[Audit Report on the Administration of Delinquent Loans by the Phoenix Area Office, Bureau of Indian Affairs]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 96-I-1266

Title: Audit Report on the Administration of Delinquent Loans by
       the Phoenix Area Office, Bureau of Indian Affairs

Date: September 30, 1996

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United States Department of the Interior
OFFICE OF THE INSPECTOR GENERAL
Washington, D.C. 20240

MEMORANDUM

TO:                 The Secretary

FROM:               Wilma A. Lewis


SUBJECT SUMMARY:    Final Audit Report for Your Information -
     "Administration of Delinquent Loans by the Phoenix Area
     Office, Bureau of Indian Affairs" (No. 96-I-1266)

Attached for your information is a copy of the subject final report. The objective of
the audit was to determine whether the Bureau of Indian Affairs Phoenix Area
Office adequately pursued amounts due on delinquent direct and assigned loans.

We concluded that the Area Office did not adequately administer delinquent loans.
Specifically, the Area Office: (1) did not aggressively pursue the collection of
delinquent loans; (2) did not adequately secure its interest in, appraise, and liquidate
collateral for loans; and (3) canceled or waived interest on a direct loan without
proper authority. As a result, the Area Office may have lost the opportunity to
collect unpaid delinquent loan balances and collateral pledged as security for these
loans. These deficiencies existed because required debt collection practices and
collateral liquidation were not routinely performed, primarily because experienced
Area Office credit staff retired and were not replaced.

The Bureau concurred with our recommendations regarding implementation of debt
collection procedures but nonconcurred with our recommendations regarding
collateral for guaranteed loans and renegotiation of a loan where interest was
waived.  We requested the Bureau to reconsider its responses to the
recommendations with which it nonconcurred.

If you have any questions concerning this matter, please contact me at (202)
208-5745 or Mr. Robert J. Williams, Acting Assistant Inspector General for Audits,
at (202) 208-4252.

Attachment

 

C-IN-BIA-002-96
United States Department of the Interior
OFFICE OF THE INSPECTOR GENERAL
Washington, D.C. 20240

AUDIT REPORT

Memorandum

To:    Assistant Secretary for Indian Affairs

From:  Robert J. Williams

Subject:  Audit Report on the Administration of Delinquent Loans by the
 Phoenix Area Office, Bureau of Indian Affairs (No. 96-I-1266)

INTRODUCTION

This report presents the results of our audit of the administration of delinquent loans
by the Bureau of Indian Affairs Phoenix Area Office. The objective of the audit was
to determine whether the Area Office adequately pursued amounts due on
delinquent direct and assigned loans.

BACKGROUND

The Indian Reorganization Act of 1934 created an Indian revolving loan fund to
serve the financing needs of individual Indians and tribes. On April 12, 1974, the
Congress passed the Indian Financing Act of 1974 (Public Law 93-262, as amended)
to promote economic development activities for individual Indians and Indian
enterprises by providing funding that is not available from the private sector. Title
I of the Act expanded the Indian revolving loan fund by authorizing additional
funding for direct loans to individual Indians and Indian enterprises for many
different economic development opportunities. However, the Congress eliminated
funding for direct loans in fiscal year 1995. Title II of the Act established the Indian
Loan Guaranty Fund for the purpose of guaranteeing loans made by financial
institutions to individual Indians and Indian enterprises. The Bureau is authorized
to approve and to guarantee up to 90 percent of an outstanding balance on these
loans. Guaranteed loans in default become assigned loans when the Bureau pays the
loan guaranty. The Bureau is then responsible for collecting assigned loan amounts
from the borrowers who defaulted.

 


The Bureau's Office of Economic Development provides policy and guidance on the
loan program to area and agency credit personnel and evaluates and monitors area
and agency office programs. The program is administered through 12 area offices
and many agencies nationwide. Area credit and finance personnel are responsible
for monitoring daily activities of the loan program. Agency credit personnel are
responsible for reviewing initial loan applications, with guidance, support, and
assistance from area credit officers.

