Emergency Disaster Farm Loans:

Government's Financial Risk Could Be Reduced

RCED-96-80: Published: Mar 29, 1996. Publicly Released: Mar 29, 1996.

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GAO analyzed the financial condition of the Department of Agriculture's multi-billion dollar farm loan portfolio, focusing on: (1) the factors that contribute to the financial risk associated with these loans; and (2) the extent to which farmers attempted to minimize the need for farm loans by purchasing insurance to protect their farming operations.

GAO found that: (1) since 1989, the Farm Service Agency (FSA) has forgiven over $6 billion in emergency disaster farm loans and interest; (2) additional losses should be expected because 80 percent of the $3 billion in loan debt is held by borrowers who are already delinquent or have had difficulty repaying their loans; (3) weak FSA lending policies and practices add to the inherent risk of emergency loans; (4) FSA does not consistently implement lending safeguards to protect federal financial interests; and (5) few borrowers purchase insurance to protect their property, preferring to rely on government assistance.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Federal Agriculture Improvement and Reform Act of 1996 requires borrowers to have had insurance on property damaged or destroyed as a condition for receiving emergency loans.

    Matter: If Congress waives the requirement for crop insurance, it should consider options that would more selectively target the applicants who would be eligible for the waiver and limit the amount of the loan that they could receive. These options could include prohibiting borrowers who have previously been granted insurance waivers from receiving additional waivers and reducing the amount of an emergency loan to exclude the value of the proceeds that would have been available if the borrower had chosen to purchase the required insurance.

Recommendation for Executive Action

  1. Status: Closed - Not Implemented

    Comments: USDA and the Farm Service Agency do not plan to develop regulations unless required by Congress.

    Recommendation: The Secretary of Agriculture should direct the Farm Service Agency Administrator to develop regulations that improve the cash flow analyses used in loanmaking decisions by incorporating an allowance to cover contingencies and the cost of replacing equipment.

    Agency Affected: Department of Agriculture


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