Farmers Home Administration: The Guaranteed Farm Loan Program Could Be
Managed More Effectively (Chapter Report, 11/16/94, GAO/RCED-95-9).

Because it assists farmers who present less financial risk than direct
loan borrowers, the Farmers Home Administration's (FmHA) guaranteed farm
loan program has substantially lower rates of delinquency and loan
losses than its direct loan program. Nonetheless, FmHA has hundreds of
millions of dollars in guaranteed loans that are at risk, in part,
because FmHA's lending policies allow borrowers who defaulted on past
loans to obtain new guaranteed loans.  Also, FmHA's field office
officials have not always followed the agency's standards for servicing
guaranteed loans, which are meant to protect the government's financial
interest.  The guaranteed loan program has not been effectively used as
a tool to graduate direct loan borrowers to commercial credit.  As a
result, some borrowers may have direct loans longer than justified,
taking advantage of the more favorable terms.  Commercial lenders told
GAO that changes are needed to FmHA's farm loan programs in order for
lenders to consider taking on more direct loan borrowers as clients.
They suggest changing the direct loan program to provide incentives for
borrowers to seek commercial credit and changing the guaranteed loan
program to make it more attractive to lenders.

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

 REPORTNUM:  RCED-95-9
     TITLE:  Farmers Home Administration: The Guaranteed Farm Loan 
             Program Could Be Managed More Effectively
      DATE:  11/16/94
   SUBJECT:  Farm credit
             Direct loans
             Government guaranteed loans
             Loan defaults
             Eligibility determinations
             Lending institutions
             Risk management
             Farm income stabilization programs
             Farm subsidies
             Losses
IDENTIFIER:  FmHA Guaranteed Farm Loan Program
             FmHA Direct Farm Loan Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

November 1994

FARMERS HOME ADMINISTRATION - THE
GUARANTEED FARM LOAN PROGRAM COULD
BE MANAGED MORE EFFECTIVELY

GAO/RCED-95-9

FmHA Guaranteed Loans


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

  ABA - American Banking Association
  CAR - Coordinated Assessment Review
  Con Act - Consolidated Farm and Rural Development Act
  FmHA - Farmers Home Administration
  GAO - General Accounting Office
  USDA - U.S.  Department of Agriculture

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


B-257535

November 16, 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

As part of our continuing review of the farm loan programs of the
U.S.  Department of Agriculture's (USDA) Farmers Home Administration
(FmHA), this report presents information on the guaranteed farm loan
program and its use as a tool for graduating FmHA's direct loan
borrowers to commercial credit.  We are recommending that USDA take
actions to strengthen the process for graduating borrowers from
direct loans. 

We are sending copies of this report to other appropriate Senate and
House committees; the Secretary of Agriculture; the Administrator,
FmHA; the Director, Office of Management and Budget; and other
interested parties.  We will make copies available to others upon
request. 

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

Keith O.  Fultz
Assistant Comptroller General


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

The Farmers Home Administration (FmHA)--the government's lender of
last resort to the nation's agricultural sector--has guaranteed $12
billion of lenders' farm loans to almost 86,000 farmers since 1976. 
Most of these loans, which are made by banks and other commercial
lenders, were made since the mid-1980s.  At that time, the
government's emphasis in farm lending shifted from providing direct
loans to farmers who could not qualify for commercial credit to
guaranteeing loans for those who could qualify with government
backing.  This shift in lending was intended to, among other things,
encourage farm lending from commercial lenders and reduce budget
outlays for FmHA's direct loans. 

Concerned about the high losses in FmHA's direct loan program and the
potential for similar losses in FmHA's guaranteed loan program, GAO
examined (1) the extent of losses under the guaranteed farm loan
program compared with those under the direct loan program, (2) the
extent to which the guaranteed farm loan program has graduated FmHA's
direct loan borrowers to commercial credit, and (3) ways to make the
guaranteed farm loan program more of a source for funding direct loan
borrowers. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Until the early 1970s, FmHA, an agency of the U.S.  Department of
Agriculture, provided credit to farmers exclusively through direct
government-funded loans.  However, in 1972, the Congress authorized
FmHA to guarantee farm loans made by commercial lenders.  In
guaranteeing a farm loan, FmHA agrees, in the event of a borrower's
default, to reimburse a commercial lender for up to 90 percent of the
lost principal plus accrued interest and liquidation costs.  Direct
loans are made to riskier farmers, have lower interest rates, and are
for longer repayment periods than guaranteed loans.  FmHA's
assistance is intended to be temporary; as soon as farmers become
financially viable, they are to graduate from FmHA to commercial
lenders for their financial needs.  In recent years, FmHA has made an
average of about $1.5 billion annually in new guaranteed loans and,
as of September 30, 1993, had about $5 billion in outstanding
guaranteed farm loan debt. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Because it assists farmers who present less financial risk than
direct loan borrowers, FmHA's guaranteed farm loan program has
substantially lower rates of delinquency and loan losses than its
direct loan program.  Nonetheless, FmHA has hundreds of millions of
dollars in guaranteed loans that are at risk, in part, because FmHA's
lending policies allow borrowers who defaulted on past loans to
obtain new guaranteed loans.  Also, FmHA's field office officials
have not always followed the agency's standards for servicing
guaranteed loans, which are designed to protect the federal
government's financial interest. 

The guaranteed loan program has not been effectively used as a tool
for graduating direct loan borrowers to commercial credit.  During
fiscal years 1991 through 1993, only 4 percent of the direct loan
borrowers obtained guaranteed farm loans.  Consequently, some
borrowers may have direct loans longer than justified, taking
advantage of the more favorable terms.  One reason for this, which
FmHA is developing a process to correct, is that FmHA has not
systematically used the guaranteed loan program as an interim step to
graduate borrowers.  Another contributing factor is that the agency's
processes for identifying and graduating qualified direct loan
borrowers have often not been fully implemented. 

Commercial lenders told GAO that changes to FmHA's farm loan programs
are needed in order for lenders to consider taking on more direct
loan borrowers as clients.  Their suggestions center on changing the
direct loan program to provide incentives for borrowers to seek
commercial credit and changing the guaranteed loan program to make it
more attractive to lenders. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      WHILE LESS RISKY THAN THE
      DIRECT LOAN PROGRAM, FMHA'S
      OPERATION OF THE GUARANTEED
      LOAN PROGRAM ADDS TO THE
      GOVERNMENT'S RISK
-------------------------------------------------------- Chapter 0:4.1

In terms of its loss and delinquency performance, the guaranteed farm
loan program has been much more successful than the direct loan
program.  From 1976 through 1993, FmHA guaranteed $12 billion of
lenders' farm loans and made almost $56 billion in direct loans. 
Overall losses--actual losses through 1993 plus estimates of future
losses--on guaranteed loans will be about 9 percent compared with
losses on direct loans of about 40 percent.  Also, FmHA's existing
guaranteed portfolio is in much better financial condition than its
direct loan portfolio.  GAO estimates that 13.4 percent of the
outstanding guaranteed loan debt in June 1993 was held by problem
borrowers--those who were delinquent or who had their debts
rescheduled because of past repayment difficulties.  Previously, GAO
estimated that 70 percent of the outstanding direct loan debt in
September 1990 was in a similar condition. 

However, some of FmHA's loan-making policies contribute to the
government's exposure to risk with guaranteed loans.  Specifically,
borrowers who had defaulted on their previous guaranteed and direct
loans and who had caused the agency to incur losses can obtain new
guaranteed loans.  During fiscal years 1991 through 1993, FmHA made
guaranteed loans totaling about $60 million to borrowers who had
previously caused the agency to incur about $67 million in losses. 
Added risk also exists because FmHA's field office officials have not
always properly implemented loan-servicing standards, such as
monitoring lenders' servicing of guaranteed loans.  In April 1992,
GAO made a recommendation to the Congress to strengthen FmHA's
policies for making guaranteed loans, which has not yet been
implemented.  At the same time, GAO recommended that the Secretary of
Agriculture increase compliance with standards for servicing
guaranteed loans.  FmHA's fiscal year 1994 reviews indicate
improvement in this area. 


      THE GUARANTEED LOAN PROGRAM
      HAS GENERALLY NOT HELPED TO
      GRADUATE DIRECT LOAN
      BORROWERS TO COMMERCIAL
      CREDIT
-------------------------------------------------------- Chapter 0:4.2

Only 4 percent of the borrowers who had direct loans during fiscal
years 1991 through 1993 obtained guaranteed loans.  Historically,
FmHA has not attempted to use the guaranteed loan program as a
stepping stone for direct loan borrowers to graduate to commercial
credit.  However, as directed by the Congress, FmHA has proposed
regulations to accomplish this transition.  These proposed
regulations, which are expected to become effective in November 1994,
could ultimately help the agency to graduate more direct loan
borrowers to commercial credit. 

Currently, FmHA's process for identifying direct loan borrowers to
consider for graduation to commercial credit allows potential
candidates to be easily eliminated.  As a result, borrowers who
qualify for guaranteed loans may continue with direct loans longer
than justified.  Over 500 of 1,160 borrowers reviewed, whom FmHA
should have reviewed for graduation potential during fiscal years
1991 and 1992, either were not reviewed or were removed from
consideration without explanation.  Recently, at the direction of the
Congress, FmHA proposed to use its loan classification system to
identify potential candidates for graduation.  However, FmHA's
classifications are often incorrect.  Of 171 borrowers who were
classified as "commercial quality" borrowers, GAO found that about 66
percent were misclassified because they could not meet minimum
commercial credit standards. 


      SUGGESTIONS FOR USING THE
      GUARANTEED LOAN PROGRAM FOR
      FUNDING MORE DIRECT LOAN
      BORROWERS
-------------------------------------------------------- Chapter 0:4.3

Commercial lenders, banking industry representatives, and FmHA
officials suggested changes for increasing the use of the guaranteed
loan program as a source of credit for direct loan borrowers.  These
suggestions included changing the direct loan program to stimulate
borrowers' efforts to seek guaranteed loans.  Such changes could
include gradually increasing the interest rate charged over the life
of a new direct loan until it matches the rates charged by commercial
lenders.  Also, they suggested changes to the guaranteed loan program
to stimulate lenders' participation, such as increasing the guarantee
percentage when the loan is made to refinance outstanding direct loan
debt.  However, in the opinion of some FmHA officials and commercial
lenders, if the suggested changes were made, few direct loan
borrowers would be financially able to meet the lenders' requirements
for loans even with guarantees. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

To strengthen the graduation process, GAO is recommending that the
Secretary of Agriculture direct the FmHA Administrator to (1)
accurately assign and promptly update borrowers' loan classifications
and (2) adequately evaluate direct loan borrowers for graduation to
guaranteed loans or commercial credit and graduate those who qualify. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

In commenting on a draft of this report, FmHA stated that it shares
GAO's concerns that the guaranteed loan program avoid the high losses
that the direct loan program has had.  Moreover, FmHA said that it
has been aware of the issues raised by GAO, and FmHA believes that
its ongoing and planned actions address GAO's concerns.  FmHA
indicated that it agreed with GAO's recommendations and cited planned
actions to require that borrowers' loan classifications be updated at
least every 2 years and that borrowers who are classified as
potential commercial credit candidates be referred to commercial
lenders every 2 years.  However, FmHA did not provide specifics on
how it plans to ensure that county office officials perform the
required review of borrowers' loan classifications and potential for
graduation or to graduate those borrowers who qualify.  FmHA also
said that it agreed that additional changes can be made to the
guaranteed loan program to help graduate direct loan borrowers to
commercial credit.  FmHA cited various actions to make the guaranteed
loan program more attractive to commercial lenders and said that it
will consider the other suggestions for using guaranteed loans to
fund more borrowers who have direct loans.  FmHA's specific comments
and GAO's evaluation are discussed in chapters 2, 3, and 4. 


INTRODUCTION
============================================================ Chapter 1

The Farmers Home Administration (FmHA), a lending agency within the
U.S.  Department of Agriculture (USDA), provides assistance to
financially troubled farmers through direct government-funded loans
and guarantees on loans made by other agricultural lenders.\1 Until
the early 1970s, FmHA provided direct loans only.  The Rural
Development Act of 1972 (P.L.  92-419, Aug.  30, 1972) provided FmHA
with discretionary authority to guarantee farm loans made by other
agricultural lenders, such as commercial banks and the Farm Credit
System.  In guaranteeing a farm loan, FmHA agrees, in the event that
a borrower defaults, to reimburse a commercial lender for up to 90
percent of lost principal plus accrued interest and liquidation
costs. 


--------------------
\1 FmHA's basic authority for making farm loans is the Consolidated
Farm and Rural Development Act of 1961, referred to as the Con Act,
as amended (P.L.  87-128, Aug.  8, 1961). 


