Farm Service Agency: Status of the Farm Loan Portfolio and the Use of
Three Contracting Provisions for Loan Servicing (Letter Report,
05/05/1998, GAO/RCED-98-141).

The Farm Service Agency provides financial assistance to farmers and
ranchers who are unable to obtain commercial credit at reasonable rates.
This report provides information on the Farm Service Agency's direct
farm loan program. Specifically, GAO discusses the levels of outstanding
principal on active direct farm loans at the end of fiscal years 1995
through 1997, including the amounts owed by delinquent borrowers and the
amount of debt written off by the Farm Service Agency through the debt
settlement process in each of these fiscal years. GAO also summarizes
information on the Farm Service Agency's use of three statutory
provisions enacted in the mid-1990s that authorize the Farm Service
Agency to contract with (1) private attorneys for legal assistance in
resolving delinquent farm loan accounts, (2) private lenders for
assistance in servicing farm loan borrowers' accounts, and (3) private
collection agencies for assistance in collecting delinquent farm loans.

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

 REPORTNUM:  RCED-98-141
     TITLE:  Farm Service Agency: Status of the Farm Loan Portfolio and
	     the Use of Three Contracting Provisions for Loan
	     Servicing
      DATE:  05/05/1998
   SUBJECT:  Direct loans
	     Agricultural programs
	     Loan defaults
	     Debt collection
	     Delinquent loans
	     Loan repayments
	     Privatization

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GAO/RCED-98-141

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

Report to the Honorable
Chet Edwards, House of Representatives

May 1998

FARM SERVICE AGENCY - STATUS OF
THE FARM LOAN PORTFOLIO AND THE
USE OF THREE CONTRACTING
PROVISIONS FOR LOAN SERVICING

GAO/RCED-98-141

FSA Farm Loans and Contracting

(150339)

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

  ConAct - Consolidated Farm and Rural Development Act
  DCIA - Debt Collection Improvement Act of 1996
  FAIRAct - Federal Agriculture Improvement and Reform Act of 1996
  FSA - Farm Service Agency
  GAO - General Accounting Office
  OGC - Office of General Counsel
  USDA - U.S.  Department of Agriculture

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

B-279552

May 5, 1998

The Honorable Chet Edwards
House of Representatives

Dear Mr.  Edwards:

The Farm Service Agency (FSA), a lending agency within the U.S.
Department of Agriculture (USDA), provides financial assistance to
farmers and ranchers who are unable to obtain commercial credit at
reasonable rates and terms.\1 This report responds to your request
for selected information on FSA's direct farm loan program.  In
particular, we are providing information on the levels of outstanding
principal on active direct farm loans at the end of fiscal years 1995
through 1997, including the amounts owed by delinquent borrowers, and
the amount of debt written off by FSA through the debt settlement
process in each of these fiscal years.  Additionally, as you
requested, we have summarized information on FSA's use of three
statutory provisions enacted in the mid-1990s that authorize FSA to
contract with (1) private attorneys for legal assistance in resolving
delinquent farm loan accounts, (2) private lenders for assistance in
servicing farm loan borrowers' accounts, and (3) private collection
agencies for assistance in collecting delinquent farm loans.

--------------------
\1 FSA administers the farm loan programs that historically were
operated by USDA's Farmers Home Administration.  In this report, we
refer to these loan programs as FSA's programs.

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

The size of the Farm Service Agency's direct farm loan portfolio has
decreased in recent years.  The outstanding principal on active farm
loans totaled about $11.4 billion in September 1995, $10.5 billion in
September 1996, and $9.7 billion in September 1997.\2 The percentage
of the portfolio held by delinquent borrowers--those who were at
least 30 days past due on loan repayment--also decreased.  In
September 1995, delinquent borrowers held 40.7 percent of the
outstanding principal on direct farm loans; the delinquency rates for
1996 and 1997 were 34.2 percent and 28.2 percent, respectively.

The Farm Service Agency wrote off about $380 million for almost 2,000
borrowers in fiscal year 1997 through its debt settlement process,
which essentially represents the agency's final resolution of unpaid
loans and generally occurs after loan-security property has been
liquidated.  Previously, the agency had written off about $860
million and $780 million in fiscal years 1996 and 1995, respectively.
Of the more than $2 billion that was written off during the 1995-97
period, most--81.5 percent--was written off with no payments to the
agency by the borrowers at the time of debt settlement.  The extent
of these write-offs underscores the high risks associated with the
agency's farm loans.

To date, the Farm Service Agency has made only limited use of one of
the three new loan-servicing authorities it was given in the
mid-1990s.  Specifically, it has contracted with private attorneys to
obtain legal assistance in resolving delinquent farm loan accounts in
two states and has no plans to expand its use in other states.  In
regard to the other two authorities, the Farm Service Agency has not
contracted with private lenders or with private collection agencies
and is not actively considering such contracting.  Agency officials
said they have not used these new contracting authorities more
extensively because, among other things, they can obtain assistance
from the departments of Justice and the Treasury or they can perform
the servicing functions with their own personnel.

--------------------
\2 Direct loans totaling about $560 million, $830 million, and $780
million were made in fiscal years 1995 through 1997, respectively.

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

FSA, established by the Federal Crop Insurance Reform and Department
of Agriculture Reorganization Act of 1994 (P.L.  103-354, Oct.  13,
1994), provides, among other things, direct government-funded loans
to farmers and ranchers who are unable to obtain financing elsewhere
at reasonable rates and terms.  For example, direct farm ownership
loans are made for buying farm real estate and making capital
improvements.  Direct farm operating loans are made for purposes such
as buying feed, seed, fertilizer, livestock, and farm equipment and
paying family living expenses.  Additionally, emergency disaster
loans are made to farmers and ranchers whose operations have been
substantially damaged by adverse weather or other natural disasters.