As of September 30, 1995, the Phoenix Area Office had 45 outstanding direct loans,
with unpaid principal balances totaling $13.5 million. Delinquencies existed on 20
of these loans, with unpaid principal balances totaling $7.6 million. The Area Office
also had three assigned loans, with unpaid balances totaling $9.7 million. One of
those loans was delinquent, with an unpaid principal balance of about $7.1 million.

SCOPE OF AUDIT

We reviewed 30 direct loans and 3 assigned loans. Of the 33 loans reviewed, 17
direct loans, with unpaid principal of about $7.6 million, and 1 assigned loan, with
unpaid principal of about $7.1 million, were delinquent at the time of our review.l

This audit was conducted in accordance with the "Government Auditing Standards,"
issued by the Comptroller General of the United States. Accordingly, we included
such tests of records and other auditing procedures that were considered necessary
under the circumstances to accomplish the audit objective.

The audit was performed during October 1995 through January 1996 at the Phoenix
Area Office. As part of this audit, we evaluated the system of internal controls over
loan program collection functions to the extent we considered necessary. The
internal control weaknesses identified are discussed in the Results of Audit section
of this report. If implemented, the recommendations should improve the internal
controls.

We reviewed the Department of the Interior Annual Statement and Report, required
by the Federal Managers' Financial Integrity Act, for fiscal year 1994. This report
identified a material weakness in the Bureau's cash management and debt collection.
Specifically, the weakness included inadequate, obsolete, outdated, or otherwise
insufficient regulations, procedures, and guidelines to properly administer cash
management operations and debt collection functions. In addition, the report was
critical of the Bureau's accounting system because, according to the report, the
system could not accommodate accounts receivable accounting, which was further
adversely impacted by inadequate staffing. However, the report stated that the
weaknesses relating to the improper filing of security documents and to the
foreclosure and liquidation of collateral in a timely manner had been corrected. We

1The three outstanding delinquent direct loans not reviewed totaled about $26,000.

2

 




considered the impact of these reported material weaknesses during the conduct of
our audit.

PRIOR AUDIT COVERAGE

Neither the Office of Inspector General nor the General Accounting Office has
issued any audit reports within the past 5 years that addressed the Phoenix Area
Office's collection of delinquent loans. However, the Office of Inspector General
issued three audit reports, one on the Albuquerque Area Office and two on the
Minneapolis Area Office, that addressed selected aspects of debt collection on loans
as follows:

  - The audit report titled "Business Enterprise Development, Albuquerque
Area Office, Bureau of Indian Affairs" (No. 92-I-1195) was issued on August 27,
1992. The report stated that the Area Office: (1) made follow-on loans either to
Indian enterprises that had defaulted on prior loans or to Indian enterprises whose
businesses were incapable of generating sufficient profits to repay the loans; (2) had
not secured available assets as collateral to offset any future direct loan losses; and
(3) did not aggressively pursue delinquent loan payments.

  - The audit report titled "Selected Loans Related to the Guaranteed Loan
Program, Minneapolis Area Office, Bureau of Indian Affairs" (No. 92-I-1289) was
issued on September 12, 1992. The report stated that the Bureau had not secured
or maintained sufficient collateral for two assigned loans.

  - The audit report titled "Business Enterprise Development, Minneapolis Area
Office, Bureau of Indian Affairs" (No. 93-I-794) was issued on March 29, 1993. The
report stated that the Bureau: (1) wrote off delinquent loans to Indian tribes that
had the economic resources to pay the loans; (2) did not secure collateral and did
not foreclose and liquidate collateral in a timely manner; and (3) did not aggressively
pursue the collection of delinquent loans.

RESULTS OF AUDIT

The Phoenix Area Office did not adequately administer delinquent loans.
Specifically, we found that the Area Office: (1) did not aggressively pursue the
collection of delinquent loans; (2) did not adequately secure its interest in, appraise,
and liquidate collateral for loans; and (3) canceled or waived interest on a direct
loan without proper authority. Prescribed debt collection procedures are detailed
in the Code of Federal Regulations (Title 25), the Treasury Financial Manual and
accompanying guidelines, and the Departmental Manual. However, required debt
collection practices and collateral liquidation were not routinely performed primarily
because experienced Area Office credit staff retired and were not replaced. As a
result, the Area Office may have lost the opportunity to collect unpaid delinquent
loan balances and collateral pledged as security for these loans.

