Farm Service Agency: Additional Actions Needed to Address Employee
Conflict-of-Interest Issues (Letter Report, 04/25/97, GAO/RCED-97-104).

GAO reviewed conflicts of interest in the Farm Service Agency's (FSA)
farm loan program, focusing on the: (1) number of FSA's federal and
nonfederal employees and county committee members who have FSA farm
loans; (2) comparative size and repayment history of farm loans to FSA's
federal employees, FSA's nonfederal employees, county committee members,
and other FSA borrowers; (3) number of cases FSA has identified
requiring action to avoid conflicts of interest; and (4) actions FSA has
taken to address these cases.

GAO noted that: (1) as of September 30, 1996, FSA's loan portfolio
indicated that 414 of about 16,300 FSA federal and nonfederal employees
and 1,209 of about 8,150 members of county committees had 4,089 FSA farm
loans; (2) while the outstanding principal of the loans of FSA's federal
and nonfederal employees and county committee members was about $265
million of FSA's outstanding loan principal of $16.9 billion, these
employees' loans differed in size when compared with the loans of other
FSA borrowers; (3) as of September 30, 1996, the loans of FSA's federal
employees averaged about $197,700 per borrower, the loans of nonfederal
employees averaged about $127,000, the loans of FSA's county committee
members averaged about $183,500, and the loans of all other borrowers
averaged about $145,200 per borrower; (4) with respect to repayment
history, FSA's federal and nonfederal employees and county committee
members were delinquent and needed debt relief on their farm loans less
often than other borrowers; (5) however, when these employees received
debt relief, it was greater than the relief granted other borrowers, 53
percent, on average, for FSA's federal employees, and 7 percent and 2
percent, respectively, for nonfederal employees and county committee
members; (6) as of March 1997, FSA had identified 1,767 cases in which
its federal and nonfederal employees or county committee members had
loans or relationships with other borrowers that required action to
avoid conflicts of interest; (7) these cases were identified through
FSA's review of 3,622 cases in which FSA's federal and nonfederal
employees and county committee members reported that they or their
relatives or business associates had FSA farm loans; (8) the total
number of cases is likely to increase as FSA proceeds with its efforts
to identify cases requiring action to avoid conflicts of interest; (9)
although FSA has made progress in dealing with conflicts of interest, it
has not provided its state offices with clear and consistent guidance on
how to identify and address conflict-of-interest cases; (10)
furthermore, FSA headquarters has not reviewed the state offices'
efforts to address conflicts of interest; and (11) as a result, FSA's
state offices vary in the extent to which they have identified and taken
action on cases to avoid conflicts of interest.

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

 REPORTNUM:  RCED-97-104
     TITLE:  Farm Service Agency: Additional Actions Needed to Address 
             Employee Conflict-of-Interest Issues
      DATE:  04/25/97
   SUBJECT:  Conflict of interest
             Farm credit
             Agricultural programs
             Federal/state relations
             Loan repayments
             Federal employees
             Farm income stabilization programs
             Delinquent loans
             Direct loans
             Government guaranteed loans
IDENTIFIER:  FSA Direct Farm Loan Program
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Agriculture, Nutrition, and
Forestry, U.S.  Senate

April 1997

FARM SERVICE AGENCY - ADDITIONAL
ACTIONS NEEDED TO ADDRESS EMPLOYEE
CONFLICT-OF-INTEREST ISSUES

GAO/RCED-97-104

Conflict-of-Interest Issues in the Farm Service Agency

(150425)


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

  ASCS - Agricultural Stabilization and Conservation Service
  FmHA - Farmers Home Administration
  FSA - Farm Service Agency
  GAO - General Accounting Office
  USDA - U.S.  Department of Agriculture

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


B-276432

April 25, 1997

The Honorable Richard G.  Lugar
Chairman, Committee on Agriculture,
 Nutrition, and Forestry
United States Senate

Dear Mr.  Chairman: 

Through its farm credit programs, the U.S.  Department of
Agriculture's (USDA) Farm Service Agency (FSA) provides loans at less
than market interest rates for borrowers of limited resources. 
Farmers borrow about $2.5 billion annually through these programs. 

The potential for conflicts of interest\1 in federal farm loan
programs increased with the creation of FSA in 1994.  At that time,
the farm credit programs of the former Farmers Home Administration
(FmHA), most of the functions of the former Agricultural
Stabilization and Conservation Service (ASCS), and other USDA
activities were merged.  Consequently, FSA now has federal employees,
former ASCS nonfederal employees,\2 and members of county farmer
committees (county committees), as well as the family members and
business associates of these groups, participating in the farm credit
program.  Prior to the creation of FSA, ASCS federal and nonfederal
employees were not involved in the administration of the farm loan
programs and were eligible to participate in USDA's farm programs. 
In contrast, FmHA employees were not permitted to receive FmHA farm
loans, and their relationships with borrowers had been subject to
review to avoid conflicts of interest.  FSA has started to phase out
the eligibility of all of its employees for farm loans and has been
working to identify cases requiring action to avoid conflicts of
interest through a nationwide survey of employees and county
committee members.  FSA's instructions on addressing conflicts of
interest are based on FmHA's instructions and the definition of
conflict of interest in USDA's regulations. 