When a borrower does not repay his or her loans, FSA has various
tools to resolve the delinquency, such as (1) restructuring the
loans, which may include reducing debt; (2) allowing a borrower who
does not qualify for restructuring to make a payment for less than
the amount owed, which results in FSA's forgiving the balance; and
(3) reaching a final resolution of the debt that may or may not
include a payment by the borrower, which also results in debt
forgiveness.  The Consolidated Farm and Rural Development Act, as
amended (P.L.  87-128, Aug.  8, 1961), which is referred to as the
Con Act, is the basic authority for the farm loan programs.

   OUTSTANDING AND DELINQUENT
   LOANS HAVE DECLINED IN RECENT
   YEARS
------------------------------------------------------------ Letter :3

Table 1 shows that as of September 30, 1997, about 110,000 borrowers
owed FSA about $9.7 billion on active direct farm loans; these
figures represent 9.5 percent fewer borrowers and 14.8 percent less
debt compared with those of September 1995.\3 About 18,600 borrowers
were delinquent at the end of September 1997; these borrowers owed
about $2.7 billion, or 28.2 percent of the total outstanding
principal.\4 This delinquency rate is an improvement from the
delinquency rates in September 1996 and 1995, which were 34.2 percent
and 40.7 percent, respectively.  Table 1 also shows that borrowers
with larger amounts of debt had higher delinquency rates than
borrowers owing smaller amounts.  In 1997, for example, about 72
percent of the principal held by borrowers with loans totaling
$500,000 or more was held by delinquent borrowers, whereas about 25
percent of the principal held by borrowers with loans totaling less
than $500,000 was held by delinquent borrowers.

                                     Table 1

                       Amount and Percentage of Outstanding
                       Direct Farm Loans Owed by Delinquent
                      Borrowers, September 30, 1995, Through
                                September 30, 1997

                              (Dollars in millions)

                                   Owed by delinquent       Percentage owed by
       Outstanding principal           borrowers           delinquent borrowers
      ------------------------  ------------------------  ----------------------
Year
and
rang
e of
borr
ower                                                                  Percentage
s'                   Number of                 Number of  Percentage          of
debt      Amount     borrowers      Amount     borrowers     of debt   borrowers
----  ----------  ------------  ----------  ------------  ----------  ----------
1997
Borr    $9,000.3       109,332    $2,238.9        18,022        24.9        16.5
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr       695.6           787       498.5           536        71.7        68.1
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota    $9,695.9       110,119  $2,737.5\a        18,558        28.2        16.9
 l
1996
Borr    $9,603.0       114,779    $2,905.8        23,623        30.3        20.6
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr       854.8           935       672.3           693        78.6        74.1
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota   $10,457.8       115,714    $3,578.1        24,316        34.2        21.0
 l
1995
Borr   $10,213.7       120,484    $3,625.5        28,669        35.5        23.8
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr     1,166.0         1,227     1,002.0         1,000        85.9        81.5
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota   $11,379.7       121,711    $4,627.5        29,669        40.7        24.4
 l
--------------------------------------------------------------------------------
\a Figures do not add to total because of rounding.

Source:  GAO's analysis of records from FSA's Finance Office.

Borrowers in a small number of states accounted for a
disproportionate share of the total delinquent debt in FSA's farm
loan portfolio.  For example, borrowers in five states owed slightly
over 40 percent of the total delinquent debt at the end of fiscal
year 1997.  This compares with about 36 percent and 34 percent at the
end of fiscal years 1996 and 1995, respectively.  Appendix I provides
information on the five states with the most delinquent debt in each
of these 3 fiscal years.

--------------------
\3 The information presented in this report covers the outstanding
principal owed on active direct farm loans and excludes inactive
loans, such as those involved in bankruptcy or foreclosure
proceedings.

\4 If a borrower was delinquent (at least 30 days past due on loan
repayment) on any farm loan, the principal on all farm loans held by
the borrower was totaled to calculate the amount owed by the
delinquent borrower.

   LARGE AMOUNTS OF DEBT WRITTEN
   OFF THROUGH DEBT SETTLEMENTS
------------------------------------------------------------ Letter :4

FSA incurs losses when it writes off the direct farm loans of
delinquent borrowers through its debt settlement process, which
essentially represents the agency's final resolution of unpaid loans
and generally occurs after loan-security property has been
liquidated.\5 In fiscal year 1997, FSA wrote off about $380 million
through debt settlements, which is down from the more than $860
million written off in fiscal year 1996 and $780 million written off
in fiscal year 1995.\6 In total, about 7,600 borrowers had slightly
more than $2 billion written off during this 3-year period.

FSA has the following four options for resolving debts in its debt
settlement process:

  -- Adjustment.  A borrower agrees to make, at some time in the
     future, one payment, or a series of payments, that is less than
     the amount owed.

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

  -- Cancellation.  The debt is written off without any payment made,
     and the borrower is released from further liability because FSA
     believes that the borrower has insufficient potential to make
     additional payments.

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

Table 2 summarizes the amount of debt written off during the fiscal
year 1995-97 period through each of the four debt settlement options.
As the table shows, a comparatively small number of borrowers who had
a large amount of debt written off accounted for a substantial
portion of the write-offs.  In 1997, for example, 182 borrowers, or
about 9 percent of those whose debts were written off, had $500,000
or more forgiven; these borrowers received about 48 percent of the
total debt forgiveness.