3

 


Debt Collection

The Area Office did not aggressively attempt to collect delinquent loans.
Specifically, for the 18 delinquent loans reviewed, we found that the Area Office did
not pursue collection of the loans beyond issuing letters demanding payment. As a
result, the Area Office may have jeopardized the collection of $7.6 million for
delinquent direct loans and $7.1 million for a delinquent assigned loan as of
September 30, 1995.

The Department of the Treasury Asset Management Manual, Volume 1, Chapter 4,
and the Departmental Manual (344 DM 10) set forth the procedures that a Federal
agency is to follow to assist in the collection of delinquent debts as follows: (1)
issuing three progressively stronger letters at specified intervals demanding payment;
(2) reporting the delinquency to a credit bureau; (3) obtaining administrative salary
and tax refund offsets as applicable; (4) referring delinquent debts to collection
agencies; (5) referring delinquent debts to the Department of the Interior's Office
of the Solicitor and to the Department of Justice as applicable; and (6) liquidating
collateral. In addition to Treasury's procedures, the Office of the Solicitor has
determined that all financial resources of the borrower need to be considered in
order to determine whether collection action is feasible.

Our review disclosed that demand letters were generally issued for the delinquent
loans. However, we found that the Area Office had not complied with any of the
other debt collection procedures recommended by the Treasury. We also noted two
instances in which tribes that were delinquent on loan payments had other assets that
could have been pursued to liquidate the delinquent debt. In one instance, a tribe
had delinquent debt of approximately $824,000 and an unreserved, undesignated fund
equity of $13.2 million. In the other instance, a tribe had accumulated net earnings
of $2.7 million generated by an enterprise that had $2.2 million in delinquent debt.
We believe that the Area Office should pursue collection of the delinquent loans
from these resources.

Collateral

The Area Office did not always secure its interests in collateral pledged for loans,
did not always appraise the pledged collateral to ensure that it was adequate to
protect the Bureau's interests in case the borrower defaulted, and did not liquidate
collateral when loans became delinquent. Our review disclosed 11 loans for which
collateral was not adequately secured and 10 loans for which collateral was not
appraised. We found no instances where the Area Office attempted to liquidate the
collateral after these loans became delinquent. Also, our review disclosed one
instance where collateral in the possession of the Area Office was released to the
borrower, even though the loan was delinquent.

The Code of Federal Regulations (25 CFR 101.13(i)) requires that security
documents or financing statements be filed or recorded in accordance with applicable

4

 


state or Federal laws except for those customarily filed in Bureau offices. According
to the Code, if a borrower does not comply with the loan agreement, the Bureau
may take possession of all collateral given as security and liquidate the collateral if
necessary (25 CFR 101.15).

The Area Office did not adequately manage the collateral of tribal enterprises that
went out of business. For example:

operation of a store on the Papago Indian Reservation. The borrower pledged land
and an automobile as collateral for this loan. However, the Area Office never filed
the security documents needed to establish a right to the collateral in case of default.
The borrower, unable to make the required loan repayments, informed the Papago
Agency Office in October 1992 that he was filing for bankruptcy. In February 1993,
the bankruptcy judge released the borrower from all dischargeable debts. Because
the Area Office did not secure its interest in the collateral, it could not liquidate the
collateral to collect the unpaid loan principal of about $42,000.

