Federal Financial Interests Are Not Adequately Protected During Debt Settlements

FmHA forgave billions of dollars in loans through debt settlements without always taking aggressive action to protect the government’s interests. FmHA officials we spoke with noted that problems in adhering to the procedures stemmed from, among other things, (1) competing program objectives that create incentives to write off large amounts of delinquent loans in an attempt to “clean up” the loan portfolio and (2) limited staff resources. Most Debt Is Written Off With No Recovery

During fiscal years 1991 through 1993, FmHA wrote off about $3.4 billion worth of outstanding direct farm loans through debt settlements. The amount already written off through debt settlements may be just the tip of the iceberg because FmHA continues to have a large number of problem loans that may eventually be subject to settlement. Field Offices Do Not Always Implement Debt Settlement Procedures

FmHA has established procedures for its field office officials to use when settling debts. Limited Emphasis on Minimizing Losses Inhibits Maximum Recovery During Debt Settlements

FmHA has placed little emphasis on minimizing losses during debt settlements. Specifically, during fiscal years 1991-93, 86 borrowers, who had received about $20 million in debt relief when their accounts with FmHA were settled, obtained about $13 million in new direct or guaranteed loans. Concerns over providing new loans to borrowers who have defaulted on previous FmHA loans are not new. However, FmHA does not take sufficient action to identify and recover payments from those with the resources to reduce their debts. GAO’s Comments

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Why GAO Did This Study

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.

What GAO Found

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.