                                     Table 2

                         Debt Written Off by FSA in Debt
                        Settlements, Fiscal Years 1995-97

                              (Dollars in millions)

      Borrowers with less than  Borrowers with $500,000
        $500,000 written off      or more written off             Total
      ------------------------  ------------------------  ----------------------
Year
and
sett
leme                                                                        Debt
nt     Number of          Debt   Number of          Debt   Number of     written
type   borrowers   written off   borrowers   written off   borrowers         off
----  ----------  ------------  ----------  ------------  ----------  ----------
1997
Adju          78         $ 8.3          13        $ 11.4          91      $ 19.7
 stm
 ent
Comp         254          28.0          25          32.1         279        60.1
 rom
 ise
Canc       1,281         145.8         122         115.0       1,403       260.8
 ell
 ati
 on
Char         167          15.9          22          24.1         189        40.0
 ge-
 off
================================================================================
Tota       1,780        $198.1         182        $182.6       1,962      $380.6
 l
1996
Adju          89         $ 9.6          10         $ 7.4          99      $ 17.0
 stm
 ent
Comp         378          44.2          56          89.1         434       133.3
 rom
 ise
Canc       1,518         183.0         247         349.0       1,765       532.0
 ell
 ati
 on
Char         188          20.7          34         158.7         222       179.4
 ge-
 off
================================================================================
Tota       2,173        $257.5         347        $604.2       2,520      $861.6
 l
1995
Adju         147        $ 14.5           9         $ 9.8         156      $ 24.3
 stm
 ent
Comp         458          55.9          52          64.5         510       120.4
 rom
 ise
Canc       2,029         254.7         269         336.6       2,298       591.4
 ell
 ati
 on
Char         166          16.9          24          30.6         190        47.5
 ge-
 off
================================================================================
Tota       2,800        $342.1         354        $441.6       3,154      $783.7
 l
--------------------------------------------------------------------------------
Note:  Figures sometimes do not add to totals because of rounding.

Source:  GAO's analysis of records from FSA's Finance Office.

Borrowers in a small number of states accounted for a
disproportionate share of the write-offs.  Specifically, borrowers in
the five states with the most write-offs each year received about 48
percent of the total write-offs during this 3-year period.  Appendix
II provides information on the five states with the most write-offs
during each of these 3 fiscal years.

--------------------
\5 FSA also provides debt forgiveness as a result of bankruptcy
rulings and through its loan-servicing process of either
restructuring a borrower's debt or allowing a borrower to make a
buyout payment that is based on the value of loan-security property.
During fiscal year 1997, FSA forgave about $120 million for about 550
borrowers as a result of bankruptcy, restructuring, and buyouts.

\6 Some of the farm loans that were written off during fiscal years
1995 and 1996 were done so by USDA's Loan Resolution Task Force,
which is no longer in existence.

   USE OF LOAN-SERVICING
   CONTRACTING AUTHORITIES HAS
   BEEN LIMITED
------------------------------------------------------------ Letter :5

Three statutory provisions were enacted in the mid-1990s that provide
FSA with discretionary authority to contract for loan-servicing
assistance.  These provisions authorize, but do not require,
contracting with (1) private attorneys to obtain legal assistance in
resolving delinquent farm loan accounts, (2) private lenders to
obtain assistance in servicing farm loan borrowers' accounts, and (3)
private collection agencies to obtain assistance in collecting
delinquent farm loans.  FSA has made little use of these authorities:
It has contracted with private attorneys in only two states; it has
not contracted with private lenders or with private collection
agencies and is not actively considering doing so.

      AUTHORITY TO CONTRACT WITH
      PRIVATE ATTORNEYS
---------------------------------------------------------- Letter :5.1

The Farmers Home Administration Improvement Act of 1994 (P.L.
103-248, May 11, 1994) gave FSA discretionary authority to contract
with private attorneys to assist in resolving delinquent farm loan
accounts.  The process for using the new contracting authority
generally starts with a request for legal assistance from an FSA
state office to FSA's Farm Credit Programs at headquarters.  Farm
Credit Programs then refers the request to USDA's Office of General
Counsel (OGC), which after its review may refer the matter to the
Department of Justice.  Justice, in consultation with FSA and USDA's
OGC, reviews the situation to see if (1) the farm loan cases can be
handled by the U.S.  Attorney's office that has jurisdiction for the
area, (2) the cases can be referred to a private attorney under
contract with Justice, or (3) FSA should use its authority to
contract with a private attorney.  FSA is required to obtain the
approval of both OGC and Justice before it can enter into a contract
with a private attorney.  Once OGC and Justice have approved FSA's
request for contracting, FSA's state office solicits bids and
subsequently enters into contracts, with OGC providing legal advice
to the contracting office.

To date, FSA has contracted with private attorneys to obtain
assistance in resolving delinquent farm loan accounts in only two
states--Louisiana and New Jersey--and has no plans to expand its use
in other states.  Specifically, following the process described
above, FSA's Louisiana state office entered into contracts with nine
law firms to handle foreclosure cases in October 1995.  As of
February 1998, two of the nine firms were no longer under contract.
According to FSA's state officials, the agency canceled one contract
at the law firm's request and the other because of noncompliance with
the terms of the contract.  Through February 10, 1998, FSA had
referred a total of 156 foreclosure cases to the law firms.
Sixty-four of these cases had been settled, with collections totaling
$2.2 million; borrowers in another nine cases had filed for
bankruptcy; and the remaining cases were ongoing.  The cost of legal
services was about $58,000, excluding the attorneys' reimbursable
expenses, such as court filing fees.  Concerning New Jersey, USDA
officials told us that FSA's New Jersey state office contracted with
a law firm after approval by the U.S.  Attorney's office with
jurisdiction there.  No farm loan cases in New Jersey had been
referred to the private law firm, and the USDA officials said they
anticipate that none will be.

