both federal agencies that administer programs that give
rise to delinquent nontax debts and federal agencies that pursue recovery
of such debts, such as Treasury, to administratively garnish up to 15
percent of a debtor*s disposable pay until the debt is fully
recovered. 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.
Regarding the DCIA provision to offer agencies financial incentives for
collecting delinquent debt, Treasury established a debt collection
improvement account and has twice requested appropriations authorizing
expenditures from the fund. Thus far, no expenditures have been
authorized. While we support, in principle, the idea of incentives for
effective debt collection, the overall success of DCIA has not depended,
nor should it, upon the availability or use of a financial incentive. Debt
collection is a fundamental aspect of administering credit programs and
DCIA contains specific requirements for federal agencies that were
designed to improve the collection of the government*s delinquent nontax
debt. As you know, debt collection has historically not been a high
priority
at some credit agencies. However, largely due to this Subcommittee*s
oversight of agencies* DCIA implementation, the envisioned benefit of
these requirements has begun to materialize. For example, between fiscal
years 1998 and 2001, Treasury*s offset program collected over $10 billion,
about 45 percent of which was federal nontax debt. 3 In addition,
according to recent Treasury reports, federal agencies governmentwide
referred about 93 percent of their reported eligible debt as of fiscal
year 2001 for cross- servicing compared to 71 percent for fiscal year
2000, which should bode well for future collections as Treasury has begun
to incorporate AWG into its cross- servicing program.
Scope and To respond to your request, we performed work primarily at RHS,
FSA, and
Methodology Agriculture*s Office of the Chief Financial Officer. We also
performed work
at Treasury and conducted interviews with agency officials at RHS and FSA
who are responsible for taking corrective actions to ensure that all
eligible delinquent debt is promptly referred to Treasury for collection
action. We conducted interviews with Agriculture*s CFO and members of his
staff
regarding Agriculture*s implementation of AWG. To corroborate information
we obtained from interviews, we obtained and reviewed pertinent agency
documents including action plans and implementation
schedules. We did not verify the reliability of certain information that
was provided to us by agencies such as delinquent debt referred to
Treasury. We also did not assess the technical adequacy of the specific
systems
enhancements that have been deemed by the agencies as necessary for
addressing the DCIA implementation problems that we identified and
3 In addition to delinquent nontax federal debt, Treasury*s offset program
collects child support obligations and state income tax debt on behalf of
states and tax levies for the Internal Revenue Service (IRS).
discussed. We conducted interviews with Treasury officials who were
knowledgeable about the debt collection improvement account provision of
DCIA and the status of the account at Treasury. We performed our work from
July through September 2002 in accordance with U. S. generally accepted
government auditing standards. RHS Using Its
In December 2001, we testified that, as of September 30, 2000, RHS
Automated Systems to
reported it had referred to Treasury*s offset program $201 million of
direct Single Family Housing (SFH) loans but had not referred any amounts
to Make Cross- Servicing
Treasury for cross- servicing, primarily due to RHS*s systems limitations.
Referrals
RHS officials told us that since implementing a new automated centralized
loan servicing system in fiscal year 1997, RHS had been unable to readily
identify direct SFH loans that are eligible for referral to Treasury for
crossservicing. Essentially, the system did not contain sufficient data to
differentiate loans eligible for cross- servicing from those that were
not. For example, the system needed to be capable of determining the
status of any collateral, because all collateral must be liquidated prior
to a loan*s referral to Treasury for cross- servicing. After the hearing,
we
recommended that the Secretary of Agriculture direct the Administrator of
RHS to complete development of the software enhancements that will allow
automated identification of loans eligible for cross- servicing and
promptly refer all such loans to Treasury. 4 RHS has completed and
implemented the system enhancements necessary for automated identification
of direct SFH loans eligible for cross- servicing
and the prompt referral of such loans. In April 2002, RHS made its first
automated referral of direct SFH loans to Treasury for cross- servicing.
This referral involved about 10,900 loans totaling about $165.6 million.
RHS is currently using its enhanced system to identify loans eligible for
crossservicing and electronically refer them to Treasury on a monthly
basis. According to RHS documents and Treasury officials, RHS has referred
all of the loans that it has reported as eligible for cross- servicing.
Moreover, an
RHS document indicates and Treasury officials told us that there have been
no significant problems regarding eligibility for cross- servicing for the
loans that RHS has referred since April 2002.
4 U. S. General Accounting Office, Debt Collection Improvement Act of
1996: Department of Agriculture*s Rural Housing Service Has Not Yet Fully
Implemented Certain Key Provisions, GAO- 02- 308 (Washington, D. C.: Feb.
28, 2002).
