Debt Settlements: FmHA Can Do More to Collect on Loans and Avoid Losses
(Letter Report, 10/18/94, GAO/RCED-95-11).

The Farmers Home Administration (FmHA) wrote off nearly $3 billion in
farm debt between 1991 and 1993, even though the borrower may have had
assets that could have been applied to bad loans. Meanwhile, borrowers
who benefitted from such debt relief continue to obtain new loans.
FmHA's field offices do not always follow the agency's own debt
collection procedures, which are intended to mitigate the federal
government's losses. For example, FmHA's internal reviews show that
field officials often do not develop a complete inventory of borrowers'
financial assets. Furthermore, even when FMHA has a complete inventory
of borrowers' financial resources, it has not always used them to offset
losses. Borrowers who have benefitted from debt relief continue to get
new loans. In fiscal years 1991-93, FmHA approved new loans totaling $13
million to 86 borrowers who, through debt settlements, have received $20
million in debt relief.

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

 REPORTNUM:  RCED-95-11
     TITLE:  Debt Settlements: FmHA Can Do More to Collect on Loans and 
             Avoid Losses
      DATE:  10/18/94
   SUBJECT:  Farm credit
             Direct loans
             Government guaranteed loans
             Loan defaults
             Financial management
             Risk management
             Debt collection
             Government collections
             Collection procedures
             Losses
IDENTIFIER:  FmHA Guaranteed Farm Loan Program
             Louisiana
             Mississippi
             Texas
             
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Cover
================================================================ COVER


Report to Congressional Committees

October 1994

DEBT SETTLEMENTS - FMHA CAN DO
MORE TO COLLECT ON LOANS AND AVOID
LOSSES

GAO/RCED-95-11

FmHA's Debt Settlements


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

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

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


B-257647

October 18, 1994

The Honorable Patrick J.  Leahy
Chairman
The Honorable Richard G.  Lugar
Ranking Minority Member
Committee on Agriculture,
 Nutrition, and Forestry
United States Senate

The Honorable E (Kika) de la Garza
Chairman
The Honorable Pat Roberts
Ranking Minority Member
Committee on Agriculture
House of Representatives

In April and December 1992, as part of a special effort to address
federal programs that are highly vulnerable to waste, abuse, and
mismanagement, we issued two reports highlighting significant risks
associated with the Farmers Home Administration's (FmHA)
multibillion-dollar farm loan program.\1 This review continues that
effort, focusing on FmHA's debt settlements--the agency's process for
resolving unpaid direct farm loans.  Debt settlements essentially
represent FmHA's last chance to collect on loans and avoid losses. 
This report (1) assesses how well FmHA protects the federal
government's interests during debt settlements and (2) provides
information on additional FmHA loans made to borrowers after
significant amounts of their prior FmHA loans were forgiven--written
off as uncollectible--through debt settlement. 

This report is based on work performed at FmHA headquarters and state
and county offices in Louisiana, Mississippi, and Texas.  These
states had the largest amount of uncollectible debt written off
through debt settlements during fiscal year 1993. 


--------------------
\1 Farmers Home Administration:  Billions of Dollars in Farm Loans
Are at Risk (GAO/RCED-92-86, Apr.  3, 1992) and Farmers Home
Administration's Farm Loan Programs (GAO/HR-93-1, Dec.  1992). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

FmHA is not adequately protecting federal interests during debt
settlements; almost $3 billion has been written off during fiscal
years 1991-93 without any payments by borrowers.  These losses may,
in part, reflect the poor financial condition of the borrowers who
are subject to the debt settlement process.  However, they also
reflect the fact that FmHA's field office officials do not always
follow the agency's own debt settlement procedures, which are
intended to mitigate the federal government's losses.  For example,
FmHA's internal reviews, while limited in scope, revealed that field
officials frequently do not develop a complete inventory of
borrowers' financial resources.  As a result, these officials may not
be aware of assets or income that could be used to reduce loan
losses.  Furthermore, even when FmHA has a complete inventory of
borrowers' financial resources, it has not always used them to offset
losses.  According to agency officials, problems in implementing debt
settlement procedures stem from various sources, including competing
work priorities that create incentives to use the process to "clean
up" the delinquent loan portfolio rather than to recover debt. 

