Farm Loans: Information on the Status of USDA's Portfolio (Stmnt. for the
Rec., 02/21/97, GAO/T-RCED-97-78).

Pursuant to a congressional request, GAO discussed the Farm Service
Agency's (FSA) farm loan programs, focusing on: (1) GAO's January 1997
report which updated prior reports on the financial condition of FSA's
farm loan portfolio; and (2) changes to the farm loan programs that were
mandated by the Federal Agriculture Improvement and Reform (FAIR) Act of
1996.

GAO noted that: (1) its January report shows that a significant portion
of FSA's direct farm loan portfolio continues to be at risk because it
is held by delinquent borrowers; (2) as might be expected, a much
smaller percentage of FSA's guaranteed loan portfolio is held by
delinquent borrowers; (3) as of September 30, 1996, $3.6 billion, or
about 34 percent of the total outstanding principal on direct loans
($10.5 billion), was held by delinquent borrowers; (4) this level of
delinquency is an improvement over the $4.6 billion, or about 41 percent
of the total outstanding principal ($11.4 billion), that was held by
delinquent borrowers at the end of fiscal year (FY) 1995; (5) during FY
1996, FSA lost $1.1 billion of principal and interest by reducing or
forgiving the debt of delinquent direct loan borrowers; (6) as of
September 30, 1996, about $280 million, or about 4.4 percent of the
total outstanding principal on guaranteed loans ($6.4 billion), was held
by delinquent borrowers; (7) in comparison, at the end of FY 1995,
delinquent borrowers held about $218 million , or 3.7 percent of the
total outstanding principal ($5.9 billion); (8) much of the increase in
guaranteed loan delinquencies is concentrated in a few states; (9) the
FAIR Act made significant changes to FSA's lending programs; (10) these
changes were aimed at strengthening the financial condition of the farm
loan portfolio and improving the operation of the programs; (11) they
include modifying or eliminating lending policies that added to FSA's
risk and clarifying FSA's fundamental lending role and mission; (12)
because the Department of Agriculture is in the process of implementing
these changes, their impact will not be known for some time; and (13)
however, GAO believes that they should go a long way to reducing the
risk associated with the farm loan programs and to improving their
operations.

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

 REPORTNUM:  T-RCED-97-78
     TITLE:  Farm Loans: Information on the Status of USDA's Portfolio
      DATE:  02/21/97
   SUBJECT:  Direct loans
             Government guaranteed loans
             Delinquent loans
             Farm credit
             Losses
             Agricultural programs
             Debt
             Loan repayments
IDENTIFIER:  FmHA Direct Farm Loan Program
             FmHA Guaranteed Farm Loan Program
             FmHA Farm Operating Loan Program
             FmHA Farm Ownership Loan Program
             Texas
             Nebraska
             Minnesota
             Kansas
             Iowa
             Oklahoma
             Louisiana
             Wisconsin
             South Dakota
             
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Cover
================================================================ COVER


Before the Subcommittee on Forestry, Resource Conservation, and
Research, Committee on Agriculture, House of Representatives

For Release
on Delivery
Expected at
9 a.m.  CST
Friday
February 21, 1997

FARM LOANS - INFORMATION ON THE
STATUS OF USDA'S PORTFOLIO

Statement for the Record by
Robert A.  Robinson, Director,
Food and Agriculture Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-97-78

GAO/RCED-97-78T


(150427)


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

  USDA -
  FSA -
  FAIR -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

Thank you for inviting us to provide this statement for the record as
part of the Subcommittee's oversight hearing on the farm loan
programs administered by the U.S.  Department of Agriculture's (USDA)
Farm Service Agency (FSA).  You asked us to (1) summarize our January
1997 report,\1 which updated prior reports on the financial condition
of FSA's farm loan portfolio, and (2) discuss changes to the farm
loan programs that were mandated by the Federal Agriculture
Improvement and Reform (FAIR) Act of 1996 (P.L.  104-127, Apr.  4,
1996). 