   HIERARCHY OF FARM CREDIT
---------------------------------------------------------- Chapter 1:1

American farmers have a hierarchy of credit available.  Farmers who
need to borrow funds to finance their operations or purchase farm
property have three basic sources of credit.  First, farmers in the
best financial position can obtain credit from lenders such as
commercial banks, the Farm Credit System, life insurance companies,
or individuals.  Second, if farmers' security or ability to meet
repayment terms is somewhat marginal, they can obtain credit from
commercial lenders through FmHA's guaranteed farm loan program. 
Third, if farmers are unable to obtain financing elsewhere, they can
obtain a direct loan from FmHA.  Table 1.1 shows that FmHA was
responsible for about 12.5 percent of the total farm debt on December
31, 1992--guaranteed loans (3.4 percent) plus direct loans (9.1
percent).  Data from December 31, 1992, were the latest available. 



                          Table 1.1
           
            Sources of Outstanding Farm Credit, as
                     of December 31, 1992

                    (Dollars in billions)

                                               Percentage of
Source of credit                    Amount              debt
----------------------------------  ------  ----------------
Commercial lenders and individuals  $129.9              87.5
FmHA's guaranteed loans                5.0               3.4
FmHA's direct loans                   13.5               9.1
============================================================
Total                               $148.4             100.0
------------------------------------------------------------
Source:  USDA's Economic Research Service. 


   OVERVIEW OF FMHA'S FARM LOAN
   PROGRAMS
---------------------------------------------------------- Chapter 1:2

FmHA's mission is to be a temporary lender of last resort.  For
farmers who are unable to obtain credit elsewhere, FmHA can provide
financing through either a direct or a guaranteed loan.  To be
eligible for a direct loan, a borrower must be unable to obtain
commercial credit at reasonable rates and terms.  To obtain a
guaranteed loan, a lender must certify that it is unwilling to make
the loan without a government-backed guarantee.  Direct loans are
made at lower interest rates and for longer repayment periods than
guaranteed loans.  When direct loan borrowers demonstrate financial
progress, they are to graduate to commercial credit.  If properly
implemented, this process enforces FmHA's mission to supply temporary
credit and makes direct loan funds available for other high-risk
farmers needing financial assistance. 

Although FmHA has traditionally provided more direct loans than
guaranteed loans, it began to use more guaranteed loans in the
mid-1980s.  The Congress has since supported this changed emphasis
with increased authorizations for guaranteed loans. 

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 field office
structure comprising 47 state offices, about 250 district offices,
and about 1,700 county offices located throughout the nation.  FmHA's
county supervisors, who manage the county offices, have extensive
responsibility and authority for administering the agency's farm loan
programs, including approving and servicing loans.  FmHA's district
directors are to provide guidance and supervision to county
supervisors within designated geographic areas in the making and
servicing of farm loans, and state directors are to administer and
oversee operations within one or more states.  Also, district and
state directors have approval authority for certain loans.  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 that
farm loans are administered by the Department. 


      DIRECT AND GUARANTEED LOANS
      HAVE SPECIFIC AUTHORIZED
      USES
-------------------------------------------------------- Chapter 1:2.1

FmHA provides direct and guaranteed loans for both farm operating and
farm ownership purposes.  Farm operating loans are authorized for
purposes such as buying equipment items, livestock, and poultry;
paying annual operating and/or family living expenses; and
refinancing debts.  Direct operating loans may not exceed $200,000,
including any outstanding principal on other direct farm operating
loans.  Guaranteed operating loans may not exceed $400,000 in total
outstanding loan principal.  When a farm operating loan is made,
collateral must be provided as security. 

Farm ownership loans, whether direct or guaranteed, are authorized
for purposes such as buying real estate, refinancing existing debt,
and making improvements to the farm.  Direct and guaranteed farm
ownership loans may not exceed $200,000 and $300,000, respectively,
including any outstanding principal on other farm ownership loans,
soil and water loans, and recreation loans.  When a farm ownership
loan is made, real estate or a combination of real estate and chattel
property must be provided as security.\2

Terms for repaying FmHA's loans vary according to the loan's type,
the loan's purpose, and the nature of the security.  The payment
period for farm operating loans may range from 1 to 7 years, while
the payment period for farm ownership loans can be as long as 40
years. 

FmHA also makes other types of direct farm loans not evaluated in
this report, such as emergency disaster loans that are made to
farmers whose operations have been substantially damaged by adverse
weather or by other natural disasters.  These loans are intended to
assist farmers in covering actual losses incurred so that they can
return to normal farming operations. 


--------------------
\2 Chattel property, as opposed to real estate, is personal property
used in farming operations for the production of income, including
such property as trucks, tractors, and other major equipment. 


      EMPHASIS HAS BEEN CHANGING
      TO GUARANTEED LOANS
-------------------------------------------------------- Chapter 1:2.2

In the 1980s, FmHA began using more guaranteed loans and fewer direct
loans in order to encourage farm lending by commercial lenders,
reduce budget outlays on direct loans, and devote more effort to
servicing its growing number of direct loans and increasingly
delinquent direct accounts.  Under the Food Security Act of 1985
(P.L.  99-198, Dec.  23, 1985)--referred to as the 1985 Farm
Bill--and again in the Omnibus Budget Reconciliation Act of 1990
(P.L.  101-508, Nov.  5, 1990), the Congress supported this shift in
emphasis by decreasing authorizations for direct loans and increasing
authorizations for guaranteed loans.  In each year since fiscal year
1987, FmHA's new guaranteed loans have exceeded new direct loans. 
(See fig.  1.1.)

   Figure 1.1:  FmHA's Guaranteed
   and Direct Farm Loan
   Obligations, Fiscal Years
   1985-93

   (See figure in printed
   edition.)

Source:  FmHA. 

However, the Agricultural Credit Improvement Act of 1992 (P.L. 
102-554, Oct.  28, 1992) could change some of this emphasis back to
direct loans.  Under the act, FmHA must transfer 75 percent of its
unobligated guaranteed operating loan authority at the end of the
third quarter of a fiscal year to a new agency program that uses
direct ownership loans to fund beginning farmers.  In fiscal year
1993, FmHA transferred about $650 million under this authority but
obligated very little of these transferred funds. 


   PROFILE OF BORROWERS WHO
   OBTAINED GUARANTEED FARM LOANS
   DURING FISCAL YEAR 1992
---------------------------------------------------------- Chapter 1:3

During fiscal year 1992, FmHA guaranteed almost $1.6 billion on
slightly less than 14,000 farm ownership and operating loans.  On the
basis of our random sample of these loans,\3 we estimate that 91
percent of the loans went to borrowers who already had farm loans
(whether commercial or FmHA credit) when they obtained an FmHA
guaranteed loan and that 9 percent went to first-time farm loan
borrowers.  In addition, as shown in table 1.2, about 68 percent of
the loans went to borrowers who had more than 10 years' farm
experience, 64 percent went to feed grain producers, 69 percent went
to borrowers who had sales of between $100,000 and $500,000 annually,
and the loans were made to borrowers whose farms averaged over 800
acres. 



                          Table 1.2
           
                Borrowers' Characteristics for
           Guaranteed Loans Made During Fiscal Year
                             1992

                                                      Percen
Years of farming/ranch experience                          t
----------------------------------------------------  ------
Over 10 years                                           67.9
5-10 years                                              18.1
Less than 5 years                                       14.0
============================================================
Total                                                  100.0
Type of operation                                     Percen
                                                           t
Feed grains (e.g., corn and grain sorghum)              63.5
Meat animals                                            47.1
Oil-bearing crops (e.g., soybeans)                      33.8
Wheat                                                   33.1
Cotton                                                  15.8
Dairy products                                          12.4
Vegetables, melons, fruits, and/or tree nuts             9.1
Rice                                                     7.0
Poultry and/or eggs                                      6.1
Other crops                                             15.2
============================================================
Total                                                 100.0\
                                                           a
Farm sales                                            Percen
                                                           t
Less than $40,000                                        4.5
$40,000 to $99,999                                      20.8
$100,000 to $249,999                                    46.2
$250,000 to $499,999                                    22.7
$500,000 and more                                        5.8
============================================================
Total                                                  100.0
Size of operation                                     Amount
Acres (average)                                          828
Minimum (from sample)                                      2
Maximum (from sample)                                 13,618
Average number of livestock for those who had            399
 livestock
------------------------------------------------------------
Note:  The information in this table is based on the estimated
percentage of loans that were made to borrowers in fiscal year 1992. 

\a Amount totals more than 100 percent because respondents placed
borrowers in more than one category. 

Source:  GAO estimate based on a sample of FmHA's guaranteed loans. 

Furthermore, we estimate that about 54 percent of the loan funds were
used for paying operating expenses, various purchases, or other
expenses.  Another 6 percent was used for farm real estate purchases,
as shown in table 1.3, and the remaining 40 percent was used for
refinancing existing debt.  Also, commercial banks provided the
majority of the loans. 



                          Table 1.3
           
             Planned Use of Funds and Source for
           Guaranteed Loans Made During Fiscal Year
                             1992

                                                     Percent
                                                     of loan
Planned use of loan funds                              funds
--------------------------------------------------  --------
Refinance existing debt                                 39.5
Pay farm operating expenses                             38.4
Purchase livestock, machinery, or equipment              7.5
Purchase farm dwelling or farmland                       5.6
Capital and real estate improvements                     6.3
Family living expenses                                   1.6
Other                                                    1.0
============================================================
Total                                                100.0\a
                                                     Percent
 Source of loans                                    of loans
Commercial banks                                        83.4
Farm Credit System                                      14.7
Other commercial lenders\b                               1.9
============================================================
Total                                                  100.0
------------------------------------------------------------
\a Amount does not total 100 percent because of rounding. 

\b Includes mortgage corporations, credit unions, and life insurance
companies. 

Source:  GAO estimate based on a sample of FmHA's guaranteed loans. 


--------------------
\3 This report presents loan estimates on the number of recipients of
guaranteed loans and the use of such loans on the basis of sampling. 
Appendix I discusses our sampling procedures in detail and provides
the sampling errors for our estimates. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:4

Our work was part of a special GAO governmentwide audit effort to
help ensure that areas potentially vulnerable to fraud, waste,
mismanagement, and abuse are identified and that appropriate
corrective actions are taken.  Concerned about FmHA's high losses in
its direct loan program and the potential for similar losses in its
guaranteed loan program, we reviewed the guaranteed loan program to
determine (1) the extent of losses under the guaranteed farm loan
program compared with those under the direct loan program, (2) the
extent to which the guaranteed farm loan program has graduated FmHA's
direct loan borrowers to commercial credit, and (3) ways to make the
guaranteed farm loan program more of a source for funding direct loan
borrowers. 

In addressing these objectives, we conducted work at 6 FmHA state
offices, 12 FmHA county offices, FmHA's St.  Louis Finance Office,
and FmHA headquarters.  Figure 1.2 shows the location of the state
and county offices that we reviewed. 

   Figure 1.2:  FmHA's Field
   Offices Reviewed by GAO

   (See figure in printed
   edition.)

Additionally, we reviewed and analyzed our reports issued since the
1985 Farm Bill was passed,\4 reports issued by USDA's Office of
Inspector General since fiscal year 1988, the results of FmHA's
internal control reviews, and the annual reports from the Secretary
of Agriculture to the President required by the Federal Managers'
Financial Integrity Act of 1982 (P.L.  97-255, Sept.  8, 1982). 
Appendix I provides more detail on our scope and methodology. 

To obtain information on the characteristics of FmHA's guaranteed
loan borrowers and the planned use of loan funds, we sent two
questionnaires--one on farm ownership loans and another on farm
operating loans--to county office officials requesting information
about a randomly selected sample of loans that were made to borrowers
who obtained loans in fiscal year 1992.  Appendix II discusses our
survey methodology and contains our estimates and sampling errors. 
Appendixes III and IV contain copies of the questionnaires used. 
Additionally, to evaluate the quality of the guaranteed loan
portfolio, we sent another questionnaire to county office officials
requesting information about the payment record of a randomly
selected sample of borrowers who had outstanding loans as of June 30,
1993.  Appendix V discusses our survey methodology for this aspect of
our work and contains our estimates and sampling errors, and appendix
VI contains a copy of the questionnaire. 

To determine whether the guaranteed loan program is a viable funding
source for more of FmHA's direct loan borrowers, we conducted a
structured interview with 53 commercial lenders in eight states--34
of these lenders had outstanding guaranteed loans, and 19 did not. 
Also, we interviewed representatives of the American Bankers
Association and the Independent Bankers Association of America. 

We started our work in February 1993 and used September 30, 1993, as
a cut-off date for most of the financial information about FmHA's
farm loan portfolio.  This date allowed us to have relatively recent
and comparable data on the financial status of FmHA's direct and
guaranteed farm loan portfolios.  In addition, we conducted detailed
field work through October 1993, updating selected information
through July 1994.  We performed our work in accordance with
generally accepted government auditing standards.  FmHA's written
comments on the results of our work appear in appendix VIII. 


--------------------
\4 These reports include Farmers Home Administration:  Billions of
Dollars in Farm Loans Are at Risk (GAO/RCED-92-86, Apr.  3, 1992);
Farmers Home Administration:  Use of Loan Funds by Farmer Program
Borrowers (GAO/RCED-90-95BR, Feb.  8, 1990); and Farmers Home
Administration:  Implications of the Shift From Direct to Guaranteed
Farm Loans (GAO/RCED-89-86, Sept.  11, 1989). 