Little consideration has been given within USDA for additional
contracting by FSA because its needs for legal assistance are being
satisfied by Justice.  In two states, Justice has been referring
problem farm loan cases to private attorneys that it has under
contract.  Specifically, according to a Justice official, the
Department has referred such cases in the middle district of Florida
since March 1993 and the southern district since January 1994--both
before FSA received its contracting authority.  The Justice official
also told us that farm loan foreclosure cases in the northern
district of New York are being handled by private attorneys under
contract with Justice.  FSA and OGC officials said that FSA has
additional legal needs in New York, which will probably also be met
by referring cases to private attorneys under contract with Justice.
The OGC official also said that USDA discussed FSA's legal needs in
Idaho with Justice, and, as a result, the U.S.  Attorney's office has
increased legal action on farm loan cases in that state.

Finally, state law can have a considerable bearing on FSA's legal
needs involving problem farm loan cases.  Specifically, when state
law provides for nonjudicial foreclosure--that is, when judicial
process is not needed for a lender to foreclose the loan-security
property of a delinquent borrower--FSA has less need for legal
assistance than when state law requires judicial process in
foreclosure cases.  According to USDA officials, about half of all
states allow nonjudicial foreclosure.

      AUTHORITY TO CONTRACT WITH
      PRIVATE LENDERS
---------------------------------------------------------- Letter :5.2

The Federal Agriculture Improvement and Reform (FAIR) Act of 1996
(P.L.  104-127, Apr.  4, 1996) gave FSA discretionary authority to
contract with private lenders to assist in servicing outstanding
loans, including contracting for one or more pilot projects to test
the concept.  To date, FSA has not used this authority and is not
actively considering its use.

Agency officials told us that the new contracting authority is not
needed for three reasons.  First, they stated that USDA's recent
reorganization of various farm program functions and offices has
resulted in an increased number of field staff available to service
farm loan borrowers.  While this may be true, we note that FSA
continues to have problems in servicing farm loans.  Specifically,
our review of FSA's internal control reviews during fiscal year 1997
found that the agency's field officials do not always follow FSA's
own loan-servicing standards.  For example, as table 3 shows, FSA's
rates of noncompliance on four key loan-servicing standards ranged
from about 17 to 29 percent.

                                Table 3

                   Results of FSA's Internal Control
                    Reviews Covering Four Key Loan-
                 Servicing Standards, Fiscal Year 1997

                                             Number of
                                        cases in which
                                          the standard   Percentage of
FSA's loan-servicing standard                  applied   noncompliance
--------------------------------------  --------------  --------------
FSA credit manager assessed borrower's             953            29.3
 operation with input from the
 borrower
Year-end analysis of borrower                    1,113            25.2
 completed and documented
FSA credit manager followed up with                985            18.1
 borrower on progress in improving
 operations
Credit counseling and training                     886            16.7
 addressed in year-end analysis of
 borrower
----------------------------------------------------------------------
Source:  FSA's internal control review reports for fiscal year 1997.

The problems identified in FSA's fiscal year 1997 internal control
reviews were not unique.  For example, FSA's internal control reviews
in fiscal years 1995 and 1996 showed a total 20.6-percent rate of
noncompliance with the requirement that field staff analyze
borrowers' operations and assist in planning, a 20.3-percent rate of
noncompliance with the requirement that annual chattel inspections be
performed to ensure that security property is being maintained, and a
16.8-percent rate of noncompliance with the requirement that office
and field visits with borrowers be documented to reflect adequate
supervision.

FSA's officials acknowledged that the agency has a problem with loan
servicing.  They said that the agency's field staffs, which now
include people who had previously worked on USDA's farm payment
programs but not on the farm loan programs, need to be specifically
assigned to work on farm loans and trained in credit matters.  They
anticipate that these actions will be taken in the future.

The second reason cited by FSA's farm loan officials for not
contracting with private lenders is because they use other
discretionary authority to contract with entities besides lenders for
some servicing of farm loans, such as with local management
consulting firms and accounting firms to review borrowers' operations
and financial reports and with local appraisal companies to appraise
property used as security for loans.  We confirmed that FSA has
employed such contractors for some loan-servicing activities.

Finally, FSA's farm loan officials said they have not contracted with
private lenders because such contracting would increase their cost of
operating the farm loan programs.  FSA has not, however, estimated
either the cost or potential benefits of loan-servicing assistance.

The statutory provision authorizing contracting with private lenders
required USDA to report to the Congress by September 30, 1997, on its
experience in using contracts.  USDA did not file this report because
it did not contract with any private lenders for loan-servicing
assistance.

      AUTHORITY TO CONTRACT WITH
      PRIVATE COLLECTION AGENCIES
---------------------------------------------------------- Letter :5.3

The FAIR Act also gave FSA discretionary authority to contract with
private collection agencies to assist in collecting on unpaid
accounts.  However, as of March 1998, FSA had not contracted with
private collection agencies for assistance, and FSA's officials are
not actively considering such contracting.  The officials said they
are not using this authority because, before FSA can contract with
private collection agencies, it must complete the Con Act's servicing
requirements, as discussed below, that apply to borrowers with
delinquent loans.  However, because this process often takes more
than 180 days, FSA is required to transfer delinquent accounts to the
Department of the Treasury for collection action, which precludes FSA
from contracting for the services itself.  This transfer is in
accordance with the Debt Collection Improvement Act of 1996
(DCIA)--section 31001 of P.L.  104-134, Apr.  26, 1996--which was
enacted shortly after FSA was given its authority to contract with
private collection agencies.

