High Risk Series: Farm Loan Programs (Letter Report, 02/95, GAO/HR-95-9).

In 1990, GAO began a special effort to identify federal programs at high
risk of waste, fraud, abuse, and mismanagement.  GAO issued a series of
reports in December 1992 on the fundamental causes of the problems in
the high-risk areas.  This report on farm loan programs is part of the
second series that updates the status of this high-risk area. Readers
have the following three options in ordering the high-risk series: (1)
request any of the individual reports in the series, including the
Overview (HR-95-1), the Guide (HR-95-2), or any of the 10 issue area
reports; (2) request the Overview and the Guide as a package
(HR-95-21SET); or (3) request the entire series as a package
(HR-95-20SET).

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HR-95-9
     TITLE:  High Risk Series: Farm Loan Programs
      DATE:  02/01/95
   SUBJECT:  Farm credit
             Loan defaults
             Direct loans
             Government guaranteed loans
             Delinquent loans
             Federal property management
             Human resources training
             Risk management
             Collection procedures
             Oversight by Congress
IDENTIFIER:  FmHA Direct Farm Loan Program
             FmHA Guaranteed Farm Loan Program
             High Risk Series 1995
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


High-Risk Series

February 1995

FARM LOAN PROGRAMS

GAO/HR-95-9

Farm Loans


Abbreviations
=============================================================== ABBREV

  FmHA - Farmers Home Administration
  GAO - General Accounting Office
  USDA - U.S.  Department of Agriculture

Letter
=============================================================== LETTER



February 1995

The President of the Senate
The Speaker of the House of Representatives

In 1990, the General Accounting Office began a special effort to
review and report on the federal program areas we considered
high-risk because they were especially vulnerable to waste, fraud,
abuse, and mismanagement.  This effort, which has been strongly
supported by the Senate Committee on Governmental Affairs and the
House Committee on Government Reform and Oversight, brought much
needed focus to problems that were costing the government billions of
dollars. 

In December 1992, we issued a series of reports on the fundamental
causes of problems in areas designated as high-risk.  We are updating
the status of our high-risk program in this second series.  Our
Overview report (GAO/HR-95-1) discusses progress made in many areas,
stresses the need for further action to address remaining critical
problems, and introduces newly designated high-risk areas.  This
report series also includes a Quick Reference Guide (GAO/HR-95-2)
that covers all 18 high-risk areas we have tracked over the past few
years, and separate reports that detail continuing significant
problems and resolution actions needed in 10 areas. 

This report summarizes our findings and the progress made in
correcting problems with the federal government's direct and
guaranteed farm loan programs and the management of farm properties
obtained as a result of defaults on federal loans.  Within the U.S. 
Department of Agriculture, farm loans have been historically
administered by the Farmers Home Administration.  In October 1994,
the responsibility was transferred to the newly created Consolidated
Farm Service Agency.  Because of the general familiarity with the
agency's earlier name, we refer to the Farmers Home Administration
throughout this report. 

Copies of this report series are being sent to the President, the
Republican and Democratic leadership of the Congress, congressional
committee and subcommittee chairs and ranking minority members, the
Director of the Office of Management and Budget, and the Secretary of
Agriculture. 

Charles A.  Bowsher
Comptroller General
of the United States


OVERVIEW
============================================================ Chapter 0

The Farmers Home Administration (FmHA), an agency of the U.S. 
Department of Agriculture (USDA), provides temporary financial
assistance to farmers who are unable to obtain commercial loans at
reasonable rates and terms.  FmHA has two principal and often
conflicting roles:  (1) to provide high-risk borrowers with temporary
credit to enable them to stay in farming until they are able to
secure commercial credit and (2) to do so in a way that protects the
taxpayers' investment. 

THE PROBLEM

FmHA has evolved into a continuous source of credit for many of its
borrowers, and it has had a high rate of loan defaults, which have
resulted in the loss of over $6 billion of taxpayers' money in recent
years. 