In summary, our January report shows that a significant portion of
FSA's direct farm loan portfolio continues to be at risk because it
is held by delinquent borrowers.  As might be expected, a much
smaller percentage of FSA's guaranteed loan portfolio is held by
delinquent borrowers.  Specifically: 

  -- As of September 30, 1996, $3.6 billion, or about 34 percent of
     the total outstanding principal on direct loans ($10.5 billion),
     was held by delinquent borrowers.  This level of delinquency is
     an improvement over the $4.6 billion, or about 41 percent of the
     total outstanding principal ($11.4 billion), that was held by
     delinquent borrowers at the end of fiscal year 1995. 

  -- During fiscal year 1996, FSA lost $1.1 billion of principal and
     interest by reducing or forgiving the debt of delinquent direct
     loan borrowers. 

  -- As of September 30, 1996, about $280 million, or 4.4 percent of
     the total outstanding principal on guaranteed loans ($6.4
     billion), was held by delinquent borrowers.  In comparison, at
     the end of fiscal year 1995, delinquent borrowers held about
     $218 million, or 3.7 percent of the total outstanding principal
     ($5.9 billion). 

  -- Much of the increase in guaranteed loan delinquencies is
     concentrated in a few states. 

The FAIR Act made significant changes to FSA's lending programs. 
These changes were aimed at strengthening the financial condition of
the farm loan portfolio and improving the operation of the programs. 
They include modifying or eliminating lending policies that added to
FSA's risk and clarifying FSA's fundamental lending role and mission. 
Because USDA is in the process of implementing these changes, their
impact will not be known for some time.  However, we believe that
they should go a long way to reducing the risk associated with the
farm loan programs and to improving their operations. 


--------------------
\1 Farm Service Agency:  Update on the Farm Loan Portfolio
(GAO/RCED-97-35, Jan.  3, 1997). 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

FSA provides credit to farmers and ranchers who are unable to obtain
funds elsewhere at reasonable rates and terms.  The agency provides
credit assistance through direct loans, which are funded by the
government, and through guaranteed loans, which are made by
commercial lenders and guaranteed by the government.  Generally, the
maximum guarantee is 90 percent; however, the FAIR Act allows the
guarantee to be higher in certain instances.  FSA's assistance is
intended to be temporary; once farmers and ranchers have become
financially viable, they are to graduate to commercial sources of
credit. 

FSA incurs losses in the direct loan program through various types of
debt relief assistance offered to borrowers who have trouble repaying
their loans.  Two such debt relief options are (1) reducing a
borrower's debt so that the borrower continues farming or ranching
and remains an FSA client--referred to as restructuring with
write-down--and (2) forgiving debt by allowing a borrower who does
not qualify for restructuring to make a payment to FSA that is based
on the value of collateral security and that is less than the
outstanding debt--referred to as recovery value buy-out with
write-off.  FSA has a third option when one of these two approaches
does not resolve a borrower's delinquency--debt settlement. 
Typically, this option involves writing off part or all of the unpaid
loans for borrowers who are no longer farming. 

FSA also incurs losses as a result of guaranteeing farm loans.  If a
borrower defaults, FSA reimburses the commercial lender for the
guaranteed portion of lost principal, accrued interest, and
liquidation costs. 


   STATUS OF FARM LOAN PORTFOLIO,
   AS OF SEPTEMBER 30, 1996
---------------------------------------------------------- Chapter 0:2

As of September 30, 1996, the outstanding principal on FSA's farm
loans--direct and guaranteed--totaled about $17 billion.  Of this
amount, delinquent borrowers held about $4 billion.  Table 1 shows
that direct loan delinquencies decreased while guaranteed loan
delinquencies increased between the end of fiscal years 1995 and
1996. 



