Farmers Home Administration:

Debt Relief Actions for Business Entity Borrowers Are Questionable

RCED-92-29: Published: Dec 10, 1991. Publicly Released: Jan 10, 1992.

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Pursuant to a congressional request, GAO reviewed the Farmers Home Administration's (FmHA) implementation of the debt restructuring provisions of the Agricultural Credit Act of 1987, focusing on: (1) how the provisions relate to borrowers that are business entities; (2) how FmHA county offices implemented the agency's April 1989 guidance; and (3) whether FmHA used the April 1989 guidance to recalculate the amount of debt relief provided to borrowers prior to the issuance of the guidance in order to minimize the government's losses in debt relief actions.

GAO found that: (1) as of March 31, 1991, about 44 percent of the 7,664 business entity borrowers, which held about $1.2 billion in outstanding principal on farm loans, were delinquent and eligible for FmHA debt relief; (2) when FmHA first began notifying delinquent borrowers of available debt relief options, an estimated 710 business entity borrowers received FmHA debt relief write-downs or write-offs totalling about $256 million; (3) 4 FmHA county offices, providing about $8 million in debt relief to a total of 23 business entity borrowers, did not always follow FmHA regulations or the 1989 guidance, which clarified existing regulations on granting debt relief to business entity borrowers; (4) county officials did not obtain the required financial information from all liable parties in about one-third of the 23 cases processed in those offices; (5) in two-thirds of the 23 cases, officials did not follow up or verify incomplete or conflicting data; (6) some of the reasons county officials cited for not following FmHA regulations and guidance included a lack of time, insufficient understanding of the guidance, and the belief that personal knowledge of individual financial statements was unnecessary; and (7) none of the four county offices visited issued final debt relief decisions on the estimated 74 business entity cases FmHA received before the 1989 guidance.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In February 1992, FmHA issued guidance (AN No. 2482) to its field offices concerning debt write-down and write-off decisions for business entity borrowers. The agency guidance emphasized the need to obtain personal financial statements from all individual cosigners and to verify the accuracy of the information.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FmHA, to issue guidance emphasizing the necessity of obtaining complete personal financial statements from all individual cosigners of business entity loans requesting debt relief and of verifying the accuracy of the information, particularly nonfarm income, assets, liabilities, and expenses. Sources for verification could include credit reports, tax information, and record checks at local banks and county courthouses.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: In April 1992, FmHA issued its revised loan servicing regulations which included a provision to consider all of the borrower's assets in providing debt relief.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FmHA, to specify which personal assets and income county offices should consider in providing debt relief to business entity borrowers.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Implemented

    Comments: The agency requested that its state directors review the files of 710 entity borrowers who received debt writedown or writeoff decisions. FmHA state directors identified 21 business entity debt relief cases needing corrective action. Corrective action has been taken.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FmHA, to require FmHA county offices to review prior debt write-down and write-off decisions for business entity borrowers, identify those decisions in error, and pursue recourse when errors are identified. FmHA may want to consider the potential recovery amount in deciding whether to pursue recovery.

    Agency Affected: Department of Agriculture

 

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