As we have previously reported, FmHA field office lending officials
have not always implemented loan-making and loan-servicing standards
intended to safeguard federal financial interests or prudently
managed farm property that the agency has acquired.  Also, some
loan-making, loan-servicing, and property management policies do not
adequately protect the taxpayers' interests.  Furthermore, because
legislation has not yet established clear priorities for FmHA's
fundamental role and mission, losses can be expected to continue. 

PROGRESS

FmHA has taken steps to correct some problems with its farm loan
programs.  For example, FmHA has provided its field office lending
officials with extensive training in credit and financial analysis to
improve the quality of the loans being made.  FmHA reviews show that
most new direct and guaranteed loans meet the agency's lending
standards.  Also, FmHA's field office officials recently improved
their compliance with the agency's standards for servicing guaranteed
loans. 

However, little progress has been made in correcting other basic
problems in FmHA's farm loan programs.  FmHA field officials still do
not always follow established procedures for servicing outstanding
direct loans.  Also, neither USDA nor the Congress have addressed
problems involving the agency's loan and property management
policies.  As a result, the agency continues to, for example, make
loans to borrowers who either are behind on repaying their current
debts or did not repay their previous debts; reduce and forgive the
debts of borrowers who do not repay their loans; and sell farm
properties at fixed prices to targeted purchasers, which limits
returns and increases holding costs. 

The Congress has clarified FmHA's fundamental role and mission in one
area.  Specifically, in late 1992, it required FmHA to establish
programs for beginning farmers and target a certain portion of its
loan funds to them.  The Congress, however, has not yet provided FmHA
with clear direction on being a fiscally prudent lender nor on
handling those borrowers who have come to rely on FmHA as a
continuous source of credit. 

OUTLOOK FOR THE FUTURE

FmHA's farm loan portfolio continues to contain a high level of
delinquent debt, even though billions of dollars in unpaid loans has
been forgiven.  As of September 1994, FmHA's outstanding loans to the
nation's farmers totaled $18 billion.  Of that amount, almost 27
percent--about $4.8 billion--was held by borrowers who were behind on
their loan payments.  This condition exists even though FmHA lost
more than $6 billion during fiscal years 1991-94. 

In view of the very tight fiscal constraints that the federal
government is facing, action is needed to bring FmHA's losses under
control.  Our April 1992 report presented a strategy for such action
through a series of recommendations covering, for example, policies
and program design in the direct loan, guaranteed loan, and farm
inventory property areas, and matters for congressional consideration
covering FmHA's fundamental role and mission.  As we reported in
December 1992, we believe that the Congress needs to recognize that
not all financially stressed farms can be saved and that not all farm
families can benefit from a government assistance program intended to
keep them in farming.  With this in mind, we suggested that the
Congress consider, among other things, giving FmHA firm guidance on
the following:  (1) the level of loan losses that the Congress is
willing to accept, (2) the length of time over which borrowers should
be allowed to receive FmHA assistance, and (3) the kind of
assistance, if any, that should be made available to unsuccessful
borrowers who want to leave farming. 


FMHA'S FARM LOAN PROGRAMS CONTINUE
TO BE VERY RISKY
============================================================ Chapter 1

Under the authority of the Consolidated Farm and Rural Development
Act, as amended, FmHA provides financial assistance to farmers
through federally funded direct loans and through guaranteed loans,
which are made by commercial lenders and guaranteed up to 90 percent
by the federal government.  FmHA's assistance is intended to be
temporary; once farmers have become financially viable, they are
expected to move to commercial sources of credit. 

FmHA incurs a loss on a direct or a guaranteed farm loan when a
borrower defaults and the proceeds from selling the collateral do not
equal the outstanding loan amount plus the costs of acquiring and
disposing of the collateral.  In some cases, FmHA may acquire the
property that was pledged as security for the loan and subsequently
try to sell that property to recover some or all of the unpaid debt. 

BILLIONS OF DOLLARS HAVE BEEN LOST
AND BILLIONS MORE ARE AT RISK

Because of loan defaults, FmHA lost about $6.3 billion on its farm
loan programs during fiscal years 1991-94.  Of this amount, about
$6.1 billion was forgiven debt on unpaid direct loans and about $200
million was payments to lenders on guaranteed loans. 

