Farmers Home Administration:

Billions of Dollars in Farm Loans Are at Risk

RCED-92-86: Published: Apr 3, 1992. Publicly Released: Apr 3, 1992.

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GAO reviewed the Farmers Home Administration's (FmHA): (1) direct and guaranteed loan programs; and (2) management of farm properties obtained as a result of federal loan defaults.

GAO found that: (1) almost $14 billion, or about 70 percent of the FmHA direct loan portfolio, is at risk, since the loans are held by delinquent borrowers or by borrowers whose debts had been rescheduled because of repayment difficulties; (2) FmHA estimates potential losses of $1.2 billion, or about 28 percent of its guaranteed loan program, but plans to revise its loss-projection formula; (3) in the direct loan program, field lending officials did not comply with FmHA loan-making and loan-servicing standards established to safeguard federal financial interests; (4) FmHA loan-making and servicing policies, some congressionally directed, increase the government's risk of losses; (5) in the guaranteed loan program, FmHA lending officials approved guarantees without obtaining proof of borrowers' creditworthiness and inadequately monitored commercial lenders' loan-servicing; (6) FmHA policies permitting commercial lenders to refinance existing farm debt and obtain maximum-rate guarantees for most loans, regardless of risk, encouraged lenders to shift their high-risk farm debt to the government; (7) FmHA estimated that, as of September 30, 1991, it had acquired about 3,100 farms from borrowers who had not repaid their loans; (8) FmHA did not ensure proper maintenance of the properties in its inventory; (9) legislative mandates regulating property sales limit FmHA returns on the properties and increased holding costs; and (10) management weaknesses contributing to the longstanding loan management problems include poor management information systems and weak financial controls.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Federal Agriculture Improvement and Reform Act of 1996 prohibits using direct ownership loans for refinancing and places limits on the use of direct operating loans for refinancing. It does not, however, limit the use of guaranteed loans for refinancing. The act also eliminated the use of farm loans for nonfarming purposes.

    Matter: In clarifying the FmHA role, Congress should establish some broad parameters for FmHA operations that earlier recommendations have not addressed. In establishing these parameters, Congress should specify the extent that loan funds can be used to refinance existing debts and for new credit purchases.

  2. Status: Closed - Implemented

    Comments: The Federal Agriculture Improvement and Reform Act of 1996 prohibits loans to borrowers who previously bought out with debt write-off. It also generally prohibits loans to borrowers who were previously restructured with debt write down. In addition, the act prohibits direct loans to delinquent borrowers.

    Matter: To strengthen FmHA direct loan-making policies, Congress should amend the Consolidated Farm and Rural Development Act to: (1) prohibit direct loans to previously delinquent borrowers whose direct loans were bought out with debt write-off or restructured with debt write-down; and (2) eliminate direct loans under the continuation policy to currently delinquent borrowers.

  3. Status: Closed - Implemented

    Comments: The Federal Agriculture Improvement and Reform Act of 1996 limits borrowers who are restructured with debt write-down to one instance of restructuring. The act does not limit borrowers who are restructured or otherwise rescheduled or reamortized without debt relief to one instance of servicing. It does, however, require borrowers to pay a portion of the interest due as a condition of rescheduling or reamortizing loans.

    Matter: To strengthen FmHA direct loan-servicing policies and to limit the amount of debt that can be accumulated though rescheduling and reamortizing loans, Congress should amend the Consolidated Farm and Rural Development Act to: (1) limit a borrower whose debt is 180 days or more overdue to one restructuring action; and (2) require that a borrower repay the interest portion of the loan payment as a condition of rescheduling or reamortizing loans that are less than 180 days delinquent.

  4. Status: Closed - Implemented

    Comments: On October 28, 1992, Congress enacted P.L. 102-554 which targeted loan funds for beginning farmers.