GUARANTEED LOANS HAVE RESULTED IN
LESS LOSSES THAN DIRECT LOANS, BUT
FMHA'S ACTIONS INCREASE POTENTIAL
FOR LOSS
============================================================ Chapter 2

FmHA's guaranteed loan program has been more successful than the
direct loan program from a financial standpoint.  From 1976 through
1993, FmHA guaranteed $12 billion of lenders' loans and made $55.6
billion in direct loans.  Overall losses--actual losses through 1993
plus estimates of future losses--on FmHA's guaranteed loans are
expected to be about 9 percent compared with direct loan losses of
about 40 percent.  A key reason for the differences in losses is that
guaranteed loan borrowers are lower credit risks than direct loan
borrowers are; that is, to obtain a direct loan, a borrower must show
that a commercial lender would not make the loan at reasonable
interest rates.  Another contributing factor is that a greater
proportion of the direct loans was made just prior to the farm
financial crisis in the mid-1980s, when farm lenders experienced
higher-than-normal loss rates. 

Although more successful than the direct loan program, the guaranteed
loan program is experiencing programmatic problems that contribute to
increased financial risk to the government.  Specifically, FmHA
allows guaranteed or direct loan borrowers who have defaulted on
previous loans to obtain new guaranteed loans.  Also, FmHA's internal
control reviews have reported that field office officials have not
always followed the agency's standards for servicing guaranteed
loans. 


   THE GUARANTEED LOAN PROGRAM IS
   NOT AS FINANCIALLY STRESSED AS
   THE DIRECT LOAN PROGRAM
---------------------------------------------------------- Chapter 2:1

Borrowers who receive FmHA's guaranteed loans are more creditworthy
than FmHA's direct loan borrowers.  As a result, FmHA has experienced
and estimates it will experience lower losses from guaranteed loans. 
Also, as of September 30, 1993, about 5 percent of the outstanding
guaranteed loan debt was held by delinquent borrowers compared with
about 38 percent that was held by direct loan borrowers. 


      ACTUAL AND POTENTIAL LOSSES
      FROM GUARANTEED LOANS ARE
      LESS THAN THOSE FROM DIRECT
      LOANS
-------------------------------------------------------- Chapter 2:1.1

FmHA's actual and estimated losses from guaranteed loans are
substantially less than those from its direct loans.  From 1976
through 1993, FmHA guaranteed about $12 billion in lenders'
loans--almost 135,000 farm loans to approximately 86,000
borrowers--and expects to incur losses of about $1.1 billion, or 9.2
percent.  These losses are much lower than those expected for the
direct loan program, which total about $22.3 billion on $56 billion
of loans for the same period, or about 40 percent.  (See table 2.1.)



                          Table 2.1
           
               Comparison of FmHA's Actual and
             Estimated Loan Losses for Direct and
                       Guaranteed Loans

                    (Dollars in billions)

                                Direct loans      Loans that
                                   that FmHA            FmHA
FmHA's loans and losses                 made      guaranteed
------------------------------  ------------  --------------
Total loans, 1976-93                   $55.6         $12.0\a
Total losses, 1976-93\b               14.8\c             0.6
FmHA's estimate of future                7.5             0.5
 losses (allowance for losses)
Total actual and estimated             $22.3            $1.1
 losses
Percentage of actual and                40.1             9.2
 estimated losses
------------------------------------------------------------
Note:  All dollars are nominal. 

\a Adjusted to reflect FmHA's risk, which is based on $13.5 billion
in guaranteed loans made over the fiscal year 1976-93 period and an
estimated average guarantee of about 89 percent. 

\b Although we attempted to compare the performance of the two loan
programs by the year of loan origination, we could not do so because
FmHA does not retain the information needed for direct loans. 

\c FmHA reported $16.2 billion in actual direct loan losses over the
fiscal year 1976-93 period.  However, because some of these losses
relate to loans made prior to fiscal year 1976, we adjusted the
losses and report here an estimate of the losses that relate to loans
made during and after fiscal year 1976. 

Source:  GAO's analysis of FmHA's data. 

Guaranteed loan losses would be expected to be less because
guaranteed loan borrowers are less of a credit risk than direct loan
borrowers are.  Another contributing factor to the lower guaranteed
loan losses is that a greater proportion of the direct loans was made
in the late 1970s and early 1980s, just prior to the start of a
period when farm lenders, overall, experienced higher-than-normal
losses.  Prior to 1987, the majority of FmHA's farm loans were direct
loans.  However, beginning with 1987 and through 1993, the majority
of FmHA's farm loans were guaranteed loans. 


      GUARANTEED LOAN PORTFOLIO IS
      NOT AS VULNERABLE TO FUTURE
      LOSSES AS THE DIRECT LOAN
      PORTFOLIO
-------------------------------------------------------- Chapter 2:1.2

Consistent with FmHA's estimate of future losses, two other measures
of future performance each indicate that the outstanding guaranteed
loans are less vulnerable to future losses than direct loans.  These
indicators consist of our assessment of the outstanding guaranteed
loans and recent delinquencies. 

According to our estimates, 13.4 percent of the 1993 guaranteed loan
portfolio is at risk:  7.5 percent is held by delinquent borrowers,
and 5.9 percent is held by borrowers whose loans have been
rescheduled to keep their accounts current.  (See table 2.2.)\1 In
comparison, as shown in our prior report, we estimated that 70
percent of the direct loans that were outstanding in 1990 were
similarly at risk.\2



                          Table 2.2
           
           Estimated Number of Borrowers and Amount
           of Outstanding Debt That Was and Was Not
           Current on Guaranteed Loan Payments, as
                       of June 30, 1993

                    (Dollars in billions)


                                        Percen  Amou  Percen
Loan category                   Number       t    nt       t
------------------------------  ------  ------  ----  ------
Original loans
Paid current                    22,747    64.6  $3.0    64.5
First payment not                4,257    12.1   0.8    16.4
 due
============================================================
Subtotal                        27,003    76.7  3.7\    80.9
                                    \a             a
Rescheduled loans\b
To be kept current               2,505     7.1   0.3     5.9
Other reasons\c                  1,665     4.7   0.3     5.6
============================================================
Subtotal                         4,170    11.8  0.5\    11.5
                                                   a
Loans not paid current
Original                         1,764     5.0   0.3     6.4
Rescheduled                        355     1.0   0.1     1.2
============================================================
Subtotal                         2,119     6.0  0.3\   7.5\a
                                                   a
============================================================
Total                           35,210  100.0\  $4.6  100.0\
                                    \d       d    \a       a
------------------------------------------------------------
Note:  We obtained the figures for the total number of borrowers
(35,210) and the total outstanding debt ($4.6 billion) from the
records of FmHA's Finance Office and used these figures as a basis
for sampling and calculating a resulting estimate. 

\a Items do not add to total because of rounding. 

\b Loans that were paid current or the first payment was not due. 

\c Includes loans that were rescheduled to obtain a lower interest
rate or to consolidate debt. 

\d Items do not add to total because an estimated 5.4 percent of the
borrowers who had paid off their loans were included in FmHA's
database.  (See app.  V.)

Source:  GAO estimate based on a sample of FmHA's borrowers. 

Another indicator of the extent that guaranteed loans are less risky
than direct loans is the difference in delinquencies.  FmHA reports
show that as of September 30, 1993, delinquent borrowers held 4.8
percent of the outstanding guaranteed loan debt compared with 37.6
percent of the direct loan debt. 


--------------------
\1 The data on the outstanding debt presented in this part of the
chapter are based on our estimates from a dollar-unit sample of loans
to 1,000 borrowers.  Appendix V discusses our sampling procedures in
detail and provides the sampling errors for our estimates. 

\2 In Farmers Home Administration:  Billions of Dollars in Farm Loans
Are at Risk (GAO/RCED-92-86, Apr.  3, 1992), we estimated that about
40 percent of the 1990 direct loan debt was held by delinquent
borrowers and another 30 percent was held by borrowers whose loans
had been rescheduled (sampling errors of 5.4 percent and 4.0 percent,
respectively). 


   CURRENT LENDING POLICIES AND
   PRACTICES EXPOSE FMHA TO
   INCREASED FINANCIAL RISK
---------------------------------------------------------- Chapter 2:2

Despite the fact that the guaranteed farm loan program is in better
financial condition than the direct loan program, FmHA has hundreds
of millions of dollars in guaranteed loans that are at risk, in part,
because some of its policies and practices do not protect the
government's interest.  Specifically, FmHA does not prohibit
borrowers with poor repayment histories from obtaining new loans. 
Furthermore, FmHA's field office officials have not always properly
implemented loan-servicing standards, which are designed to protect
the federal government's financial interest. 


      GUARANTEED LOAN-MAKING
      POLICIES ADD TO FMHA'S RISK
-------------------------------------------------------- Chapter 2:2.1

FmHA's loan-making policies do not prohibit borrowers who defaulted
on a guaranteed or direct loan from obtaining new guaranteed loans. 
As we reported in February 1994,\3 408 borrowers who received new
guaranteed loans totaling almost $60 million during fiscal years
1991-93 had cost FmHA $67 million in losses on their previous loans. 
(See table 2.3.)



                          Table 2.3
           
            Borrowers Who Received New Guaranteed
           Loans During Fiscal Years 1991-93 After
            Defaulting on Previous Guaranteed and
                         Direct Loans

                    (Dollars in millions)

                        Number     Amount of       Amount of
                            of           new  FmHA's loss on
Action on borrower's  borrower    guaranteed        previous
previous loan                s         loans         loans\a
--------------------  --------  ------------  --------------
Loss on previous            36          $6.7            $2.9
 guaranteed loans
Loss on previous           372          52.9            64.2
 direct loans\b
============================================================
Total                      408         $59.6           $67.1
------------------------------------------------------------
\a These losses resulted from payments to commercial lenders on
guaranteed loans or debt relief provided on direct loans. 

\b Covers borrowers whose delinquent debts were restructured with
debt write-down or satisfied through a payment that resulted in debt
write-off. 

Although the loans are relatively new--from 1 to 3-years old--16
borrowers, or about 4 percent of the 408, were delinquent on their
new loans as of September 30, 1993.  For example, one borrower
received a guaranteed loan for $80,000 in 1991 after receiving about
$317,000 in direct loan debt relief in 1989; by 1993, this borrower
was delinquent on the guaranteed loan.  Similarly, FmHA guaranteed a
$400,000 loan in 1991 for a borrower who had defaulted on an earlier
guaranteed loan, thereby causing FmHA to pay a loss claim of
$254,000; by 1993, this borrower was delinquent on the new guaranteed
loan. 

In our April 1992 report, we recommended that to strengthen FmHA's
loan-making standards, the Congress amend the Con Act to prohibit
loan guarantees for borrowers (1) whose defaulting on previous
guaranteed loans caused FmHA to pay commercial lenders' loan loss
claims and (2) whose defaulting on previous direct loans resulted in
debt being written off or written down.  The Congress has not
implemented these recommendations. 


--------------------
\3 Farmers Home Administration:  Farm Loans to Delinquent Borrowers
(GAO/RCED-94-94FS, Feb.  8, 1994). 


      FMHA'S FIELD OFFICES'
      NONCOMPLIANCE WITH
      LOAN-SERVICING STANDARDS
      ADDS TO FMHA'S FINANCIAL
      RISK
-------------------------------------------------------- Chapter 2:2.2

In recent years, FmHA's field offices have improved their compliance
with the agency's standards for making guaranteed loans but, through
fiscal year 1993, had not improved in complying with the standards
for servicing such loans.  FmHA requires its field offices to follow
specific credit standards in approving guaranteed loans.  These
standards include determining an applicant's eligibility and
repayment ability and the adequacy of collateral.  FmHA also requires
its field offices to follow specific loan-servicing standards in
overseeing the lender's servicing of loans.  This servicing includes
(1) inspecting collateral to ensure that the borrower possesses and
is maintaining security property, (2) providing the same servicing
for FmHA guaranteed loans as for other loans, and (3) ensuring that
loan funds are used properly. 

To evaluate the extent that FmHA's field offices comply with the
agency's policies, procedures, and standards, FmHA established the
Coordinated Assessment Review (CAR) as a part of its internal control
review.  The CAR consists of examining a random sample of direct and
guaranteed loans each year in selected states.  Generally, loans made
in about 15 states are sampled and reviewed each year so that each
state is reviewed every 3 years.  FmHA's target for an acceptable
compliance rate is 85 percent--or no more than a 15-percent
noncompliance rate. 

According to the CARs, FmHA's field offices improved their oversight
of lenders' guaranteed loan-making process.  Since our April 1992
report, recent CARs have shown that the field offices had less than a
15-percent noncompliance rate for all standards that put the
government at risk. 