Borrowers who have benefited from debt relief continue to obtain new
loans.  In fiscal years 1991 through 1993, FmHA approved new loans
totaling $13 million to 86 borrowers who, through debt settlements,
had received $20 million in debt relief. 


   BACKGROUND
------------------------------------------------------------ Letter :2

FmHA, a lending agency within the U.S.  Department of Agriculture
(USDA), provides direct government-funded loans to farmers who are
unable to obtain financing elsewhere at reasonable rates and terms.\2
FmHA's assistance is intended to be temporary.  Once farmers have
become financially viable, they are to "graduate" to commercial
sources of credit.  FmHA provides loan services through a highly
decentralized organization consisting of a national program office in
Washington, D.C.; a finance office in St.  Louis, Missouri; and a
nationwide structure of field offices comprising 47 state offices,
about 250 district offices, and about 1,700 county offices. 

As we reported in April 1992, FmHA has lost billions of dollars
through its farm loan program and billions more is at risk.  Our
report noted that, as of September 1990, about 70 percent of the
agency's direct loan portfolio of almost $20 billion was held by
borrowers who were delinquent or whose loans had been restructured as
a result of or to avoid delinquency.  We concluded that FmHA and the
Congress shared responsibility for these problems, which stem from
(1) ineffective implementation of standards for loan making, loan
servicing, and property management and (2) loan and property
management policies, some congressionally directed, that conflict
with fiscal controls designed to minimize risk.  We also reported
that FmHA's problems will continue until the Congress tells the
agency how to better balance its mission of assisting financially
troubled farmers with its obligation to provide that assistance in a
businesslike and fiscally responsible manner. 

Although our previous work examined certain types of loan-servicing
actions that result in FmHA's reducing portions of a borrower's debt,
we have not, until this report, specifically examined the debt relief
provided through the agency's debt settlement process.  Under this
process, which essentially represents the final resolution of unpaid
loans, FmHA county office officials try to identify and evaluate the
financial resources a borrower may have that could be used to offset
loan losses.  Final approval of debt relief is granted by officials
in either FmHA's state or national offices.\3 As table 1 shows, FmHA
has four options for settling debts, each of which results in writing
off debt. 



                           Table 1
           
            Options Available to FmHA in Settling
                             Debt

Settlement type     Description
------------------  ----------------------------------------
Adjustment          The debt is satisfied when a borrower
                    agrees to make, at some time in the
                    future, one payment, or a series of
                    payments, that is less than the amount
                    owed.

Compromise          The debt is satisfied when a borrower
                    makes an immediate, single lump-sum
                    payment that is less than the amount
                    owed.

Charge off          The debt is written off without any
                    payment made, and collection activity is
                    ended, but the borrower is not released
                    from liability for the amount owed.

Cancellation        The debt is written off without any
                    payment made, and the borrower is
                    released from further liability because
                    FmHA believes that the borrower has
                    insufficient potential to make
                    additional payments.
------------------------------------------------------------
Source:  FmHA regulations (7 C.F.R.  part 1956, subpart B). 


--------------------
\2 FmHA also guarantees farm loans made by commercial lenders. 
However, this report focuses on the agency's direct loans, which are
subject to debt settlements. 

\3 During 1993, the Secretary of Agriculture proposed to the Congress
a plan to restructure USDA.  In early October 1994, the Congress
approved a restructuring plan for USDA.  This action could change the
way debt settlement cases are processed and approved. 


   FEDERAL FINANCIAL INTERESTS ARE
   NOT ADEQUATELY PROTECTED DURING
   DEBT SETTLEMENTS
------------------------------------------------------------ Letter :3

FmHA forgave billions of dollars in loans through debt settlements
without always taking aggressive action to protect the government's
interests.  More specifically, although FmHA has procedures and
policies intended to produce fair recoveries, FmHA's compliance
reviews of a limited number of debt settlement cases indicate that
field office officials often do not follow these procedures.  FmHA
officials we spoke with noted that problems in adhering to the
procedures stemmed from, among other things, (1) competing program
objectives that create incentives to write off large amounts of
delinquent loans in an attempt to "clean up" the loan portfolio and
(2) limited staff resources. 