RHS Able to Provide As we stated at the December 2001 hearing, when we
attempted to
Listing of Excluded independently verify specific debts that RHS had
excluded from referral to
Treasury*s offset program as of September 30, 2000, we were told by RHS
Loans for Independent
officials that the supporting documentation for the $182 million of direct
Verification
SFH loans excluded from referral had not been saved. We subsequently
recommended that the Secretary of Agriculture direct the Administrator of
RHS to maintain supporting documentation, in an appropriate level of
detail that can be made readily available for independent verification,
for all SFH debts reported and certified to Treasury as excluded from
referral for collection action. At a minimum, the documentation should
include, for
each exclusion category, such as foreclosure, the total amount reported as
excluded on the certified Treasury Report on Receivables Due from the
Public (TROR) and a listing of the identities and dollar amounts of the
specific loans excluded. 5 Such documentation would facilitate an
efficient independent review to determine whether RHS*s exclusions meet
relevant legislative and regulatory criteria. The Comptroller General*s
Standards for Internal Control in the Federal Government states that all
transactions and other significant events need to be clearly documented
and that the
documentation should be readily available for examination. 6 During our
follow- up review, RHS provided us a detailed listing of specific direct
SFH loans and the loans* corresponding dollar amounts that had been
reported as excluded from referral to Treasury on the TROR as of September
30, 2001, the last period for which certified data were available.
Although we were not requested to and did not test the specific loans
excluded to determine whether they met relevant legislative and regulatory
criteria, RHS*s ability to provide such listings should facilitate future
independent verifications of the validity of its reported exclusions, and
is critical for the oversight of the agency*s DCIA implementation.
5 GAO- 02- 308. 6 See U. S. General Accounting Office, Standards for
Internal Control in the Federal Government, GAO/ AIMD- 00- 21. 3.1
(Washington, D. C.: Nov. 1999), p. 15. This standard is critical for the
oversight of agency DCIA implementation as the act permits debts to be
excluded from referral to Treasury for offset and/ or cross- servicing if
they are under appeal, in forbearance, in litigation at the Department of
Justice, in bankruptcy, or in foreclosure. In August 2000, we reported
that agencies were excluding from referral the vast majority of debts
reported delinquent more than 180 days under DCIA or Treasury exclusion
criteria. We cautioned that the reliability of the amounts reported as
excluded needed to be independently verified on a periodic basis. See 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).
Treasury Instructs Treasury is the sole operator of a governmentwide
centralized debt
Rural Development to collection center. As such, it is critical that
Treasury obtain accurate
information from federal agencies on the status of their nontax debt,
Report Accelerated
particularly the debt over 180 days delinquent, for which DCIA was
Balances for RHS*s
designed in large part to help agencies collect through centralized Direct
SFH Loans collection. During the December 2001 hearing, we stressed that
RHS was only reporting the delinquent installment portion of its direct
SFH loans as delinquent in its TROR. It was not reporting, as required by
Treasury, the accelerated loan balance, which is the total debt due and
payable. In the report we issued after our testimony, 7 we stated that, as
a result of such reporting, RHS may have underreported to Treasury direct
SFH loan amounts delinquent over 180 days by about $849 million and direct
SFH loan amounts eligible for Treasury*s offset program by about $348
million as of September 30, 2000. We recommended that the Secretary of
Agriculture direct the Administrator of RHS to work with Treasury to
resolve any inconsistencies between RHS*s reporting of delinquent debts on
its TROR and Treasury*s instructions for such reporting. In addition, we
recommended that absent any modifications to Treasury*s instructions for
preparing the TROR, RHS report the entire accelerated balance of
delinquent direct SFH loans to Treasury as delinquent debt and, absent any
allowable exclusions, as debt eligible for referral to Treasury for
collection action. 8
After we made our recommendations, Agriculture and Treasury officials met
to address the inconsistency that existed between RHS*s reporting of
delinquent direct SFH loans on the TROR and Treasury*s instructions for
such reporting. In a September 2002 letter, Treasury informed Rural
Development that RHS should report the entire unpaid principal balances as
delinquent on the TROR, and requested that such reporting begin with the
TROR for the fourth quarter of fiscal year 2002. Treasury stated in the
letter that once an acceleration notice is sent to the borrower, which has
been RHS*s ongoing practice, the entire debt is due and payable and should
be reflected as such on the TROR. Treasury also stated that its decision
was based on consultation with its legal counsel and recent discussions
with Agriculture officials including its CFO. According to RHS officials,
the agency will report the entire unpaid principal balances for its direct
SFH
7 GAO- 02- 308. 8 GAO- 02- 308.
loans that have been accelerated beginning with the TROR for the fourth
quarter of fiscal year 2002.