Despite relief of this magnitude, as of September 30, 1994, another
$4.8 billion in direct and guaranteed loans was held by borrowers who
were unlikely to meet some or all of their obligations. 
Specifically, borrowers were delinquent on almost 27 percent of the
$18 billion in outstanding loans--about $4.6 billion of the $12.6
billion direct and about $200 million of the $5.4 billion guaranteed
loan debt. 

As we reported in December 1992, FmHA and the Congress share
responsibility for many of the problems with FmHA's farm loan
programs.  Although some contributing factors--such as the general
decline of the agricultural economy in the 1980s--have been beyond
the control of FmHA or the Congress, other factors do lie within
their authority.  First, FmHA's field office lending officials have
not always followed the agency's own standards for making loans,
servicing loans, and managing property.  Second, FmHA loan and
property management policies--some of which are congressionally
directed--do not protect the taxpayers' interests.  For example,
these policies allow FmHA to make new loans to borrowers who either
are behind on repaying their current debts or did not repay their
previous debts; reduce and forgive the debts of borrowers who do not
repay their loans; and sell farm properties at fixed prices to
targeted purchasers, which limits returns and increases holding
costs. 

The Congress has the ability to influence the direction of FmHA's
farm loan programs.  However, it has given FmHA two broad, often
conflicting, responsibilities--(1) to provide high-risk borrowers
with temporary credit to keep them in farming until they secure
commercial credit and (2) to operate as a fiscally prudent lender. 
Congressional actions emphasizing assistance over prudence are
perhaps a greater cause of FmHA's farm loan problems than program
management.  For example, a previous attempt by FmHA to make loan
standards more stringent was not implemented because of, among other
things, congressional concern about the adverse impact that the
proposed changes might have on farmers.  Similarly, FmHA has also
been directed by the Congress to allow delinquent borrowers to obtain
additional loans and relief from existing debts. 


LIMITED PROGRESS MADE CORRECTING
BASIC PROBLEMS
============================================================ Chapter 2

FmHA has taken steps to correct some problems with its farm loan
programs.  However, these actions do not fully address the root
causes of problems in these programs.  As a result, the taxpayers'
investment continues to be at substantial risk. 

COMPLIANCE WITH LOAN-MAKING
STANDARDS IS IMPROVING

On the positive side, in the past few years FmHA has provided its
field office lending officials with extensive training in credit and
financial analysis and has emphasized the importance of ensuring that
new loans meet the agency's loan-making standards.  Recent FmHA
reviews show that the vast majority of direct and guaranteed loans
now being made meet the agency's basic lending criteria, which cover
such credit standards as applicants' demonstrating an ability to
repay and providing adequate collateral.  For example, while FmHA's
internal reviews during fiscal years 1988 through 1991 showed that
13.5 percent of the sampled direct loans did not meet the agency's
cash flow standard used to test a borrower's repayment ability,
reviews during fiscal years 1993 and 1994 showed that about 7 percent
of the sampled loans failed to meet this standard.\1 Reviews during
the same periods also showed that the failure to verify borrowers'
debts has decreased from about 31 percent of the sampled direct loans
to about 11 percent. 

The approval of guaranteed loans shows similar improvement.  For
example, FmHA's internal reviews during fiscal years 1988 through
1991 showed that 13 percent of the sampled guaranteed loans did not
meet the cash flow standard for guaranteed loans and 20 percent did
not have adequate collateral; reviews during fiscal years 1993 and
1994 showed that only about 3 percent of the sampled loans failed to
meet these two key loan-making standards. 