Because of concerns about conflicts of interest in FSA's farm loan
program, we reviewed the (1) number of FSA's federal and nonfederal
employees and county committee members who have FSA farm loans; (2)
comparative size and repayment history of farm loans to FSA's federal
employees, FSA's nonfederal employees, county committee members, and
other FSA borrowers; (3) number of cases FSA has identified requiring
action to avoid conflicts of interest; and (4) actions FSA has taken
to address these cases. 

Starting in 1995, FSA directed its state offices to survey their
employees and county committee members to identify (1) those with
loans and relationships with borrowers and (2) cases in which action
was needed to avoid conflicts of interest.  However, FSA's state
offices were not required to report to headquarters on the cases they
reviewed.  Accordingly, we surveyed FSA's state office directors to
obtain information that had been reported to FSA's state offices on
employees' and county committee members' loans and relationships with
other borrowers, as well as the determinations of these state offices
on actions to avoid conflicts of interest. 


--------------------
\1 In this report, the term conflict of interest refers to both
actual and apparent conflicts of interest as used in FSA's
instructions.  A conflict of interest is defined as a situation in
which the private interest, usually of an economic nature, of an FSA
federal employee, nonfederal employee, or county farmer committees
member conflicts with his or her government duties and
responsibilities.  An apparent conflict of interest is defined as a
situation in which it could reasonably be concluded that a private
interest of an FSA federal employee, nonfederal employee, or county
committee member is in conflict with his or her government duties and
responsibilities, even though there may not actually be such a
conflict. 

\2 Nonfederal employees staffed and administered ASCS' farm programs
in county offices nationwide.  FSA continues to use this nonfederal
employee workforce in addition to its federal employees.  FSA's
nonfederal employees are paid from Commodity Credit Corporation funds
and are hired by the county executive director, who in turn is hired
by the each county committee. 


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

As of September 30, 1996, FSA's loan portfolio indicated that 414 of
about 16,300 FSA federal and nonfederal employees and 1,209 of about
8,150 members of county committees had 4,089 FSA farm loans. 

While the outstanding principal of the loans of FSA's federal and
nonfederal employees and county committee members was about $265
million of FSA's outstanding loan principal of $16.9 billion, these
employees' loans differed in size when compared with the loans of
other FSA borrowers.  As of September 30, 1996, the loans of FSA's
federal employees averaged about $197,700 per borrower; the loans of
nonfederal employees averaged about $127,000; the loans of FSA's
county committee members averaged about $183,500; and the loans of
all other borrowers averaged about $145,200 per borrower.  With
respect to repayment history, FSA's federal and nonfederal employees
and county committee members were delinquent and needed debt relief
on their farm loans less often than other borrowers.  However, when
these employees received debt relief, it was greater than the relief
granted other borrowers--53 percent, on average, for FSA's federal
employees, and 7 percent and 2 percent, respectively, for nonfederal
employees and county committee members. 

As of March 1997, FSA had identified 1,767 cases in which its federal
and nonfederal employees or county committee members had loans or
relationships with other borrowers that required action to avoid
conflicts of interest.  These cases were identified through FSA's
review of 3,622 cases in which FSA's federal and nonfederal employees
and county committee members reported that they or their relatives or
business associates had FSA farm loans.  The total number of cases is
likely to increase as FSA proceeds with its efforts to identify cases
requiring action to avoid conflicts of interest. 

Although FSA has made progress in dealing with conflicts of interest,
it has not provided its state offices with clear and consistent
guidance on how to identify and address conflict-of-interest cases. 
Furthermore, FSA headquarters has not reviewed the state offices'
efforts to address conflicts of interest.  As a result, FSA's state
offices vary in the extent to which they have identified and taken
action on cases to avoid conflicts of interest. 


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

FSA provides credit assistance through direct loans funded by the
federal government and through guaranteed loans, which are made by
commercial lenders to farmers and generally guaranteed by the
government for up to 90 percent of the face value of the loan.  FSA
offers several types of loans, such as farm operating loans, farm
ownership loans, and emergency disaster loans.  Farm operating loans
are authorized for buying feed, seeds, fertilizer, livestock, and
farm equipment; paying family living expenses; and refinancing
existing debt.  Farm ownership loans are authorized for buying and
improving farmland; constructing, repairing, and improving farm
buildings; and refinancing existing debt.  Emergency disaster loans
are for farmers whose operations have been substantially damaged by
adverse weather or by other natural disasters. 