Efforts Under Way, But At the December 2001 hearing, we stated that RHS
had not referred losses
RHS Will Not Be Able on its guaranteed SFH loans to Treasury for
collection action. RHS officials
told us that the agency could not pursue recovery from the debtor or
utilize to Refer Guaranteed
DCIA debt collection tools because under the SFH guaranteed loan Losses in
the
program, no contract existed between the debtor and RHS. Consequently,
Immediate Future
RHS did not recognize the losses that it paid to guaranteed lenders as
federal debt and could not apply DCIA debt collection remedies to them. We
were particularly concerned about DCIA debt collection remedies not being
available for RHS*s guaranteed SFH losses because, according to RHS,
through September 30, 2000, such losses totaled about $132 million. 9
After the hearing, we recommended that the Secretary of Agriculture direct
the Administrator of RHS to finalize and implement necessary regulatory
changes and modifications to lender agreements so that losses on
guaranteed SFH loans could be treated as federal debt and referred to
Treasury for collection action. 10 RHS is currently working on making the
regulatory changes that are
needed to refer losses on guaranteed SFH loans to Treasury*s offset
program; however, the agency will not be able to refer such losses until
regulatory action is completed and guaranteed loan applications are
modified. According to a RHS official, to expedite the regulatory
recognition of losses on guaranteed SFH loans as federal debt, Agriculture
is currently incorporating the regulatory changes that are needed into the
draft final rule for the Section 502 Guaranteed Rural Housing Program. It
is important to note, however, that the Office of Management and Budget
(OMB) has determined that the final rule for this program will constitute
a *significant regulatory action.* As such, the rule will be subject to a
more lengthy clearance process that will involve OMB review in the final
9 RHS*s guaranteed SFH losses have continued to increase to about $258
million through the third quarter of fiscal year 2002. 10 GAO- 02- 308.
rulemaking stages. 11 According to a schedule provided by Agriculture,
which includes internal agency review as well as OMB review, publication
of the final rule for the Section 502 Guaranteed Rural Housing Program is
expected by about August 2003.
Given that the aforementioned regulation is not expected to be finalized
for a considerable time, it is important to note that, as of our fieldwork
completion date, RHS also had not modified the guaranteed loan
applications for the SFH guaranteed loan program that are needed to
establish a contractual relationship between the debtor and RHS so that
losses stemming from SFH guaranteed loans can be recognized as federal
debt and be subject to the debt collection provisions of DCIA. Initially,
an RHS official stated that RHS planned to make changes to the
applications
when the final rule for the guaranteed loan program is issued. However, we
pointed out that that approach could possibly delay RHS*s ability to
recognize guaranteed loan losses as federal debt, and we suggested that
RHS change the guaranteed loan applications as soon as practicable so that
once the rule goes into effect, it may be able to be applied retroactively
to cover as many guaranteed loans as possible. As a result, according to
an RHS official, RHS consulted with its Office of General Counsel and
obtained approval for changing the guaranteed loan applications prior to
the issuance of the final rule. 12 Currently, RHS is in the process of
revising
its guaranteed loan application form to include an acknowledgement that
any claim paid by RHS on a guaranteed loan would be subject to provisions
of the DCIA.
11 Under Executive Order 12866, which was adopted during the previous
Administration, OMB reviews all significant regulatory actions to ensure
consistency with the principle of good regulatory analysis and policy. At
both the proposed and final stages of a major rulemaking, OMB is provided
up to 90 days to review an agency*s rulemaking package, including the
draft rule, the cost- benefit analysis, and any other supporting
materials. During the 90- day review period, professional analysts at OMB
scrutinize the agency*s work
and often work with an agency to improve the analysis and/ or draft rule.
There are ultimately three possible outcomes of an OMB review: (1)
clearance for publication in the
Federal Register, (2) withdrawal by the agency for further consideration,
or (3) return by OMB to the agency for reconsideration.
12 As will be discussed later, FSA modified its guaranteed loan
applications for guaranteed farm loans to establish a contractual
relationship between FSA and the debtor approximately 1 year prior to
finalizing its regulation for recognizing losses on such loans as federal
debt. According to FSA officials, all losses on guaranteed loans made
after the
applications were modified are considered federal loans and subject to
DCIA collection remedies.
Once the regulations are finalized and RHS makes the necessary
modifications to the guaranteed loan application, the agency will need to
be able to promptly refer guaranteed losses to Treasury*s offset program.
Given the fact that the SFH guaranteed loan program continues to grow
significantly, thereby increasing the number of loss claims being
processed each year, automated tracking of guaranteed loan losses and
referring them to Treasury will be critically important. RHS has initiated
a project to
automate the tracking of SFH loss claims from lenders and payments made to
lenders to cover such claims, which it plans to complete in April 2003. It
is important to note, however, that the project does not cover the process
for the automated referral of guaranteed losses to Treasury. According to
RHS officials, this automated referral process will not be covered until
RHS initiates the second phase of the current project after April 2003,
and which is estimated to take an additional 9 to 12 months to complete.