PROGRESS IN COMPLYING WITH
LOAN-SERVICING STANDARDS IS MIXED

FmHA's field office officials recently improved their compliance with
the agency's standards for servicing guaranteed loans, but the
officials still frequently fail to implement standards for servicing
direct loans.  For example, FmHA requires field office officials to
approve a lender's plan to reschedule or reamortize a delinquent
guaranteed loan and to concur with cash flow estimates (income and
expenses) before approving advances for the second and third years on
a line-of-credit operating loan.  FmHA's fiscal year 1993 reviews
showed 37-percent and 21-percent noncompliance rates with these two
standards, respectively; reviews during fiscal year 1994 showed
improvement--
5-percent and 10-percent noncompliance rates with these standards,
respectively. 

In servicing direct loans, however, the story is not the same.  For
example, FmHA requires field office officials to annually (1) inspect
property offered as collateral, (2) analyze borrowers' operations and
assist them in planning for future farming, and (3) conduct
supervisory visits with borrowers.  FmHA's internal reviews during
fiscal year 1991 disclosed that collateral had not been inspected for
12.5 percent of the sampled direct loans; the rates of noncompliance
with this key standard increased to 19 percent in fiscal year 1993
and then decreased to 10 percent in fiscal year 1994.  FmHA's reviews
showed a somewhat different pattern with the analysis and planning
requirement--a noncompliance rate of 20 percent in both 1991 and 1993
that declined to 16 percent in 1994.  Noncompliance with the
supervisory visit requirement, however, has continued rising, from 11
percent in 1991 to 19 percent in 1993 and to 21 percent in 1994. 

Furthermore, as we reported in November 1994, field office officials
do not always take action to identify direct loan borrowers who have
the potential to move to commercial credit.  And, when they do
identify potential candidates, they often fail to take actions to
move them to commercial credit.  They did not do so because they
perceived other work, such as resolving delinquent debts, to be more
important.  Likewise, as we reported in October 1994, when field
officials were resolving unpaid direct loans, they frequently did not
develop a complete inventory of borrowers' financial resources and
were not aware of assets or income that could have been used to
reduce loan losses.  Even when they had a complete inventory of
borrowers' financial resources, these officials did not always use
those resources to offset losses.  They did not do so because the
agency's managers have placed little emphasis on minimizing losses
and maximizing recoveries and because competing work priorities
create incentives to use the debt settlement process to "clean up"
the loan portfolio by writing off delinquent debt rather than to
pursue recoveries. 

FmHA has published in the Federal Register proposed and interim
changes to its operation of the farm loan programs.  For example,
FmHA is in the process of developing regulations that would implement
congressional requirements to assess the farming operation and
financial condition of its borrowers, assist borrowers to obtain
credit through guaranteed rather than direct loans, and attempt to
move direct loan borrowers to commercial credit.  Furthermore, in
October 1994, a nationwide USDA task force was established to
concentrate on resolving many of the agency's delinquent loan
accounts. 

PROBLEMS WITH FMHA'S FARM LOAN
POLICIES REMAIN UNCHANGED

Neither USDA nor the Congress has addressed policies involving
whether the agency should continue, for example, to

make additional loans to borrowers whose previous delinquent debts
were forgiven and to borrowers who are delinquent on their existing
loans;

allow lenders to use guaranteed loans to refinance existing
customers' debts and to guarantee most loans at the maximum rate (90
percent) regardless of risk;

rewrite loan terms and conditions, without requiring borrowers to
make payments;

forgive borrowers' delinquent debts; and

dispose of farm inventory properties in ways that prevent FmHA from
increasing recoveries and lessening losses. 

LIMITED PROGRESS IN CLARIFYING
FMHA'S ROLE AND MISSION

The Congress somewhat clarified FmHA's fundamental role and mission
in the Agricultural Credit Improvement Act of 1992, which directed
the agency to establish programs for, and target a certain portion of
its loan funds to, beginning farmers.  Specifically, the Congress
required FmHA to establish a farm ownership loan program that is
aimed at enhancing the financial viability of new farmers by putting
them in a position to build equity in their farming operations.  The
Congress also required FmHA to establish a farm operating loan
program that is aimed at putting beginning farmers in a financially
viable position, independent of the need for further FmHA financial
assistance, within a set period of time.  For example, the Congress
directed that financial assistance in the operating loan program be
available for up to 10 years to borrowers who develop and meet
operating plans that provide for their progression to private credit
and who participate in loan assessment, borrower training, and
financial management programs. 

