Economic Development:

Equitable Interest Rates Are Needed for Farmers Home Administration Loans

RCED-83-157, Aug 12, 1983

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GAO reviewed the Farmers Home Administration's (FmHA) policies, procedures, and practices for setting and revising interest rates on farm, home, and community facility loans.

Between June 1981 and March 1982, FmHA approved about 94,000 housing and farm loans, for which borrowers will receive subsidies or pay premiums, totalling $112 million over the life of their loans. GAO noted that, because subsidies will exceed premiums, FmHA program costs on these loans could be increased by as much as $94 million. GAO found that FmHA has not developed an adequate rate review or decisionmaking process to allow judicious use of its discretionary authority to set interest rates on housing and farm loans. Specifically, the cutoff point for changing rates was an estimate established without analysis. Further, FmHA application of its own guidelines has resulted in inconsistencies. GAO stated that the lack of criteria resulted in inequitable treatment of borrowers within the same programs, and it questioned the 25-year period FmHA uses to set rates on real estate loans and the use of the municipal bond rate to set rates on community facility loans.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Secretary of Agriculture, to ensure continued validity of the maturity period being used to set interest rates, should direct the Administrator, FmHA, to periodically determine the actual maturity period of FmHA loans.

    Agency Affected: Department of Agriculture

    Status: Closed - Not Implemented

    Comments: FmHA will continue to use a 25-year maturity period because it believes that this period better reflects actual maturity. A new management information system will provide better data on maturity periods.

    Recommendation: The Secretary of Agriculture, to better comply with the requirements of FmHA authorizing legislation, should direct the Administrator, FmHA, to use a 30-year maturity period to set interest rates on farm ownership, including limited-resource farm ownership, and single family housing loans.

    Agency Affected: Department of Agriculture

    Status: Closed - Not Implemented

    Comments: FmHA will continue to use a 25-year maturity period because it believes that this period better reflects actual maturity. A new management information system will provide better data on maturity periods.

    Recommendation: The Secretary of Agriculture should require the Administrator, FmHA, before extending FmHA authority, to develop specific, quantitative criteria to identify and weigh other factors in setting loan program interest rates.

    Agency Affected: Department of Agriculture

    Status: Closed - Implemented

    Comments: Other than reviewing and adjusting interest rates on a monthly basis, FmHA will not develop further criteria to set rates because of volatility of farm economy.

    Recommendation: The Secretary of Agriculture, to facilitate this change without adversely affecting the FmHA work load, should direct the Administrator, FmHA, to implement rate changes by the fifth work day of each month and require FmHA county supervisors to determine the maximum rate applicants can pay.

    Agency Affected: Department of Agriculture

    Status: Closed - Implemented

    Comments: Changes in interest rates will be effective on the first of the following month.

    Recommendation: The Secretary of Agriculture, to provide for changes in farm and home loan program interest rates in a timely, economical, and equitable manner, should direct the Administrator, FmHA, to revise interest rates monthly, setting new rates at the Treasury monthly cost-of-money rate with appropriate adjustments for limited-resource farm loans.

    Agency Affected: Department of Agriculture

    Status: Closed - Implemented

    Comments: FmHA agreed to adjust interest rates monthly, generally following Treasury and statutory rates. Savings are not determinable without extensive, new audit work which is not planned.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FmHA, to use a revenue bond index to determine bond market rates for the purpose of setting interest rates on community facility loans.

    Agency Affected: Department of Agriculture

    Status: Closed - Not Implemented

    Comments: FmHA policy is legal and consistent with program objectives to provide financing at reasonable rates and terms.