However, RHS currently tracks guaranteed losses, and RHS officials stated
that
referrals to Treasury could be done manually if the automated enhancements
needed to make such referrals are not complete.
FSA Has Initiated At the December 2001 hearing, we stated that FSA did not
have a process
Actions to Improve Its or sufficient controls in place to adequately
identify direct farm loans
eligible for referral to Treasury. We emphasized that, as a result,
amounts of Process and Controls
direct farm loans FSA reported to Treasury as eligible for referral were
not for Identifying and
accurate and, for certain loans, not only distorted the TROR for debt
Referring Debts
management and credit policy purposes but also distorted key financial
indicators such as receivables, total delinquencies, and loan loss data.
Specifically, FSA automatically excluded from referral all judgment debts
without any review to identify and refer deficiency judgments, which are
eligible for Treasury*s offset program and should be referred. 13 We
emphasized that, as of September 30, 2000, FSA*s judgment debts totaled
$295 million, and our inquiries prompted the agency to initiate a manual
process to identify deficiency judgments eligible for referral. 14 13 A
judgment may represent a judicial declaration that a debtor is personally
indebted to a
creditor for a sum of money. Judgments may include (1) judgment liens, (2)
foreclosures, and (3) foreclosures and deficiency judgments. Deficiency
judgments require payment of a sum certain to the United States and are
intended to cover the shortfall between the amount owed the United States
and the proceeds from the foreclosed property securing the loan.
14 According to FSA, the agency manually identified 280 judgment debts
totaling over $20 million through June 2002 that were eligible for
referral to Treasury*s offset program, and subsequently referred the debts
to the program.
Moreover, FSA*s Program Loan Accounting System did not contain current
information from the detailed loan files located at the numerous FSA
county field offices that would be key to determining a farm loan*s
eligibility for referral to Treasury. In addition, there were no
monitoring or review procedures in place to help ensure that FSA personnel
routinely updated the detailed loan files that are the source of such key
information. The severity of this problem was reflected in the results of
our statistical sample of loans that had been excluded by FSA in four
large states. 15 Based on our review of this sample, we estimated that
about one- half of the excluded loans in the four states had been
inappropriately placed in exclusion categories by FSA as of September 30,
2000. 16 One of the most frequently identified inappropriate exclusions
pertained to amounts that
had been discharged in bankruptcy. Such exclusions involved debts that FSA
should have written off and closed out, in many instances, several years
prior to our test date. In addition, the written- off and closed- out
amounts for such debts should have been reported to IRS as income to the
debtor in accordance with the Federal Claims Collection Standards and OMB
Circular A- 129. 17 After the hearing, to address these problems, we
recommended that the
Secretary of Agriculture direct the Administrator of FSA to develop and
implement (1) automated system enhancements to make the Program Loan
Accounting System capable of identifying all judgment debts eligible for
referral to Treasury for collection action, (2) 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,
including whether the debts are eligible for referral to Treasury for 15
Using statistical sampling, we selected and reviewed supporting documents
to determine whether farm loans that selected FSA county field offices in
California, Louisiana, Oklahoma, and Texas had excluded from referral to
Treasury were consistent with established criteria dealing with
bankruptcy, forbearance/ appeals, foreclosure, and
litigation. Field offices in these four states serviced about $272
million, or about 39 percent, of the total debts FSA excluded from
referral to Treasury as of September 30, 2000, for bankruptcy,
forbearance/ appeals, foreclosure, or litigation.
16 We estimated that 48.5 percent + 15.7 percent of the population were
inappropriately reported as exclusions from referral to Treasury*s offset
program. When projecting these errors to the population of 1,187 loans, we
were 95 percent confident that the errors in the
population were between 389 and 761 loans. 17 Federal Claims Collection
Standards and OMB Circular A- 129 require agencies to report the discharge
of the debts, also known as close out, to the IRS in accordance with the
requirements of 26 U. S. C. 6050P and 26 CFR 1.6050P- 1.
collection action, and (3) oversight procedures to ensure that all debts
discharged through bankruptcy are promptly closed out and reported to the
IRS as income to the debtor in accordance with the Federal Claims
Collection Standards and OMB Circular A- 129. We also recommended that FSA
continue to manually identify deficiency judgments eligible for referral
until the system enhancements for automated identification were completed
and implemented. 18
FSA has developed an action plan to improve its process and controls for
identifying and referring eligible debts to Treasury and, based upon our
review of documents provided by FSA, the agency has made progress toward
implementing such improvements. As of our fieldwork completion date, FSA
was using its Program Loan Accounting System and systemgenerated
reports to better track the status of FSA*s delinquent debts, including
judgment debts, for the purpose of meeting the DCIA referral requirements.