When a borrower misses a loan payment, the Con Act's requirements and
FSA's implementing regulations provide the following process for
servicing the delinquent loan.  Specifically, when a borrower is 90
days past due on a scheduled payment, FSA is to formally notify the
borrower of its available loan-servicing options, such as the
possibility of restructuring the outstanding loans.  Generally, the
delinquent borrower has 60 days to apply for servicing.  If the
borrower applies for restructuring, FSA has 90 days to process the
application and to notify the borrower if he or she qualifies for
restructuring.  After notification, FSA has 45 days to offer to
restructure the borrower's debts.  If the borrower did not qualify
for restructuring, the borrower has 90 days to make a buyout payment
to FSA that is based on the value of property used as security for
the loan.

When the borrower does not apply for servicing or when the borrower
does apply but restructuring or a buyout does not occur, FSA will
demand full repayment of the debt.  If the payment is not made, FSA
starts the liquidation phase of its servicing, which may include
foreclosure action, and then debt settlement.

FSA's farm loan officials told us that the agency needs to complete
its loan servicing for borrowers, including debt settlement, before
it could consider private collection services.  Furthermore, in debt
settlement, only delinquent borrowers whose debts are charged off by
FSA remain liable for the unpaid amounts of their loans and would be
subject to debt collection action.  However, because of the time
required for servicing delinquent accounts, most of these borrowers
have been delinquent for at least 180 days.  As a result, under the
DCIA, FSA is required to transfer the accounts to Treasury for
collection action.\7 Once the accounts are transferred, Treasury may
refer these borrowers to one of the private collection agencies that
it has contracted with for collection action.\8 USDA officials also
said that Treasury officials have told them to forward any accounts
that are less than 180 days delinquent, after the loan security has
been liquidated, for referral to one of Treasury's collection
contractors.

At the time of our review, none of FSA's farm loan accounts had been
or were ready to be transferred to Treasury, nor was Treasury ready
to receive delinquent accounts.  FSA officials told us that the
agency has to complete two tasks before any accounts can be
transferred.  First, FSA has to modify the format of its automated
farm loan record system because the current format does not meet
Treasury's requirements.  Second, each borrower whose debt was
charged off has to be reviewed by FSA's field offices to ensure that
the account qualifies to be transferred--for example, the borrower is
not in litigation, foreclosure, or bankruptcy, and the statute of
limitations on pursing collections has not expired.  FSA officials
estimated that both the modification of their automated system and
the review of the borrowers would be completed by September 1998.

--------------------
\7 The DCIA requires executive branch agencies to transfer to
Treasury the accounts of borrowers who are at least 180 days
delinquent.  The act has certain exceptions to this transfer
requirement, such as the accounts of borrowers who are in litigation
or foreclosure.

\8 In 1997, Treasury contracted with 13 private collection agencies
for assistance in collecting on delinquent loans owed to the federal
government.

   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We provided a draft of this report to USDA and met with Department
officials to obtain their comments.  These officials included the
Farm Service Agency's Deputy Administrator for Farm Credit Programs
and the Director of the Loan Servicing and Property Management
Division and the Office of General Counsel's Associate General
Counsel for Rural Development.  The USDA officials generally agreed
with the material contained in the report and offered technical
corrections and suggestions for clarifying the report.  We made these
corrections and incorporated their suggestions as appropriate.

---------------------------------------------------------- Letter :6.1

We performed our work from January through April 1998 in accordance
with generally accepted government auditing standards.  Our scope and
methodology are discussed in appendix III.

As agreed, unless you publicly announce its contents earlier, we plan
no further distribution of this report until 14 days from the date of
this letter.  At that time, we will send copies of this report to the
appropriate Senate and House committees; interested Members of
Congress; 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 upon 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
IV.

Sincerely yours,

Robert A.  Robinson
Director, Food and
 Agriculture Issues

OUTSTANDING AND DELINQUENT LOANS
IN THE FIVE STATES WITH THE
HIGHEST AMOUNTS OF DELINQUENT DEBT
=========================================================== Appendix I

This appendix provides information on the Farm Service Agency's (FSA)
active direct farm loans in the five states with the highest amounts
of delinquent debt.  Tables I.1, I.2, and I.3 show the total amount
of outstanding principal and the portion owed by delinquent borrowers
at the end of fiscal years 1997, 1996, and 1995, respectively.  The
tables also provide this information for borrowers in two ranges of
outstanding principal--those owing less than $500,000 and those who
owe $500,000 or more.

                                    Table I.1

                      Five States With the Highest Amount of
                      Outstanding Direct Farm Loans Owed by
                      Delinquent Borrowers, as of September
                                     30, 1997

                              (Dollars in millions)