FSA's full-time permanent workforce included about 5,940 federal and
10,365 nonfederal employees at the time of our review.  FSA's federal
employees consist of headquarters staff, former FmHA county loan
specialists, former ASCS state executive directors, state committee
members, district directors, and state office employees.  FSA's
nonfederal employees consist of former ASCS county executive
directors and county office staff.  Prior to FSA's creation, FmHA's
policy precluded the agency's employees from obtaining farm loans to
avoid conflicts of interest.  Unlike former FmHA employees, former
ASCS employees were not involved in the administration of the farm
loan programs and were eligible to receive the benefits of USDA's
farm programs and FmHA's farm loans. 

FSA uses county committees, consisting of about 8,150 locally elected
farmers, to assist in implementing agricultural programs, including
the farm loan program.  USDA pays county committee members for their
services.  Among other tasks, county committees review loan
applications to determine if the applicants have sufficient farming
experience to qualify for an FSA farm loan.  In addition, each FSA
state office has a committee of farmers who provide advice on farm
program operations. 

Within FSA, the operations and offices of the former FmHA and ASCS
offices have been consolidated.  Former ASCS employees who have FSA
farm loans may be physically located at the same office as the FSA
employees who approve and service these loans.  In addition, FSA
anticipates that some former ASCS employees will be assigned to
assist in administering farm loans. 

FSA has adopted procedures to avoid conflicts of interest in
loan-making and servicing decisions.  These rules are similar to
those used by the former FmHA.  For example, loan-processing,
approval, servicing, and review activities can be conducted only by
FSA employees who are not immediate family members or relatives of
loan applicants and who have not had a business or a close personal
association with these applicants. 

To avoid conflicts of interest, FSA is phasing out the eligibility of
former ASCS employees for FSA farm loans.  In December 1995, FSA
announced that its employees, including former ASCS nonfederal
employees, would no longer be eligible for direct farm ownership
loans.  However, it stated that FSA employees would still be eligible
for direct emergency loans and guaranteed loans.  Those in an
employee's household with existing direct loans may be considered for
annual operating loans through September 30, 1998.  Employees were
also authorized to co-sign (and are therefore considered borrowers)
for direct annual operating loans until December 1998 if they were
already a cosigner on such a loan. 


   NUMBER OF EMPLOYEES AND
   COMMITTEE MEMBERS WITH FSA FARM
   LOANS
------------------------------------------------------------ Letter :3

Our analysis of FSA's loan portfolio database showed that 414
employees and 1,209 county committee members had FSA farm loans as of
September 30, 1996.  FSA's federal employees and county committee
members had slightly more loans per borrower than other FSA
borrowers, while FSA's nonfederal employees had slightly fewer loans
per borrower than other borrowers.  Table 1 provides information on
the number of direct and guaranteed loans obtained by FSA's federal
employees, nonfederal employees, and county committee members, as
well as other borrowers. 



                                Table 1
                
                 Number of FSA Farm Loans per Borrower
                  for FSA Employees, County Committee
                  Members, and Other Borrowers, as of
                           September 30, 1996

                                     Number of   Number of   Number of
                         Number of      direct  guaranteed   loans per
Type of borrower         borrowers       loans       loans    borrower
----------------------  ----------  ----------  ----------  ----------
Federal employee                77          65         138         2.6
Nonfederal employee            337         578         158         2.2
County committee             1,209       2,525         625         2.6
 member
All other borrowers        138,469     260,217      60,381         2.3
----------------------------------------------------------------------
Source:  GAO's analysis of FSA's loan file database. 


   DIFFERENCES IN THE SIZE AND
   REPAYMENT HISTORY OF LOANS TO
   FSA EMPLOYEES, COUNTY COMMITTEE
   MEMBERS, AND OTHER BORROWERS
------------------------------------------------------------ Letter :4

While the outstanding principal of the direct and guaranteed loans of
FSA employees and county committee members was about $265 million of
the $16.9 billion in FSA's outstanding loan principal as of September
30, 1996, we found some differences in the average amount of loans,
loan delinquencies, and debt relief received by FSA employees and
county committee members in comparison with other FSA borrowers. 

FSA has not developed information about the comparative loan sizes
for these groups nor examined why these groups would differ in their
loans, repayment history, and debt relief.  Consequently, FSA
officials do not have specific information that would explain the
sources of these differences.  However, an FSA official said that
these differences may be influenced by, among other things, (1) a
comparison of groups of borrowers that vary in number; (2) the
incomes of FSA employees, which would enable them to have larger farm
operations than some other borrowers; and (3) the inclusion of
several hundred cases in which borrowers have debt of $1 million or
more.  In addition, according to USDA officials, committee members
are likely to have larger farm operations than many other producers,
which could lead to differences in loan amounts and debt-relief
decisions.\3

More specifically, our analysis shows that FSA's federal employees
and county committee members had obtained loans that were somewhat
larger, while nonfederal employees' loans were somewhat smaller than
the loans of other FSA borrowers.  Table 2 shows the status of
outstanding FSA farm loans, as of September 30, 1996. 