Specifically, FSA was generating an enhanced debt report to include
various types of debts under FSA*s farm loan programs, including judgment
debts, to facilitate field office review of debts to determine eligibility
for referral to Treasury. In September 2002, FSA provided its field
offices the initial enhanced debt report and directed the field offices to
review the debts for accuracy. FSA plans to routinely use the enhanced
debt report in such field office reviews in the future.
In addition, actions are being taken to improve field office oversight for
DCIA implementation. Beginning in August 2002, county field offices must
provide their respective state offices with documentation for loans that
they determine are ineligible for Treasury*s offset program because of
bankruptcy, foreclosure, or litigation. 19 The state offices, in turn, are
responsible for making the final decision regarding the loans* eligibility
for referral and for actually excluding the loans from referral. In
addition, FSA has amended its National Internal Review Guide to include
specific procedures that are designed to help ensure that state offices,
among other things, establish monitoring systems to accurately track
borrowers in
18 U. S. General Accounting Office, Debt Collection Improvement Act of
1996: Department of Agriculture*s Farm Service Agency Has Not Yet Fully
Implemented Certain Key Provisions, GAO- 02- 463 (Washington, D. C.: March
29, 2002).
19 FSA maintains a state office in each state, usually in a state capital
or near a state landgrant university. State offices, among other things,
provide administrative support and oversight to county servicing offices,
which are designed to be a single location where
customers can access the services provided by FSA.
foreclosure, bankruptcy, and litigation. The procedures are intended to
facilitate the timely and routine updating of information in the Program
Loan Accounting System to accurately reflect the status of delinquent
debts, including whether the debts are eligible for referral to Treasury
for collection action, and that all debts discharged through bankruptcy
are promptly closed out and reported to IRS. FSA*s policy is to perform
its national internal reviews at state offices not less than every 2
years, and the new procedures should improve FSA*s implementation of
DCIA*s delinquent debt referral requirements. It is important to note,
however, that specific actions in FSA*s action plan that are needed to (1)
ensure field offices are routinely reviewing accounts for Treasury*s
offset program and crossservicing referral eligibility; (2) ensure that
field offices routinely monitor the status of accounts and properly code
them for foreclosure, bankruptcy, and litigation; and (3) ensure
discharged bankruptcy accounts are promptly closed out, removed from the
farm loan debt portfolio, and appropriately reported to the IRS as
discharged debts, have target completion dates of September 2003.
Efforts Under Way at We stated at the December 2001 hearing that even
though FSA reported
FSA to Begin Referring having referred $934 million of direct farm loans
to Treasury*s offset
program as of September 30, 2000, the agency has lost opportunities for
Codebtors to Treasury
maximizing collections on this debt because it does not refer codebtors.
We emphasized that the vast majority of direct farm loans have codebtors
and pointed out that FSA*s Program Loan Accounting System did not have the
capacity to record more than one debtor and that the necessary system
modifications to record more than one taxpayer identification number had
not been made. After the hearing, we recommended that the Secretary of
Agriculture direct the Administrator of FSA to 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. 20 FSA has acknowledged the need to refer codebtors. Its
action plan includes
time frames for developing and testing the systems enhancements deemed
necessary for recording and reviewing relevant information needed for
referring debts to Treasury*s offset program, including the codebtor*s
name, address, and taxpayer identification number. Based on our review of
20 GAO- 02- 463.
documents provided by FSA, the agency has established a codebtor code for
its system and has begun to input codebtor information. According to FSA,
as of our fieldwork completion date, 254 loans with codebtors totaling
about $8.3 million had been identified for initiating the due process
required for referral to Treasury*s offset program in December 2002. Given
that the vast majority of the agency*s direct farm loans have codebtors,
FSA
has a substantial challenge ahead to obtain the required information to
refer all eligible debt for codebtors to Treasury*s offset program. 21
Quarterly Referrals to
As we noted at the December 2001 hearing, data provided by FSA officials
Treasury*s Offset showed that about $400 million of new delinquent debt
became eligible for
Treasury*s offset program during calendar year 2000. Although FSA Program
to Begin in
officials acknowledged that debts became eligible relatively evenly
December 2002
throughout the year, debts eligible for offset were being referred to
Treasury only once annually, during December. As a result, a large portion
of the $400 million of debt likely was not promptly referred when it
became eligible. FSA agreed that quarterly referrals could enhance
possible collection of delinquent debts by getting them to Treasury
earlier. After the hearing, we recommended that the Secretary of
Agriculture direct the Administrator of FSA to monitor effective
completion of the planned automated system modifications to refer eligible
debt to Treasury*s offset program on a quarterly, rather than annual,
basis. 22 FSA plans to make quarterly referrals to Treasury*s offset
program and
intends to make the first such referral in December 2002. In August 2002,
FSA issued guidance to the field offices for review of eligible debts for
the December 2002 referral. 23 In September 2002, FSA informed its field
offices that quarterly referrals are now required, and the agency has
determined that the same due process notification and referral process
that has been
used annually will be used quarterly, except under a shorter time frame.
