Farmers Home Administration:

Sounder Loans Would Require Revised Loan-Making Criteria

RCED-89-9: Published: Feb 14, 1989. Publicly Released: Feb 23, 1989.

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In response to a congressional request, GAO examined the Farmers Home Administration's (FmHA) loan policies and practices to determine: (1) whether FmHA used adequate criteria to make and service loans; (2) how FmHA loan policies affected borrower equity; (3) whether security for FmHA loans was adequate; and (4) the potential impact of FmHA-proposed loan criteria on existing borrowers.

GAO found that: (1) FmHA analyses of its cash flow were overly optimistic, since it did not allow for unexpected expenses or equipment replacement and often overstated borrowers' repayment ability; (2) FmHA used extensive loan-servicing techniques, such as reducing interest rates and increasing repayment periods, to keep borrowers current on their loans; (3) loan servicing usually increased the outstanding loan principal by adding unpaid interest to the principal, and created long-term debts; (4) increased debt and the declining value of collateral assets decreased borrowers' equity; (5) although FmHA required adequate security to ensure repayment for new loans, it did not have similar security requirements for serviced loans; (6) FmHA proposed stricter eligibility and loan criteria in 1987 to speed loan processing and improve loan portfolio financial management; (7) although the proposed criteria would have denied assistance to a large percentage of existing borrowers, FmHA attempted to define those farmers whom it could help or not help with its loans and identified borrowers' degree of risk; (8) FmHA withdrew the proposal due to congressional and public concern over inadequate information on the proposal's impact and the denial of further assistance; and (9) Congress directed FmHA to reinstate the continuation policy that allowed existing borrowers to obtain additional loans without showing their ability to repay prior loans, but enacted new legislation that directed FmHA to consider reducing delinquent borrowers' debt if it was financially better for the government than liquidation.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: GAO has a more recent, comprehensive report with a similar recommendation.

    Matter: Congress may wish to reconsider whether the continuation and debt-restructuring policies are the best means of assisting already heavily indebted farmers.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: GAO has a more recent, comprehensive report with similar recommendations.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FmHA, to pursue the development of more comprehensive loan-making criteria that assess an applicant's financial solvency, profitability, liquidity, and repayment ability prior to making new loans. After FmHA develops new criteria and studies the effects on borrowers, as required by the Agricultural Credit Act, FmHA should, in consultation with appropriate congressional committees, determine where to draw the line between those financially troubled farmers who could be helped and those who could not be helped with FmHA financial assistance. This will improve the financial condition of the FmHA loan portfolio and assist borrowers by providing them with a more realistic assessment of their financial condition before they accept additional credit.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: Consistent with the GAO recommendations, 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 adequate credit analysis training to county supervisors. The training should stress the importance of preparing required year-end analyses of farm operations for all borrowers, including actual performance data, and the development of realistic farm operating budgets for nondelinquent borrowers.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Not Implemented

    Comments: GAO has a more recent, comprehensive report with similar recommendations.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FmHA, to develop regulations, in consultation with appropriate congressional committees, that protect the government's financial interests by requiring that, when servicing loans, county supervisors obtain security of equal or greater value than the serviced loan's outstanding principal or the best security interest available on all of the borrower's assets.

    Agency Affected: Department of Agriculture

  4. Status: Closed - Not Implemented

    Comments: GAO has a more recent, comprehensive report with similar recommendations.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FmHA, to develop regulations, in consultation with appropriate congressional committees, that improve the cash-flow analysis used in loan-making decisions by incorporating an allowance to cover contingencies and equipment replacement.

    Agency Affected: Department of Agriculture

 

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