Concerned about FmHA’s high losses in its direct loan program and the potential for similar losses in its guaranteed loan program, we reviewed the guaranteed loan program to determine (1) the extent of losses under the guaranteed farm loan program compared with those under the direct loan program, (2) the extent to which the guaranteed farm loan program has graduated FmHA’s 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. Specifically, FmHA allows guaranteed or direct loan borrowers who have defaulted on previous loans to obtain new guaranteed loans. FmHA Has Not Routinely Used the Guaranteed Loan Program to Help Viable Direct Loan Borrowers Progress to Commercial Credit

A logical step in graduating borrowers from direct loans to commercial credit would be to promptly replace their direct loans with guaranteed loans when a borrower qualifies. As table 3.1 shows, only about 7,300 FmHA direct loan borrowers, or 4 percent of the total number during fiscal years 1991-93, obtained guaranteed loans. FmHA Officials and Lenders Believe That Few Direct Loan Borrowers Qualify for Guaranteed Loans

FmHA’s headquarters and field office officials believe that few direct loan borrowers can meet the credit standards required by commercial lenders to qualify for guaranteed loans. VIII), FmHA agreed that it has not emphasized the graduation of direct loan borrowers to commercial credit through the use of the guaranteed loan program.
Why GAO Did This Study

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.

What GAO Found

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.