                                         Table 2
                         
                            Loan Amounts and Loan Debt of FSA
                         Employees, County Committee Members, and
                           Other Borrowers, as of September 30,
                                           1996

                                  Percent
                                                          Percent                 Percent
                      Average  difference     Average  difference     Average  difference
                       direct        from  guaranteed        from    debt per        from
Type of borrower         Loan      others        loan      others    borrower      others
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
Federal employee      $65,800        37.7     $79,300      (37.6)    $197,700        36.2
Nonfederal            $46,700       (2.3)    $100,100      (21.2)    $127,000      (12.5)
 employee
County committee      $52,400         9.6    $143,500        13.0    $183,500        26.4
 member
All other             $47,800                $127,000                $145,200
 borrowers
-----------------------------------------------------------------------------------------
Source:  GAO's analysis of FSA's loan file database. 

With respect to delinquencies, FSA's federal employees were
delinquent on their direct farm loans slightly less often than other
borrowers.  FSA's nonfederal employees and county committee members
were delinquent on their direct farm loans about half as often as
other borrowers.\4 However, the average amounts of the delinquencies
for FSA's federal employees and county committee members were
somewhat larger than the delinquencies of other borrowers, as shown
in table 3. 



                                Table 3
                
                 Delinquencies on Direct Loans for FSA
                Employees, County Committee Members, and
                  Other Borrowers, as of September 30,
                                  1996

                         Number of                             Average
                         borrowers                              amount
                              with   Number of  Percent of  delinquent
                            direct  delinquent  delinquent         per
Type of borrower             loans   borrowers   borrowers    borrower
----------------------  ----------  ----------  ----------  ----------
Federal employee                31           6        19.4    $169,344
Nonfederal employee            301          37        12.3    $136,961
County committee               969         110        11.4    $162,906
 member
All other borrowers        114,473      24,179        21.1    $147,032
----------------------------------------------------------------------
Source:  GAO's analysis of FSA's loan file database. 

Finally, with respect to debt relief, all of FSA's employee groups
received more debt relief per borrower than others who received debt
relief, as shown in table 4. 



                                Table 4
                
                  Debt Relief on Direct Loans for FSA
                Employees, County Committee Members, and
                  Other Borrowers, as of September 30,
                                  1996

                                     Number of     Average
                                     borrowers   amount of     Percent
                                     receiving        debt  difference
                                          debt  relief per  from other
Type of borrower                        relief    borrower   borrowers
----------------------------------  ----------  ----------  ----------
Federal employee                            32    $278,300        52.8
Nonfederal employee                        168     195,300         7.2
County committee                           231     185,032         1.6
 member
All other borrowers                     78,572     182,165
----------------------------------------------------------------------
Source:  GAO's analysis of FSA's loan file database. 

Additional information about the debt relief FSA has provided to
federal employees and other borrowers is included in appendix I. 


--------------------
\3 USDA's Payments Through County Offices (GAO/RCED-96-102R, Apr.  8,
1996). 

\4 We did not include guaranteed loans in our analysis of
delinquencies and debt relief because about only about 4 percent of
FSA borrowers had been delinquent on guaranteed loans as of Sept. 
30, 1996.  This compares with a delinquency rate of over 21.1 percent
for borrowers with direct loans. 


   NUMBER OF CASES REQUIRING
   ACTION TO AVOID CONFLICTS OF
   INTEREST
------------------------------------------------------------ Letter :5

Starting in 1995, FSA's state offices began to survey FSA employees
and committee members to identify those with loans and relationships
with borrowers so that the offices could take action to avoid
conflicts of interest in FSA's farm loan program.  However, FSA's
state offices were not required to report to headquarters on the
cases they reviewed.  Accordingly, we surveyed FSA's 50 state office
directors to obtain information that they had developed on employees'
and county committee members' loans and relationships with borrowers,
as well as state offices' determinations on cases requiring action to
avoid conflicts of interest. 

As of March 1997, according to the data we obtained from the 50 FSA
state offices, 1,767 employees and county committee members (about 7
percent) had loans or loan-related relationships that required action
to avoid conflicts of interest.  FSA identified these cases through
its state offices' (1) surveys of employees and committee members and
(2) reviews of individual cases to identify those whose loans and
relationships with borrowers required action to avoid conflicts of
interest.  However, the information we obtained from state offices
shows that not all employees and committee members had responded to
the state office surveys and that some state offices had not reviewed
all cases in which employees reported that they or their relatives
had farm loans.  Consequently, the number of cases requiring action
by FSA's state offices to avoid conflicts of interest can be expected
to increase as these offices complete their case reviews.  Table 5
summarizes the results of the state offices' surveys.  (See app.  II
for state-by-state information on these surveys.)



                                Table 5
                
                FSA Employees and Committee Members With
                    Loans or With Close Relatives or
                Business Associates Who Had Loans, as of
                               March 1997

                                        Number
                                    with loans                   Cases
                                       or with               requiring
                                     relatives               action to
                                        and/or                   avoid
                                      business               conflicts
                         Number of  associates       Cases          of
Type of employee         employees  with loans    reviewed    interest
----------------------  ----------  ----------  ----------  ----------
Federal employee             4,010         583         394         182
Nonfederal employee         12,055       2,000       1,532         776
County committee             8,539       1,896       1,696         809
 member
======================================================================
Total                       24,604       4,479       3,622       1,767
----------------------------------------------------------------------
Note:  Not all state offices responded to each of our questions. 

