Credit Management:

Deteriorating Credit Picture Emphasizes Importance of OMB's Nine-Point Program

AFMD-90-12: Published: Apr 16, 1990. Publicly Released: May 22, 1990.

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Pursuant to a congressional request, GAO provided information on five federal agencies': (1) changes in loans receivable data between fiscal years 1985 and 1988; and (2) activities to implement the Office of Management and Budget's (OMB) nine-point credit management program.

GAO found that, over the past several years, federal agencies have made progress in certain credit management areas, such as screening loan applicants, servicing loan accounts, and implementing debt collection procedures, but credit management programs have continued to deteriorate because agencies failed to: (1) check whether loan applicants were delinquent in paying taxes; (2) adequately monitor private lenders whose loans were guaranteed; (3) fully utilize private collection firms in the collection process; and (4) follow appropriate write-off procedures or report close-out accounts to the Internal Revenue Service (IRS) as income to the debtor. GAO also found that: (1) guaranteed loans increased 34 percent and defaulted guarantees increased 84 percent during fiscal year 1988; and (2) the Farmers Home Administration (FmHA) and Small Business Administration (SBA) understated loan delinquencies by about $9.5 billion and $200 million, respectively, because they did not report the entire amount of loans due over 180 days.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The recommendation is substantially addressed by the Debt Collection Improvement Act of 1996, which was passed April 26, 1996. The legislation addresses (1) through (8) above, except for one reference to IRS in (7). In regard to (7), the act, subsections (v) and (w), states that all appropriate debts will be referred to Treasury for the purpose of offsetting delinquent debtor's tax refunds, versus to IRS. The substitution of Treasury for IRS as the responsible party for IRS offsets is considered acceptable and in line with the intent of the recommendation.

    Matter: Because of the magnitude of the government's credit management problems, Congress should amend the Debt Collection Act to require agencies, where consistent with program legislation, to: (1) contract for debt collection services; (2) offset salaries of government employees who owe delinquent debts; (3) report information about an individual's delinquent debts to credit reporting agencies; (4) use administrative offset to recover delinquent debts; (5) prescreen loan applicants to determine credit worthiness, ability to repay, and if they owe delinquent debts to the federal government, including IRS; (6) deny credit to applicants who owe delinquent debt to the federal government; (7) refer all appropriate debts to IRS for the purpose of offsetting delinquent debtor's tax refunds; and (8) report closed out debts to IRS as income to the debtor. When enacting new credit programs or when reauthorizing existing programs, Congress should specify the applicability of those techniques.

  2. Status: Closed - Implemented

    Comments: The recommendation is addressed in the Debt Collection Improvement Act of 1996. Subsection (i) (1) of the act requires that the head of each agency shall require each person doing business with that agency to furnish to that agency such person's taxpayer identifying number. This provision of the act addresses the intent of the recommendation, therefore the action is considered completed.

    Matter: Congress should legislatively direct the Secretaries of Housing and Urban Development and Veterans Affairs and the Administrators, FmHA and SBA, in coordination with IRS, to test the use of consent forms for obtaining and using tax information in the loan-making process. The affected agencies could designate selected programs, including those with guaranteed loans, for participation in the test.

  3. Status: Closed - Implemented

    Comments: This action is considered completed. IRS Code section 26 USC 6103 (m)(2) states that the Secretary may, upon written request, disclose the mailing address of a taxpayer for use by officers, employees, or agents of a federal agency for purposes of locating such taxpayer to collect or compromise a federal claim against the taxpayer. The Debt Collection Improvement Act of 1996, in subsection (i)(1) requires agencies to disclose to a person required to furnish a taxpayer identifying number under this subsection its intent to use such number for purposes of collecting and reporting on any delinquent amounts arising out of such person's relationship with the government.

    Matter: Congress should require IRS to disclose address information to agencies pursuing debt collection activities under authorities in addition to the Federal Claims Collection Act.

  4. Status: Closed - Implemented

    Comments: The CFO Act of 1990 requires federal agencies to prepare audited financial statements on their commercial functions, which include making loans, loan guarantees, and other credit programs which should include a description and analysis of loan programs which should satisfy this recommendation.