   In March 1992, a direct loan of over $1.5 million was made to a tribal
enterprise to purchase additional cattle and to expand cropland to improve an
existing feedlot operation. For collateral, the tribe pledged income from selected
trust lands and all livestock, equipment, and fixtures located on these lands.
Financing statements were filed by the Western Nevada Agency Office to secure the
Bureau's position in this collateral. However, the Area Office did not appraise the
collateral when it was pledged to determine whether it was adequate to cover the
loan amount in case of default. The tribe made loan payments until May 1994, when
the unpaid loan principal was about $1.4 million. In April 1994, the Area Office
directed that the feedlot be appraised. The appraised value was $360,000, which was
significantly lower than the unpaid loan principal. The Area Office did not attempt
to foreclose on the collateral. At the December 1995 exit conference, the Area
Director estimated the value of the available collateral to be less than $70,000.

   In January 1989, a direct loan of $100,000 was made to an individual for a
home construction business. The Area Office increased the loan amount to $350,000
and $505,000 in December 1989 and June 1992, respectively, even though the
borrower never made a payment against the principal. As collateral for the loan, all
of which was adequately secured by the Area Office, the borrower pledged a total
of 5 acres of allotted lands within the Salt River Pima-Maricopa Indian Community.
The Area Office did not appraise the land when the collateral was pledged. In
September 1994, the Area Office requested an appraisal of the land. The appraisal
estimated the land at $115,500, or $389,500 less than the unpaid principal of the
loan.

   In August 1988, a direct loan of $600,000 was made to a partnership that had
majority ownership by a tribal enterprise to manufacture machine parts and electrical
wire harnesses. In June 1990, the loan was increased by $500,000. Collateral
pledged, which was secured by the Area Office, included equipment purchased with

5

 
loan proceeds and other enterprise equipment. When the loan was increased, the
Area Office required additional collateral and the tribe pledged a special deposit
account of approximately $619,000, which was jointly controlled by the tribe and the
Uintah and Ouray Agency Office. The tribe also pledged royalties from an oil and
gas lease of approximately $2,850 per month. However, the Area Office permitted
the tribe to use these royalties rather than to escrow them until the loan was repaid.

The tribe subsequently had cash flow problems, which caused the Agency Office to
make some of the loan payments from the special deposit account. Because of these
problems, the tribe asked that the special deposit account be released and the loan
be restructured.  The loan, with an unpaid principal of about $820,000, was
restructured in July 1994, which deferred the next loan payment until July 1995. In
August 1994, the Area Office released the special deposit account with a balance of
$586,000 and allowed the tribe to substitute, as collateral, income to be generated
from timber sales beginning in 1994 through 1998. At the time of our review, no
timber sales had occurred, and the tribe had not made the July 1995 loan payment
of $199,000. Since the special deposit account had been released and the royalty
income had been expended, there was no collateral readily available for the Area
Office to pursue to cover the delinquent loan payment.

Interest Cancellation and Waiver

The Area Office improperly canceled about $1.9 million in accrued interest and
waived about $1.5 million in future interest on a loan to the Fort Mojave Tribe for
its farming operation. The Code of Federal Regulations (25 CFR 101.11) requires
that interest be charged on direct loans at a rate determined by the Secretary of the
Treasury. Further, the Departmental Manual (Parts 209 and 230) states that Area
Directors may not cancel or waive interest on Bureau loans.

In the late 1970s, direct loans totaling about $3.2 million were made to the Tribe for
its farming operation, However, because of the Tribe's financial difficulties, the
loans were restructured in May 1983, which resulted in payments being deferred
except for interest until 1996. In addition, a separate non-interest-bearing note was
executed for about $1.5 million to cover all accrued interest on the original loan
through December 31, 1984, with repayment to begin in 1986. These restructuring
actions were approved by the Deputy Assistant Secretary for Indian Affairs.

The financial prospects of the farming operation did not improve, and in September
1987, the loan was again restructured (Modification 4) by canceling all accrued
interest through February 19, 1987, which amounted to about $1.9 million, and by
approving a non-interest-bearing promissory note for the remaining unpaid principal
of $3,060,000. The restructuring, which was approved by the Area Director,
stipulated that repayment be renegotiated again before January 1, 1993. In January
1992, when the loan principal had been paid down to $2,660,000, the loan was again
restructured (Modification 5) and a new promissory note was executed that waived
interest (estimated to be about $1.5 million) until January 1997, when the remaining

6

 


unpaid principal would accrue interest at 6 percent.  These actions were also
approved by the Area Director.