                                   Owed by delinquent       Percentage owed by
       Outstanding principal           borrowers           delinquent borrowers
      ------------------------  ------------------------  ----------------------
Stat
e
and
rang
e of
borr
ower                                                                  Percentage
s'                   Number of                 Number of  Percentage          of
debt      Amount     borrowers      Amount     borrowers     of debt   borrowers
----  ----------  ------------  ----------  ------------  ----------  ----------
Texa
 s
Borr      $760.6         7,765      $382.8         3,028        50.3        39.0
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr        54.5            68        48.4            60        88.8        88.2
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $815.1         7,833      $431.2         3,088        52.9        39.4
 l
Miss
 iss
 ipp
 i
Borr      $292.1         4,438      $139.1         1,140        47.6        25.7
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr        80.7            85        76.2            78        94.5        91.8
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $372.7         4,523      $215.3         1,218        57.8        26.9
 l
Cali
 for
 nia
Borr      $233.7         1,701      $ 82.7           485        35.4        28.5
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr       143.1            80       114.3            58        79.9        72.5
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $376.8         1,781      $197.0           543        52.3        30.5
 l
Okla
 homa
Borr      $381.6         5,340      $117.8         1,025        30.9        19.2
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr        24.2            34        12.7            18        52.7        52.9
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $405.8         5,374      $130.5         1,043        32.2        19.4
 l
New
 York
Borr      $280.2         2,753      $ 96.7           699        34.5        25.4
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr        38.6            49        27.0            33        69.9        67.3
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $318.8         2,802      $123.7           732        38.8        26.1
 l
--------------------------------------------------------------------------------
Note:  Figures sometimes do not add to totals because of rounding.

Source:  GAO's analysis of records from FSA's Finance Office.

                                    Table I.2

                      Five States With the Highest Amount of
                      Outstanding Direct Farm Loans Owed by
                      Delinquent Borrowers, as of September
                                     30, 1996

                              (Dollars in millions)

                                   Owed by delinquent       Percentage owed by
       Outstanding principal           borrowers           delinquent borrowers
      ------------------------  ------------------------  ----------------------
Stat
e
and
rang
e of
borr
ower                                                                  Percentage
s'                   Number of                 Number of  Percentage          of
debt      Amount     borrowers      Amount     borrowers     of debt   borrowers
----  ----------  ------------  ----------  ------------  ----------  ----------
Texa
 s
Borr      $790.5         8,052      $420.9         3,386        53.3        42.1
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr        66.0            76        62.2            70        94.2        92.1
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $856.5         8,128      $483.1         3,456        56.4        42.5
 l
Miss
 iss
 ipp
 i
Borr      $334.1         4,883      $167.6         1,436        50.2        29.4
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr        90.9            97        87.2            91        95.8        93.8
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $425.0         4,980      $254.8         1,527        59.9        30.7
 l
Cali
 for
 nia
Borr      $237.9         1,720      $ 83.3           492        35.0        28.6
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr       174.6           103       139.4            75        79.9        72.8
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $412.5         1,823      $222.7           567        54.0        31.1
 l
Okla
 homa
Borr      $408.9         5,636      $168.0         1,564        41.1        27.8
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr        30.1            39        25.0            32        83.0        82.1
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $439.0         5,675      $193.0         1,596        44.0        28.1
 l
Nort
 h
 Dak
 ota
Borr      $468.7         4,460      $132.9           992        28.3        22.2
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr        16.5            23        14.8            20        89.5        87.0
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $485.3         4,483      $147.7         1,012        30.4        22.6
 l
--------------------------------------------------------------------------------
Note:  Figures sometimes do not add to totals because of rounding.

Source:  GAO's analysis of records from FSA's Finance Office.

                                    Table I.3

                      Five States With the Highest Amount of
                      Outstanding Direct Farm Loans Owed by
                      Delinquent Borrowers, as of September
                                     30, 1995

                              (Dollars in millions)

                                   Owed by delinquent       Percentage owed by
       Outstanding principal           borrowers           delinquent borrowers
      ------------------------  ------------------------  ----------------------
Stat
e
and
rang
e of
borr
ower                                                                  Percentage
s'                   Number of                 Number of  Percentage          of
debt      Amount     borrowers      Amount     borrowers     of debt   borrowers
----  ----------  ------------  ----------  ------------  ----------  ----------
Texa
 s
Borr      $798.7         8,264      $421.6         3,207        52.8        38.8
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr        91.8           109        83.8            97        91.3        89.0
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $890.5         8,373      $505.3         3,304        56.8        39.5
 l
Miss
 iss
 ipp
 i
Borr      $344.0         5,158      $191.8         1,563        55.8        30.3
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr       138.6           144       133.4           138        96.2        95.8
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $482.7         5,302      $325.2         1,701        67.4        32.1
 l
Cali
 for
 nia
Borr      $244.9         1,788      $ 93.1           527        38.0        29.5
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr       243.7           134       218.7           107        89.7        79.9
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $488.6         1,922      $311.8           634        63.8        33.0
 l
Okla
 homa
Borr      $420.1         5,703      $185.0         1,561        44.0        27.4
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr        46.6            52        40.8            45        87.6        86.5
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $466.8         5,755      $225.8         1,606        48.4        27.9
 l
Sout
 h
 Dak
 ota
Borr      $479.6         5,994      $182.2         1,554        38.0        25.9
 owe
 rs
 owi
 ng
 les
 s
 tha
 n
 $50
 0,0
 00
Borr        27.5            37        24.4            32        88.8        86.5
 owe
 rs
 owi
 ng
 $50
 0,0
 00
 or
 mor
 e
Tota      $507.0         6,031      $206.6         1,586        40.7        26.3
 l
--------------------------------------------------------------------------------
Note:  Figures sometimes do not add to totals because of rounding.

Source:  GAO's analysis of records from FSA's Finance Office.

LOANS WRITTEN OFF THROUGH DEBT
SETTLEMENTS IN THE FIVE STATES
WITH THE HIGHEST AMOUNTS OF
WRITE-OFFS
========================================================== Appendix II

This appendix provides information on write-offs of direct farm loans
by FSA in settling delinquent borrowers' debts through the debt
settlement process in the five states with the highest amounts of
write-offs.  Tables II.1, II.2, and II.3 show the total amount of
debt written off for borrowers who have undergone debt settlements
during fiscal years 1997, 1996, and 1995, respectively.  The tables
also provide this information for borrowers by two ranges of
write-offs--those who received less than $500,000 and those who
received $500,000 or more in debt forgiveness.