Conversely, through fiscal year 1993, the CARs showed that FmHA's
field offices had not improved their oversight of lenders' servicing. 
In our April 1992 report, for example, we reported that in 25 percent
of the cases reviewed, field office officials had not, as required,
effectively monitored lenders' compliance with standards for
inspecting collateral and for ensuring the proper use of loan funds. 
The CARs for fiscal year 1993 showed that the field offices continue
to have a high rate of noncompliance in several areas.  Of the 15
loan-servicing standards, the field offices exceeded a noncompliance
rate of 15 percent for 12 of the standards.  For example, the
following three cases relate to potential loss claims and demonstrate
the noncompliance areas found: 

There was a 36.8-percent noncompliance rate for the standard that
FmHA officials concur with the lender that a delinquency was beyond a
borrower's control before allowing the lender to reschedule or
reamortize a loan.  The failure to follow this standard can lead to
the increased risk of paying higher loss claims because of accrued
interest and deteriorated collateral. 

There was a 36.2-percent noncompliance rate for the standard that
FmHA officials review lenders' loan files within 90 days of closing a
loan.  Not following this standard can lead to the increased risk of
paying higher loss claims because of errors in the value of
collateral and the position of the lien. 

There was a 21-percent noncompliance rate for the standard that FmHA
officials approve cash flow values prior to advances for the 2nd and
3rd years on line-of-credit operating loans.  Such deficiencies can
lead to the increased risk of paying higher loss claims because of
credit advances to borrowers (1) whose operations had changed to the
point where the advances were not in accordance with the terms of the
loan or (2) whose financial conditions had deteriorated to the point
where repayment would be questionable. 

In our April 1992 report, we recommended that FmHA develop and
implement a system that ensures that its field office officials
adhere to its standards for making and servicing guaranteed loans. 
In response, FmHA informed us about various actions it had developed
for ensuring compliance, such as monitoring through its internal
reviews and using the results of reviews to evaluate lending
officials' performance.  However, as discussed above, while FmHA's
compliance with loan-making standards has improved, compliance with
loan-servicing standards, through fiscal year 1993, had not. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:3

Although the guaranteed loan program has incurred much less losses
than the direct loan program, some of FmHA's lending policies and
practices continue to place the government at a higher-than-necessary
financial risk.  These risks exist because (1) certain loan-making
policies allow FmHA to guarantee loans whose potential for loss is
high and (2) FmHA's field office officials have not always followed
the agency's credit standards for servicing guaranteed loans.  This
risk could be reduced if, for example, the Congress implemented
recommendations that we made in our April 1992 report. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 2:4

In commenting on a draft of this report (see app.  VIII), FmHA agreed
that a borrower's past record of debt repayment often reflects a
willingness to repay debt.  However, FmHA stated that our statistics
do not support the position that losses caused by events beyond the
control of borrowers should prevent them from receiving additional
credit.  FmHA also stated that there is no correlation between past
failures and a probability of future losses.  We share FmHA's
concerns and recognize that there are cases in which borrowers may
default for reasons that are beyond their control.  Nonetheless, we
are concerned that past failures are a strong indicator of not only
the willingness but the priority of debt repayment by
borrowers--i.e., the forgiveness of debt followed by the making of
additional loans sends a signal (1) that could encourage borrowers to
default and (2) that there will be little if any impact on obtaining
additional loans. 

As a beginning of a renewed emphasis on monitoring lenders, FmHA
cited several actions that it has initiated and planned.  FmHA added
that its emphasis has resulted in improved monitoring, as evidenced
by a significant improvement in the rate of compliance with the three
key standards for servicing guaranteed loans discussed in this
chapter.  We are encouraged by the results of FmHA's fiscal year 1994
CAR reviews, which were not complete at the time of our review, and
hope that the pattern of compliance with the servicing standards
continues to follow the path of compliance with the agency's
loan-making standards. 

Furthermore, FmHA stated that its loss rate on guaranteed loans,
which it calculated by comparing the total amount of losses incurred
with the total amount of loans made over the life of the program, is
4 percent.  We disagree with FmHA's methodology for making this
calculation because it fails to take into account the losses
estimated on outstanding loans.  A more accurate presentation is to
compare total loans made with the total of losses already incurred
and those estimated to occur on loans that are outstanding.  As shown
in table 2.1, this results in a 9.2- percent loss rate. 


GUARANTEED LOANS HAVE NOT BEEN
SYSTEMATICALLY USED AS AN INTERIM
STEP TO GRADUATE DIRECT LOAN
BORROWERS TO COMMERCIAL CREDIT
============================================================ Chapter 3

Few direct loan borrowers have moved to guaranteed loans as a step
toward graduating to commercial--nongovernment supported--credit.  A
contributing factor has been the lack of an FmHA policy that would
encourage the use of the guaranteed loan program as an interim step
in graduating direct loan borrowers to commercial credit.  At the
direction of the Congress, FmHA initiated action in late 1993 to
include moving to guaranteed loans as an interim step in the
graduation process.  Furthermore, FmHA field office staff often fail
to follow through on the required processes for identifying direct
loan borrowers with the potential for graduation and graduating those
who have shown sufficient financial progress to qualify for
commercial credit.  As a result, some borrowers may remain in the
direct loan program longer than justified, taking advantage of the
agency's subsidized interest rates and long repayment terms. 
Although FmHA officials and commercial lenders believe that few
direct loan borrowers can meet the requirements for a guaranteed
loan, FmHA does not know how many can qualify. 


   FMHA HAS NOT ROUTINELY USED THE
   GUARANTEED LOAN PROGRAM TO HELP
   VIABLE DIRECT LOAN BORROWERS
   PROGRESS TO COMMERCIAL CREDIT
---------------------------------------------------------- Chapter 3:1

A logical step in graduating borrowers from direct loans to
commercial credit would be to promptly replace their direct loans
with guaranteed loans when a borrower qualifies.  However, most
direct loan borrowers are not getting guaranteed loans.  Furthermore,
FmHA has not had a policy to use the guaranteed loan program as a
means of encouraging direct loan borrowers to graduate to commercial
credit. 


      FEW DIRECT LOAN BORROWERS
      OBTAIN GUARANTEED LOANS
-------------------------------------------------------- Chapter 3:1.1

According to FmHA's data on borrowers who have outstanding loans and
who receive new loan obligations, most direct loan borrowers do not
obtain guaranteed loans.  As table 3.1 shows, only about 7,300 FmHA
direct loan borrowers, or 4 percent of the total number during fiscal
years 1991-93, obtained guaranteed loans.  These borrowers held
direct loans for varying lengths of time--some for more than 20
years. 



                          Table 3.1
           
              Direct Loan Borrowers Who Obtained
             Guaranteed Loans During Fiscal Years
                           1991-93

               Borrowers   Borrowers who       Percentage of
               in direct        obtained         direct loan
                    loan      guaranteed   borrowers who got
Fiscal year    portfolio           loans    guaranteed loans
------------  ----------  --------------  ------------------
1991             169,782           7,049                 4.2
1992             154,505           4,240                 2.7
1993             140,297           1,892                 1.3
============================================================
Total\a          181,156           7,323                 4.0
------------------------------------------------------------
\a The total shows the number of discrete borrowers over this period
--i.e., if a borrower was in the portfolio for more than 1 year, the
person is counted once in the total. 

Source:  GAO's analysis of the records at FmHA's St.  Louis Finance
Office. 


      FMHA IS DEVELOPING A POLICY
      TO USE GUARANTEED LOANS AS A
      TRANSITION FROM DIRECT
      GOVERNMENT ASSISTANCE
-------------------------------------------------------- Chapter 3:1.2

FmHA has not historically used the guaranteed loan program as a
stepping stone in helping direct loan borrowers progress to
commercial credit.  According to its own policies, FmHA, as a
temporary source of credit, should graduate a borrower from direct
loans to commercial credit at the earliest possible time.  Because
qualifying for commercial credit without a government guarantee is
more stringent than qualifying with a guarantee, moving from a direct
loan to a guaranteed loan is a logical progression for borrowers
whose financial condition has improved but not sufficiently to
qualify for commercial credit. 

FmHA has not used the guaranteed program in this way because its
criteria for graduation from direct loans to commercial credit have
not included any interim steps.  FmHA considers a direct loan
borrower to graduate from government support when that borrower (1)
pays in full, before the expiration of the loan, all farm program
loans or all of one type of farm program loan by refinancing with
other credit sources and (2) continues farming.  FmHA does not
consider graduation to cover a borrower who pays off the debt under
normal terms, and the agency specifically excludes borrowers who move
from direct to guaranteed loans. 

However, FmHA recently initiated action to include moving to
guaranteed loans as an interim step in the graduation process.  In
December 1993, 14 months after enactment of the Agricultural Credit
Improvement Act of 1992, which required such action, FmHA published a
proposed regulation in the Federal Register to incorporate the use of
guaranteed loans as an interim step in graduating direct loan
borrowers to commercial credit without a guarantee.  In late October
1994, FmHA officials told us that the agency anticipates publishing
the revised regulations to graduate direct loan borrowers to
guaranteed loans in November 1994. 


   FMHA HAS NOT EFFECTIVELY
   ADMINISTERED ITS ESTABLISHED
   PROCESSES FOR GRADUATING DIRECT
   LOAN BORROWERS
---------------------------------------------------------- Chapter 3:2

FmHA requires that its field offices annually review direct loan
borrowers for graduation to commercial credit.  However, the field
office lending officials often do not adhere to the process.  As a
result, some borrowers with graduation potential are not identified
as likely candidates, and other borrowers who are identified are not
made to graduate.  In addition, its classification of borrowers
according to their repayment ability is not reliable.  Thus, FmHA
does not know how many direct loan borrowers qualify for guaranteed
loans.  Nonetheless, FmHA officials and commercial lenders believe
that few FmHA direct loan borrowers can meet the requirements for a
guaranteed loan. 


      FMHA'S FIELD OFFICE
      OFFICIALS OFTEN DO NOT
      COMPLY WITH REQUIREMENTS TO
      IDENTIFY AND GRADUATE
      QUALIFIED DIRECT LOAN
      BORROWERS
-------------------------------------------------------- Chapter 3:2.1

FmHA's primary tool for identifying and graduating qualified direct
loan borrowers is its annual graduation review process.  This process
is intended to target borrowers who have displayed sufficient
financial progress to graduate from the direct loan program to
commercial credit.  Annually, FmHA's St.  Louis Finance Office
provides each county office with a list of borrowers who have had
outstanding loans for 3 years or more.  County office officials
initially review and remove borrowers from the list who are clearly
unable to graduate by using available knowledge of local lenders'
criteria or other information that the officials may have on
borrowers' financial status.  County office officials may also add to
the list borrowers whose financial condition has substantially
improved since obtaining their loans.  Borrowers who are not
initially removed or who are added to the list are considered
potential candidates for graduation.  County office officials are to
thoroughly evaluate these borrowers' financial position by
considering their financial strengths, income capabilities, and other
characteristics that relate to meeting local lenders' criteria.  For
those identified as candidates for commercial credit through this
process, FmHA requires that they be requested to graduate or to
provide information documenting why they cannot graduate. 

However, FmHA's field office officials do not always conduct the
reviews to identify which borrowers are potential candidates for
graduation.  Almost 200 borrowers, or about 17 percent, of the
approximately 1,160 borrowers who FmHA should have reviewed for
graduation potential during fiscal years 1991 and 1992 at the 12
county offices we visited were not reviewed.  County office
supervisors said they did not review the borrowers because they
believed other pressing work was more important, such as servicing
delinquent borrowers.  In addition, another 310 borrowers, or about
27 percent, at these 12 offices were removed from consideration
without any reasons annotated in the county offices' records for
their removal.  County office supervisors could not explain why the
borrowers were removed from consideration. 

Of 115 direct loan borrowers identified for graduation to commercial
credit at these county offices, the FmHA supervisors did not take the
additional steps required to graduate 54 borrowers or to conclude
that they could not graduate.  For 32 borrowers, the county office
supervisors said they did not try to graduate them because they
believed the borrowers could not meet local lenders' credit
standards.  For the remaining 22 borrowers, the county office loan
files showed that the borrowers had not responded to the county
offices' request to graduate and that the county office supervisors
had not taken any further action.  If a borrower fails to respond,
the county office supervisor may consider the borrower to be in
default as provided for in the loan agreement.  A county office
supervisor may then initiate action to accelerate repayment of the
loan or legal action to foreclose on the loan.  In taking such
actions, the county office supervisor must obtain the concurrence of
the FmHA district and state office officials and, if legal action is
involved, USDA's Office of General Counsel.  However, some county
office supervisors said they did not pursue more forceful action with
borrowers who did not provide the requested financial information
because they did not believe that higher-level officials would
support their efforts. 

Our review indicates that some of the borrowers who did not graduate
to commercial credit had financial circumstances indicating that they
could have moved from the direct loan program if the county office
supervisors would have followed through as required.  For example, a
borrower obtained a $28,000, 40-year soil and water loan in 1987 and
paid off $1,300 by June 1993.  According to June 1989 financial
information in his FmHA loan file, the borrower had a net worth of
over $400,000 and liabilities of about $116,000.  The borrower did
not comply with the county office's request for financial information
during the 1991 graduation review.  In early 1993, the borrower was
again asked to provide updated financial information, but no response
had been received as of August 1993.  The county office's supervisor
acknowledged that FmHA should have taken further action to force this
borrower to graduate.  Other examples are described in appendix VII. 