21 We noted during our fieldwork that FSA officials were unaware of the
requirement to report discharged or closed- out debts to IRS as income for
codebtors as required by 26 U. S. C. 6050P and 26 CFR 1. 6050P- 1.
According to FSA officials, FSA*s Office of General
Counsel has agreed that reporting discharged debts for codebtors to IRS
could be done, and FSA is currently researching its systems capability for
such reporting. 22 GAO- 02- 463. 23 As of the completion date of our
fieldwork, FSA documents indicated that the initial quarterly referral in
December 2002 could potentially bring the total direct farm loans in
Treasury*s offset program to over 35, 000 loans totaling about $1.5
billion.
Significant Actions At the December 2001 hearing, we pointed out that FSA
had paid out about
Taken by FSA to Be $293 million in losses for guaranteed farm loans since
fiscal year 1996, but
like RHS, FSA had missed opportunities to potentially collect millions of
Able to Refer
dollars related to guaranteed loan losses because they were not treated as
Guaranteed Losses to federal debt. We also noted while performing work at
FSA that the agency
Treasury*s Offset had revised its guaranteed loan application applicable
to guaranteed loans made after July 20, 2001, to include a section
specifying that amounts FSA
Program pays to a lender as a result of a loss on a guaranteed loan
constitute a
federal debt. After the hearing, because FSA needed to make revisions to
its Guaranteed Loan Accounting System to classify guaranteed farm loan
losses as federal debt, we recommended that the Secretary of Agriculture
direct the Administrator of FSA to monitor planned system enhancements to
the Guaranteed Loan Accounting System to ensure that the software needed
to implement the revisions to the lender agreement to establish guaranteed
loan losses as federal debt is completed. In addition, we recommended that
once FSA establishes guaranteed loan losses as federal debt and deems them
to be eligible for referral to Treasury, FSA timely refer such debt to
Treasury for collection action in accordance with DCIA. 24
FSA has issued the final regulations for recognizing claims paid on
guaranteed farm loans as federal debt and is currently making needed
systems modifications to refer such losses to Treasury*s offset program.
According to FSA officials, the July 2002 regulations apply to guaranteed
farm loans made after July 20, 2001, the date of the revised guaranteed
loan application. FSA has established December 2002 as the milestone date
for
completing the automated systems capability to refer eligible losses to
Treasury*s offset program and, according to FSA officials, the agency is
on schedule. According to FSA officials, as of our fieldwork completion
date, the agency has not paid any loss claims associated with guaranteed
farm loans made under the July 20, 2001, revision of the guaranteed loan
application, and does not expect to experience such losses in the near
future because the loans are relatively new. 25 However, it is important
to note that if FSA experiences such losses, it has procedures for the
manual referral of guaranteed loan loss debt to Treasury*s offset program.
24 GAO- 02- 463. 25 According to FSA, as of July 24, 2002, $2.3 billion of
guaranteed farm loans had been made under the revised guaranteed loan
application.
Agriculture Is Working At the December 2001 hearing, we stated that
Agriculture and eight other
toward agencies we surveyed still had not utilized AWG as authorized by
DCIA to
collect delinquent nontax debt even though experts had previously
testified Departmentwide
before this Subcommittee that AWG could potentially be an extremely
Implementation of
powerful debt collection tool. We noted that the agencies, including AWG
Agriculture, needed to develop the required regulations to implement AWG.
In addition, we emphasized that Agriculture had not established specific
dates for implementing AWG and was among five surveyed agencies that said
they intended to implement AWG in the future but had no written
implementation plan for doing so. After the hearing, we recommended, among
other things, that the Secretary of Agriculture direct the CFO to complete
and finalize regulations for conducting AWG and prepare a comprehensive
written implementation plan that clearly defines, at a minimum, the types
of debt that will be subject to AWG, the policies and procedures for
administering AWG, and the process for conducting hearings, which are
required by Treasury. We also recommended that, when practicable, (1) AWG
be used in conjunction with other debt collection tools and (2) debts be
referred to Treasury prior to 180 days delinquent when relying on Treasury
to perform AWG. 26 Agriculture agrees that AWG has the potential to be a
powerful tool for
collecting delinquent federal debts and has taken actions to develop
needed regulations and has completed a departmentwide AWG implementation
plan. As of our fieldwork completion date, Agriculture had drafted AWG
regulations and incorporated them into the overall debt collection
regulations for the department, which are currently being
revised. 27 Agriculture also plans to work with OMB to determine whether
Agriculture*s regulatory revisions for debt collection should be
considered a *significant regulatory action.* According to Agriculture*s
implementation
plan, if the regulatory revisions are determined to be a *significant
regulatory action,* they will require a more lengthy review process
resulting in a target date of May 2003 for final publication.
