Outstanding and Delinquent Loans Have Declined in Recent Years

Table 1 shows that as of September 30, 1997, about 110,000 borrowers owed FSA about $9.7 billion on active direct farm loans; these figures represent 9.5 percent fewer borrowers and 14.8 percent less debt compared with those of September 1995. About 18,600 borrowers were delinquent at the end of September 1997; these borrowers owed about $2.7 billion, or 28.2 percent of the total outstanding principal. This delinquency rate is an improvement from the delinquency rates in September 1996 and 1995, which were 34.2 percent and 40.7 percent, respectively. Large Amounts of Debt Written Off Through Debt Settlements

FSA incurs losses when it writes off the direct farm loans of delinquent borrowers through its debt settlement process, which essentially represents the agency’s final resolution of unpaid loans and generally occurs after loan-security property has been liquidated. In fiscal year 1997, FSA wrote off about $380 million through debt settlements, which is down from the more than $860 million written off in fiscal year 1996 and $780 million written off in fiscal year 1995. Appendix II provides information on the five states with the most write-offs during each of these 3 fiscal years. FSA has made little use of these authorities: It has contracted with private attorneys in only two states; it has not contracted with private lenders or with private collection agencies and is not actively considering doing so. To date, FSA has contracted with private attorneys to obtain assistance in resolving delinquent farm loan accounts in only two states—Louisiana and New Jersey—and has no plans to expand its use in other states. According to FSA’s state officials, the agency canceled one contract at the law firm’s request and the other because of noncompliance with the terms of the contract. FSA’s officials acknowledged that the agency has a problem with loan servicing. Objectives, Scope, and Methodology

As requested, our objectives were to assess (1) the levels of outstanding principal on active direct farm loans at the end of fiscal years 1995 through 1997, including the amounts owed by delinquent borrowers; (2) the amount of debt written off by FSA through the debt settlement process in fiscal years 1995 through 1997; and (3) FSA’s use of three statutory provisions enacted in the mid-1990s that authorize FSA to contract with private attorneys for legal assistance in resolving delinquent farm loan accounts, private lenders for assistance in servicing farm loan borrowers’ accounts, and private collection agencies for assistance in collecting delinquent farm loans.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on: (1) the levels of outstanding principal on active direct farm loans at the end of fiscal years (FY) 1995 through 1997, including the amounts owed by delinquent borrowers and the amount of debt written off by the Farm Service Agency (FSA) through the debt settlement process in each of these fiscal years; and (2) FSA's use of three statutory provisions enacted in the mid-1990s that authorize FSA to contract with the private sector to resolve delinquent loans.

What GAO Found

GAO noted that: (1) the size of the Farm Service Agency's direct farm loan portfolio has decreased in recent years; (2) the outstanding principal on active farm loans totalled about $11.4 billion in September 1995, $10.5 billion in September 1996, and $9.7 billion in September 1997; (3) the percentage of the portfolio held by delinquent borrowers--those who were at least 30 days past due on loan repayment--also decreased; (4) in September 1995, delinquent borrowers held 40.7 percent of the outstanding principal on direct farm loans; the delinquency rates for 1996 and 1997 were 34.2 percent and 28.2 percent, respectively; (5) FSA wrote off about $380 million for almost 2,000 borrowers in fiscal year (FY) 1997 through its debt settlement process, which essentially represents the agency's final resolution of unpaid loans and generally occurs after loan-security property has been liquidated; (6) previously, the agency has written off about $860 million and $780 million in (FY) 1996 and 1995, respectively; (7) of the more than $2 billion that was written off during the 1995-1997 period, most--81.5 percent--was written off with no payments to the agency by the borrowers at the time of debt settlement; (8) the extent of these write-offs underscores the high risks associated with the agency's farm loans; (9) to date, FSA has made only limited use of one of the three new loan-servicing authorities it was given in the mid-1990s; (10) specifically, it has contracted with private attorneys to obtain legal assistance in resolving delinquent farm loan accounts in two states and has no plans to expand its use in other states; (11) in regard to the other two authorities, FSA has not contracted with private lenders or with private collection agencies and is not actively considering such contracting; and (12) agency officials said they have not used these new contracting authorities more extensively because, among other things, they can obtain assistance from the Department of Justice and the Department of the Treasury or they can perform the servicing functions with their own personnel.