      FMHA'S FIELD OFFICES HAVE
      NOT ACCURATELY CLASSIFIED
      BORROWERS' REPAYMENT ABILITY
-------------------------------------------------------- Chapter 3:2.2

Another tool, which the Congress has directed FmHA to use in
identifying direct loan borrowers for graduation, is FmHA's loan
classification system.  The loan classification system is designed to
record FmHA's current judgment of all borrowers' ability to repay
their loans.  The objectives of the system are to assess the overall
quality of FmHA's loan portfolio, estimate loan losses to the
government, assess the need for any special loan servicing, and
improve the management of the loan program.  Classifications are to
be assigned when loans are made and updated whenever a borrower's
financial condition changes significantly.  As shown in table 3.2,
borrowers are classified on a 1-to 5-scale, with the highest-quality
loans described as "commercial" (category 1) and the lowest quality
described as a "loss" (category 5). 



                          Table 3.2
           
                 FmHA's Loan Classifications

Classificati  Descriptio
on category   n           Definition
------------  ----------  ----------------------------------
1             Commercial  Highest-quality loans; borrower
                          has ample security and is viewed
                          as profitable.

2             Standard    Fully acceptable accounts; risks
                          and servicing costs are higher
                          than acceptable to other lenders;
                          and loans are adequately secured.

3             Substandar  Special counseling and servicing
              d           required; borrower's repayment
                          ability marginal and payments are
                          sometimes delinquent; and
                          borrower's loan security is
                          adequate but marginal.

4             Doubtful    Inadequate repayment ability; a
                          loss will occur if liquidated; and
                          at least one of the borrower's
                          FmHA loans is undersecured.

5             Loss        Repayment is unlikely; liquidation
                          is imminent; and security for all
                          loans is inadequate.
------------------------------------------------------------
Source:  FmHA instruction 2006-W. 

However, in many cases, FmHA's county offices did not assign a
correct classification, and in other cases they did not keep the
classifications current, as required.  As of September 30, 1993,
FmHA's records showed that about 27,000, or about 20 percent, of
FmHA's approximately 140,000 direct loan borrowers were classified in
the two highest loan categories, indicating that they should be
candidates for graduation.  Of these, 4,856 were classified as
commercial, and 22,331 were classified as standard.  In reviewing 171
borrowers who were classified as commercial quality borrowers at the
12 county offices we reviewed, county office officials told us that
112 borrowers, or about 66 percent, were improperly classified
because they had insufficient income or inadequate loan security to
meet minimum commercial credit standards. 

County office supervisors explained that many borrowers were simply
categorized incorrectly when originally classified.  They stated that
when the system was implemented in 1988, they had only a limited time
to classify all borrowers.  In their haste to meet the deadline to
classify each borrower, county office supervisors relied on personal
knowledge in lieu of supporting financial documents.  Moreover, they
said that in some cases, they did not update the borrowers'
classifications because they do not view the information as useful to
them. 

In accordance with congressional requirements, FmHA is developing a
plan to improve its graduation process.  In December 1993, 8 months
after the date established in the Agricultural Credit Improvement Act
of 1992 for implementing such action, FmHA published a proposal in
the Federal Register to improve the graduation process and plans to
implement it in November 1994.  The principal change in the proposed
regulations strengthens the process by identifying potential
graduation candidates on the basis of their financial condition as
recorded in FmHA's loan classification system.  Specifically,
borrowers classified in the top two categories--i.e., commercial and
standard quality--are to be reviewed each year for graduation. 
However, FmHA's proposed plan does not contain any new initiative to
ensure that FmHA staff accurately assign and update the loan
classifications of their borrowers--an overriding weakness in the
existing program. 


      FMHA OFFICIALS AND LENDERS
      BELIEVE THAT FEW DIRECT LOAN
      BORROWERS QUALIFY FOR
      GUARANTEED LOANS
-------------------------------------------------------- Chapter 3:2.3

FmHA's headquarters and field office officials believe that few
direct loan borrowers can meet the credit standards required by
commercial lenders to qualify for guaranteed loans.  For example, all
6 FmHA state officials and 9 of the 12 county office supervisors we
interviewed said that many direct loan borrowers will never be able
to qualify for guaranteed loans unless there is a major turnaround in
their production and finances, which they believed would not occur. 
These officials' beliefs are based upon perceptions that some direct
loan borrowers either (1) do not have sufficient farm management
skills or financial education or (2) have farm operations or
financial needs that are too small to be of interest to commercial
lenders. 

Furthermore, some lenders in the eight states we reviewed\1 also
believed that FmHA's guaranteed loan program--as currently designed
and operated--is not a viable funding source for some direct loan
borrowers.  These lenders stated that most direct loan borrowers
simply cannot qualify for guaranteed loans.  On the other hand, they
also told us that it is viable for those individuals who have made
progress in overcoming the financial difficulties that led to their
becoming direct loan borrowers. 


--------------------
\1 We contacted 53 lenders in eight states--34 lenders with
guaranteed loans and 19 with farm loans but with no guaranteed
loans--to obtain their comments about the guaranteed program. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:3

Most direct loan borrowers do not receive guaranteed loans even
though obtaining such loans would seem to be a natural progression in
improving their creditworthiness and ultimately qualifying them for
commercial credit without a guarantee.  While FmHA officials and
lenders contend that few direct loan borrowers can qualify for a
guaranteed loan, FmHA cannot verify this because its county offices
have often failed to identify and graduate direct loan borrowers who
qualify for commercial credit.  As a result, some borrowers remain in
the direct loan program and receive government assistance from the
program longer than justified. 

Congress's required changes to the graduation process, directed in
1992 legislation, have the potential to bring improvement when FmHA
implements them--which are planned for November 1994.  Requiring that
FmHA's guaranteed loan program be routinely used as an interim step
for direct loan borrowers in their progression to commercial credit
without a guarantee and using the loan classification system as the
basis for identifying candidates for graduation can bring
improvement.  However, given the past failure of FmHA field offices
to comply with existing graduation and loan classification
requirements, FmHA needs to address county supervisors' views that
graduation is not a high priority and their skepticism about whether
superiors will support them in graduating borrowers. 


   RECOMMENDATIONS TO THE
   SECRETARY OF AGRICULTURE
---------------------------------------------------------- Chapter 3:4

To ensure that FmHA effectively implements the congressionally
directed plan for using guaranteed loans as an interim step in moving
direct loan borrowers to commercial credit without a guarantee, we
recommend that the Secretary of Agriculture direct the FmHA
Administrator to develop and implement a plan to ensure that county
office supervisors

assign accurate loan classifications to all new direct loan
borrowers,

promptly update loan classifications as borrowers' financial
conditions change, and

adequately evaluate each direct loan borrower listed annually for
graduation potential to identify and graduate those borrowers who
qualify for guaranteed loans or commercial credit. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 3:5

In commenting on a draft of this report (see app.  VIII), FmHA agreed
that it has not emphasized the graduation of direct loan borrowers to
commercial credit through the use of the guaranteed loan program. 
FmHA stated that it will soon implement various changes to its loan
programs, some of which are designed to assist borrowers in
graduating from direct loans.  For example, FmHA plans to issue
regulations requiring that borrowers' loan classifications be updated
at least every 2 years and that borrowers who are classified as
commercial or standard grade borrowers be referred to commercial
lenders every 2 years.  However, FmHA did not provide specifics on
how it plans to ensure that county office officials perform the
required review of borrowers' loan classifications and their
potential for graduation or graduating those borrowers who qualify. 
In the past, county office officials have not fully complied with
FmHA's requirements in these areas. 

FmHA questioned our report's analyses of the agency's loan
classification system, which indicated that many borrowers were
incorrectly classified as commercial grade borrowers--the highest
quality level.  FmHA stated that the loan classification system was
designed to provide a basis for assessing the quality of its loan
portfolio by using the agency's rates and terms.  FmHA contended that
even though a borrower may be accurately classified as a commercial
grade borrower, the person still may not qualify for a bank loan when
a commercial lender's rates, terms, and security standards are
considered.  The implication of FmHA's comment is that the agency's
definition of commercial grade may be different from an individual
bank's definition.  However, FmHA's definition of "commercial"
clearly indicates that a borrower so classified should be a prime
candidate for graduation from a direct loan to a guaranteed loan or
to commercial credit.  Specifically, FmHA describes commercial grade
borrowers as follows: 

     "These are FmHA's highest quality Farmer Program accounts.  The
     financial condition of the borrowers is strong enough to enable
     them to absorb the normal adversities of agricultural production
     and marketing.  There is ample security for all loans, there is
     sufficient cash flow to meet the expenses of the agricultural
     enterprise and the financial needs of the family, and to service
     debts.  The account is of such quality that commercial lenders
     would view the loans as a profitable investment." (Underscoring
     added.)

Therefore, our point remains unchanged--i.e., according to the county
supervisors we spoke with, many borrowers (66 percent of the 171
direct loan borrowers reviewed who were classified as commercial)
were misclassified using FmHA's own definition and were not
candidates for graduation because of problems with cash flow, high
debt, or a marginal repayment record. 


LENDERS' AND FMHA'S SUGGESTIONS
FOR MAKING THE GUARANTEED PROGRAM
A MORE VIABLE FUNDING SOURCE FOR
DIRECT LOAN BORROWERS
============================================================ Chapter 4

Commercial lenders\1 and FmHA officials believe that to get lenders
to take on a greater portion of FmHA's approximately 140,000 direct
loan borrowers as their own clients, changes would be required in (1)
direct loan provisions to more effectively encourage borrowers to
move from such loans and (2) the guaranteed loan program to make it
more attractive to lenders.  Moving borrowers from direct loans would
reduce FmHA's outstanding direct loan debt and the government's risk
exposure that exists with such loans, allow the agency's field staff
to more effectively administer the direct loan program, and reinforce
the agency's role as a temporary credit source.  However, even if the
suggested changes are made, many borrowers would still not be able to
obtain guaranteed loans because they could not meet commercial
lenders' credit standards. 


--------------------
\1 We contacted 34 lenders who had guaranteed loans and 19 who had
farm loans without guarantees to obtain their suggestions about ways
to increase the use of the guaranteed loan program for funding direct
loan borrowers. 


   SUGGESTIONS HAVE BEEN MADE TO
   INCREASE THE USE OF GUARANTEED
   LOANS
---------------------------------------------------------- Chapter 4:1

Commercial lenders and FmHA field office lending officials that we
interviewed suggested changes to FmHA's direct loan program that they
believe would cause existing direct loan borrowers to seek commercial
credit with a guarantee as soon as they qualify.  These suggestions
involve

gradually increasing the interest rate charged on direct loans until
it equals the rate charged on commercial loans,

making direct ownership loans for the purchase of farm land for 10 to
15 years with a balloon payment at the end of the term instead of
payments over 40 years, and

writing off the amount of the outstanding direct loan debt that
exceeds the market value of the security property for the loan
(collateral). 

Regarding gradually increasing the interest rate charged on direct
loans, some commercial lenders we interviewed and a 1991 American
Bankers Association (ABA) Task Force report\2 said that interest
rates on direct loans, which are lower than commercial rates, should
be periodically increased.  Specifically, eight commercial lenders
suggested that the interest rate that FmHA charges should be
increased over time so that the rates eventually match commercial
rates.  Such increases could cause borrowers to start looking
elsewhere for financing as the advantage of below-market rates is
eliminated.  According to 64 percent of the 53 lenders that we
interviewed, borrowers do not have an incentive to move from direct
to guaranteed loans because of the low interest rates on direct
loans. 

The ABA Task Force recommended that all of FmHA's direct loans have a
graduated interest rate clause so that borrowers understand that
interest rates will change on specific dates.  According to the ABA,
because there is no interest rate adjustment mechanism in place for
FmHA's direct loans, borrowers are encouraged to remain in the
program, particularly when the rates remain low in relation to
commercial rates.  For example, while interest rates on guaranteed
operating loans made in 1992 averaged 9.8 percent, FmHA's direct
loans were often made at 7 percent. 

On the other hand, implementing a proposal that routinely causes
interest rates to increase without considering the borrowers'
financial condition could adversely affect some borrowers' abilities
to repay their loans on schedule and thus result in defaults. 

With respect to the suggestion for shortening FmHA's farm ownership
loan terms, which typically run 40 years, some of the commercial
lenders we interviewed and the ABA Task Force agreed with the need
for shorter terms.  The ABA emphasized that having a maturity date
preceding the amortization date of the loan would enforce FmHA's
purpose of being a temporary lender.  Likewise, 10 of the lenders we
interviewed told us that longer repayment terms act as a disincentive
to get borrowers to move from the direct loan program.  As an
alternative, one commercial lender suggested that in lieu of making
loans with a 40-year repayment, FmHA should make shorter-term
loans--e.g., loans with a 15-year maximum term--and require a balloon
payment at the end of the term. 