                                         Table 1
                         
                         Outstanding Principal and Amount Owed by
                          Delinquent Borrowers, by Loan Type, as
                         of September 30, 1996, and September 30,
                                           1995

                                  (Dollars in millions)

                                          Owed by delinquent        Percentage owed by
              Outstanding principal           borrowers            delinquent borrowers
             ------------------------  ------------------------  ------------------------
Loan type                   Number of                 Number of  Percentage    Percentage
and year         Amount     borrowers      Amount     borrowers     of debt  of borrowers
-----------  ----------  ------------  ----------  ------------  ----------  ------------
Sept. 1996
Direct        $10,457.8       115,743    $3,578.1        24,326        34.2          21.0
Guaranteed      6,360.3        39,653       279.9         1,957         4.4           4.9
Total         $16,818.1     155,396\a    $3,858.0      26,283\a        22.9          16.9
Sept. 1995
Direct        $11,379.7       121,732    $4,627.5        29,676        40.7          24.4
Guaranteed      5,932.6        38,671       217.7         1,567         3.7           4.1
Total         $17,312.3     160,403\a    $4,845.2      31,243\a        28.0          19.5
-----------------------------------------------------------------------------------------
\a The total number of borrowers may include some borrowers who are
counted twice because they have both direct and guaranteed loans. 

Source:  GAO/RCED-97-35. 

The amount of direct loans owed by delinquent borrowers varied by
state.  As of September 30, 1996, nine states had borrowers who held
at least $100 million in delinquent loans.  Collectively, these
states had about 51 percent of the total $3.6 billion held by
delinquent borrowers.  Specifically, delinquent borrowers in Texas
owed $483 million, those in Mississippi owed $255 million, and those
in California owed $223 million.  Delinquent borrowers in Oklahoma,
North Dakota, New York, Louisiana, Minnesota, and South Dakota owed
more than $100 million but less than $200 million. 

On guaranteed loans, borrowers in nine states accounted for about 64
percent of the delinquency.  Specifically, as of September 30, 1996,
delinquent borrowers in Oklahoma owed $43 million, and those in Texas
owed $38 million.  Delinquent borrowers in Nebraska, Louisiana,
Minnesota, Wisconsin, Kansas, South Dakota, and Iowa owed more than
$10 million but less than $20 million.  Additionally, much of the
increase in delinquencies on guaranteed loans in fiscal year 1996
involved borrowers in three states--Texas, Oklahoma, and Louisiana. 

Table 2 shows that during fiscal year 1996, FSA incurred losses of
about $1.1 billion on direct loans (principal and interest) and about
$42 million on guaranteed loans. 



                                Table 2
                
                FSA's Direct and Guaranteed Loan Losses,
                            Fiscal Year 1996

                         (Dollars in millions)

                                                             Number of
Loan type                               Amount of loss       borrowers
--------------------------------------  --------------  --------------
Direct
Restructured with write-down                     $26.8             254
Recovery value buy-out with write-off             50.9             253
Debt settled with write-off                    1,020.9           2,887
======================================================================
Subtotal                                      $1,098.6           3,394
Guaranteed
Payments on loss claims                           41.9             545
======================================================================
Total                                         $1,140.5           3,939
----------------------------------------------------------------------
Source:  GAO/RCED-97-35. 

Borrowers in four states accounted for slightly more than half of the
total losses on FSA's direct loans.  Specifically, during fiscal year
1996, FSA reduced or forgave $224 million on direct loans for
borrowers in California, $135 million for those in Mississippi, $103
million for those in Texas, and $101 million for those in Louisiana. 

On guaranteed loans, the highest amount of loss payments involved
borrowers in two states--$6.8 million in Louisiana and $5.5 million
in Oklahoma. 


   FAIR ACT'S CHANGES TO THE FARM
   LOAN PROGRAMS
---------------------------------------------------------- Chapter 0:3

Title VI of the FAIR Act contains fundamental reforms to the farm
loan programs that are intended to reduce the risks associated with
the programs and clarify FSA's basic lending mission.  In particular,
the act modifies or eliminates certain lending and servicing policies
that had, in the past, increased the risk of loss.  Specifically, the
act, among other things, does the following: 

  -- Prohibits borrowers who are delinquent on FSA direct or
     guaranteed farm loans from obtaining direct farm operating
     loans. 