26 U. S. General Accounting Office, Debt Collection Improvement Act of
1996: Status of Selected Agencies* Implementation of Administrative Wage
Garnishment, GAO- 02- 313 (Washington D. C.: Feb. 28, 2002).
27 Agriculture is currently revising its debt collection regulations,
which are contained in 7 CFR part 3, in order to ensure that they reflect
implementation of all aspects of DCIA, including AWG, and are consistent
with the Federal Claims Collection Standards, issued by Treasury and the
Department of Justice in November 2000.
In addition, Agriculture*s implementation plan contains other milestone
dates that need to be met and key elements that are needed to implement
AWG. In accordance with the implementation plan, the CFO*s office has
obtained from component agencies their best estimates of the number of AWG
cases they are likely to have each year for loans and administrative debt
along with a corresponding estimate for the number of requests for
hearings. Agriculture plans to have the Department of Veterans Affairs
conduct AWG hearings on Agriculture*s behalf and has had discussions with
Veterans Affairs regarding such services.
To actually perform AWG, Agriculture plans to rely upon Treasury*s
crossservicing program for the vast majority of its debt types for
specific debts of $100 or more. 28 Agriculture believes that Treasury*s
private collection agency contractors already have the knowledge,
expertise, and resources to seek out debtors, verify employment sources,
and pursue debt collection through AWG. Because of Agriculture*s reliance
upon Treasury to perform AWG as part of cross- servicing, the CFO*s office
plans to incorporate into Agriculture*s due process notifications to
delinquent debtors, which are mailed prior to debt referrals to Treasury,
the potential use of AWG as part of cross- servicing. In addition, the
CFO*s office plans to work with Agriculture*s component agencies to refer
debts for cross- servicing prior to the 180- day threshold, when
practicable. These steps could serve to accelerate collections of
delinquent debt.
Although Agriculture has completed its departmentwide AWG implementation
plan, components of the plan still need to be carried out. For example,
the CFO plans to obtain individual AWG implementation plans from
Agriculture*s agencies that include each agency*s timetable for
implementation, written policies and procedures, and types of debt subject
to AWG. In addition, Agriculture still needs to work with its agencies to
provide Treasury with authorization to use AWG as part of cross- servicing
and to complete the agreement with Veterans Affairs to conduct AWG
hearings on Agriculture*s behalf.
28 According to Agriculture, certain agency debts are exempt from cross-
servicing. For example, Food Stamp Program debts are held by the states,
which Agriculture considers to be third parties. These debts are serviced
and/ or collected by third parties, and thus are exempt from the
requirement to transfer to Treasury for cross- servicing by 31 CFR 285.12.
Agriculture plans to analyze these debts to see if the AWG process is
doable and feasible economically as many such debts involve very low
dollar amounts. Agriculture intends to determine the feasibility of using
AWG to collect Food Stamp Program debt by December
2002. Currently, Agriculture is surveying its component agencies to
identify other types of debt that may be exempt from cross- servicing.
Treasury*s Debt DCIA includes a voluntary *gainsharing* provision that
allows agencies to Collection
deposit a limited and defined portion of their debt collections into a
special fund account maintained and managed by Treasury. The law provides
that Improvement Account deposits into the special fund are available to
the Secretary of the Treasury
Has Not Been for gainsharing purposes only in amounts provided in advance
in appropriations acts. 29 The Secretary may make payments from amounts
Activated appropriated to agencies for purposes related to credit
management, debt
collection, and debt recovery. 30 However, because collections are
routinely deposited into the general fund of the Treasury, appropriations
would be required in order to implement this incentive provision. Treasury
has established a debt collection improvement account that can
be activated if its appropriations authorize the expenditure. 31 To date,
only the Small Business Administration (SBA) has requested funding for
gainsharing through Treasury*s debt collection improvement account. Based
on SBA*s requests, Treasury*s appropriation requests for fiscal years 1998
and 1999 included language for funding the debt collection improvement
account for up to $384,000 and $3 million, respectively. However, the
Congress made no amounts available in Treasury*s appropriations to fund
the account.
According to Treasury, because the debt collection improvement account has
never been utilized, it is difficult to assess how effective the account
29 Agencies may contribute amounts equal to 5 percent of their collections
in a fiscal year less their baselines, which are generally 5 percent of
their collections in the previous year or 5 percent of their average
annual amounts collected in the previous 4 years, whichever is greater.
OMB in consultation with Treasury may adjust an agency*s contribution
amount to reflect the level of effort in credit management by the agency.