On the other hand, implementing a proposal that causes a loan's
maturity date to be shortened and that increases payments could
result in repayment difficulties for those borrowers who acquire
additional farm real estate to expand their operations or who made
capital improvements to their existing operations. 

Concerning the third suggestion--that FmHA reduce direct loan debt to
the value of the loan security\3 --many lenders believe that some
FmHA borrowers have outstanding direct loan debt that exceeds the
value of their security.  Some of the commercial lenders we
interviewed told us that they would not make a loan to repay a
borrower's outstanding direct loan debt if the loan could not be
adequately secured by collateral property.  Specifically, most of the
53 lenders we interviewed said that FmHA would need to reduce the
debt to at least the value of the security if the borrowers could not
pay the debt down to that value.  Implementing such a suggestion
could provide lenders with a greater incentive to provide credit to
direct loan borrowers. 

On the other hand, implementing a proposal that causes FmHA to reduce
outstanding debt would result in the agency's incurring losses on
loans to borrowers who have remained current on their agreed-upon
loan payments. 


--------------------
\2 Agricultural Credit for the 1990's and Beyond, American Bankers
Association's Agricultural Credit Task Force (Feb.  1991). 

\3 The value of the security used as collateral that has depreciated
or been devalued to the point where it no longer is worth the amount
recorded in the loan agreement. 


   SUGGESTIONS HAVE BEEN MADE TO
   MAKE THE GUARANTEED LOAN
   PROGRAM MORE ATTRACTIVE TO
   COMMERCIAL LENDERS
---------------------------------------------------------- Chapter 4:2

Many of the commercial lenders that we interviewed told us about
problems they have had in participating in the guaranteed farm loan
program and suggested changes.  For example, many of the lenders
stated that FmHA's paperwork requirements are excessive.  Some also
said that FmHA has been slow in processing their guaranteed loan
applications.  Even though the lenders have had problems, many of
them are still interested in participating in the guaranteed loan
program.  They, as well as the FmHA field office officials we
interviewed, provided us with suggested changes that they said could
increase the willingness of lenders to take on more direct loan
borrowers as clients.  These suggestions cover both administrative
and programmatic aspects of making guaranteed farm loans. 


      PROBLEMS THAT LENDERS HAVE
      HAD WITH THE GUARANTEED LOAN
      PROGRAM
-------------------------------------------------------- Chapter 4:2.1

Of the 34 lenders with guaranteed farm loans that we interviewed, 28
told us that FmHA's paperwork requirements are excessive. 
Seventy-five percent of these 28 lenders said it was the most
significant problem they have had in participating in the guaranteed
program.  Another problem area frequently cited by the 34 lenders was
that FmHA's field offices have been slow in processing applications. 
Table 4.1 shows the major problems that lenders identified. 



                          Table 4.1
           
            Comments From 34 Commercial Lenders on
           Problems They Have Had in Participating
             in the Guaranteed Farm Loan Program

                                            Number
                                                of  Percenta
Problems that lenders cited with the      lenders\     ge of
guaranteed farm loan program                     a   lenders
----------------------------------------  --------  --------
FmHA requires excessive paperwork               28      82.4
FmHA has been slow in processing                18      52.9
 applications
FmHA's county committees have been slow          6      17.6
 in deciding on applicants' eligibility
FmHA has been slow in making guaranteed          5      14.7
 payments when losses occurred
------------------------------------------------------------
\a Lenders sometimes stated more than one problem area.  Furthermore,
in some cases, lenders stated a problem not shown in this table.  As
a result, the responses do not add to the total number of lenders
(34). 

Source:  GAO's analysis of commercial lenders' comments. 

Generally, lenders with guaranteed loans told us that FmHA's
paperwork requirements increase a bank's workload and the time spent
in processing a loan application.  This occurs because FmHA requires
more information in a guaranteed loan application than a bank
requires in an application for a loan not involving a guarantee. 


      ADMINISTRATIVE CHANGES THAT
      MAY MAKE THE GUARANTEED LOAN
      PROGRAM MORE VIABLE
-------------------------------------------------------- Chapter 4:2.2

The commercial lending officials we interviewed suggested changes to
administrative aspects of the guaranteed loan program as a means of
increasing their participation.  These suggestions include

reducing the paperwork required for guaranteed loans,

eliminating the requirement that lenders submit financial and
production history data on existing direct loan borrowers who seek
guaranteed loans to repay outstanding direct loan debt, and

allowing lenders to certify borrowers' eligibility to participate in
the guaranteed loan program. 

As discussed earlier, problems with FmHA's paperwork requirements
were cited by lenders as a significant issue affecting their
participation in the guaranteed loan program.  Among other things,
they told us that because FmHA's paperwork requirements differ from
those normally used in the banking industry, they had to prepare two
sets of loan application documents--one for reviews by their internal
credit committee and a second containing the same information but in
a different format on FmHA's forms.  Also, according to ABA
officials, lenders have to submit paperwork in the application
package that does not directly relate to the loan, such as a
certification that loan funds will not be used for lobbying
activities.  According to the lenders, requirements such as these add
to their cost of doing business and make them reluctant to
participate--particularly, in regard to funding low-valued loans
because of their low-profit potential. 

In response to previous reports that have criticized FmHA's paperwork
requirements and as required by the Agricultural Credit Improvement
Act of 1992, on June 24, 1993, FmHA published interim regulations in
the Federal Register revising FmHA's loan application paperwork
requirements for loans of $50,000 or less and for lenders who
participate in FmHA's certified lender program.\4 While these
revisions should result in a lessening of the paperwork required for
some lenders, many of the lenders that we interviewed did not know
that FmHA was attempting to streamline the loan application process. 

On the related suggestion that FmHA should stop requiring lenders to
obtain and submit financial and production history data for borrowers
when applying for guaranteed loans to repay existing direct loan
debts, ABA officials and some of the lenders we interviewed
questioned the need to submit such data, which the county offices
should already have.  Also, the lenders said that while FmHA requires
5 years of historical data, some lenders usually consider only the
past 3 years in deciding on an application.  ABA officials further
recommended that if a commercial lender was willing to repay a
borrower's outstanding direct loan debt with a guaranteed loan, then
FmHA should simply "pass through" the person's outstanding debt to
the bank without the need to submit any new or additional paperwork. 
In such cases, the ABA officials said that there is no need for an
entire application package as with a new applicant/borrower. 
Fifty-eight percent of the 53 lenders we interviewed told us that
eliminating this requirement could result in an increase in the use
of the guaranteed farm loan program to repay applicants' outstanding
direct loan debts. 

The third change suggested by lenders was that they, rather than
FmHA's county committees, should be allowed to certify applicants'
eligibility to receive guaranteed loans.  Specifically, county
committees, which consist of two members elected by local farmers and
one designated by FmHA, decide on the eligibility of applicants to
participate in FmHA's farm loan programs.  Among other things, two of
the lenders who had guaranteed loans said they have encountered
personal bias by some county committee members against their loan
applicants, and six others said that county committees have been slow
in making decisions on guaranteed loan applications.  One lender
illustrated the situation as follows:  The bank makes lending
decisions on a daily basis, but it is delayed in making guaranteed
loans if the applications do not arrive in time for a county
committee meeting or if the committee requests additional
information.  Nineteen of the 53 lenders we interviewed stated that
participation in the guaranteed loan program could increase if
lenders were permitted to certify applicants' eligibility. 


--------------------
\4 The certified lender program will make it possible for high-
volume lenders having a proven record of success with FmHA to be
rewarded with reduced application requirements, faster approval time,
and reduced cost and paperwork. 


      SUGGESTED PROGRAMMATIC
      CHANGES TO THE GUARANTEED
      LOAN PROGRAM
-------------------------------------------------------- Chapter 4:2.3

The commercial lenders and the FmHA field office officials we
interviewed also cited various changes to the program that could
result in increased use of guaranteed loans.  These include

increasing the guarantee percentage above 90 percent when the loan is
being used to refinance outstanding direct loan debt,

removing the guaranteed loan fee for borrowers whose direct loan
debts are being refinanced with guaranteed loans, and

increasing the authority for making subsidized loans under the
Interest Assistance Program. 

The first proposal applies to increasing the guarantee percentage
above 90 percent when the loan is being used to refinance outstanding
direct loan debt owed to FmHA.  The Con Act currently limits the
guarantee to 90 percent for all loan-use purposes.  Forty of the 53
lenders we interviewed said that such a change would increase their
use of the guaranteed loan program to repay an applicant's
outstanding direct loan debt.  Twenty-seven of these lenders
suggested a 100-percent guarantee, and 12 others suggested a
95-percent guarantee (one did not suggest a specific percentage above
90 percent).  Furthermore, one lender said that FmHA's guarantee
percentage should be reduced over time, after a borrower demonstrates
a record of loan repayment.  FmHA has a 100-percent exposure with
direct loans.  If a 95-percent guarantee was provided on a loan for
repaying outstanding direct loan debt, then the government's risk
exposure would be reduced by 5 percent.  If a 100-percent guarantee
was provided on a loan for that purpose, then FmHA would only have
the additional risk for any accrued interest and liquidation costs
over what those costs would be to the agency. 

Another proposed change was for FmHA to remove the guaranteed loan
fee for borrowers whose direct loan debts were being refinanced with
guaranteed loans.  FmHA charges lenders a 1-percent loan origination
fee for the federal guarantee, which lenders usually pass on to
borrowers.  For example, if a loan is for $200,000 and the guarantee
is for 90 percent, then the guaranteed amount is $180,000, and the
fee is $1,800.  Removing this fee when any part of a guaranteed loan
is being used to repay direct loan debt could be an added inducement
for borrowers to seek guaranteed loans.  Five lenders suggested
removing the fee on loans involving the repayment of direct loan debt
in order to make the guaranteed program more viable.  For example,
one lender said that the fee adds to a borrower's cost, and another
said that borrowers can use the added cost as an excuse for not
seeking to move from their direct loans.  Although FmHA requires
county supervisors to waive this fee when more than half of the
guaranteed loan funds are being used for refinancing direct loan
debt, two county office supervisors we interviewed said they do not
waive the fee on any guaranteed loan. 

The third change that some commercial lenders and county supervisors
suggested was that FmHA's authority for making subsidized loans under
the Interest Assistance Program should be increased.  Under this
program, which is an interest subsidy program, a lender is reimbursed
by FmHA for charging a borrower an interest rate that is less than
the lender's regular rate.  Some lenders and county supervisors told
us that this program has helped some direct loan borrowers obtain
guaranteed farm operating loans.  However, the agency has not been
authorized to use the program for farm ownership loans.  Four
commercial lenders and five state and county office officials said
that if FmHA's interest assist authority was expanded, they believe
that some direct loan borrowers could move their outstanding farm
ownership debt to guaranteed loans. 


   MANY BORROWERS MAY HAVE NO
   ALTERNATIVE TO FMHA'S DIRECT
   LOANS
---------------------------------------------------------- Chapter 4:3

In order for borrowers to obtain commercial loans, they must be able
to meet the credit standards of the lenders who make the loans. 
Because direct loan borrowers may not be able to fully meet standards
in areas such as cash flow, security, and equity, lenders may need to
lower their standards.  However, even if the lenders relaxed their
standards, there are, in the opinion of some lenders and banking
industry representatives we interviewed, direct loan borrowers who
would not be able to obtain commercial credit even with guarantees
because of their inability to qualify for such credit.  For example,
the 30,806 borrowers who were delinquent on $5.2 billion in direct
loans, as of September 30, 1993, would not be candidates for
commercial credit. 

Ten lenders with guaranteed loans told us that the guaranteed program
cannot replace the direct loan program for some borrowers.  Four
lenders without guaranteed loans said that some direct loan borrowers
simply are unable to qualify for commercial credit.  Furthermore,
some lenders, notably those without guaranteed loans, said that (1)
they are not looking for risky customers, which FmHA's direct loan
borrowers are by definition, or for clients who cannot meet their
minimum credit standards and (2) they will not make a loan that is
not financially sound.  Three lenders, who did not have outstanding
FmHA guaranteed loans, specifically said that they perceived
borrowers who needed a guaranteed loan to be financially weak and
that they would not lower their lending standards in order to fund an
applicant with a guaranteed loan. 

Likewise, officials from ABA and from the Independent Bankers
Association of America said that even if changes are made to FmHA's
farm loan programs, the guaranteed program would not be a viable
funding source for some direct loan borrowers.  For example, ABA
officials said that commercial banks would be unwilling to fund some
direct loan borrowers because their financial histories reflect a
long-term pattern of failing to meet their debt obligations. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 4:4

To stimulate the movement of borrowers from direct loans, lenders
have made a variety of suggestions.  If some or all of the proposals
are implemented, some existing FmHA direct loan borrowers would
likely move to guaranteed loans, which could lessen the agency's risk
exposure, reinforce its role as a temporary source of credit, and
reduce its workload.  The exact number, while unknown, probably would
not be a high percentage of FmHA's approximately 140,000 direct loan
borrowers because many have marginal production and financial
histories.  Nonetheless, moving any portion of the outstanding direct
loan borrowers to the commercial sector is desirable if the
government's risk exposure can be adequately protected.  Therefore,
deciding whether suggested changes should be made ultimately requires
balancing FmHA's risk exposure against the concessions that would
have to be made to lenders. 

