Debt Collection Improvement Act of 1996:

Department of Agriculture's Rural Housing Service Has Not Yet Fully Implemented Certain Key Provisions

GAO-02-308: Published: Feb 28, 2002. Publicly Released: Apr 1, 2002.

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The Debt Collection Improvement Act of 1996 seeks to maximize the collection of billions of dollars of nontax delinquent debt owed to the federal government. The act requires agencies to refer eligible debts delinquent more than 180 days to the Department of the Treasury for payment offset and to Treasury or a Treasury-designated debt collection center for cross-servicing. The Treasury Offset Program, includes the offset of benefit payments, vendor payments, and tax refunds. Cross-servicing involves locating debtors, issuing demand letters, and referring debts to private collection agencies. The Rural Housing Service (RHS) has initiatives to ensure the timely referral of all delinquent debt. However, the agency's failure to make the act a priority has left key provisions of the legislation unimplemented and severely reduced collection opportunities. The agency had referred no direct single-family housing (SFH) loans to the Financial Management Service for cross-servicing. Three major factors delayed implementation. First, RHS's loan-servicing system had not incorporated key features necessary to implement the act's referral provisions. Second, RHS did not refer any debts for cross-servicing while pursuing an exemption from Treasury. Third, amounts reported as delinquent and eligible for consideration for referral were materially understated. RHS had not kept the documentation needed to independently verify the accuracy and validity of the exclusion amounts in its certified fiscal year 2000 year-end report. Accordingly, GAO was unable to determine whether RHS had appropriately excluded $182 million of delinquent loans from referral for offset and for cross servicing as of September 2000.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: According to RHS officials, software enhancements to allow identification of loans eligible for cross-servicing and prompt referral of all such loans to FMS for cross-servicing were completed and tested in April 2002. On April 19, 2002, RHS made its first automated referral of all direct SFH debt eligible for cross-servicing, involving about 10,900 loans totaling about $156.6 million. As of August 2002, RHS and Treasury concurred that RHS had referred all eligible SFH loans for cross-servicing.

    Recommendation: To improve RHS's compliance with DCIA, GAO recommends that the Secretary of Agriculture direct the Administrator of RHS to take the following actions: complete development of the software enhancements that will allow automated identification of loans eligible for cross-servicing, and promptly refer all such loans to FMS for cross-servicing.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, on January 29, 2003, the Rural Housing Service (RHS) issued its modified "Request for Single Family Housing Loan Guarantee" application, Form RD 1980-21, which includes an acknowledgement by the loan applicant that any loss paid to a lender as a result of loan default will be considered federal debt collectible under the provisions of the DCIA. RHS is using the modified Form RD 1980-21 for all new guaranteed rural housing loan applications. RHS expects the final regulation to be in place prior to the time that any loan loss that is subject to the DCIA, as established by the acknowledgement signed by the borrower at the time of application on Form RD 1980-21, is paid to the lender. It is important to note that Agriculture's General Counsel has advised RHS that in the absence of the new rule, accounts may still be sent to Treasury for offset if a loss is incurred, provided that the new Form RD 1980-21 has been signed. By modifying the SFH guaranteed loans lender agreement, RHS can recognize losses on guaranteed SFH loans as federal debts and apply DCIA debt collection remedies to recover such losses.

    Recommendation: To improve RHS's compliance with DCIA, GAO recommends that the Secretary of Agriculture direct the Administrator of RHS to take the following actions: finalize and implement necessary regulatory changes and modifications to lender agreements to recognize losses on guaranteed SFH loans as federal debt and promptly refer such debt to FMS for collection action.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Implemented

    Comments: Agriculture and Treasury officials met to address the inconsistency that existed between Rural Housing Service's (RHS) reporting of delinquent direct single-family housing (SFH) loans on Treasury Report on Receivables (TROR) and the instructions for such reporting. In a September 2002 letter, Treasury informed Rural Development that RHS should report the entire unpaid principal balances as delinquent on the TROR, and requested that such reporting begin with the TROR for the fourth quarter of fiscal year 2002. As a result, RHS reported the accelerated SFH principal balances on its TROR for the fourth quarter of fiscal year 2002.

    Recommendation: To improve RHS's compliance with the Debt Collection Improvement Act of 1996 (DCIA), GAO recommends that the Secretary of Agriculture direct the Administrator of RHS to take the following actions: work together with the Financial Management Service (FMS) to resolve any inconsistencies between RHS's reporting of delinquent debts on its Treasury Report on Receivables (TROR) and Treasury's instructions for such reporting. Absent any modifications to Treasury's instructions for preparing the TROR, report the entire accelerated balance of delinquent direct single-family housing (SFH) loans to FMS as delinquent debt and, absent any allowable exclusions, as debt eligible for referral to FMS for collection action.

    Agency Affected: Department of Agriculture

  4. Status: Closed - Implemented

    Comments: During GAO's review of Agriculture's progress in addressing key challenges, RHS developed and provided GAO a detailed listing of specific direct SFH loans and the loans' corresponding dollar amounts that had been reported as excluded from referral to Treasury on the TROR as of September 30, 2001. Such documentation enables independent verifications in the future of RHS' reported exclusions, which is critical for the oversight of the agency's implementation of DCIA. According to RHS officials, RHS archives their entire loan portfolio every quarter and maintains the information for 2 years.

    Recommendation: To improve RHS's compliance with DCIA, GAO recommends that the Secretary of Agriculture direct the Administrator of RHS to take the following actions: maintain supporting documentation, in an appropriate level of detail that can be made readily available for independent verification, for all SFH debts reported and certified to Treasury as excluded from referral for collection action. At a minimum, the documentation should include, for each exclusion category (e.g., foreclosure), the total amount reported as excluded on the certified TROR and a listing of the identities and dollar amounts of the specific loans excluded.

    Agency Affected: Department of Agriculture

 

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