  -- Generally prohibits borrowers whose past default resulted in
     loan losses from obtaining new direct or guaranteed farm loans. 
     Specifically, FSA may not make a new loan to a borrower if the
     borrower's prior direct loans were reduced or forgiven or if a
     payment had to be made to a commercial lender on the borrower's
     prior guaranteed loan.  One exception to this prohibition is
     allowed:  A direct or guaranteed farm operating loan for paying
     annual farm or ranch operating expenses--that is, for purchasing
     seed, feed, fertilizer, insecticide, and farm or ranch supplies,
     and for meeting other essential farm or ranch operating
     expenses, including cash rent--may be made to a borrower whose
     restructuring resulted in debt forgiveness. 

  -- Limits borrowers to one instance of debt forgiveness on direct
     loans. 

  -- Requires borrowers, as a measure of protection on loans made by
     FSA, to have, or agree to obtain, hazard insurance on the
     property that they acquire with farm ownership and operating
     loans.  In addition, as a condition for getting disaster
     emergency loans, applicants are required to have had hazard
     insurance on property that was damaged or destroyed.  The
     Secretary of Agriculture is to establish the levels of insurance
     that borrowers need to obtain on property acquired with farm
     loans and the level of insurance that borrowers needed to have
     had as a condition for obtaining an emergency loan. 

  -- Establishes a maximum indebtedness level of $500,000 for
     disaster emergency loans. 

  -- Allows FSA to (1) contract with commercial lenders to service
     the farm loan portfolio (2) use private collection agencies to
     assist in collecting delinquent amounts. 

  -- Requires borrowers to pay at least a portion of the interest on
     their loans as a condition for having the terms of their loans
     rescheduled or reamortized.  In particular, borrowers who are
     unable to make their farm loan payments, but who are not 90 days
     past due, can have the terms of their farm loans rescheduled or
     reamortized if they pay a portion of the interest that is due on
     the loans.  The Secretary of Agriculture is to establish the
     level of interest payments that borrowers need to make. 

The FAIR Act also clarifies FSA's basic lending mission by, among
other things, emphasizing that its assistance is to be temporary. 
Additionally, the act builds upon other legislation enacted earlier
in the 1990s that emphasized helping beginning farmers and ranchers
get started and progress in farming or ranching.  The act also
reinforces past congressional emphasis on shifting farm lending from
direct loans to guaranteed loans.  More specifically, the act, among
other things, does the following: 

  -- Sets term limits for the receipt of direct farm ownership and
     operating loans.  A person must have operated a farm or ranch
     for at least 3 years to be eligible to obtain a direct farm
     ownership loan.  A borrower can obtain direct farm ownership
     loans during a 10-year period that starts when the person first
     obtains a farm ownership loan.  A borrower can obtain direct
     farm operating loans during 7 years; these may be consecutive,
     nonconsecutive, or a combination of consecutive and
     nonconsecutive years. 

  -- Encourages the graduation of direct loan borrowers to
     conventional credit by allowing a 95-percent guarantee on loans
     made by commercial lenders to refinance the existing direct
     loans that borrowers have. 

  -- Increases the guarantee percentage allowed on loans made by
     commercial lenders to beginning farmers and ranchers who
     participate in a farm ownership loan program that is targeted to
     them. 

  -- Targets farm properties that are in FSA's inventory for sale to
     beginning farmers and ranchers.  If a beginning farmer or
     rancher does not offer to acquire the property at current market
     value within 75 days of FSA's acquisition, then the properties
     are to be disposed of competitively. 

The changes in the FAIR Act address many of the problems that we have
reported on in the past.  While it is too early to gauge their impact
on the financial condition of the portfolio, we believe that, if
properly implemented, they will reduce the financial risk associated
with the farm lending programs.  We plan to continue to monitor and
report on the USDA's progress in implementing the FAIR Act's credit
provisions. 


-------------------------------------------------------- Chapter 0:3.1

This concludes our prepared statement. 


*** End of document. ***