      MOST DEBT IS WRITTEN OFF
      WITH NO RECOVERY
---------------------------------------------------------- Letter :3.1

During fiscal years 1991 through 1993, FmHA wrote off about $3.4
billion worth of outstanding direct farm loans through debt
settlements.  Table 2, which summarizes the amount of debt written
off by settlement type, shows that most of the debt--about $2.9
billion--was canceled or charged off with no payments to FmHA by the
borrowers. 



                           Table 2
           
               Debt Written Off by FmHA in Debt
              Settlements, Fiscal Years 1991-93

                    (Dollars in millions)


                       Number of
                       borrowers
                           whose
                        debt was
Settlement type          settled        Amount       Percent
----------------  --------------  ------------  ------------
Adjustment                   887           $74           2.2
Compromise                 3,060           370          11.0
Charge off                 4,509           434          12.9
Cancellation              20,975         2,493          74.0
============================================================
Total                     29,431        $3,371       100.0\a
------------------------------------------------------------
Note:  During this period, FmHA also wrote off an additional $611
million for 4,035 borrowers as a result of bankruptcy rulings. 

\a Percentages do not add to 100 because of rounding. 

Source:  FmHA. 

The amount already written off through debt settlements may be just
the tip of the iceberg because FmHA continues to have a large number
of problem loans that may eventually be subject to settlement. 
Specifically, as of January 1994, FmHA classified $7.6 billion--about
45 percent of its $16.7 billion in outstanding principal and
interest--as at risk because the loans were held by borrowers with
questionable repayment ability and/or inadequate loan security. 


      FIELD OFFICES DO NOT ALWAYS
      IMPLEMENT DEBT SETTLEMENT
      PROCEDURES
---------------------------------------------------------- Letter :3.2

FmHA has established procedures for its field office officials to use
when settling debts.  These procedures, intended to reduce losses
during the process, include verifying a borrower's income and
searching for undisclosed assets.  However, FmHA's internal control
reviews, as well as our work, indicate that field office officials
often do not follow these procedures and thus do not fully protect
the government's interests. 

FmHA's Coordinated Assessment Review, referred to as CAR,\4 is a key
internal control review that includes assessing field office
officials' compliance with debt settlement policies and procedures. 
CARs of debt settlements consist of reviewing a small sample of
completed cases, usually five per state.  During fiscal years 1993
and 1994 (through May 1994), FmHA completed CARs of debt settlement
cases in 15 states.  As table 3 shows, the rates of noncompliance
ranged from 18 to 39 percent on five key standards intended to
protect the government's interests during debt settlements. 



                           Table 3
           
            Results of CARs of Debt Settlements in
            15 States, Fiscal Years 1993 and 1994
                      (Through May 1994)

                                    Number of
                                     cases in
                                    which the
FmHA's key debt settlement           standard  Percentage of
standard                              applied  noncompliance
------------------------------  -------------  -------------
Consideration given to                     56           39.3
 reducing debt relief amount
 by offsetting other federal
 payments
Public records searched for                54           35.2
 undisclosed assets from which
 collections might be possible
All sources of income verified             48           31.2
Credit report obtained and                 38           21.1
 used to evaluate present and
 future repayment ability
Current financial information              56           17.9
 considered in the decision on
 debt settlement
------------------------------------------------------------
Note:  Because the CARs of debt settlements covered only a relatively
small number of cases, the results cannot be projected to all
settlement cases and apply only to the sampled cases. 

Source:  FmHA's fiscal year 1993 and 1994 CAR reports. 