                                    Table II.1

                      Five States With the Most Debt Written
                      Off by FSA in Debt Settlements, Fiscal
                                    Year 1997

                              (Dollars in millions)

      Borrowers with less than  Borrowers with $500,000
        $500,000 written off      or more written off             Total
      ------------------------  ------------------------  ----------------------
Stat
e
and
sett
leme                                                                        Debt
nt     Number of          Debt   Number of          Debt   Number of     written
type   borrowers   written off   borrowers   written off   borrowers         off
----  ----------  ------------  ----------  ------------  ----------  ----------
Texa
 s
Adju           0         $ 0 1                     $ 0.7           1       $ 0.7
 stm
 ent
Comp          12           1.5           1           0.9          13         2.4
 rom
 ise
Canc          96          14.4          18          17.7         114        32.1
 ell
 ati
 on
Char           0             0           0             0           0           0
 ge-
 off
================================================================================
Tota         108         $15.9          20         $19.3         128       $35.2
 l
Miss
 iss
 ipp
 i
Adju           1         $ 0\a           0           $ 0           1       $ 0\a
 stm
 ent
Comp          17           1.9           2           2.0          19         3.9
 rom
 ise
Canc          84          10.3          14          12.5          98        22.8
 ell
 ati
 on
Char          19           3.7           6           4.0          25         7.7
 ge-
 off
================================================================================
Tota         121         $15.9          22         $18.5         143       $34.5
 l
Loui
 sia
 na
Adju           2         $ 0.2           1         $ 0.9           3       $ 1.1
 stm
 ent
Comp          25           3.7           1           0.7          26         4.4
 rom
 ise
Canc         100           9.5           9           6.8         109        16.3
 ell
 ati
 on
Char          14           1.1           3           2.5          17         3.6
 ge-
 off
================================================================================
Tota         141         $14.5          14         $11.0         155       $25.5
 l
Cali
 for
 nia
Adju           1          $0.3           0           $ 0           1       $ 0.3
 stm
 ent
Comp           2           0.1           2           3.0           4         3.1
 rom
 ise
Canc          20           2.4           8           8.8          28        11.2
 ell
 ati
 on
Char           3           0.5           2           6.8           5         7.3
 ge-
 off
================================================================================
Tota          26          $3.3          12         $18.5          38       $21.8
 l
Geor
 gia
Adju           4          $0.5           1         $ 0.7           5       $ 1.2
 stm
 ent
Comp          19           2.6           5           6.3          24         8.9
 rom
 ise
Canc          48           5.2           7           4.7          55         9.9
 ell
 ati
 on
Char           2           0.1           0             0           2         0.1
 ge-
 off
================================================================================
Tota          73          $8.3          13         $11.7          86       $20.0
 l
--------------------------------------------------------------------------------
Note:  Figures sometimes do not add to totals because of rounding.

\a Less than $50,000.

Source:  GAO's analysis of records from FSA's Finance Office.

                                    Table II.2

                      Five States With the Most Debt Written
                      Off by FSA in Debt Settlements, Fiscal
                                    Year 1996

                              (Dollars in millions)

      Borrowers with less than  Borrowers with $500,000
        $500,000 written off      or more written off             Total
      ------------------------  ------------------------  ----------------------
Stat
e
and
sett
leme                                                                        Debt
nt     Number of          Debt   Number of          Debt   Number of     written
type   borrowers   written off   borrowers   written off   borrowers         off
----  ----------  ------------  ----------  ------------  ----------  ----------
Cali
 for
 nia
Adju           4          $0.8           1         $ 0.7         5 <     b>$ 1.5
 stm
 ent
Comp           3           0\a           7          16.8          10        16.8
 rom
 ise
Canc          40           6.4          23          53.7          63        60.1
 ell
 ati
 on
Char           5           0.9           8         125.6          13       126.5
 ge-
 off
================================================================================
Tota          52          $8.2          39        $196.8          91      $205.0
 l
Miss
 iss
 ipp
 i
Adju           2         $ 0.3           0           $ 0           2       $ 0.3
 stm
 ent
Comp          17           2.2           7          11.6          24        13.8
 rom
 ise
Canc         130          16.6          42          71.2         172        87.8
 ell
 ati
 on
Char          12           1.1           7          10.5          19        11.6
 ge-
 off
================================================================================
Tota         161         $20.1          56         $93.3         217      $113.5
 l
Loui
 sia
 na
Adju           3         $ 0.6           0           $ 0           3       $ 0.6
 stm
 ent
Comp          76           9.9           5           5.1          81        15.0
 rom
 ise
Canc         156          19.1          10          11.3         166        30.4
 ell
 ati
 on
Char          50           5.1           9          10.8          59        15.9
 ge-
 off
================================================================================
Tota         285         $34.6          24         $27.2         309       $61.8
 l
Texa
 s
Adju           0           $ 0           0           $ 0           0         $ 0
 stm
 ent
Comp          10           1.5           5           7.4          15         8.9
 rom
 ise
Canc          71          11.3          28          38.7          99        50.0
 ell
 ati
 on
Char           0             0           0             0           0           0
 ge-
 off
================================================================================
Tota          81         $12.8          33         $46.1         114       $58.9
 l
Ariz
 ona
Adju           0           $ 0           0           $ 0           0         $ 0
 stm
 ent
Comp           1           0\a           0             0           1         0\a
 rom
 ise
Canc          20           3.7          20          52.0          40        55.7
 ell
 ati
 on
Char           0             0           1           1.8           1         1.8
 ge-
 off
================================================================================
Tota          21          $3.7          21         $53.8          42       $57.5
 l
--------------------------------------------------------------------------------
Note:  Figures sometimes do not add to totals because of rounding.