The Congress, however, has not yet provided FmHA with clear direction
on being a fiscally prudent lender nor on handling those borrowers
who have come to rely on it as a continuous source of credit. 


--------------------
\1 The numbers presented in this and the following section on the
results of FmHA reviews are taken directly from FmHA reports.  We did
not attempt to verify their accuracy or the methodology used to
generate these numbers. 


FURTHER ACTION NEEDED TO PROTECT
TAXPAYERS' INVESTMENT
============================================================ Chapter 3

As we reported in April and December 1992, FmHA has neither acted as
a prudent lender nor enhanced the creditworthiness of the nation's
financially stressed farmers.  As the lender of last resort to
borrowers whom commercial lenders do not consider creditworthy, FmHA
would be expected to incur some losses through defaults on loans. 
However, the massive amount of money that FmHA has lost, and the
amount that is vulnerable to loss, far exceed the losses that might
be anticipated, even for a lender of last resort. 

In April 1992, we made numerous recommendations to the Secretary of
Agriculture and to the Congress to improve compliance with loan and
property management standards and to strengthen policies and program
design in the direct loan, guaranteed loan, and farm inventory
property areas.  However, only limited action has been taken on those
recommendations.  In October and November 1994, we made additional
recommendations aimed at strengthening the farm loan programs and
presented various suggestions aimed at helping the agency to move
borrowers from direct loans. 

Many of our recommendations have been directed toward improving
FmHA's program management.  However, as we previously reported, if
the losses in FmHA's programs are to be brought under control, the
Congress needs to make clear that it expects FmHA to act as a prudent
lender.  In our opinion, not all marginal, financially stressed farms
can be saved and not all farm families can benefit from attempts to
keep them in farming.  To communicate this recognition to FmHA and
its managers, the Congress should, among other things, establish
guidance concerning (1) the level of loan losses that it is willing
to accept, (2) the length of time that borrowers may receive
financial assistance from FmHA, and (3) the type of assistance, if
any, that should be made available to help unsuccessful borrowers who
want to leave farming.  The Congress took a step in this direction
when it directed FmHA to establish programs for beginning farmers in
which loan funds are targeted on the basis of farming experience and
are available for a set period of time, and which emphasize the
developing of plans covering farm operations, progression to private
credit, borrower training, and close FmHA supervision. 


RELATED GAO PRODUCTS
============================================================ Chapter 4

Farmers Home Administration:  The Guaranteed Farm Loan Program Could
Be Managed More Effectively (GAO/RCED-95-9, Nov.  16, 1994). 

Debt Settlements:  FmHA Can Do More to Collect on Loans and Avoid
Losses (GAO/RCED-95-11, Oct.  18, 1994). 

Farmers Home Administration:  Farm Loans to Delinquent Borrowers
(GAO/RCED-94-94FS, Feb.  8, 1994). 

High-Risk Series:  Farmers Home Administration's Farm Loan Programs
(GAO/HR-93-1, Dec.  1992). 

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


1995 HIGH-RISK SERIES
============================================================ Chapter 5

An Overview (GAO/HR-95-1)

Quick Reference Guide (GAO/HR-95-2)

Defense Contract Management (GAO/HR-95-3)

Defense Weapons Systems Acquisition (GAO/HR-95-4)

Defense Inventory Management (GAO/HR-95-5)

Internal Revenue Service Receivables (GAO/HR-95-6)

Asset Forfeiture Programs (GAO/HR-95-7)

Medicare Claims (GAO/HR-95-8)

Farm Loan Programs (GAO/HR-95-9)

Student Financial Aid (GAO/HR-95-10)

Department of Housing and Urban Development (GAO/HR-95-11)

Superfund Program Management (GAO/HR-95-12)

The entire series of 12 high-risk reports can be ordered by using the
order number GAO/HR-95-20SET. 