    Matter: Congress should require agencies to provide it with: (1) audited financial information on their receivables and delinquencies; and (2) information on the implementation of the credit management techniques. Congress could use this, as well as information on agencies' efforts to implement the nine-point program, when making agency budgetary decisions.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: In the future, this recommendation will be tracked based on OMB's actions in this area.

    Recommendation: To improve loan origination procedures, the Director, OMB, and the Secretary of the Treasury, in conjunction with IRS and affected agencies, should resolve impediments to prescreening loan applicants against delinquent tax accounts.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: This action is considered completed. On April 26, 1996, the Debt Collection Improvement Act was passed. The act prevents borrowers from obtaining federal credit if the borrower is delinquent on other federal loans. Internal Revenue Code section 26 USC 6103 (l) (3) states, "In general, upon written request, the Secretary may disclose to the head of the Federal agency administering any included Federal loan program whether or not an applicant for a loan under such program has a tax delinquent account." This provision is restricted to determining the creditworthiness of the applicant for the loan in question. The Debt Collection Improvement Act expands the IRS provision to all federal loan programs and eliminates the limitation that application of the screening provision substantially prevent or reduce future delinquencies under such programs thereby resolving this previous impediment to prescreen applicants.

    Recommendation: To improve loan origination procedures, the Director, OMB, and the Secretary of the Treasury, in conjunction with IRS and affected agencies, should resolve impediments to prescreening loan applicants against delinquent tax accounts.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  3. Status: Closed - Implemented

    Comments: FmHA has adopted and in summer 1994 began using the "Uniform Residential Loan Application" developed and used by Fannie Mae and other government agencies and GSEs. Page 3 of the form has the question about delinquency on federal debt. FmHA was previously in compliance with this requirement for its other loan programs.

    Recommendation: The Secretary of Education and the Administrator, FmHA, should require program managers or private lenders to modify loan applications to include an applicant's certification that he or she is not delinquent on federal debt.

    Agency Affected: Department of Agriculture: Farmers Home Administration

  4. Status: Closed - Implemented

    Comments: Final regulations addressing this recommendation were published in December 1992. A task force is developing a common form to be used by all guaranty agencies. According to Education, this form was approved on April 16, 1993, and disseminated to program participants for use.

    Recommendation: The Secretary of Education and the Administrator, FmHA, should require program managers or private lenders to modify loan applications to include an applicant's certification that he or she is not delinquent on federal debt.

    Agency Affected: Department of Education

  5. Status: Closed - Not Implemented

    Comments: The recommendation was overtaken by legislation proposed in August 1995 (see above).

    Recommendation: The Secretary of Veterans Affairs (VA), (for the VA Loan Guaranty Program), and the Administrator, FmHA (for FmHA rural housing programs), should require program managers to deny credit to any loan applicant found to be delinquent on a federal debt, until the debt is satisfactorily resolved.

    Agency Affected: Department of Agriculture: Farmers Home Administration

  6. Status: Closed - Implemented

    Comments: VA revised its credit standards in May 1991. The standards state that an applicant will not be considered a satisfactory credit risk, if presently delinquent or in default on any federal government debt, and may not be approved for the loan until the delinquent account has been brought current or satisfied.

    Recommendation: The Secretary of Veterans Affairs (VA), (for the VA Loan Guaranty Program), and the Administrator, FmHA (for FmHA rural housing programs), should require program managers to deny credit to any loan applicant found to be delinquent on a federal debt, until the debt is satisfactorily resolved.

    Agency Affected: Department of Veterans Affairs

  7. Status: Closed - Implemented

    Comments: Education is revising its regulations to require full disclosure of collection practices. Final regulations were published in December 1992 requiring all guaranty agencies to use a common form. The common application form was approved on April 16, 1993, and has been disseminated to program participants for use.

    Recommendation: The Secretaries of Education and Housing and Urban Development should require that program managers and private lenders modify loan applications to include a signed borrower's certification that the borrower has been advised of and understands the government's debt collection practices.

    Agency Affected: Department of Education

  8. Status: Closed - Implemented

    Comments: HUD agrees to modify those applications which do not include such a certification. Final regulations were published during October 1991.

