Farmers Home Administration

Pursuant to a congressional request, GAO reviewed the Farmers Home Administration's (FmHA) progress in implementing its congressionally authorized shift from direct to guaranteed farm loans and the overall impact on farm credit availability, focusing on: (1) the impact of the shift on borrowers, private lenders, and the government; (2) borrowers' financial conditions; and (3) whether program problems contributed to losses on guaranteed loans.

GAO found that: (1) the total annual authorization for guaranteed farm loans increased from $175 million to $3.3 billion, while total obligations for the loans grew from about $71 million in 1983 to about $1.3 billion in 1988; (2) the increase in guaranteed lending resulted from private lenders obtaining guarantees for their financially distressed customers; (3) only 2 percent of FmHA direct-loan borrowers obtained guaranteed loans, because their poor financial conditions made private lenders reluctant to give them even guaranteed loans; (4) the decrease in direct FmHA loans resulted from such factors as increased use of government farm program payments instead of credit to finance farm operations, fewer borrowers, and reduced FmHA authorization for farm ownership loans; (5) although guaranteed loans help high-risk borrowers obtain private credit, they pay higher interest rates and loan fees and face a greater chance of liquidation if they default on their loans; (6) because recent congressional actions extended direct-loan eligibility, few of the borrowers will obtain guaranteed loans, direct-loan requests may not decline, and additional funding decreases may restrict credit availability for borrowers; (7) guaranteed loans help lenders finance borrowers who are poor credit risks, protect lenders against potential losses, and help the government keep some farm lending in the private sector and reduce outlays for new direct loans; (8) the government's financial exposure increased recently because the outstanding principal of guaranteed loans outpaced the decrease in that of direct loans; (9) losses on guaranteed loans have grown faster than guaranteed loan activities since 1984 and could exceed $115 million in 1989; and (10) although adverse weather caused some losses, inadequate assessment of borrowers' financial conditions prior to loan approval and insufficient oversight of loan guarantees were major contributors to losses.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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