Farmers Home Administration:

The Guaranteed Farm Loan Program Could Be Managed More Effectively

RCED-95-9: Published: Nov 16, 1994. Publicly Released: Nov 16, 1994.

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GAO reviewed the Farmers Home Administration's (FmHA) guaranteed farm loan program, focusing on: (1) the extent of losses under the guaranteed loan program compared with those under the FmHA direct loan program; (2) the extent to which the guaranteed loan program has graduated FmHA direct loan borrowers to commercial credit; and (3) ways to make the guaranteed farm loan program more of a source for funding direct loan borrowers.

GAO found that: (1) the guaranteed farm loan program has substantially lower delinquency and default rates than the direct loan program because its borrowers present fewer financial risks; (2) FmHA increases the government's risk exposure by permitting borrowers who have defaulted on past loans to obtain new guaranteed loans and by failing to follow FmHA loan servicing standards; (3) FmHA has not effectively used the guaranteed loan program to graduate direct loan borrowers to commercial credit; (4) only 4 percent of direct loan borrowers obtained guaranteed loans in fiscal years 1991 through 1993, partially because FmHA did not fully implement its procedures for identifying and graduating qualified direct loan borrowers; (5) Congress has required FmHA to propose regulations to improve borrowers' transition to commercial credit; (6) FmHA and commercial lenders believe that many direct loan borrowers will never qualify for guaranteed loans; and (7) commercial lenders believe that FmHA should provide incentives for borrowers to seek commercial credit and make the guaranteed loan program more attractive to commercial lenders.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: The agency does not plan to develop a plan for ensuring accurate loan classifications. Instead, it stated that it will continue to emphasize that field offices comply with current requirements for classifying new borrowers' loans.

    Recommendation: To ensure that FmHA effectively implements the congressionally directed plan for using guaranteed loans as an interim step in moving direct loan borrowers to commercial credit without a guarantee, the Secretary of Agriculture should direct the Administrator, FmHA, to develop and implement a plan to ensure that county office supervisors assign accurate loan classifications to all new direct loan borrowers.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Not Implemented

    Comments: Following passage of the 1996 Farm Bill, which had related graduation and use of guaranteed loan provisions, the agency issued regulations that implement the intent of this recommendation. Therefore, this recommendation is no longer applicable.

    Recommendation: To ensure that FmHA effectively implements the congressionally directed plan for using guaranteed loans as an interim step in moving direct loan borrowers to commercial credit without a guarantee, the Secretary of Agriculture should direct the Administrator, FmHA, to develop and implement a plan to ensure that county office supervisors promptly update loan classifications as borrowers' financial conditions change.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Implemented

    Comments: Following passage of the 1996 Farm Bill, which had related graduation and use of guaranteed loan provisions, the agency issued regulations that implement the intent of this recommendation. Therefore, this recommendation is no longer applicable.

    Recommendation: To ensure that FmHA effectively implements the congressionally directed plan for using guaranteed loans as an interim step in moving direct loan borrowers to commercial credit without a guarantee, the Secretary of Agriculture should direct the Administrator, FmHA, to develop and implement a plan to ensure that county office supervisors adequately evaluate each direct loan borrower listed annually for graduation potential to identify and graduate those borrowers who qualify for guaranteed loans or commercial credit.

    Agency Affected: Department of Agriculture

 

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