However, our review of the Tribe's audited and unaudited financial statements for
1990 through 1994 noted that the farming operation had become a profitable
venture, with accumulated retained earnings in excess of $2.7 million at December
31, 1994. Therefore, we concluded not only that interest totaling about $3.4 million
was canceled and waived without proper authority but also that these actions were
unwarranted based upon the financial position of the Tribe's farming operation.

Area Office Staffing

During fiscal years 1994 and 1995, two experienced area credit office personnel
retired, leaving one individual responsible for making and servicing loans and for
collecting debts. At the time of our audit, the two positions had not been filled.
However, we also noted that the work load in the credit program will decline
because the Congress eliminated funding for the direct loan program starting in fiscal
year 1995. We believe that if the current staff places emphasis on monitoring
current loans, pursuing delinquent loans, and implementing existing debt collection
procedures, the Phoenix Area credit program will be more effective.

Recommendations

We recommend that the Assistant Secretary for Indian Affairs ensure that the
Phoenix Area Office:

  1. Implements debt collection procedures required by the Code of Federal
Regulations, the Treasury Financial Manual, and the Departmental Manual.

  2. Obtains access to other assets to liquidate delinquent loan debt in those
cases where borrowers have sufficient financial resources to pay their debt
obligations.

  3. Adequately secures all collateral pledged on loans and maintains the
Bureau's position to that collateral until the loan is fully liquidated.

  4. Requires that all collateral be appraised and that collateral be of sufficient
value to cover the unpaid loan balance in case the borrower defaults.

  5. Liquidates collateral for delinquent unpaid loans when other collection
efforts have not been effective.

6. Complies with proper delegations of authority when regulations are waived.

  7. Renegotiates the repayment provisions of the loan for the Fort Mojave
Tribe's farming operation to require the payment of interest.

7

 
Bureau of Indian Affairs Response and Office of Inspector General
Reply

The July 16, 1996, response (Appendix2) to the draft report from the Acting
Assistant Secretary for Indian Affairs expressed concurrence with Recommendations
1, 3, and 6; partial concurrence with Recommendations 2, 4, and 5; and
nonconcurrence with Recommendation 7. Based on the response, we consider
Recommendations 1, 3, and 6 resolved and implemented; Recommendation 5
resolved but not implemented; and Recommendations 2, 4, and 7 unresolved.
Accordingly, the unimplemented recommendation will be referred to the Assistant
Secretary for Policy, Management and Budget for tracking of implementation, and
the Bureau is requested to reconsider the unresolved recommendations (see
Appendix 3).

Recommendation 2. Partial concurrence.

  Bureau Response. The Bureau stated that it has access only to assets that were
pledged as collateral in loan agreements. The Bureau further stated that it "no
longer has authority" over tribal or individual Indian trust funds because
responsibility for these funds has been transferred to the Office of Special Trustee.
The Bureau said, however, that the Phoenix Area Office was working with the Field
Solicitor and the Office of Special Trustee in an attempt to use Individual Indian
Money accounts of the Tribe to repay the delinquent loan.

  Office of Inspector General Reply. We acknowledge that the Bureau's actions
are limited with respect to trust funds; however, we do not agree that the Bureau has
access only to assets that were pledged as collateral in the loan agreements. In a
December 29, 1989, memorandum to the Area Director, Minneapolis Area Office,
Bureau of Indian Affairs, the Office of the Field Solicitor stated, in reference to loan
debt collection, that "the Secretary must examine the financial condition of the
debtor." The Field Solicitor further stated, "It [cancellation of loan indebtedness]
should be based on a factual determination of the financial capability of the debtor."
Accordingly, the Bureau should consider all of the financial resources of a borrower
when it pursues the collection of delinquent loans.

Recommendation 4. Partial concurrence.

  Bureau Response. The response stated that collateral was applicable only to
direct loans and that fiscal year 1995 was the last year in which the Bureau received
funding for direct loans.