Our review of fiscal year 1993 debt settlement cases at six FmHA
county offices in three states also disclosed (1) problems with
adherence to these five key debt settlement standards and (2) a lack
of aggressive efforts to minimize loan losses--that is, FmHA did not
pursue information indicating that additional collections could have
been possible during the debt settlement process.  In summary, of the
57 debt settlement cases we reviewed that resulted in large losses,\5
the federal investment may not have been adequately protected in 16,
or about 28 percent.  In settling these debts, FmHA recovered a total
of $5,800 from these 16 borrowers and wrote off $3.7 million.  The
following cases illustrate these findings: 

Case 1.  FmHA officials in Louisiana canceled $393,000 in debt with
no payment by the borrower without having conducted a record search. 
As a result, FmHA was unaware of an inheritance of approximately 160
acres in real estate and $61,000 in certificates of deposit that
possibly could have been used to offset the loan losses.  The lack of
a record search was particularly puzzling because the county office's
file contained a notation that the inheritance had occurred and a
payment to FmHA was possible.  County office officials could not
explain the note, and state officials said that the failure to
protect federal interests had been an oversight. 

Case 2.  Because of what FmHA state and county officials in Texas
described as an oversight, a deceased borrower's $131,000 debt was
canceled without the county office's filing a claim with a local
probate court.  Our review of this case--which included reviewing the
probate court's records, comparing the amount of outstanding debt
with the value of real and personal property owned by the borrower's
estate, and consulting with USDA's Office of General
Counsel--disclosed that about $47,000 was available for payment on
the debt if the claim had been filed. 

Case 3.  FmHA officials in Mississippi canceled a $202,000 debt
without a payment offer from a partnership consisting of two brothers
who reported a total annual income of $123,000 (about $64,500 and
$58,500, respectively).  Both borrowers submitted documentation
claiming that they were unable to repay any part of their FmHA debt
because their expenses exceeded their income.  Their expense
statements included the following information:  Both brothers claimed
over $15,000 in annual payments to other creditors and expensive
gifts to charities; one brother claimed the cost of operating three
automobiles, while the other claimed the cost of operating two; and
one brother claimed college education costs for his son and
daughter-in-law as well as living expenses for that son and his
family.  FmHA state officials told us that they did not consider
these expenses to be excessive, and the supervisor of FmHA's county
office questioned whether the agency should require borrowers to
lower their standard of living in order to repay their debt. 

Case 4.  FmHA officials in Louisiana canceled $509,000 in debt
without offsetting payments that the borrower had received from
USDA's Agricultural Stabilization and Conservation Service.  These
payments averaged $30,000 per year.  FmHA made this decision knowing
that (1) the borrower's loan defaults could be partially attributed
to excessive spending and poor management and (2) the borrower had
been referred to USDA for legal action because he had failed to
properly dispose of property he had pledged as security for the debt. 
FmHA state and county officials told us that they had chosen not to
use the payments from the Agricultural Stabilization and Conservation
Service to offset the loan losses because they did not want to create
undue hardship for the borrower. 


--------------------
\4 In the CARs, a random sample of loans is examined each year to
estimate compliance with FmHA's loan-making and loan-servicing
standards.  Generally, loans made in about 15 states are sampled and
reviewed each year so that each state is reviewed every 3 years. 

\5 These cases represent all fiscal year 1993 debt settlements in the
county offices we visited that were listed in FmHA's automated
records as not involving bankruptcy and that had debt relief of
$100,000 or more. 


      LIMITED EMPHASIS ON
      MINIMIZING LOSSES INHIBITS
      MAXIMUM RECOVERY DURING DEBT
      SETTLEMENTS
---------------------------------------------------------- Letter :3.3

FmHA has placed little emphasis on minimizing losses during debt
settlements.  FmHA's approach is illustrated in part by internal
performance goals that create work priorities and incentives that are
counter to aggressive protection of the government's interests. 
Specifically, FmHA's field office staff have annual performance goals
for resolving delinquent loan accounts, but they do not have
balancing goals that would encourage recoveries through the debt
settlement process.  As a result, several officials at FmHA's state
and county offices noted that protecting the government's interests
is not a high priority among staff.  Also, officials at FmHA's
national and field offices said that debt settlements are used
primarily to "clean up" the loan portfolio by writing off delinquent
debt. 

