Farmers Home Administration:

Changes Needed in Loan Servicing Under the Agricultural Credit Act

RCED-90-169: Published: Aug 2, 1990. Publicly Released: Aug 2, 1990.

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Pursuant to a congressional request, GAO reviewed the Farmers Home Administration's (FmHA) implementation of the debt servicing requirements under the Agricultural Credit Act of 1987.

GAO found that: (1) in January 1988, FmHA estimated that delinquent borrowers were past due on about $9.6 billion in principal and interest payments; (2) FmHA borrowers who acted in bad faith were not eligible for the primary loan servicing options, but were eligible for net-recovery-value buy-out; (3) FmHA used the same servicing process for borrowers who acted in bad faith that it used for other borrowers in determining eligibility for restructuring and net-recovery-value buy-out; (4) borrowers could obtain additional loans at the same time their delinquent debt was being restructured; (5) FmHA did not include assets that were not pledged as security for FmHA debts when computing the type and amount of debt relief for delinquent borrowers; (6) the debt reduction provisions apply only to borrowers who default on their loan payments, causing an incentive for nondelinquent borrowers to intentionally become delinquent; and (7) FmHA may be unable to deny servicing to borrowers who intentionally become delinquent.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Closing this recommendation because Congress has not acted on it for over 2 years.

    Matter: Congress should amend the Agricultural Credit Act to allow FmHA to take into consideration all assets of a borrower in determining the net-recovery-value buy-out amount.

  2. Status: Closed - Implemented

    Comments: GAO will process an accomplishment report based on changes contained in the 1990 Farm Bill.

    Matter: To provide FmHA with authority to consider all assets of delinquent borrowers under consideration for debt reduction and to reduce the cost of debt write-downs and write-offs, Congress should amend the Agricultural Credit Act of 1987 (P.L. 100-233, January 6, 1988). This can be done by enacting a provision similar to section 4 of H.R. 4077, which allows FmHA to consider all assets of a borrower, other than those necessary for family living or farm operating expenses, in determining the value of restructured loans.

  3. Status: Closed - Not Implemented

    Comments: Closing this recommendation because Congress has not acted on it for over 2 years.

    Matter: Congress should amend the Agricultural Credit Act to require borrowers to act in good faith to be eligible to reacquire their farm homestead through preservation servicing.

  4. Status: Closed - Implemented

    Comments: GAO will process an accomplishment report based on changes contained in the 1990 Farm Bill.

    Matter: To make it clear that bad-faith borrowers cannot receive debt relief benefits and to discourage other borrowers from acting in bad faith, Congress should amend the Agricultural Credit Act of 1987 (P.L. 100-233, January 6, 1988). This can be done by enacting provisions similar to sections 2 and 5 of H.R. 4077, which require borrowers to act in good faith to be eligible to reacquire their farms through preservation servicing and to be eligible for net-recovery-value buy-out.

  5. Status: Closed - Implemented

    Comments: GAO will process an accomplishment report on changes contained in the 1990 Farm Bill.

    Matter: In order to improve the quality of loans in the FmHA farmer loan program portfolio and the results of the FmHA debt servicing actions, prevent FmHA borrowers from repeatedly obtaining debt relief, promote fiscal accountability by FmHA borrowers, and limit the amount of debt relief provided to borrowers who receive primary loan servicing and net-recovery-value buy-out, Congress should amend the Agricultural Credit Act of 1987 (Public Law (P.L.) 100-233, January 6, 1988). This can be done by enacting provisions similar to sections 5 and 6 of H.R. 4077, which provide limitations on the net-recovery-value buy-out and restructuring options of the Agricultural Credit Act.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: GAO will process an accomplishment report based on changes contained in the 1990 Farm Bill.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FmHA, to revise existing regulations implementing the debt restructuring provisions of the Agricultural Credit Act to provide restructured borrowers with a 10-percent cash flow margin after servicing. This margin should provide restructured borrowers with the minimum ability to meet unplanned expenses and equipment replacements.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: In April 1992, FmHA issued regulations which restircted debt relief to bad debt borrowers. Publication of these regulations accomplishes the intent of this recommendation.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FmHA, to: (1) alert county offices that borrowers may intentionally become delinquent in an attempt to qualify for debt relief under the act; and (2) notify farmer program borrowers that intentionally causing delinquencies could disqualify them for debt relief under the act.

    Agency Affected: Department of Agriculture

 

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