  Office of Inspector General Reply. We disagree that collateral applies only to
direct loans. Collateral is also applicable to guaranteed loans. The Code of Federal
Regulations (25 CFR 103.27) requires lenders of guaranteed loans to obtain security
(collateral) if it is available from borrowers to protect the loan without consideration
of the guarantee. The Code (25 CFR 103.36) further states that the lender is to

8

 


   

subrogate its rights and assign the security for the loan to the Government upon
reimbursement for the guaranteed portion of the loan. Therefore, the Bureau
should ensure that collateral for guaranteed loans is also adequately appraised and
adequately secured.

Recommendation 6. Concurrence.

  Bureau Response. Although the Bureau concurred with this recommendation,
it noted that an April 4, 1986, memorandum from the Acting Deputy to the Assistant
Secretary for Indian Affairs (Operations) to the Phoenix Area Director (Attachment
3 to the Bureau's response) "delegated to the Phoenix Area Director the authority
to waive regulations and negotiate loan modification No. 4, which waived previously
owed interest and put the principal into a non-interest bearing loan."

  Office of Inspector General Reply.  We do not believe that the April 4
memorandum delegated authority to the Phoenix Area Director to waive interest
related to this loan. The memorandum specified that the delegation of authority was
limited to: (1) approving the farm's revised plan of operation and management
contract; (2) subordinating loan security; and (3) postponing a loan payment that was
due on January 1, 1986. The memorandum also stated, "If it becomes necessary to
further modify this loan, please advise."

Recommendation 7. Nonconcurrence.

  Bureau Response. The Bureau nonconcurred with this recommendation, stating
that the tribal farming operation had a "history of financial difficulties" and that
restructuring the loan "allowed the enterprise to recover and become a profitable
enterprise."

  Office of Inspector General Reply. The Bureau's actions on this loan have
resulted in all interest being canceled or waived from the loan's inception in 1976
through 1996, a period of about 20 years. These actions were accomplished through
numerous restructurings of the loan, the most recent of which occurred in 1992,
when interest was waived through December 1996. We do not consider these actions
to be a prudent business practice because the tribal farming enterprise has reported
increased annual profits since 1990. Therefore, this enterprise has had and continues
to have the financial resources to pay interest on the loan.

General Comments on Audit Report

The Bureau also stated that it was aware of the problems in the loan program of the
Phoenix Area Office and that it initiated corrective actions before commencement
of the audit. The Bureau further stated that its Office of Economic Development
reviewed the Phoenix Area Office's delinquent loan portfolios and issued a report
in May 1995 that contained "many of the findings" that were in our audit report and

 


that made recommendations to improve the Area Office's management of the
delinquent loan program.

Although the Bureau stated that the report was distributed to each area office, we
found that the problems related to delinquent loans continued to exist at the Phoenix
Area Office and that none of the six recommendations in the May 1995 report had
been implemented at the time our fieldwork was completed in December 1995.

In accordance with the Departmental Manual (360 DM 5.3), we are requesting a
written response to this report by December 6, 1996. The response should provide
the information requested in Appendix 3.

The legislation, as amended, creating the Office of Inspector General requires
semiannual reporting to the Congress on all audit reports issued, the monetary
impact of audit findings (Appendix 1), actions taken to implement audit
recommendations, and identification of each significant recommendation on which
corrective action has not been taken.

We appreciate the cooperation of Bureau personnel in the conduct of our audit.

10

 
APPENDIX 1

CLASSIFICATION OF MONETARY AMOUNTS

                     Funds To Be Put
Finding Area                 To Better Use

Interest Waiver                 $3.4 million

11

 
APPENDIX 2
Page 1 of 7



Memorandum

To:

From:


Subject:

The subject audit report addresses the adequacy of delinquent loan administration in the Bureau's

Phoenix Area Office. The Bureau was aware of the problems in the loan program identified by
the
Office of Inspector General (OIG) and also knew that problems existed in several other Area
Offices.
Corrective actions were initiated bureau-wide before commencement of the subject audit, and the
Office of Economic Development (OED) has been coordinating these efforts.