Source:  GAO's analysis of survey responses from 50 FSA state
offices. 

As table 5 indicates, as of March 1997, FSA's state offices had
reviewed 3,622 of 4,479 cases, leaving 857 cases that needed review. 

In addition to these cases, as table 6 shows, 11 states had not
received responses to their survey questions from every employee and
county committee member. 



                                Table 6
                
                  Response Rates of FSA Employees and
                   County Committee Members to FSA's
                Conflict-of-Interest Survey in 11 States
                Without Complete Responses, as of March
                                  1997

                                                Percentage  Percentage
                                    Percentage          of   of county
                                    of federal  nonfederal   committee
                                     employees   employees     members
State                               responding  responding  responding
----------------------------------  ----------  ----------  ----------
Arizona                                    100          98           7
Colorado                                    18          25          32
Florida                                    100         100          39
Idaho                                       90          90          90
Louisiana                                   28          23          63
New Jersey                                 100         100          50
New Mexico                                  50          80          50
Oklahoma                                    90          84          82
Rhode Island                                10           0          10
Texas                                       96          95          84
Wisconsin                                  100         100          99
----------------------------------------------------------------------
Source:  GAO's analysis of survey responses from 50 FSA state
offices. 

Furthermore, the responses of FSA's state offices to our survey shows
that the information gathered from members of county committees
varied widely among these offices.  For example, only 126 of 8,539
county committee members reported to their FSA state office that they
had business relationships with FSA borrowers, and 77 of these cases
occurred in just three states, according to responses we received
from FSA's state offices.  Committee members in 27 states did not
report to their FSA state office any business relationships with
other borrowers.  In other cases, some members indicated that they
were reluctant to reveal this information.  In one state we visited,
three county committee members, including the county committee
chairman, had submitted statements to FSA saying that it was "none of
[FSA's] business" if they had farm credit loans themselves or had
relationships with other borrowers.  During our review, we found that
one of these individuals, the county committee chairman, had two FSA
loans. 


   FSA HAS TAKEN ACTION TO AVOID
   CONFLICTS OF INTEREST, BUT
   ADDITIONAL ACTIONS ARE NEEDED
------------------------------------------------------------ Letter :6

FSA's state offices have made progress by taking action on a
significant number of cases to avoid conflicts of interest. 
Nevertheless, the guidance to state offices from FSA headquarters on
dealing with conflicts of interest has been inconsistent,
particularly regarding how state offices should address the loans of
county committee members and their relatives, as well as their
business relations with other borrowers.  Because of differences in
how FSA's state offices interpreted the guidance in these and other
areas, state offices have varied in the extent to which they have
taken actions to avoid conflicts of interest.  Furthermore, FSA has
not thus far followed up on the completeness or consistency of state
offices' actions. 


      FSA'S ACTIONS TO AVOID
      CONFLICTS OF INTEREST
---------------------------------------------------------- Letter :6.1

Of the 1,767 cases that had been identified, FSA's state offices
reported that they had taken action on 1,441 cases, as shown in table
7.  Typical actions were to transfer borrowers' loan files from (1)
one county to another for servicing or (2) one employee to another
within the same office.  These actions serve to ensure that those
administering loan files do not have a personal interest in loan
decisions. 



                                Table 7
                
                Actions Taken by FSA's State Offices to
                Avoid Conflicts of Interest, as of March
                                  1997

                                   Number of cases     Number of cases
Type of employee                  requiring action   with action taken
------------------------------  ------------------  ------------------
Federal employee                               182                 133
Nonfederal employee                            776                 595
County committee member                        809                 713
======================================================================
Total                                        1,767               1,441
----------------------------------------------------------------------
Source:  GAO's analysis of survey responses from 50 FSA state
offices. 

Action had not yet been taken on 326 cases involving 14 states, as of
March 1997. 


      INCONSISTENT INSTRUCTIONS BY
      FSA
---------------------------------------------------------- Letter :6.2

Between October 1995 and May 1996, FSA issued several notices
instructing its state offices on how to identify and deal with
conflict-of- interest issues.  An FSA headquarters official said that
these notices were developed to respond to such issues as they were
being raised.  However, officials in FSA's state offices said that
these notices were difficult to implement because the (1) scope of
conflicts they were to address changed from one notice to another and
(2) instructions for resolving conflicts were difficult to interpret. 
FSA headquarters officials said that they recognized there was
inconsistency in their notices and that the notices have been
difficult for state offices to implement.  As of March 1997, FSA had
not yet developed a specific plan of action to address these
inconsistencies. 