Implementing some of the suggestions in this chapter may not have
much impact on FmHA's risk exposure.  For example, there would be no
cost impact if FmHA stopped requiring lenders to submit financial and
production data for guaranteed loans to refinance existing direct
loan borrowers' debt owed to FmHA.  Also, since FmHA has a
100-percent risk exposure with direct loans, allowing a
greater-than-90-percent guarantee for loans to repay outstanding
direct loan debt may actually lessen FmHA's risk if the rate was, for
example, 95 percent, and may add only slightly to its risk if the
rate was 100 percent.  To ensure that lenders had some stake in the
loan, a guarantee of something less than 100 percent would be needed. 
However, some proposals, such as reducing outstanding direct loan
debt to the value of security would result in immediate losses to
FmHA--i.e., forgiveness of some portion of existing debts--although
some of the losses may ultimately occur anyway. 

We realize that commercial lenders' support for many of these
suggestions is influenced largely by their desire to expand their
clientele and generate profit.  Even so, we believe that the overall
implications of the suggestions presented in this chapter are worthy
of further discussion and consideration.  For example, if FmHA
offered to write off the part of borrowers' direct loan debts that
exceeded the market value of their loan security property, what
impact would that have on the agency's overall losses and on
borrowers' receiving commercial credit, with or without a guarantee? 
Likewise, if the guarantee percentage for loans to pay off existing
direct loans was increased above 90 percent, what impact would the
lender's lessened exposure have on its incentive to properly service
the loan and what would be the implications for other government
guaranteed loan programs? 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 4:5

In commenting on a draft of this report (see app.  VIII), FmHA agreed
that additional changes can be made to the guaranteed loan program to
assist in moving direct loan borrowers to commercial credit.  FmHA
cited various actions it has initiated or plans to take to make the
guaranteed loan program more attractive to commercial lenders, such
as reducing the paperwork required for a guaranteed loan of less than
$50,000 and having county office officials assist lenders in
completing a guaranteed loan application.  FmHA also said that it
will consider the other suggestions in this chapter and that it
shares our concern about making the guaranteed program vulnerable to
the large losses that have been experienced by the direct loan
program. 


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

Our review focused on (1) the extent of losses under the guaranteed
farm loan program compared with those under the direct loan program,
(2) the extent to which the guaranteed farm loan program has
graduated the Farmers Home Administration's (FmHA) direct loan
borrowers to commercial credit, and (3) ways to make the guaranteed
farm loan program more of a source for funding direct loan borrowers. 

To gain an understanding of the legislative requirements for FmHA's
farm loan programs, we reviewed laws and legislative histories,
including the Con Act and the Agricultural Credit Improvement Act of
1992.  To determine FmHA's policies for making guaranteed farm loans
and for graduating borrowers to nonsubsidized credit, we reviewed
FmHA's regulations, operating instructions, and guidance to field
offices; our prior reports and the U.S.  Department of Agriculture's
Office of Inspector General reports; and FmHA's annual guidance and
plans for graduating borrowers to nonsubsidized credit.  We also
interviewed FmHA officials in the Office of Farmer Programs in
Washington, D.C., to determine the status of FmHA's implementation of
its graduation regulations and policies.  Furthermore, to compile
information on the extent to which direct loan borrowers obtain
guaranteed loans and how the loan funds are used, we conducted two
nationwide mail surveys of randomly selected guaranteed loans that
were made in fiscal year 1992.  Appendix II discusses our sampling
and data analysis methodology, selection criteria, and sampling
error.  Appendixes III and IV contain copies of the questionnaires we
used. 

To determine how well the guaranteed farm loan program is working, we
assessed and analyzed information from computerized databases in
FmHA's St.  Louis Finance Office, from the Secretary of Agriculture's
annual Federal Managers' Financial Integrity Act reports to the
President, and from various FmHA financial reports covering
outstanding and delinquent loans and actual and projected losses. 
Also, to estimate the quality of the guaranteed loan portfolio, we
developed another survey instrument that we used to collect
information on a randomly selected sample of borrowers who had
outstanding guaranteed loans on June 30, 1993.  Appendix V discusses
our sampling and data analysis methodology, selection criteria, and
sampling error.  Appendix VI contains a copy of the questionnaire we
used. 

Additionally, we used our past reports that highlighted financial
risks with FmHA's guaranteed farm loan policies and practices.  For
example, our February 1994 report was used to show that FmHA's
loan-making policies do not prohibit borrowers who defaulted on
direct or guaranteed loans from obtaining new guaranteed loans.  Our
April 1992 report was used to show that the financial risk with
FmHA's farm loan programs has been previously identified and that,
among other things, the agency's field office officials often do not
comply with established credit standards.  Also, we reviewed the
results of FmHA's fiscal year 1992 and 1993 internal control
Coordinated Assessment Review process to determine whether
noncompliance with guaranteed loan standards continues. 

To determine FmHA's actions to identify and graduate direct loan
borrowers and whether it uses guaranteed loans as a tool to assist
borrowers to graduate, we conducted audit work at FmHA's Office of
Farmer Programs in Washington, D.C., 6 of FmHA's state offices, and
12 of FmHA's county offices.  Specifically, we judgmentally selected
the six states to review on the basis of their having large numbers
of guaranteed loans and dollar amounts of guaranteed loans obligated
in fiscal year 1992 and for geographic spread; the states were
California, Iowa, Mississippi, Oklahoma, South Dakota, and Texas. 
Using computerized databases from FmHA's St.  Louis Finance Office,
we judgmentally selected two county offices in each state for
detailed audit work.  The county offices were selected on the basis
of their having direct loan borrowers classified as being commercial
quality borrowers and having guaranteed operating and ownership loans
outstanding.  We interviewed the state director and/or the chief of
farmer programs at each state office and the supervisor at each
county office to determine their goals for graduating borrowers and
their procedures for selecting and graduating borrowers.  We also
discussed the incentives and disincentives for county officials to
promote graduation, for borrowers to seek commercial credit with or
without a guarantee, and for lenders to fund direct loan borrowers. 
At each county office, we analyzed the graduation review process for
fiscal years 1991 and 1992 to determine field office officials'
adherence to FmHA's procedures and to determine if direct loan
borrowers are graduating to commercial credit when they are able.  We
also reviewed the loan classification process--designed to record
FmHA's judgment of a borrower's ability to repay the loan--to
determine if it could be a reliable tool for identifying graduation
candidates. 

Since the involvement of commercial lenders is key to the use of
guaranteed loans to fund direct loan borrowers, we conducted
structured interviews with 53 commercial lenders in eight states--
California, Iowa, Maryland, Mississippi, Oklahoma, Pennsylvania,
South Dakota, and Texas.  Since most of FmHA's guaranteed loans are
made by commercial banks, 48 of the lenders we interviewed were
commercial bankers, and the other 5 were Farm Credit System lenders. 
We selected lenders who were in the vicinity of the FmHA county
offices where we conducted our work.  To select the commercial banks,
we used a database maintained by federal banking regulators to
identify those with farm loans and then matched that listing with
FmHA's guaranteed loan database to identify those that had and those
that did not have FmHA guaranteed loans.  We selected the local Farm
Credit System lenders to interview at those locations where they,
rather than commercial banks, were more heavily involved in
guaranteed loans. 

Specifically, we interviewed officials from 34 lenders with
guaranteed loans to discuss how they use the program and the problems
they have had in participating in it.  We also interviewed 19 lenders
with farm loans who did not have guaranteed loans to determine the
reasons why they do not participate in the program.  At each of the
53 lending institutions, we discussed various options and
alternatives on how to increase their participation in the program
and their use of the program to fund direct loan borrowers. 

We also interviewed representatives from the American Bankers
Association (ABA) and the Independent Bankers Association of America
in Washington, D.C., to gain their views on FmHA's guaranteed farm
loan program and how to assist FmHA's borrowers in moving from direct
loans.  Furthermore, we reviewed FmHA and independent reports, such
as those of ABA, on the guaranteed loan program and on graduation. 

The results of our work at FmHA's field offices and at the commercial
lending institutions cannot be projected to the states we reviewed or
to the nation overall. 


SAMPLING AND DATA ANALYSIS
METHODOLOGY FOR GUARANTEED LOAN
SURVEYS
========================================================== Appendix II

To obtain data on recipients of guaranteed loans and the purposes for
the loans, we obtained from FmHA a computerized record of the 13,896
farm operating and ownership loans obligated during fiscal year 1992. 
Actual total obligations for all guaranteed farm loans during that
fiscal year was $1.6 billion.  The source for these data was the
automated tape that produced the FmHA Status of Loan and Grant
Obligations Allotments or Distribution report (FmHA report code 205)
as of September 30, 1992.  From this universe, we then selected a
probability sample of 1,000 guaranteed loans--550 operating loans and
450 ownership loans.  We conducted two nationwide mail surveys:  one
of farm operating loans and a second of farm ownership loans.  The
survey questionnaires were mailed on May 25, 1993, to FmHA's county
office officials responsible for the loans.  Appendixes III and IV
contain copies of the questionnaires.  The response rate to our
mailing was 100 percent. 

We used the responses to the survey to make estimates for the
universe of 13,768 loans (sampling error of 86 loans) whose data, we
believe, would have provided useable information had we attempted to
survey all loans that FmHA made in fiscal year 1992.  In addition,
respondents also supplied documentation supporting some of the
critical facts in their responses to the survey questionnaire.  We
used the documents to verify the consistency of certain responses. 
When there were inconsistencies and data were not available to
determine the correct answer, we made telephone calls to the county
offices to obtain correct information. 

Since we used a probability sample of guaranteed loan obligations to
develop our estimates, each estimate has a measurable precision, or
sampling error, which may be expressed as a plus/minus figure.  A
sampling error indicates how closely we can reproduce from a sample
the results that we would obtain if we used the same measurement
methods to take a complete count of the universe.  By adding the
sampling error to and subtracting it from the estimate, we can
develop upper and lower bounds for each estimate.  This is called a
confidence interval.  Sampling errors and confidence intervals are
stated at a certain confidence level--in this case, 95 percent.  For
example, a confidence interval of 95-percent means that in 95 out of
100 instances, the sampling procedure we used would produce a
confidence interval containing the universe value that we are
estimating.  As shown in table II.1, our estimates have relatively
small sampling errors of less than 5 percentage points. 



                          Table II.1
           
              Sampling Errors at the 95-Percent
              Confidence Level for Estimates of
            Borrowers' Characteristics and How the
               Guaranteed Loan Funds Were Used

                                                         95-
                                                     percent
                                                    confiden
                                            Sampli        ce
                                    Estima      ng  interval
Description of estimate                 te   error        \a
----------------------------------  ------  ------  --------
Borrowers' credit history
Already had farm loan                91.3%    1.7%  89.6% to
                                                       93.0%
First-time farm loan borrowers        8.7%    1.7%   7.0% to
                                                       10.4%
Borrowers' years of experience
Over 10 years                        67.9%    3.1%  64.8% to
                                                       71.0%
5-10 years                           18.1%    2.6%  15.5% to
                                                       20.7%
Less than 5 years                    14.0%    2.3%  11.7% to
                                                       16.3%
Borrowers' type of farming
 operation\b
Feed grain (e.g., corn &             63.5%    3.2%  60.3% to
 grain sorghum)                                        66.8%
Meat animals                         47.1%    3.4%  43.8% to
                                                       50.5%
Oil-bearing crops                    33.8%    3.2%  30.5% to
                                                       37.0%
Wheat                                33.1%    3.2%  30.0% to
                                                       36.4%
Cotton                               15.8%    2.5%  13.3% to
                                                       18.3%
Dairy products                       12.4%    2.1%  10.3% to
                                                       14.5%
Vegetables, melons,                   9.1%    2.0%   7.1% to
 fruits, and/or tree nuts                              11.1%
Rice                                  7.0%    1.8%   5.2% to
                                                        8.9%
Poultry and/or eggs                   6.1%    1.1%   5.0% to
                                                        7.2%
Other crops                          15.2%    2.4%  12.8% to
                                                       17.6%
Borrowers' gross sales
Less than $40,000                     4.5%    1.4%   3.1% to
                                                        5.8%
$40,000 to $99,999                   20.8%    2.5%  18.2% to
                                                       23.3%
$100,000 to $249,999                 46.2%    3.4%  42.9% to
                                                       49.6%
$250,000 to $499,999                 22.7%    2.7%  20.0% to
                                                       25.4%
$500,000 or more                      5.8%    1.5%   4.4% to
                                                        7.3%
Size of borrowers' farming
 operation
Average number of acres\c            828.3    67.5  760.8 to
                                                       895.9
Average number of                    398.7    55.6  343.1 to
 livestock\d                                           454.2
Borrowers' planned use of funds
Refinance existing debt              39.5%    3.4%  36.2% to
                                                       42.9%
Pay farm-operating                   38.4%    3.2%  35.1% to
 expenses                                              41.6%
Purchase livestock,                   7.5%    1.8%   5.7% to
 machinery, or equipment                                9.3%
Purchase farm dwelling or             5.6%    1.0%   4.6% to
 farmland                                               6.7%
Capital and real estate               6.3%    1.1%   5.2% to
 improvements                                           7.3%
Family living expenses                1.6%    0.3%   1.3% to
                                                        2.0%
Other uses of funds                   1.0%    0.3%   0.7% to
                                                        1.3%
Borrowers' source of loans
Commercial bank                      83.4%    2.4%  81.0% to
                                                       85.8%
Farm Credit System                   14.7%    2.3%  12.4% to
                                                       17.0%
Other commercial lenders\e            1.9%    0.8%   1.1% to
                                                        2.7%
Borrowers' credit situation\b
Existing customers of lenders        9,898     413  9,485 to
 making the loans                                     10,311
                                     71.9%    3.0%  68.9% to
                                                       74.9%
Existing direct loan borrowers       4,197     432  3,765 to
                                                       4,629
                                     30.5%    3.1%  27.4% to
                                                       33.6%
First-time farm loan borrowers       1,201     237    964 to
                                                       1,438
                                      8.7%    1.7%   7.0% to
                                                       10.4%
Other borrowers                      1,018     240    778 to
                                                       1,258
                                      7.4%    1.7%   5.6% to
                                                        9.1%
------------------------------------------------------------
Note:  The estimates presented in this table are based on the
percentage of loans, except for the loan-use estimate that is based
on the percentage of dollars loaned. 