Prior to the issuance of the subject draft audit report. the OED took the following actions to
improve
program and collateral management:

1)   Guaranty ceiling allocations for Fiscal Year 1995 were made only to those Areas which
  demonstrated delinquency rates under 50 percent in their assigned guaranteed loan portfolio
  and their direct loan portfolio. In December 1995, a temporary loan guaranty ceiling
  moratorium for Fiscal Year 1996 was imposed on 11 of the 12 Area Offices because serious
  delinquency problems still existed. This moratorium was lifted on June 5, 1996.

2)   The Bureau began reviewing all Area Office delinquent loan portfolios in April 1994 and
  concluded the reviews in August 1995. In May 1995, the OED issued a report on Phoenix
  Area's delinquent loan portfolio, Many of the findings in the subject OIG draft audit report
  were also contained in these review reports.  Each Area Office received a report that
  contained facts, findings, and recommendations for improved management of the delinquent
  loan program.

3)   In August 1995, the U. S. Department of the Treasury's Asset Management Manual, Volume
  1, "Managing Federal Receivables," was  distributed to all Area Offices and they were directed
  to use this as the Bureau's official guide in collection of delinquent debts.

12

 
Responses to Report Recommendations:

APPENDIX 2
Page 2 of 7

Recommendation No. 1: Implement debt collection procedures required by the Code of Federal
Regulations, the Treasury Financial Manual, and the Departmental Manual.

Response: The Bureau concurs. The Phoenix Area Office reports that they are following the
Code
of Federal Regulations (CFR) and the Treasury Financial Manual (TFM). Meeting the
requirements
of the TFM will also meet the requirements of the Departmental Manual. The Bureau is currently
negotiating a Memorandum of Understanding with the Department of Treasury for debt
collection
management services.

It is acknowledged in the report that the findings are a direct result of the retirement of
experienced
Area Office credit staff who were not replaced. Filling the Area Credit Officer position was
hindered
by the Reduction-in-Force and the subsequent hiring freeze because of delays in appropriations.
The
Phoenix Area plans to advertise the position in July 1996 with selection scheduled for September
1996. Filling this critical position will provide adequate staff to ensure that Treasury and
Departmental guidance continue to be followed. We consider this recommendation implemented.

Recommendation No. 2: Obtain access to other assets to liquidate delinquent loan debt in those
cases
where borrowers have sufficient financial resources to pay their debt obligations.

Response: The Bureau partially concurs. Generally, the Bureau can obtain access only to assets
pledged as collateral in the loan agreement. The Phoenix Area Office is currently working with
the
Field Solicitor and the Office of Special Trustee in an attempt to use Individual Indian Money
accounts of the Tribe to repay the delinquent loan (Attachments 1 and 2). As indicated in the
draft
letter from the Special Trustee, the Bureau of Indian Affairs no longer has authority over any
tribal
or individual Indian trust finds, as these functions have been transferred to the Special Trustee. In
requesting that the Special Trustee release the funds, the Bureau has done all that is within its
authority in this matter. We, therefore, consider this recommendation resolved and implemented.
Any recommendations for further action which involve the use of trust funds should be directed
to
the Office of the Special Trustee.

Recommendation No. 3: Adequately secure all collateral pledged on loans and maintain the
Bureau's
position to that collateral until the loan is fully liquidated.

Response: The Bureau concurs. The Phoenix Area reports that staff can ensure security filings
are
current for all direct loans administered by the Phoenix Area Office. This audit finding related to
a
loan to an individual which was made at the same time the Bureau transferred responsibility for
the
credit program to the tribe under a P.L. 93-638 contract. The oversight in failing to secure the
collateral occurred during the transition period. The borrower has since filed for bankruptcy and
all
debts were discharged by the courts. Training has been provided to the tribal staff, and they
understand the requirement for securing collateral. We consider this recommendation to be
implemented.

