Debt Settlements:

FmHA Can Do More to Collect on Loans and Avoid Losses

RCED-95-11: Published: Oct 18, 1994. Publicly Released: Oct 18, 1994.

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GAO reviewed the Farmers Home Administration's (FmHA) debt settlements, focusing on: (1) how well FmHA protects government interests during debt settlements; and (2) additional FmHA loans to borrowers whose previous debts were forgiven.

GAO found that: (1) FmHA is not adequately protecting government interests during debt settlements; (2) FmHA wrote off about $3.4 billion in outstanding farm loans during fiscal years (FY) 1991 through 1993 without receiving any payments from borrowers on most of the loans; (3) FmHA has $7.6 billion in problem loans that may be subject to future settlements; (4) FmHA officials do not always follow FmHA debt settlement procedures such as developing a complete inventory of borrowers' financial resources, using the borrowers' resources to offset loan losses, or offsetting loans with other government payments; (5) FmHA does not emphasize minimizing loan losses during debt settlements; (6) problems in implementing debt settlement procedures include competing work priorities and limited staff resources; (7) borrowers in default are not prohibited from receiving new loans; (8) in FY 1991 through 1993, FmHA approved new loans worth $13 billion to 86 borrowers who had $20 million in debts forgiven; and (9) some of these borrowers became delinquent on their new loans.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Federal Agriculture Improvement and Reform Act of 1996 prohibits direct and guaranteed loans to borrowers whose previous accounts were settled through debt settlement.

    Matter: To strengthen FmHA loan-making standards, Congress should amend the Consolidated Farm and Rural Development Act to prohibit direct loans and loan guarantees to borrowers whose accounts were previously settled through debt settlements except in cases in which these borrowers were unable to repay their loans through no fault of their own. Congress should require the Secretary of Agriculture to: (1) establish guidance describing the circumstances under which the exception would apply; (2) closely supervise the borrowers who receive new loans under this exception; and (3) require these borrowers to move to commercial credit within a specified time period.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: The agency believes that it has implemented the intent of the recommendation through the creation of task forces aimed at resolving delinquent debt while maximizing returns to the federal government. It does not appear that the agency will adopt performance goals that would encourage field offices to maximize recoveries as they settle debts.

    Recommendation: To provide FmHA field office officials with incentives to better protect the federal government's interests during the debt settlement process, the Secretary of Agriculture should direct the Administrator, FmHA, to establish goals for maximizing recoveries on outstanding loans being resolved through debt settlements.

    Agency Affected: Department of Agriculture


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