Farm Loan Programs: GAO Reports on USDA Lending Practices	 
(28-JUN-06, GAO-06-912R).					 
                                                                 
This report responds to a Congressional request for information  
relating to a June 13, 2006 Congressional hearing on the U.S.	 
Department of Agriculture's (USDA) farm loan programs. In	 
particular, the May 16, 2006 letter requested that we summarize  
our findings from the 1990s through 2002 on USDA's farm loan	 
programs. Congress also requested that we provide any GAO	 
opinions on the current management and status of the loan	 
programs and identify any matters that Congress should consider. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-912R					        
    ACCNO:   A56061						        
  TITLE:     Farm Loan Programs: GAO Reports on USDA Lending Practices
     DATE:   06/28/2006 
  SUBJECT:   Agricultural assistance				 
	     Agricultural programs				 
	     Farm credit					 
	     Financial management				 
	     Loans						 
	     Program management 				 
	     FSA Direct Farm Loan Program			 

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GAO-06-912R

June 28, 2006

The Honorable Saxby Chambliss

Chairman

Committee on Agriculture, Nutrition and Forestry

United States Senate

Subject: Farm Loan Programs: GAO Reports on USDA Lending Practices

Dear Mr. Chairman:

This report responds to your request for information relating to the
committee's June 13, 2006, hearing on the U.S. Department of Agriculture's
(USDA) farm loan programs. In particular, your May 16, 2006 letter
requested that we summarize our findings from the 1990s through 2002 on
USDA's farm loan programs. You also requested that we provide any GAO
opinions on the current management and status of the loan programs and
identify any matters that the committee should consider.

The USDA Farm Service Agency's (FSA) farm loan programs are intended to
provide temporary financial assistance for the nation's farmers and
ranchers who are unable to obtain commercial credit at reasonable rates
and terms. FSA provides various types of both direct and guaranteed farm
loans. Direct farm ownership loans can be used to buy farm real estate and
make capital improvements. Guaranteed farm ownership loans are made for
the same purposes and for refinancing existing debts. Also, direct farm
operating loans can be used to buy feed, seed, fertilizer, livestock, and
farm equipment; pay family living expenses; and, subject to certain
restrictions, refinance existing debts. Guaranteed farm operating loans
are made for the same purposes, but without restriction on refinancing
existing debts. Additionally, direct loans include emergency disaster
loans, which are made to farmers and ranchers whose operations have been
substantially damaged by adverse weather or other natural disasters. In
operating the farm loan programs, USDA faces the conflicting tasks of
providing temporary credit to high-risk borrowers so that they can stay in
farming until they are able to secure commercial credit and ensuring that
the taxpayers' investment is protected.

Our reports from the mid-1980s through 2001 highlighted significant
financial and policy shortcomings in USDA's farm loan programs. In
particular, we reported that billions of dollars of losses had occurred on
USDA's farm loan programs because of weaknesses in USDA's lending
practices and management of the program. In 1990, we placed USDA's farm
loan programs on our "high-risk" list because delinquent farm loan
borrowers held $11.1 billion of the agency's outstanding loans. In 1992,
we reported that because of defaults in recent preceding years the Farmers
Home Administration (FmHA) had reduced or forgiven delinquent debt of $7.6
billion. However, starting in the mid-1990s, the Congress passed key
legislation, such as the 1996 Farm Bill, that addressed many of

United States Government Accountability Office

Washington, DC 20548

the weaknesses in USDA's farm loan programs. USDA also initiated program
management improvements in response to our recommendations. In January
2001, we removed these programs from our high-risk list because actions
taken by the Congress and USDA had a significant positive impact on the
operations and financial condition of USDA's farm loan programs. In our
January 2001 report,1 we noted that borrowers who were delinquent on their
farm loans owed $1.8 billion on direct loans (about 21 percent of the
outstanding principle on direct loans)-a significant decrease in
delinquent debt. Moreover, we reported that USDA's direct loan losses of
$427 million in fiscal year 2000 were the lowest in over 10 years.
Summaries of selected GAO reports from 1988 through 2001 that outline our
prior findings on USDA's farm loan programs are enclosed.

Concerning USDA's more recent farm loan program performance, we have not
performed work that would allow us to comment on the current management
and status of the loan programs, or identify matters that the committee
should consider at this time. We would, of course, be pleased to discuss
further work in this area should it be of interest to the committee.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. Please contact me at
(202) 512-5988 or [email protected] if you or your staff have any questions
about this report.

Sincerely yours,

Daniel Bertoni

Acting Director, Natural Resources

and Environment

Enclosure

1GAO, Major Management Challenges and Program Risks: Department of
Agriculture, GAO-01-242 (Washington D.C.: January 2001).