    Recommendation: The Secretaries of Education and Housing and Urban Development should require that program managers and private lenders modify loan applications to include a signed borrower's certification that the borrower has been advised of and understands the government's debt collection practices.

    Agency Affected: Department of Housing and Urban Development

  9. Status: Closed - Not Implemented

    Comments: The activities of FmHA's county offices will be examined as part of the administration's National Performance Review. The closure and/or restructure of FmHA's county offices is likely to be effected.

    Recommendation: To improve servicing activities, the Administrator, FmHA, should address the feasibility of consolidating servicing and collection activities into regional centers. This should be part of the FmHA planned review of its county office organizational structure.

    Agency Affected: Department of Agriculture: Farmers Home Administration

  10. Status: Closed - Implemented

    Comments: Education recently increased resources for oversight activities. Education and a contractor conducted 46 reviews of guaranty agencies during FY 1990 and 1991. Reviews focused on financial management and financial conditions at agencies.

    Recommendation: To improve lender monitoring, the Secretary of Education and the Administrator, SBA, should require program managers to implement the procedures set forth in their agencies' regulations, such as regularly scheduled site visits.

    Agency Affected: Department of Education

  11. Status: Closed - Implemented

    Comments: SBA directed program managers to continue emphasis on annual bank visits and requested increased field office staffing in its 1992 and 1993 budget requests for oversight functions. Field offices are implementing direction to the extent possible, according to an agency official. Visits are made on the basis of on priority--banks with troubled accounts and/or those with a large volume of loans are visited first.

    Recommendation: To improve lender monitoring, the Secretary of Education and the Administrator, SBA, should require program managers to implement the procedures set forth in their agencies' regulations, such as regularly scheduled site visits.

    Agency Affected: Small Business Administration

  12. Status: Closed - Not Implemented

    Comments: VA has closed this recommendation based on the Department's concurrence.

    Recommendation: The Secretary of Veterans Affairs should require program managers to develop and use formal lender agreements that include specific lender requirements and penalties for not achieving those requirements.

    Agency Affected: Department of Veterans Affairs

  13. Status: Closed - Not Implemented

    Comments: The recommendation was overtaken by legislation proposed in August 1995 (see above).

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Administrator, FmHA, should require program managers to report eligible delinquent Rural Housing accounts to credit bureaus as soon as practicable.

    Agency Affected: Department of Agriculture: Farmers Home Administration

  14. Status: Closed - Implemented

    Comments: Education sent a "Dear Colleague" letter to guarantee agencies in March 1990 advising them to participate fully and stated that participation would become mandatory. An agency official stated that all guaranty agencies were participating. However, Education's analysis of guaranty agencies' loan portfolios showed that about 71 percent of eligible loans had been assigned to Education.

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Secretary of Education should require the guaranty agencies to temporarily assign delinquent accounts to Education so that those accounts can be referred by Education to IRS for federal income tax refund offset.

    Agency Affected: Department of Education

  15. Status: Closed - Implemented

    Comments: HUD has referred $128 million in Title I debts and has implemented procedures for referring single family deficiency judgments.

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Secretaries of Housing and Urban Development and Veterans Affairs and the Administrator, SBA, should require program managers to refer delinquent accounts to private collection firms in the normal course of their collection activities and in accordance with OMB Circular A-129.

    Agency Affected: Department of Housing and Urban Development

  16. Status: Closed - Not Implemented

    Comments: VA maintains that it is referring accounts in its normal course of collection but admits that it is not referring accounts until 1 year after delinquency. It does not intend to change. VA OIG has closed this recommendation. GAO is pursuing legislation that would require use of private collection firms.

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Secretaries of Housing and Urban Development and Veterans Affairs and the Administrator, SBA, should require program managers to refer delinquent accounts to private collection firms in the normal course of their collection activities and in accordance with OMB Circular A-129.

    Agency Affected: Department of Veterans Affairs

  17. Status: Closed - Implemented

    Comments: Since February 1990, SBA has referred more than 500 accounts worth $23 million. However, it continues to refer accounts only after field personnel have pursued all avenues of collection and consider the account no longer collectible. SBA referred $262 million to private collection agencies during FY 1991. SBA does not plan to change its policy on this issue.