FSA twice notified its state offices to survey employees and
committee members and take action on conflict-of-interest issues--in
October 1995 and in December 1995.  Four states--California,
Connecticut, Iowa, and Tennessee--based their surveys on the October
notice only.  This notice instructed FSA's state offices to (1)
survey employees and county committee members to identify those with
loans, (2) identify those whose loan files were in the county in
which they work, and (3) move those loan files to another county or
state for servicing to avoid conflicts of interest.  The December
notice called for an expanded survey that was to identify loans to
employees and committee members, loans to close relatives of
employees, loans co-signed by employees, business relationships
between borrowers and employees, and the investment or managerial
roles of employees or their close relatives in firms doing farm
credit business with FSA.  However, this expanded survey did not call
for county committee members to disclose loans that had been received
by their family members and business associates.  As a result, some
states did not collect this information. 

FSA's October 1995 notice concerning employees' and committee
members' loans was consistent with the former FmHA's policy.  FmHA's
policy had stated that while county committee members were not
employees, they had a special relationship with the agency and
therefore were subject to conflict-of-interest restrictions.  These
restrictions included avoiding certain situations, such as
participating in decisions on loans for themselves, family members,
or business associates. 

However, FSA's March 1996 notice appears inconsistent with its
October 1995 position.  This notice stated that the loan files of
county committee members did not need to be moved from the county in
which these members were serving unless there were unusual
circumstances or the files had already been moved and the state
executive director determined that they should remain in the new
location.  The notice did not define unusual circumstances or provide
other guidance on how to determine when county committee members'
files should be moved.  We found that some states had returned these
files to the original county office, while others had not. 

In May 1996, FSA issued a notice providing instructions for dealing
with conflict-of-interest situations that it had not mentioned
previously.  This notice stated that county committee members were
not to act in an official capacity in any decision or meeting
involving an FSA borrower or potential borrower when a business or
family relationship was involved.  However, this notice also stated
that county committee members were not specifically prohibited from
leasing real estate to FSA borrowers or loan applicants (as are
employees or state committee members), although FSA stated that such
leases were to be discouraged.  As a result of this inconsistency,
the state office officials we interviewed expressed frustration and
confusion about the proper actions to take in such circumstances. 

Furthermore, the May 1996 notice emphasized that employees needed to
recognize an even broader range of relationships that could be
identified as posing conflict-of-interest concerns.  This notice
stated that employees must examine the employment, activity, and
financial interests of their family members because these are
considered the same as if done by the employees and are crucial to
determining if a conflict of interest exists.  These additional
relationships had not been specifically mentioned in FSA's October
and December 1995 notices.  According to the responses of FSA's state
offices to our questionnaire, 23 of these offices had completed their
reviews of cases to identify potential conflicts of interest before
this notice was issued and therefore did not obtain this information
from their employees. 


      VARIATIONS IN THE ACTIONS OF
      FSA'S STATE OFFICES
---------------------------------------------------------- Letter :6.3

Our review disclosed wide variations in the extent to which state
offices decided on whether action was needed to avoid a conflict of
interest and in the frequency of actions taken to address those
cases.  FSA state office officials from Arkansas, California, Iowa,
Mississippi, North Dakota, and Texas said that their efforts to
identify and address cases were hampered by the unclear guidance from
FSA headquarters.  To illustrate, some states, such as Iowa and
Wisconsin, decided as a matter of procedure that every case they
reviewed in which an employee or committee member reported a
relationship with a borrower required action to ensure that conflicts
of interest would be avoided.  However, other state offices decided
action was warranted less often.  For example, North Carolina,
Kansas, and Missouri officials took action to avoid actual or
apparent conflicts for only 42, 12, and 4 percent of the cases,
respectively, that state office officials had reviewed as of March
1997. 

In addition, as of March 1997, many state offices had not yet taken
action to address all of the cases in which action appeared to be
needed to avoid conflicts of interest.  For example, according to the
FSA director of state agriculture credit in Missouri, his primary
concern in deciding whether to take action was to avoid
inconveniencing borrowers by moving loan files to distant county
offices.  Other FSA officials in state and county offices agreed that
the convenience of the borrower was one of the important
considerations in deciding where loan files should be maintained.  On
the other hand, FSA officials in Mississippi made arrangements for
borrowers to continue to visit the same county offices for day-to-day
loan transactions, such as making payments on a loan, while their
loan files were moved to other counties for servicing decisions. 


      LACK OF FOLLOW-UP BY THE
      NATIONAL AND STATE OFFICES
---------------------------------------------------------- Letter :6.4

While FSA headquarters instructed state offices to address conflicts
of interest, it has had a limited role in following up on state
offices' efforts.  FSA headquarters addressed conflicts involving FSA
state executive directors and state committee members and responded
to specific inquiries from FSA state office officials.  However, FSA
headquarters has not reviewed the actions of its state offices on
county employee groups.  FSA headquarters officials said that while
they have been very much concerned about conflicts of interest, they
have relied on FSA state offices to take appropriate action because
of staffing limitations and the need to focus attention on FSA's
urgent program and organizational priorities. 