    Matter: In clarifying the FmHA role, Congress should establish some broad parameters for FmHA operations that earlier recommendations have not addressed. In establishing these parameters, Congress should specify the extent that loan funds can be used by customers already holding loans made or guaranteed by FmHA and by new customers, such as beginning farmers.

  5. Status: Closed - Not Implemented

    Comments: The 104th Congress did not include this recommendation in the Federal Agriculture Improvement and Reform Act of 1996 and no further action is anticipated.

    Matter: In clarifying the FmHA role, Congress should establish some broad parameters for FmHA operations that earlier recommendations have not addressed. In establishing these parameters, Congress should specify the type and extent of assistance, if any, that should be made available to help unsuccessful borrowers obtain other employment.

  6. Status: Closed - Implemented

    Comments: The Federal Agriculture Improvement and Reform Act of 1996 provides that borrowers can receive direct ownership loans over a 10-year period and direct operating loans in a total of 7 years.

    Matter: In clarifying the FmHA role, Congress should establish some broad parameters for FmHA operations that earlier recommendations have not addressed. In establishing these parameters, Congress should specify limits for the length of time that borrowers may receive FmHA financial assistance.

  7. Status: Closed - Implemented

    Comments: The 104th Congress did not include this provision in the Federal Agriculture Improvement and Reform Act of 1996. However, through the annual appropriations process, USDA is provided loan subsidy cost authority, which limits losses and interest expenses on new loans.

    Matter: In clarifying the FmHA role, Congress should establish some broad parameters for FmHA operations that earlier recommendations have not addressed. In establishing these parameters, Congress should specify acceptable ranges of losses for FmHA direct and guaranteed loan programs.

  8. Status: Closed - Implemented

    Comments: The Federal Agriculture Improvement and Reform Act of 1996, in addition to eliminating the "suitable" classification, imposes shortened timeframes for USDA to dispose of properties and requires competitive sales.

    Matter: To increase FmHA returns from sales of suitable farm inventory properties and reduce the amount of time that properties remain in inventory, Congress should amend the Consolidated Farm and Rural Development Act to require that FmHA use competitive methods in selling such properties to targeted purchasers.

  9. Status: Closed - Implemented

    Comments: The Federal Agriculture Improvement and Reform Act of 1996 eliminated the "suitable" classification.

    Matter: To improve the quality of FmHA properties that are used for program purposes, Congress should amend the Consolidated Farm and Rural Development Act to change the definition of suitable property to reflect only properties that FmHA considers to be viable, independent farming units for the locale.

  10. Status: Closed - Implemented

    Comments: The Federal Agriculture Improvement and Reform Act of 1996 prohibits loan guarantees to borrowers whose defaulting on previous guaranteed loans resulted in USDA paying commercial lenders' loan loss claims and to borrowers whose direct loan debts were bought out with debt write-off. The act also generally prohibits guarantees to borrowers whose direct loan debts were restructured with write-down.

    Matter: To strengthen FmHA loan-making standards, Congress should amend the Consolidated Farm and Rural Development Act to prohibit loan guarantees for borrowers: (1) whose defaulting on previous guaranteed loans resulted in FmHA paying commercial lenders' loan loss claims; or (2) whose direct loans were bought out with debt write-off or restructured with debt write-down.

  11. Status: Closed - Not Implemented

    Comments: The 104th Congress did not implement this recommendation as part of the Federal Agriculture Improvement and Reform Act of 1996.

    Matter: To protect the government from excessive losses on FmHA guaranteed loans, Congress should amend the Consolidated Farm and Rural Development Act to require FmHA to establish and implement a range of guarantees that places the highest percentage guarantee on the least risky loan and a lower percentage guarantee on the most risky loan. At a minimum, this could include limiting the guarantee percentage on certain loans: (1) used for refinancing existing debt; or (2) made to a commercial lender's existing borrowers.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The agency has taken limited action on this recommendation since it was issued over 3 years ago. Moreover, it does not appear likely that any action will be taken in the near future.