FmHA's management has also placed little emphasis on overseeing field
offices' implementation of the agency's policies and practices for
ensuring maximum recoveries.  In fact, the debt settlement process
was not part of internal control review through CARs until 1993. 
Also, 13 of the 34 CARs of debt settlements scheduled for fiscal
years 1993 and 1994 were not performed because of other
higher-priority work.\6

According to several officials in FmHA's state and county offices,
insufficient staff resources also inhibit implementing the agency's
policies and procedures on debt settlements.  We did not verify the
extent to which staffing was a problem.  However, an official in one
state office said that county offices do not always have adequate
staff to complete all assigned duties and, as a result, are unable to
give proper attention to some activities, including protecting the
government's interests when settling debts.  Also, the supervisor of
a county office said that the office's limited staff resources are
targeted more toward eliminating delinquent accounts than toward
protecting the government's interests during debt settlements. 


--------------------
\6 In March 1993, the Secretary of Agriculture directed that
borrowers whose delinquent accounts were the subject of formal
actions to demand loan repayment or obtain property pledged as
security for loans would be provided with an opportunity to have
their cases reviewed to determine if they had been treated fairly. 
In April 1993, the acting FmHA Administrator suspended the CARs, and
the loan- servicing staff who worked on the CARs of debt settlements
were diverted to work on case reviews resulting from the Secretary's
directive. 


   BORROWERS WHO RECEIVE DEBT
   RELIEF CONTINUE TO OBTAIN FMHA
   LOANS
------------------------------------------------------------ Letter :4

The lending criteria that FmHA follows in making farm loans expose
the agency to potential losses.  Specifically, the Consolidated Farm
and Rural Development Act of 1961, as amended (P.L.  87-128, Aug.  8,
1961), which provides FmHA's basic authority for making and servicing
farm loans, does not prohibit borrowers who receive debt relief
through debt settlements from obtaining additional farm loans. 

We identified borrowers who obtained new FmHA farm loans after
benefiting from debt relief through debt settlements.  Specifically,
during fiscal years 1991-93, 86 borrowers, who had received about $20
million in debt relief when their accounts with FmHA were settled,
obtained about $13 million in new direct or guaranteed loans.\7 For
example, one borrower who went through debt settlement in April 1991,
receiving $500,351 in debt relief, subsequently received a direct
loan of $25,100 in April 1993. 

Our review showed that some borrowers who obtained additional loans
after receiving debt relief through debt settlements became
delinquent again.  Specifically, although their loans were relatively
new--1 to 3 years old--six of the 86 borrowers had already become
delinquent again.  The following examples illustrate this cycle of
delinquency.  A borrower who received $278,318 in debt relief in
December 1990 obtained two new direct farm loans totaling $65,000 in
February 1992; he was $4,087 behind on payments in September 1993. 
Another borrower, after receiving $1.9 million in debt relief in
March 1991, obtained a $120,000 guaranteed loan in September 1991; he
was $9,467 behind on payments in September 1993. 

Concerns over providing new loans to borrowers who have defaulted on
previous FmHA loans are not new.  For example, in our December 1992
report, we pointed out that FmHA made about $93 million in loans to
borrowers who had received large amounts of debt relief under
loan-servicing actions other than debt settlements.  Such lending
practices have been justified on the basis of the agency's
responsibility to help financially strapped farmers remain in
farming.  However, as we have also previously reported, FmHA has
another, sometimes conflicting responsibility--to be fiscally prudent
and protect the taxpayers' dollars.  Lending to borrowers who have
defaulted on previous loans undermines the agency's responsibility in
this area.  These lending practices can also detract from FmHA's
overall mission of assistance because they encourage farmers to rely
on FmHA as a continuous source of credit rather than a temporary one. 


--------------------
\7 Seventy-six other borrowers received about $26 million in debt
relief through bankruptcy and then obtained about $10 million in new
loans from FmHA. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

Billions of dollars in FmHA loans has been written off with little or
no recovery under debt settlements.  In some respects, these losses
are not totally unexpected because FmHA's loans are targeted to
borrowers who are financially stressed.  By the time a borrower's
financial situation has deteriorated to the point that debt
settlement may be an option, the borrower may have few resources that
could be used to offset potential loan losses.  However, FmHA does
not take sufficient action to identify and recover payments from
those with the resources to reduce their debts.  FmHA's internal
control reviews as well as our own work indicate that FmHA's field
offices often do not implement the agency's procedures and policies
intended to protect federal interests during debt settlements. 