We also found a lack of follow-up by state offices on actions that
county offices had taken to address conflict-of-interest cases. 
While some FSA state offices are developing their own case-tracking
systems for monitoring these actions, others have no such systems. 
Officials in 13 of 50 state offices indicated they had no system for
following up on actions taken to address conflict-of-interest cases. 
Officials in the other 37 state offices indicated that they have some
method, generally informal, for tracking such cases.  These methods
include having FSA district directors follow up on
conflict-of-interest cases or using manual tracking systems.  A few
FSA state offices, such as Kansas and Wisconsin, have developed
computer-based information systems. 

FSA headquarters officials recognized that additional follow-up
efforts are needed to address both state and county offices'
activities.  In particular, they specifically agreed that it is
important for FSA to follow up on the inconsistencies in the state
offices' surveys and actions.  A tool that could enhance FSA's
overall monitoring effort is a feature in its computer system that
allows computer records to be marked to identify loans received by
employees, their relatives, and their business associates.  However,
FSA would need to update the database to make its information current
and useful.  Finally, FSA officials said that they plan to rewrite
their policy manual on how to address conflicts of interest. 

In addition to the agency's nationwide effort to identify existing
conflict-of-interest cases, FSA county offices make daily efforts to
identify and address future conflicts of interest whenever an
individual applies for an FSA farm loan.  In this regard, FSA state
office officials said that they were following instructions that call
for loan applicants and employees to disclose relationships and
associations so that conflicts of interest can be avoided from the
outset.  Although this activity has not been reviewed regularly, FSA
headquarters officials said that they are considering the development
of a procedure for periodically reviewing state and county offices'
activities. 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

FSA has made a concerted effort to address conflict-of-interest
concerns in its state and county offices.  It has delegated most of
the responsibility for dealing with conflicts of interest to its
state offices.  However, FSA has not provided state offices with
clear and consistent guidance on identifying situations that
constitute conflicts of interest and carrying out their
responsibilities, nor has it periodically reviewed how well the state
offices are fulfilling their roles.  As a result, FSA has little
assurance that state offices have consistently identified and acted
upon all conflict-of-interest cases. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :8

We recommend that the Secretary of Agriculture direct the
Administrator of FSA to (1) clarify FSA's policy and guidance that
define situations constituting potential conflicts of interest and
the actions that are needed for addressing such cases, (2) require
all state offices to address conflict-of-interest cases using the
revised policy and guidance, and (3) monitor and review state and
county offices' actions to ensure that the efforts to address
conflicts of interest are adequate and thorough. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :9

We provided copies of a draft of this report to FSA for review and
comment.  Subsequently, we met with FSA's Deputy Administrator and
Assistant Deputy Administrator for Program Delivery and Field
Operations and seven other FSA officials to discuss the information
in this report.  These officials agreed with the presentation of
issues in the report and our finding that FSA's instructions for
addressing conflict-of-interest issues require clarification.  They
stated that our recommendations were reasonable steps that would
address the issues. 


   SCOPE AND METHODOLOGY
----------------------------------------------------------- Letter :10

We analyzed USDA's databases to identify FSA employees and county
committee members who have received direct and guaranteed farm loans. 
We determined the extent of loans to these groups, compared their
loans with loans to other FSA borrowers, and determined the extent to
which the loans of borrowers were delinquent, restructured, or
written off.  We did not include the family members and business
associates of FSA employees and county committee members in this
analysis because FSA's database identifies only a portion of these
individuals, and we did not verify the accuracy of FSA's loan
database. 

We surveyed FSA's 50 state executive directors to obtain information
on conflicts of interest.  The information we obtained includes data
on the number of FSA employees with loans and relationships with
borrowers and FSA's state offices' determinations on whether actions
were needed to avoid conflicts of interest.  We did not review the
appropriateness of state offices' decisions on individual cases.  We
visited and interviewed officials at FSA headquarters and selected
FSA offices in California, Iowa, Kansas, Missouri, Mississippi, and
Texas.  Our work was performed from June 1996 through March 1997 in
accordance with generally accepted government auditing standards. 

As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 10 days from the date of this letter.  At that time we will
make copies available to appropriate Senate and House committees; the
Secretary of Agriculture, the Administrator of FSA; the Director,
Office of Management and Budget; and other interested parties.  We
will also make copies available to others on request. 

Please call me at (202) 512-5138 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
III. 

Sincerely yours,

Robert A.  Robinson
Director, Food and
 Agriculture Issues


ADDITIONAL INFORMATION ON DEBT
RELIEF
=========================================================== Appendix I

The Farm Service Agency's (FSA) direct loan policies provide various
types of relief assistance to help borrowers who are delinquent and
having trouble repaying their loans.  Two such options are (1)
"writing down" (reducing) portions of restructured debt so that
borrowers can continue farming and remain FSA clients and (2)
allowing borrowers to satisfy the debt in its entirety by paying an
adjusted amount based on the value of the loan collateral and
"writing off" the remaining debt--referred to as "net recovery value
buy-out with write-off." A third direct loan-servicing option--the
debt settlement process--also results in writing off debt. 