An indicator of this effort is based on two factors: (1) the number of
days between a debt being delinquent and referral to Treasury for
collection (or an exemption from referral obtained) and (2) the ratio of
delinquent debts to total receivables for a given program and the change
in the ratio over a period of time. The amounts agencies transfer to
Treasury*s debt collection improvement account would be available to
reimburse the agencies only to the extent and in amounts provided in
advance by Treasury*s appropriations.
30 Credit management, debt collection, and debt recovery expenses cover
activities such as account servicing, data processing equipment,
delinquent debt collection, measures to minimize delinquent debt, sales of
delinquent debt, asset disposition, and training of personnel involved in
credit and debt management.
31 The account is the Gainsharing Receipts Debt Collection Improvement
Account, which is a receipt account that has been established by Treasury
in accordance with OMB procedures. Treasury*s FMS would monitor and manage
the account for administrative purposes and record the gainsharing funds
for each agency.
could be in enhancing federal agencies* debt collection or what changes,
if any, should be made in the financial incentive area to improve debt
collection governmentwide. Although the effectiveness of DCIA*s
gainsharing provision cannot be fairly
assessed at this time, it is important that the provision be kept in
proper perspective relative to the overall effectiveness of DCIA in
improving the federal government*s debt collection efforts. DCIA contains
specific requirements for federal agencies to improve collection of their
nontax debts, namely referral of certain delinquent debts to Treasury for
centralized collection. While the pace of implementation has been slow,
and collection opportunities have been lost, progress is being made. 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.
(191031)
a
GAO United States General Accounting Office
Recent actions taken by Agriculture demonstrate increased commitment to
DCIA implementation. However, it will take sustained commitment and
priority by top management to fully address the problems we identified.
GAO*s findings include the following:
RHS has worked to address systems limitations that hampered it from
promptly referring debts to Treasury for cross- servicing and is now,
according to Treasury, referring all reported eligible debt. The agency
will begin reporting certain loans* entire unpaid principal balances on
accelerated debt as delinquent, beginning with its report for the fourth
quarter of fiscal year 2002. RHS is working on making regulatory changes
needed for it to refer losses on guaranteed loans to Treasury*s offset
program, but the changes are not expected to be completed until about
August 2003.
FSA has developed an action plan to improve its process and controls for
identifying and referring eligible debts to Treasury. GAO*s review of
documents related to the plan indicates that FSA has made progress toward
implementing the improvements. In addition, by December 2002, the agency
expects to be able to begin reporting information for some codebtors when
referring delinquent debts for collection action; to begin referring debts
quarterly, rather than annually; and to be able to refer eligible losses
on guaranteed loans.
Agriculture has taken steps toward departmentwide implementation of AWG.
Agriculture has completed its AWG implementation plan but still needs to
carry out certain elements of the plan, including obtaining from its
component agencies specific information on the types of debt subject to
AWG and finalizing an agreement with the Department of Veterans Affairs to
conduct AWG hearings on Agriculture*s behalf. Agriculture has also drafted
regulations necessary for implementing AWG, which may not be published
until May 2003.
Treasury has established a debt collection improvement account but, to
date, it has not been activated because no amounts have been made
available in Treasury*s appropriations to fund the account. Agencies would
be allowed to contribute a portion of their debt collections into the
account, and amounts could be used to reimburse agencies for certain
expenses related to credit management and debt collection and recovery.
Because the account has not been activated, it is difficult to assess how
effective it might be in improving federal debt collection beyond the debt
collection improvements that have resulted directly from DCIA*s major debt
collection requirements for federal agencies.
DEBT COLLECTION
Agriculture Making Progress in Addressing Key Challenges
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 202T. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Gary T. Engel at (202) 512- 3406 or engelg@ gao. gov.
Highlights of GAO- 03- 202T, testimony
before the Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations, Committee on Government Reform, House of
Representatives
November 13, 2002
In December 2001, GAO testified at a hearing before the Subcommittee that
the Department of Agriculture, primarily the Rural Housing Service (RHS)
and the Farm Service Agency (FSA), faced challenges in implementing key
provisions of the Debt Collection Improvement Act of 1996 (DCIA). The
testimony focused on RHS*s and FSA*s progress in referring delinquent debt
for administrative offset and cross- servicing and Agriculture*s
implementation of administrative wage garnishment (AWG).
During the hearing, Agriculture pledged to place a higher priority on
delinquent debt collection and to substantially improve the department*s
implementation of DCIA by December 31, 2002. After the hearing, GAO made
recommendations to Agriculture to help the department address the
implementation problems GAO had identified.
It is with this backdrop that the Subcommittee requested GAO to review and
provide an update on actions Agriculture has taken to resolve these
problems. In addition, the Subcommittee requested GAO to report on the
status of Treasury*s implementation of a debt collection improvement
account, a vehicle authorized by DCIA to give agencies financial
incentives to improve their debt collection efforts.
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