    Recommendation: To improve management control over FmHA farm inventory properties, the Secretary of Agriculture should direct the Administrator, FmHA, to centralize property management functions at the FmHA state office level.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Not Implemented

    Comments: The agency has not changed its fundamental loanmaking criteria since the recommendation was made over 3 years ago. It also does not appear likely to do so in the near future.

    Recommendation: To strengthen FmHA lending policies, the Secretary of Agriculture should direct the Administrator, FmHA, to develop more comprehensive loan-making criteria for guaranteed loans that assess an applicant's financial solvency, profitability, liquidity, repayment ability, and repayment history before a loan guarantee is approved.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Implemented

    Comments: While some states are reviewing applications, not all of them are doing so.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FmHA, to require that all guaranteed loan applications or, if resources do not permit, a randomly selected sample of such applications be reviewed by state offices before loan guarantees are finally approved.

    Agency Affected: Department of Agriculture

  4. Status: Closed - Implemented

    Comments: The agency has taken actions to better train its field officials, which may have helped improve compliance with some loanmaking and servicing standards. However, it has not, nor does it plan to, develop and implement a system to improve compliance.

    Recommendation: To increase compliance with existing standards for making and servicing guaranteed loans, the Secretary of Agriculture should direct the Administrator, FmHA, to develop and implement a system that will ensure that lending officials adhere to FmHA loan-making and loan-servicing standards.

    Agency Affected: Department of Agriculture

  5. Status: Closed - Implemented

    Comments: USDA is obtaining all available security.

    Recommendation: To strengthen FmHA direct loan-servicing policies, the Secretary of Agriculture should direct the Administrator, FmHA, to require security for serviced loans that at least equals the loan's outstanding principal or that provides the best security interest available on all of the borrower's assets.

    Agency Affected: Department of Agriculture

  6. Status: Closed - Not Implemented

    Comments: This recommendation is no longer applicable in view of the changes made in the Federal Agriculture Improvement and Reform Act of 1996. The act requires that borrowers who do not qualify for restructuring pay USDA current market value for the property.

    Recommendation: To strengthen FmHA direct loan-servicing policies, the Secretary of Agriculture should direct the Administrator, FmHA, to develop a method for calculating the average holding period that reflects normal property market conditions in servicing delinquent borrowers' debts.

    Agency Affected: Department of Agriculture

  7. Status: Closed - Implemented

    Comments: The agency is now requiring a more comprehensive analysis of an applicant's farming business. However, its basic criteria for approving loans has changed very little, and it does not appear that the agency will change the criteria in the near future.

    Recommendation: To strengthen FmHA lending policies, the Secretary of Agriculture should direct the Administrator, FmHA, to develop more comprehensive loan-making criteria for direct loans that go beyond the current emphasis on cash flow and that assess an applicant's financial solvency, profitability, liquidity, and repayment ability before a new loan is made.

    Agency Affected: Department of Agriculture

  8. Status: Closed - Implemented

    Comments: Some state FmHA offices are reviewing loan applications, but this practice is not common to all states.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FmHA, to require that all direct loan applications or, if resources do not permit, a randomly selected sample of such applications be reviewed by state offices before they are finally approved.

    Agency Affected: Department of Agriculture

  9. Status: Closed - Implemented

    Comments: USDA has revised its Acquired Property Tracking System to address long-standing problems.

    Recommendation: To provide accurate information for property management, the Secretary of Agriculture should direct the Administrator, FmHA, to place high priority on completing Acquired Property Tracking System corrections and conducting full testing to ensure that these efforts have been successful.

    Agency Affected: Department of Agriculture

  10. Status: Closed - Not Implemented

    Comments: FmHA has not established a specific system to ensure that its field staff adheres to lending standards.

    Recommendation: To increase compliance with existing standards for making and servicing direct loans, the Secretary of Agriculture should direct the Administrator, FmHA, to develop and implement a system that will ensure that lending officials adhere to FmHA loan-making and loan-servicing standards.

    Agency Affected: Department of Agriculture

 

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