FmHA's management has provided few incentives for the field offices
to aggressively implement debt settlement procedures.  The agency
does not have performance goals that would encourage the field
offices to maximize recoveries during the debt settlement process. 
However, it does have goals for reducing the levels of delinquent
debt.  As a result, field offices may view debt settlements more as a
means of cleaning up their loan portfolios than as a final
opportunity to minimize loan losses. 

Additionally, we question the reasonableness of FmHA's making new
direct loans and providing loan guarantees to individuals whose past
performance resulted in significant losses through debt settlements. 
We recognize that some borrowers may find themselves subject to the
debt settlement process for reasons beyond their control (e.g., crop
losses due to a natural disaster).  Our concern is not with these
borrowers but rather with those whose own action or inaction resulted
in their failure to repay loans. 

Overall, the problems we found with debt settlements are symptomatic
of a much larger, more fundamental problem that we highlighted in our
April and December 1992 reports:  The agency's congressionally
defined mission--to lend money to farmers who cannot obtain loans
elsewhere--often conflicts with normal fiscal controls and policies
designed to minimize risk and reduce losses.  Until the Congress
clarifies how FmHA should better balance these conflicting missions,
problems similar to the ones we describe in this report will
continue. 


   RECOMMENDATION TO THE SECRETARY
   OF AGRICULTURE
------------------------------------------------------------ Letter :6

To provide FmHA's field office officials with incentives to better
protect the federal government's interests during the debt settlement
process, we recommend that the Secretary of Agriculture direct the
FmHA Administrator to establish goals for maximizing recoveries on
outstanding loans being resolved through debt settlements. 


   RECOMMENDATION TO THE CONGRESS
------------------------------------------------------------ Letter :7

To strengthen FmHA's loan-making standards, we recommend that the
Congress amend the Consolidated Farm and Rural Development Act to
prohibit direct loans and loan guarantees to borrowers whose accounts
were previously settled through debt settlements except in cases in
which these borrowers were unable to repay their loans through no
fault of their own.  The Congress should require the Secretary to (1)
establish guidance describing the circumstances under which the
exception would apply, (2) closely supervise the borrowers who
receive new loans under this exception, and (3) require these
borrowers to move to commercial credit within a specified time
period. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

In commenting on a draft of this report, FmHA pointed out that we had
reviewed a very small sample of debt settlement cases and that
conclusions based on such a sample may be questionable.  We
appreciate the limitations of conclusions drawn from small samples. 
However, our conclusions are not based solely on information obtained
through the cases we reviewed.  Rather, these cases are only one of
several indications of the problems that form the basis for our
concerns about the debt settlement process.  For example, FmHA's own
internal control reviews identified problems similar to those found
in the cases we examined.  Limited recoveries under debt settlements
are another reason for concern--almost $3 billion has been written
off in recent years without any payments being made by the borrowers. 
In short, we believe that there is sufficient reason to raise
questions about how well the federal government's interests are
protected in debt settlements. 

FmHA generally agreed with our recommendation to establish goals for
maximizing recoveries during debt settlements but was not clear about
how this recommendation will be implemented.  In line with the intent
of the recommendation, FmHA noted that USDA's Loan Resolution Task
Force, established to resolve delinquent loans, has developed a
process designed to ensure that debt settlements are properly
implemented through centralized management.  This process was
scheduled to go into effect in October 1994.  FmHA also stated that
it is working on a new internal review system that will cover debt
settlements.  It is too early to determine the extent to which these
and other proposed actions will address the problems discussed in
this report. 

An earlier draft of this report contained a recommendation that FmHA
prohibit loans to all borrowers who received debt relief through debt
settlements.  FmHA noted that this prohibition might unnecessarily
penalize those individuals who failed to repay their loans for
reasons beyond their control.  We have revised the recommendation to
accommodate such exceptions.  However, we would caution against
having the exception become the standard mode of operation. 
Furthermore, as indicated in the revised recommendation, we believe
any borrower receiving a new loan under this exception should be
closely supervised and required to move to commercial credit within a
specified period of time.  We recognize that implementing our
recommendation to generally prohibit additional loans to borrowers
whose past debts have been settled may require trade-offs concerning
the program's goal of assisting farm borrowers.  Ultimately, the
Congress will have to weigh these difficult trade-offs and determine
the direction that FmHA should go. 