13

 
APPENDIX 2
Page 3 of 7

Recommendation No. 4: Require that all collateral be appraised and that collateral be of
sufficient
value to cover the unpaid loan balance in case the borrower defaults.

Response: The Bureau partially concurs. Collateral is only an issue for the Bureau on direct
loans,
and Fiscal Year 1995 was the last year finding was provided for new direct loans. Exceptions to
collateral requirements are contained in 25 CFR 101.13(a) which states that ".. lack of security
will
not preclude the making of a loan.. .".

For existing loans, appraisal of the collateral would have occurred at the time of loan application,
and
additional collateral can be added only with the concurrence of the borrower. We will continue to
ensure that security filings are updated and collateral inspections conducted for existing direct
loans
until they are paid in fill.

For delinquent loans, the Bureau could negotiate with the borrower to provide additional
collateral
to cover the unpaid loan balance. The borrower, however, may be unwilling to renegotiate
because
it would be financially beneficial to default or because there are no additional assets to pledge.

We consider this recommendation implemented.

Recommendation No. 5: Liquidate collateral for delinquent unpaid loans when other collection
efforts have not been effective.

Response: The Bureau partially concurs. If a borrower has only one loan, we concur that
collateral
should be liquidated when other collection efforts are not successful. If a borrower has more than
one loan, however, we need to consider the impact liquidating collateral might have on the
continuing
operation of enterprises operated under other loans.

The May 1995 OED review report on the Phoenix Area Credit Office recommended that the
Area
Director conduct collateral inspections on all delinquent loans. Collateral inspections have been
completed on four delinquent loans, appraisals of collateral have been completed on three
delinquent
loans, and collateral was liquidated for one loan. The Phoenix Area is continuing to make
progress
on reviews of the remaining delinquent loans.

Under the Memorandum of Understanding, Treasury will also be able to liquidate collateral on
delinquent loans.

Responsible Person:       Phoenix Area Director
Estimated Date of Completion:   December 31, 1996

Recommendation No. 6: Comply with proper delegations of authority when regulations are
waived.



Response: The Bureau concurs. This recommendation resulted from the interest waivers granted
by the Phoenix Area Director to the Fort Mojave Tribe.

14

 
APPENDIX 2
Page 4 of 7

On Apri1 4, 1986, the Deputy to the Assistant Secretary - Indian Affairs(Operations) delegated to
the Phoenix Area Director the authority to waive regulations and negotiate loan modification No.
4,
which waived previously owed interest and put the principal into a non-interest bearing loan
(Attachment 3). The Phoenix Area was aware that delegation of authority was required for
Modification No. 5, however, they believed that the delegation had been granted.

We consider this recommendation to be implemented.

Recommendation No. 7: Renegotiate the repayment provisions of the loan for the Fort Mojave
Tribe's farming operation to require the payment of interest.

Response: The Bureau does not concur. The tribal farming operation had a history of financial
difficulties. The restructuring of the loan allowed the enterprise to recover and become a
profitable
enterprise. Modification No. 5 already requires the Tribe to begin paying interest in January
1997.



   

Attachments

15

 
 
APPENDIX 2
Page 6 of 7

ATTACHMENT 2

17

 
18

 
APPENDIX 3




  STATUS OF AUDIT REPORT


Finding/Recommendation
  Reference        Status

RECOMMENDATIONS



     Action Required

1, 3, and 6     Implemented     No further action is
                  required.

5       Resolved; not    No further response to the
      Implemented     Office of Inspector General
                is required. The
                recommendation will be
                referred to the Assistant
                Secretary for Policy,
                Management and Budget
                for tracking of
                implementation.

2, 4, and 7

Unresolved

Reconsider each
recommendation, and
provide action plans that
include target dates and
titles of officials responsible
for implementation.

19

 
   SHOULD BE REPORTED TO
THE OFFICE OF INSPECTOR GENERAL BY:

Sending written documents to:             Calling:

Within the Continental United States

TDD for hearing impaired
(703) 235-9403 or
1-800-354-0996

Outside the Continental United States



 


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