\a The estimates plus or minus the sampling error may not equal the
upper and lower limits because of rounding. 

\b Items add to more than 100 percent because of responses in more
than one category. 

\c Average based on an estimate of 11,769 loans involving acreage,
with a sampling error of 300 loans. 

\d Average based on an estimate of 7,558 loans involving livestock,
with a sampling error of 463 loans. 

\e Other commercial lenders include mortgage corporations, credit
unions, and life insurance companies. 




(See figure in printed edition.)Appendix III
GUARANTEED FARM OPERATING LOAN
SURVEY
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)




(See figure in printed edition.)Appendix IV
GUARANTEED FARM OWNERSHIP LOAN
SURVEY
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


SAMPLING AND DATA ANALYSIS
METHODOLOGY FOR GUARANTEED LOAN
PORTFOLIO QUALITY SURVEY
=========================================================== Appendix V

To estimate the proportion of FmHA's active guaranteed farm loan
portfolio that is held by borrowers who have kept the payments on
their original loans current and by other borrowers who have not kept
current, we reviewed, through FmHA's St.  Louis Finance Office, a
dollar-unit sample of loans to 1,000 of the 35,210 borrowers who were
identified as having outstanding loans in the agency's computerized
records as of June 30, 1993.  The source for these data was the
automated tape that produced the FmHA Guaranteed Loan Master File. 
The probability that borrowers would be selected was proportional to
the dollar value of their unpaid loan principal.  Thus, borrowers
with higher unpaid principal balances were more likely to be sampled. 

We mailed questionnaires to FmHA's county office officials
responsible for handling the loans on July 30, 1993.  Appendix VI
contains a copy of the questionnaire.  We received a 100-percent
response rate to our mailing.  We obtained information on the
outstanding loan balances as of June 30, 1993, and classified
borrowers according to whether their loans were original loans or
rescheduled loans and whether the loans were paid current, the first
loan payments were not due, or the loans were not paid current.  We
classified borrowers whose loans fell into more than one of these
categories into the category that had the largest outstanding
balance. 

As discussed in appendix II, since we used a probability sample of
1,000 borrowers to develop our estimates, each estimate has a
measurable precision, or sampling error, which may be expressed as a
plus/minus figure.  Table V.1 shows our estimates, the sampling
errors, and the upper and lower confidence interval limits for our
estimates of borrowers who kept current and did not keep current on
their loan payments.  Table V.2 shows our estimates, the sampling
errors, and the upper and lower confidence interval limits for our
estimates for the FmHA debt that was kept current and not kept
current by borrowers. 

In the tables, the figures for the total number of borrowers (35,210)
and the total outstanding debt ($4.6 billion) are the actual figures
we obtained from FmHA's St.  Louis Finance Office and were used as a
basis for sampling and making the resulting projections.  As a result
of our sampling, we estimate that 1,918 of the 35,210 borrowers did
not have outstanding loans as of June 30, 1993.  This discrepancy
resulted from timing differences between the time when loans are
repaid and recorded as paid-in-full in the agency's database. 



                          Table V.1
           
           Sampling Errors and Confidence Intervals
            for Estimated Number of Borrowers Who
              Did and Did Not Keep Loan Payments
                           Current

                                  Sampli          95-percent
                          Estima      ng          confidence
Description of estimate       te   error            interval
------------------------  ------  ------  ------------------
Estimated number of borrowers
------------------------------------------------------------

Original loans
------------------------------------------------------------
Paid current              22,747   1,459    21,288 to 24,206
First payment not due      4,257     887      3,370 to 5,144
============================================================
Subtotal                  27,003   1,239    25,764 to 28,242
                              \a

Rescheduled loans\b
------------------------------------------------------------
To be kept current         2,505     771      1,734 to 3,276
Other reasons              1,665     535      1,130 to 2,200
============================================================
Subtotal                   4,170     924      3,246 to 5,094

Loans not paid current
------------------------------------------------------------
Original                   1,764     513      1,251 to 2,277
Rescheduled                  355     190          165 to 545
============================================================
Subtotal                   2,119     549      1,570 to 2,668
============================================================
Total outstanding         33,292
Did not make loans        1,918\     721      1,197 to 2,639
 outstanding as of June        c
 30, 1993
============================================================
Total in FmHA's database  35,210

Percentage of estimated borrowers
------------------------------------------------------------

Original loans
------------------------------------------------------------
Paid current                64.6     4.1        60.5 to 68.7
First payment not due       12.1     2.5         9.6 to 14.6
============================================================
Subtotal                    76.7     3.5        73.2 to 80.2

Rescheduled loans\b
------------------------------------------------------------
To be kept current           7.1     2.2          4.9 to 9.3
Other reasons                4.7     1.5          3.2 to 6.2
============================================================
Subtotal                    11.8     2.6         9.2 to 14.5

Loans not paid current
------------------------------------------------------------
Original loan                5.0     1.5          3.5 to 6.5
Rescheduled loan             1.0     0.5          0.5 to 1.5
============================================================
Subtotal                     6.0     1.6          4.4 to 7.6
============================================================
Total outstanding           94.5
Did not have loans         5.4\c     2.0          3.4 to 7.4
 outstanding as of June
 30, 1993
============================================================
Total in FmHA's database  100.0\
                               a
------------------------------------------------------------
\a Does not add because of rounding. 

\b Loans that were either paid current or for which the first payment
was not due. 

\c Due to timing differences between when loans were repaid and
recorded in the agency's database. 



                          Table V.2
           
           Sampling Errors and Confidence Intervals
           for Estimated Debt That Was and Was Not
                         Kept Current

                    (Dollars in millions)

                                  Sampli          95-percent
                          Estima      ng          confidence
Description of estimate       te   error            interval
------------------------  ------  ------  ------------------
Estimated outstanding debt
------------------------------------------------------------

Original loans
------------------------------------------------------------
Paid current              $2,965    $154    $2,811 to $3,119
First payment not due        756     115          641 to 871
============================================================
Subtotal                   3,721     146      3,575 to 3,867

Rescheduled loans\a
------------------------------------------------------------
To be kept current           271      63          208 to 334
Other reasons                259      62          197 to 321
============================================================
Subtotal                  531\b\      86          445 to 617

Loans not paid current
------------------------------------------------------------
Original                     294      71          223 to 365
Rescheduled                   53      28            25 to 81
============================================================
Subtotal                     347      75          272 to 422
============================================================
Total                     $4,599
Combined rescheduled        $618     $94        $524 to $712
 loans to be kept
 current and loans not
 paid current

Percentage of estimated debt
------------------------------------------------------------

Original loans
------------------------------------------------------------
Paid current                64.5     3.0        61.5 to 67.5
First payment not due       16.4     2.4        14.0 to 19.0
============================================================
Subtotal                    80.9     2.4        78.5 to 83.3

Rescheduled loans\a
------------------------------------------------------------
To be kept current           5.9     1.4          4.5 to 7.3
Other reasons                5.6     1.4          4.2 to 7.0
============================================================
Subtotal                    11.5     1.9         9.6 to 13.4

Loans not paid current
------------------------------------------------------------
Original                     6.4     1.5          4.9 to 7.9
Rescheduled                  1.2     0.6          0.6 to 1.8
Subtotal                   7.5\b     1.6          5.9 to 9.1
Total                     100.0\
                               b
Combined rescheduled        13.4     2.1        11.3 to 15.5
 loans to be kept
 current and loans not
 paid current
------------------------------------------------------------
\a Loans that were either paid current or for which the first payment
was not due. 

\b Does not add because of rounding. 




(See figure in printed edition.)Appendix VI
GUARANTEED FARM LOAN PORTFOLIO
QUALITY SURVEY
=========================================================== Appendix V



(See figure in printed edition.)


EXAMPLES OF BORROWERS WHOSE
FINANCIAL CONDITIONS INDICATES
THAT THEY COULD HAVE GRADUATED
========================================================= Appendix VII

Case A.  A borrower producing grain and livestock on a 400-acre farm
had paid $5,000 of his $17,000, 40-year farm ownership loan over 20
years.  A July 1992 financial statement showed that the borrower had
a net worth of almost $300,000 and total assets of about $360,000,
indicating that he could graduate.  However, county officials did not
refer the borrower to a lender to determine whether he could qualify
for commercial financing.  The borrower was not asked to graduate in
1992, according to the county office officials, because his cash flow
(comparison of projected income to expenses) did not appear to meet
minimum local lending standards. 

Case B.  A borrower producing grain and livestock on 720 acres
reported gross sales of $46,000 annually.  Over a 28-year period,
$14,900 of the borrower's $20,800 direct farm ownership loan had been
paid off.  During this time, he had obtained and repaid another farm
ownership loan with a Farm Credit System bank.  In 1986, the borrower
informed FmHA that he had transferred all his assets and liabilities
to a living trust.  In 1990, county office officials pursued
graduation by asking for updated financial information, but the
borrower failed to respond.  At that time, the borrower had about
$208,000 of assets and $5,900 in liabilities.  In 1992, the borrower
was again asked for updated financial information as part of the
graduation review.  In response, he provided incomplete information
and did not provide, as requested, any letters from commercial
lenders denying him credit.  The county office officials told us they
planned to request a legal decision concerning the borrower's
transfer of his farm without FmHA's approval. 

Case C.  A borrower with a 500-acre cattle operation paid off $15,500
of his $40,000, 40-year farm ownership loan over the past 25 years. 
In August 1992, in response to the county office's request, the
borrower submitted updated financial information.  Although this
borrower was on the 1992 graduation review list, there was no
evidence in the county office's files indicating that the financial
information was reviewed.  Upon our questioning, the county office's
supervisor added the borrower to the 1993 graduation review list for
follow-up and evaluation. 




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



(See figure in printed edition.)

See comment 1. 

See comment 2. 

See comment 3. 

See comment 3. 



(See figure in printed edition.)

See comment 1. 

See comment 3. 



(See figure in printed edition.)

See comment 4. 

See comment 4. 



(See figure in printed edition.)

See comment 5. 


The following are GAO's comments on the September 15, 1994, letter
from the Farmers Home Administration. 


   GAO'S COMMENTS
------------------------------------------------------- Appendix VII:1

1.  We revised the report to recognize the updated information that
FmHA provided us with in its comments.  Also, in late October 1994,
FmHA officials told us that the agency anticipates publishing the
revised regulations in November 1994. 

2.  We addressed FmHA's comment in the discussion of agency comments
in the executive summary. 

3.  We addressed FmHA's comment in the discussion of agency comments
and our evaluation in chapter 2. 

4.  We addressed FmHA's comment in the discussion of agency comments
and our evaluation in chapter 3. 

5.  We addressed FmHA's comment in the discussion of agency comments
and our evaluation in chapter 4. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IX

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

Robert A.  Robinson, Associate Director
Patrick J.  Sweeney, Assignment Manager
LaSonya R.  Roberts, Staff Evaluator
Karen E.  Bracey, Supervisory Operations Research Analyst
Kelly S.  Ervin, Social Science Analyst

KANSAS CITY REGIONAL OFFICE

Carl L.  Aubrey, Assistant Director
Larry D.  Van Sickle, Evaluator-in-Charge
John C.  Smith, Staff Evaluator
Robert C.  Sommer, Computer Analyst

DALLAS REGIONAL OFFICE

Syrene D.  Mitchell, Site Senior
Leigh M.  White, Staff Evaluator
Debra M.  Conner, Computer Analyst