\a Less than $50,000.

Source:  GAO's analysis of records from FSA's Finance Office.

                                    Table II.3

                      Five States With the Most Debt Written
                      Off by FSA in Debt Settlements, Fiscal
                                    Year 1995

                              (Dollars in millions)

      Borrowers with less than  Borrowers with $500,000
        $500,000 written off      or more written off             Total
      ------------------------  ------------------------  ----------------------
Stat
e
and
sett
leme                                                                        Debt
nt     Number of          Debt   Number of          Debt   Number of     written
type   borrowers   written off   borrowers   written off   borrowers         off
----  ----------  ------------  ----------  ------------  ----------  ----------
Texa
 s
Adju           4         $ 0.3           0           $ 0           4       $ 0.3
 stm
 ent
Comp          39           5.2           3           1.6          42         6.8
 rom
 ise
Canc         306          45.2          52          64.9         358       110.1
 ell
 ati
 on
Char           1           0.1           1           0.8           2         0.8
 ge-
 off
================================================================================
Tota         350         $50.8          56         $67.3         406      $118.1
 l
Cali
 for
 nia
Adju           7         $ 1.2           0           $ 0           7       $ 1.2
 stm
 ent
Comp           4           1.6           4           9.4           8        11.0
 rom
 ise
Canc          31           5.8          18          44.6          49        50.4
 ell
 ati
 on
Char           0             0           4          13.8           4        13.8
 ge-
 off
================================================================================
Tota          42          $8.7          26         $67.9          68       $76.5
 l
Loui
 sia
 na
Adju           7         $ 1.0           0           $ 0           7       $ 1.0
 stm
 ent
Comp          67           7.9           4           4.2          71        12.1
 rom
 ise
Canc         181          25.4          19          19.4         200        44.8
 ell
 ati
 on
Char           5           0.8           0             0           5         0.8
 ge-
 off
================================================================================
Tota         260         $35.0          23         $23.6         283       $58.6
 l
Miss
 iss
 ipp
 i
Adju           1         $ 0.5           0           $ 0           1       $ 0.5
 stm
 ent
Comp          14           2.1           2           2.2          16         4.3
 rom
 ise
Canc          95          14.7          17          20.7         112        35.4
 ell
 ati
 on
Char           1           0\a           1           1.5           2         1.5
 ge-
 off
================================================================================
Tota         111         $17.3          20         $24.4         131       $41.7
 l
Geor
 gia
Adju           8         $ 1.2           3         $ 4.9          11       $ 6.1
 stm
 ent
Comp          22           3.6           7          10.3          29        13.9
 rom
 ise
Canc          63           7.6           5           6.7          68        14.2
 ell
 ati
 on
Char           2           0.3           1           0.6           3         0.9
 ge-
 off
================================================================================
Tota          95         $12.6          16         $22.4         111       $35.1
 l
--------------------------------------------------------------------------------
Note:  Figures sometimes do not add to totals because of rounding.

\a Less than $50,000.

Source:  GAO's analysis of records from FSA's Finance Office.

OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================= Appendix III

As requested, our objectives were to assess (1) the levels of
outstanding principal on active direct farm loans at the end of
fiscal years 1995 through 1997, including the amounts owed by
delinquent borrowers; (2) the amount of debt written off by FSA
through the debt settlement process in fiscal years 1995 through
1997; and (3) FSA's use of three statutory provisions enacted in the
mid-1990s that authorize FSA to contract with private attorneys for
legal assistance in resolving delinquent farm loan accounts, private
lenders for assistance in servicing farm loan borrowers' accounts,
and private collection agencies for assistance in collecting
delinquent farm loans.

To address the first two objectives, we obtained and analyzed
information in the computerized databases in FSA's St.  Louis Finance
Office and in the agency's various financial reports on the farm loan
portfolio.  As requested, this effort included compiling information
on borrowers who owe less than $500,000 and those who owe $500,000 or
more, the five states with the highest amounts of delinquent debt,
borrowers who received write-offs of less than $500,000 and those who
received write-offs of $500,000 or more, and the five states with the
highest amounts of write-offs.  We did not verify the accuracy of the
information contained in these databases or reports.

To address the third objective, we reviewed the three statutory
provisions and their legislative histories.  We interviewed FSA's
officials, including the Deputy Administrator for Farm Credit
Programs, the Director of the Loan Servicing and Property Management
Division, and the Director of the Financial Management Division; and
the U.S.  Department of Agriculture's (USDA) Associate General
Counsel for Rural Development.  Additionally, concerning the
authority to contract with private attorneys, we discussed
contracting by the Department of Justice with its Director of Debt
Collection Management; and we reviewed the executive memorandum for
USDA and Justice on FSA's contracting, USDA's and FSA's operating
documentation, and statistical information we obtained from FSA's
Louisiana state office.  On contracting with private collection
agencies, we reviewed the requirements of the Debt Collection
Improvement Act of 1996 concerning the transfer of delinquent
accounts to the Department of the Treasury and guidance issued by
Treasury on using the private collection agencies that it has under
contract.

Our work was performed from January through April 1998 in accordance
with generally accepted government auditing standards.

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

Charles M.  Adams, Assistant Director
Oliver H.  Easterwood
Jerry D.  Hall
Patrick J.  Sweeney
Larry D.  Van Sickle
*** End of document ***