             Summaries of Selected GAO Reports on USDA's Farm Loan

                             Programs, 1988 - 2000

Farmers Home Administration: Farm Loan Programs Have Become a Continuous
Source of Subsidized Credit, GAO/RCED-89-3 (Nov. 22, 1988)

We reported that the Farmers Home Administration (FmHA), which was FSA's
predecessor agency, faced the dilemma of finding the appropriate balance
between acting as the lender of last resort for family farmers who could
not get credit elsewhere while at the same time fulfilling its
congressional mandate to serve as a temporary source of credit. Between
1976 and 1987, the amount of delinquent loan payments increased from $164
million to about $7 billion, and the total outstanding principal owed by
delinquent borrowers increased from $723 million to over $12.8 billion.
FmHA was originally established as a temporary source of credit for
farmers, and it was expected that FmHA's borrowers would graduate to
commercial sources of credit once they could do so at affordable rates and
terms. However, the farm loan programs were not operating in that
manner--many FmHA borrowers remained in the farm loan program for extended
periods. We found that about 42 percent of FmHA's borrowers had borrowed
from FmHA for 7 or more years, including about 57,600 borrowers who had
had borrowed from FmHA for 10 or more years. We suggested that the
Congress reevaluate the role of FmHA in farm lending by considering, among
other things, at what point the costs of providing long-term credit
assistance to farmers in financially marginal situations outweigh the
benefits to the government, rural communities, and the farmer. We also
recommended that FmHA develop an operational definition of "graduation"
and monitor compliance with that definition.

Government Financial Vulnerability: 14 Areas Needing Special Review,
OCG-90-1 (Jan. 23, 1990)

This report identified federal programs that we considered to be plagued
by serious breakdowns in their internal controls and financial management
systems and, as a result, vulnerable to major losses of federal funds. We
included the FmHA's loan programs because delinquent farm loan borrowers
held $11.1 billion, or 48 percent, of the agency's $23.3 billion in
outstanding loans as of September 30, 1989. We stated that the potential
for controlling loan losses warranted additional review and oversight.

Farmers Home Administration: Billions of Dollars in Farm Loans Are At
Risk, GAO/RCED-92-86 (Apr. 3, 1992)

We reported that the multibillion-dollar federal investment in farmer loan
programs was not adequately protected: about 70 percent of USDA's direct
farm loans of almost $20 billion were held by borrowers who might not meet
some or all their obligation to repay their loans. In the direct loan
program, field lending officials had not complied with agency loan-making
and loan-servicing standards established to safeguard federal financial
interests. By allowing delinquent borrowers to obtain additional credit,
FmHA had also reinforced its lending to poor credit risks, and by
providing debt relief to borrowers who had defaulted on their loans, it
had created incentives for farmers to avoid repaying their debts.
Furthermore, the FmHA's mission--to help keep high-risk farmers on their
farms-often conflicted with normal fiscal controls and policies designed
to minimize risk and financial losses. As a result, there were no clear
guidelines that would have enabled FmHA to balance its responsibilities as
the lender of last resort for the nation's farmers with its
responsibilities as a fiscally prudent lender. We made numerous
recommendations to USDA and the Congress aimed at (1) improving compliance
with loan and property management standards, (2) strengthening farm loan
policies and programs design, and (3) clarifying USDA's farm lending role
and mission.

Farm Service Agency: Information on Farm Loans and Losses (GAO/RCED-99-18,
Nov. 27, 1998)

We reported that the value of direct farm loans held by delinquent
borrowers had decreased from $4.6 billion in 1995--about 41 percent of
USDA's total outstanding direct farm loan principal--to $2.7 billion by
1997. However, in fiscal years 1996 and 1997, about $1.9 billion of
principal and interest owed on farm loans was written off by USDA. For the
9-year period, fiscal years 1989 through 1997, FSA wrote off $15 billion
of direct farm loans for almost 80,000 borrowers through its various
processes for resolving delinquencies.

Farm Service Agency: Updated Status of the Multibillion-Dollar Farm Loan
Portfolio, GAO-01-202 (Jan 10, 2001)

We provided an updated overview of the changing financial condition of
FSA's farm loan portfolio as of September 30, 2000. FSA had more than
$16.6 billion in outstanding farm loans at the time. Of that amount, about
$2.1 billion was owed by delinquent borrowers, and most of this amount (87
percent) was owed on direct loans. Overall, this financial position
reflected improvement in FSA's direct farm loan portfolio as well as a
continuation of a relatively healthy guaranteed farm loan portfolio. Also,
farm loan losses incurred by FSA during fiscal year 2000 totaled about
$486 million, considerably less than in each of fiscal years 1995 through
1999, when USDA's direct farm loan losses averaged $778 million per year.

Farm Loan Programs: Improvements in the Loan Portfolio But Continued
Monitoring Needed, GAO-01-732T (May 16, 2001)

We testified that the overall financial condition of the farm loan
portfolio had improved and that USDA's direct loan losses in fiscal year
2000 were the lowest in over 10 years. We also noted that the continued
improvements in the farm loan portfolio in recent years had resulted from
legislative and management actions. In particular, the 1996 Farm Bill
included provisions that (1) prohibited borrowers who are delinquent on
direct or guaranteed farm loans from obtaining additional direct farm
operating loans, (2) generally prohibited borrowers whose past defaults
resulted in loan losses from obtaining new direct or guaranteed farm
loans, and (3) limited borrowers to one instance of debt forgiveness on
direct loans. The 1996 Farm Bill also required borrowers to have or to
agree to obtain hazard insurance on the property that they acquire with
farm ownership and operating loans, and required applicants, as a
condition for obtaining an emergency disaster loan, to have had hazard
insurance on property that was damaged or destroyed. Further, the 1996
Farm Bill limited the length of time that direct loan assistance is
available and enhanced the potential for direct loan borrowers to obtain
conventional credit by allowing a 95-percent guarantee on loans made by
commercial lenders. Also, since the mid-1990s, USDA had addressed several
loan management problems, such as the quality controls over loan-making
and loan-servicing, thereby reducing some of the risks associated with the
farm loan programs.

(360728)

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