The Status of FmHA Farm Loan Portfolio and Farm Loan-Making Criteria and Policies

GAO discussed the Department of Agriculture's Farmers Home Administration's (FmHA): (1) farm loan portfolio; and (2) proposed changes to improve its lending policies and their potential impact on FmHA borrowers' ability to qualify for future farm loans. GAO found that: (1) due to rapidly deteriorating financial conditions, more farmers sought assistance from FmHA because private lenders rejected their financing requests; (2) the FmHA farm debt in its five major farmer programs increased about 370 percent after 1977; (3) although the number of borrowers and loans decreased, the outstanding principal increased about $100 million; (4) one reason for the poor condition of the FmHA farm loan portfolio was the FmHA policy decision to help farmers stay in business with the hope that the farm economy would improve; (5) FmHA introduced a credit scoring system to help determine financial eligibility for its farm loan programs; and (6) half of the borrowers who received new farm loans in 1986 would not have qualified under the FmHA-proposed credit scoring system due to negative cash flow, technical insolvency, unpaid outstanding loans, or declining equity. GAO plans to further document the potential impact of the FmHA-revised credit scoring system and determine whether FmHA loan-servicing actions actually help borrowers return to profitability, or merely forestall financial failure while increasing the borrowers' debt loads, reducing their equity, and increasing potential future losses to the government.