Debt Settlements

FmHA Can Do More to Collect on Loans and Avoid Losses Gao ID: RCED-95-11 October 18, 1994

The Farmers Home Administration (FmHA) wrote off nearly $3 billion in farm debt between 1991 and 1993, even though the borrower may have had assets that could have been applied to bad loans. Meanwhile, borrowers who benefitted from such debt relief continue to obtain new loans. FmHA's field offices do not always follow the agency's own debt collection procedures, which are intended to mitigate the federal government's losses. For example, FmHA's internal reviews show that field officials often do not develop a complete inventory of borrowers' financial assets. Furthermore, even when FMHA has a complete inventory of borrowers' financial resources, it has not always used them to offset losses. Borrowers who have benefitted from debt relief continue to get new loans. In fiscal years 1991-93, FmHA approved new loans totaling $13 million to 86 borrowers who, through debt settlements, have received $20 million in debt relief.

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.

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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