                               Table I.1
                
                 Debt Relief Provided to FSA Employees
                          and Other Borrowers

                                                   Average
                                       Average        loan     Average
                                          loan      write-        loan
Type of borrower                     write-off        down      buyout
----------------------------------  ----------  ----------  ----------
FSA employees                         $190,600    $135,000    $220,400
Other borrowers                        204,700     153,200     182,900
======================================================================
Percent difference                       (6.9)      (11.9)        20.5
----------------------------------------------------------------------
Source:  GAO's analysis of FSA loan file database. 


CASES REVIEWED BY FSA TO AVOID
CONFLICTS OF INTEREST, ACCORDING
TO FSA'S STATE OFFICES' RESPONSES
RECEIVED FROM JANUARY THROUGH
MARCH, 1997
========================================================== Appendix II

                                                     Number
                                                       with               Cases
                                                   loans or                with
                                 Number    Number      with              action
                       Number        of        of  relation              needed    Number
                           of  nonfeder    county     ships            to avoid  of cases
                      federal        al  committe  with FSA    Number  conflict      with
                     employee  employee         e  borrower  of cases      s of    action
State                       s         s   members       s\a  reviewed  interest     taken
-------------------  --------  --------  --------  --------  --------  --------  --------
Alabama                    66       238       189        52        52        52        52
Alaska                      8         5        12         3         1         1         0
Arkansas                  119       290       325       166       153        16        16
Arizona                    22        48        42         5         5         0         0
California                 71       145       147        19        19         4         4
Colorado                   49       147       150        37        37        14         5
Connecticut                12        20        24         1         1         1         1
Delaware                   13        10         9         8         8         7         7
Florida                    71       149       131        13        13        13        13
Georgia                   102       411       335        92        81        49        49
Hawaii                     15        17        16         5         5         0         0
Idaho                      67       125       123        33        33        29         4
Illinois                  144       578       282       197       196       166         6
Indiana                    92       419       263       109       109         4         4
Iowa                      219       790       300       151       151       151       151
Kansas                    123       516       312       242       242        30        30
Kentucky                  129       409       414       281       281       113       113
Louisiana                 147       204       156       134       134        \b        \b
Maine                      37        45        43        24        24        21        21
Maryland                   22        60        69         9         9         8         8
Massachusetts              24        24        34         9         7         7         7
Michigan                   87       268       194        23        23        16        16
Minnesota                 142       461       246       261       239        48        48
Mississippi               141       265       246       148       122       122       122
Missouri                  153       448       286       347       347        13         8
Montana                    68       217       168       116       112       107       107
Nebraska                  132       518       279       205       203        82        35
Nevada                     15        20        54         9         8         2         2
New Hampshire              11        16        30        10         8         8         8
New Jersey                 23        31       124        37         6         3         3
New Mexico                 36        77        96        38        38        18        18
New York                   88       162       153        49        49        31        31
North Carolina            112       457       291        50        50        21        21
North Dakota              157       347       159       242        12        12         0
Ohio                       71       528       405        87        85        36         3
Oklahoma                  114       300       230       163        98        97        97
Oregon                     43        97        88        23        23        16        16
Pennsylvania               80       201       197        64        64        63        63
Rhode Island                9         4        25         6         2         1         1
South Carolina             67       177       121        31        31        31        31
South Dakota              153       330        \c       240        34        22        12
Tennessee                 103       333       285        41        41        40        40
Texas                     269      1066       613       395       162        13        13
Utah                       33        73        86        42        42        42        42
Vermont                    24        29        36         7         7         0         0
Virginia                   76       210       237        67        67        66        42
Washington                 53       110       106        14        14         4         4
West Virginia              41        96       138        36        36        29        29
Wisconsin                 128       505       208       124       124       124       124
Wyoming                    29        59        62        14        14        14        14
=========================================================================================
Total                   4,010    12,055     8,539     4,479     3,622     1,767     1,441
-----------------------------------------------------------------------------------------
\a The figures in this column include employees with loans,
employees' with close relatives with loans, and employees having
business relationships with other borrowers. 

\b According to Louisiana FSA officials, FSA district directors in
Louisiana identified cases requiring action to avoid conflicts of
interest and took the required actions.  However, the district
directors did not report on these cases to the FSA state office. 

\c South Dakota FSA officials did not obtain information on the total
number of county committee members. 

Source:  GAO's analysis of survey responses from 50 state offices. 


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

Charles M.  Adams, Assistant Director
Larry D.  Van Sickle, Evaluator-in-Charge
Daniel F.  Alspaugh
W.  Carl Christian, Jr.
Kelly S.  Ervin
Alice G.  Feldesman
Jerry D.  Hall
Judy K.  Hoovler
Carol Herrnstadt Shulman
Robert C.  Sommer


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