FmHA's specific comments and our evaluation of them are presented in
appendix I. 


---------------------------------------------------------- Letter :8.1

We performed our work between July 1993 and July 1994 in accordance
with generally accepted government auditing standards.  Our
objectives, scope, and methodology are discussed in appendix II. 

We are sending copies of this report to the appropriate congressional
committees; interested Members of Congress; the Secretary of
Agriculture; the Administrator, FmHA; the Director, Office of
Management and Budget; and other interested parties.  We will also
make copies available to others on request. 

This work was performed under the direction of John W.  Harman,
Director, Food and Agriculture Issues, who may be reached at (202)
512-5138 if you or your staff have any questions.  Other major
contributors to this report are listed in appendix III. 

Keith O.  Fultz
Assistant Comptroller General




(See figure in printed edition.)Appendix I
COMMENTS FROM THE FARMERS HOME
ADMINISTRATION
============================================================== Letter 



(See figure in printed edition.)

See comment 1. 



(See figure in printed edition.)

See comment 2. 



(See figure in printed edition.)

See comment 3. 

See comment 4. 



(See figure in printed edition.)


The following are GAO's comments on the July 28, 1994, letter from
the Farmers Home Administration. 

GAO'S COMMENTS

1. As discussed in the agency comments section of our report, these
cases are only one of several indications of the problems that form
the basis for our concerns about the debt settlement process. 

2. We updated the report to recognize the Secretary's reorganization
plan. 

3. FmHA expressed its concern that prohibiting loans to borrowers
whose accounts are resolved through debt settlement could eliminate
the use of its leaseback/buyback and homestead protection programs. 
In these programs, borrowers who default on FmHA loans are given
preference in reacquiring the farms that they had pledged as security
for those loans.  FmHA may finance these transactions.  Implementing
our recommendation would not eliminate these loan- servicing
programs--former owners would still retain preference for reacquiring
their farms.  However, we recognize that it would be difficult for
some former owners to take advantage of this preference without FmHA
financing. 

4. As discussed in the agency comments section of our report, we
revised our draft recommendation to accommodate borrowers who fail to
repay loans because of circumstances beyond their control. 


OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================== Appendix II

This review was undertaken as part of a special effort to address
federal programs subject to a high risk of waste, abuse, and
mismanagement.  To gain a complete understanding of FmHA's debt
settlement process, we reviewed FmHA's regulations, operating
instructions, and other guidance to field offices.  We also
interviewed officials at the agency's Office of Farmer Programs in
Washington, D.C., and at state and county field offices. 
Computerized program records were provided by FmHA's Finance Office
in St.  Louis, Missouri, and information on CARs was obtained in the
form of summaries of state performance reviews from FmHA's
Washington, D.C., headquarters. 

For our review of individual debt settlement cases, we used records
from FmHA's Finance Office to identify the three states-- Louisiana,
Mississippi, and Texas--with the largest dollar amounts of debt
written off through debt settlements during fiscal year 1993.  We
then used detailed statistics on borrowers from these states to
select the two counties in each state with the highest number of debt
settlements.  Finally, for the two selected counties, we eliminated
all the cases settled through bankruptcy or resulting in a debt
write-off of less than $100,000.  We reviewed the remaining 57 cases
by making field visits to the six county offices to examine files on
borrowers, search public records, and discuss debt settlements with
county officials to evaluate whether the federal government's
interests were adequately protected.  We then discussed the results
of our case reviews and general debt settlement issues with FmHA
state officials and, where necessary, with USDA's Office of General
Counsel. 

To evaluate the extent of new loans to borrowers whose past debts had
been settled, we matched information on debt settlements and loan
obligations in data bases provided by the St.  Louis Finance Office. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Robert E.  Robertson, Assistant Director
Patrick J.  Sweeney, Assignment Manager

DALLAS REGIONAL OFFICE

Reid H.  Jones, Evaluator-in-Charge
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