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Secretaries of Housing and Urban Development and Veterans Affairs and the Administrator, SBA, should require program managers to refer delinquent accounts to private collection firms in the normal course of their collection activities and in accordance with OMB Circular A-129.

    Agency Affected: Small Business Administration

  18. Status: Closed - Not Implemented

    Comments: FmHA has two single-family housing loan situations: simple interest and amortized interest. FmHA has decided not to charge additional interest, penalties, and administrative costs for late loans involving simple interest. For loans involving amortized interest, FmHA plans to eventually apply late payment charges, but this will depend on automating a new system. This new system is far in the future and a specific completion date is not given.

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Secretaries of Education, Housing and Urban Development, and Veterans Affairs, and the Administrators, SBA and FmHA (for its Rural Housing loans), should assess interest, penalties, and administrative costs on delinquent debts, pursuant to the Debt Collection Act or other applicable statutes.

    Agency Affected: Department of Agriculture: Farmers Home Administration

  19. Status: Closed - Implemented

    Comments: Education began charging each active account $3 per month to cover Education's administrative costs.

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Secretaries of Education, Housing and Urban Development, and Veterans Affairs, and the Administrators, SBA and FmHA (for its Rural Housing loans), should assess interest, penalties, and administrative costs on delinquent debts, pursuant to the Debt Collection Act or other applicable statutes.

    Agency Affected: Department of Education

  20. Status: Closed - Implemented

    Comments: On October 18, 1991, the final rule was published requiring lenders to provide notice to borrowers that the government may assess penalties and administrative costs on delinquent debts. HUD published its final rules for calculation of initial debt owed and for assessing interest on that debt on September 7, 1993. This rule applies to HUD's Title I debt collection process.

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Secretaries of Education, Housing and Urban Development, and Veterans Affairs, and the Administrators, SBA and FmHA (for its Rural Housing loans), should assess interest, penalties, and administrative costs on delinquent debts, pursuant to the Debt Collection Act or other applicable statutes.

    Agency Affected: Department of Housing and Urban Development

  21. Status: Closed - Implemented

    Comments: The Department has agreed to charge interest and administrative costs on loan guaranty debts only.

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Secretaries of Education, Housing and Urban Development, and Veterans Affairs, and the Administrators, SBA and FmHA (for its Rural Housing loans), should assess interest, penalties, and administrative costs on delinquent debts, pursuant to the Debt Collection Act or other applicable statutes.

    Agency Affected: Department of Veterans Affairs

  22. Status: Closed - Implemented

    Comments: SBA published proposed regulations in the Federal Register in 1989. The final regulations were published in the Federal Register on September 23, 1993 (Federal Register Volume 58, Number 183, page 49422).

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Secretaries of Education, Housing and Urban Development, and Veterans Affairs, and the Administrators, SBA and FmHA (for its Rural Housing loans), should assess interest, penalties, and administrative costs on delinquent debts, pursuant to the Debt Collection Act or other applicable statutes.

    Agency Affected: Small Business Administration

  23. Status: Closed - Implemented

    Comments: FmHA began reporting writeoffs to IRS in January 1990 and plans to continue this reporting.

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Secretary of Housing and Urban Development and the Administrators, SBA and FmHA (for its Rural Housing loans), should report closed-out accounts to IRS as income to the debtor.

    Agency Affected: Department of Agriculture: Farmers Home Administration

  24. Status: Closed - Implemented

    Comments: HUD established a procedure for reporting single family accounts to IRS. HUD reported accounts totalling $849,000 to IRS in 1992.

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Secretary of Housing and Urban Development and the Administrators, SBA and FmHA (for its Rural Housing loans), should report closed-out accounts to IRS as income to the debtor.

    Agency Affected: Department of Housing and Urban Development

  25. Status: Closed - Implemented

    Comments: SBA began such reporting in January 1990.

    Recommendation: To improve debt collection and appropriately write off uncollectible accounts, the Secretary of Housing and Urban Development and the Administrators, SBA and FmHA (for its Rural Housing loans), should report closed-out accounts to IRS as income to the debtor.

    Agency Affected: Small Business Administration

 

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