Farmers Home Administration:

Implications of the Shift From Direct to Guaranteed Farm Loans

RCED-89-86: Published: Sep 11, 1989. Publicly Released: Sep 11, 1989.

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Pursuant to a congressional request, GAO reviewed the Farmers Home Administration's (FmHA) progress in implementing its congressionally authorized shift from direct to guaranteed farm loans and the overall impact on farm credit availability, focusing on: (1) the impact of the shift on borrowers, private lenders, and the government; (2) borrowers' financial conditions; and (3) whether program problems contributed to losses on guaranteed loans.

GAO found that: (1) the total annual authorization for guaranteed farm loans increased from $175 million to $3.3 billion, while total obligations for the loans grew from about $71 million in 1983 to about $1.3 billion in 1988; (2) the increase in guaranteed lending resulted from private lenders obtaining guarantees for their financially distressed customers; (3) only 2 percent of FmHA direct-loan borrowers obtained guaranteed loans, because their poor financial conditions made private lenders reluctant to give them even guaranteed loans; (4) the decrease in direct FmHA loans resulted from such factors as increased use of government farm program payments instead of credit to finance farm operations, fewer borrowers, and reduced FmHA authorization for farm ownership loans; (5) although guaranteed loans help high-risk borrowers obtain private credit, they pay higher interest rates and loan fees and face a greater chance of liquidation if they default on their loans; (6) because recent congressional actions extended direct-loan eligibility, few of the borrowers will obtain guaranteed loans, direct-loan requests may not decline, and additional funding decreases may restrict credit availability for borrowers; (7) guaranteed loans help lenders finance borrowers who are poor credit risks, protect lenders against potential losses, and help the government keep some farm lending in the private sector and reduce outlays for new direct loans; (8) the government's financial exposure increased recently because the outstanding principal of guaranteed loans outpaced the decrease in that of direct loans; (9) losses on guaranteed loans have grown faster than guaranteed loan activities since 1984 and could exceed $115 million in 1989; and (10) although adverse weather caused some losses, inadequate assessment of borrowers' financial conditions prior to loan approval and insufficient oversight of loan guarantees were major contributors to losses.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: No action to date--highly unlikely that action will be taken.

    Recommendation: To help control losses and improve management of the guaranteed farm loan program, the Secretary of Agriculture should direct the Administrator, FmHA, to establish in regulations procedures for recovering from defaulted borrowers amounts the government paid to lenders for guaranteed loan losses.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: A more current, comprehensive report (RCED-92-86) contains a similar recommendation.

    Recommendation: To help control losses and improve management of the guaranteed farm loan program, the Secretary of Agriculture should direct the Administrator, FmHA, to enforce FmHA requirements for lender servicing of guaranteed loans and place greater emphasis on establishing the extent to which lenders' negligent servicing caused loan losses before determining the amounts to be paid as loss claims.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Not Implemented

    Comments: A more current, comprehensive report (RCED-92-86) contains a similar recommendation.

    Recommendation: To help control losses and improve management of the guaranteed farm loan program, the Secretary of Agriculture should direct the Administrator, FmHA, to establish a range of loan guarantee percentages based on loan risk, with the higher guarantee percentages going to lower-risk loans.

    Agency Affected: Department of Agriculture

  4. Status: Closed - Not Implemented

    Comments: A more current, comprehensive report (RCED-92-86) contains a similar recommendation.

    Recommendation: To help control losses and improve management of the guaranteed farm loan program, the Secretary of Agriculture should direct the Administrator, FmHA, to establish in regulations the type and amount of security required for a guarantee and, if crops are accepted as the only security, require that crop insurance be obtained.

    Agency Affected: Department of Agriculture

  5. Status: Closed - Not Implemented

    Comments: A more current, comprehensive report on FmHA (RCED-92-86) contains a similar recommendation.

    Recommendation: To help control losses and improve management of the guaranteed farm loan program, the Secretary of Agriculture should direct the Administrator, FmHA, to develop, in consultation with Congress, and implement more comprehensive guaranteed-loan-approval criteria that assess an applicant's financial solvency, profitability, liquidity, and repayment ability prior to approving loan guarantees.

    Agency Affected: Department of Agriculture

  6. Status: Closed - Implemented

    Comments: Consistent with the GAO recommendation, FmHA has been providing credit analysis training during fiscal year 1991. GAO plans to submit an accomplishment report recognizing these actions by October 1992.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FmHA, to provide: (1) county supervisors with training in credit analysis to better acquaint them with what constitutes adequate financial data on which to base a guaranteed loan-approval decision; and (2) guidance and training to state, district, and county officials that would enhance the monitoring of lenders' guaranteed loan-servicing activities, especially guaranteed loan liquidations.

    Agency Affected: Department of Agriculture

 

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