Debt Collection
Agriculture Making Progress in Addressing Key Challenges Gao ID: GAO-03-202T November 13, 2002In December 2001, GAO testified at a hearing, before the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, House Committee on Government Reform, that the Department of Agriculture, primarily the Rural Housing Service (RHS) and the Farm Service Agency (FSA), faced challenges in implementing key provisions of the Debt Collection Improvement Act of 1996 (DCIA). The testimony focused on RHS's and FSA's progress in referring delinquent debt for administrative offset and cross-servicing and Agriculture's implementation of administrative wage garnishment (AWG). During the hearing, Agriculture pledged to place a higher priority on delinquent debt collection and to substantially improve its implementation of DCIA by December 31, 2002. After the hearing, GAO made recommendations The Subcommittee requested GAO to review and provide an update on actions Agriculture has taken to resolve these problems. In addition, the Subcommittee requested that GAO report on the status of Treasury's implementation of a debt collection improvement account, a vehicle authorized by DCIA to give agencies financial incentives to improve their debt collection efforts.
Recent actions taken by Agriculture demonstrate increased commitment to DCIA implementation. However, it will take sustained commitment and priority by top management to fully address the problems we identified. RHS has worked to address systems limitations that hampered it from promptly referring debts to Treasury for cross-servicing and is now referring all reported eligible debt. RHS will begin reporting certain loans' entire unpaid principal balances on accelerated debt as delinquent, beginning with its report for the fourth quarter of fiscal year 2002. RHS is working on making regulatory changes needed for it to refer losses on guaranteed loans to Treasury's offset program, but the changes are not expected to be completed until about August 2003. FSA has developed an action plan to improve its process and controls for identifying and referring eligible debts to Treasury. GAO's review of documents related to the plan indicates that FSA has made progress toward implementing the improvements. In addition, by December 2002, FSA expects to be able to begin reporting information for some codebtors when referring delinquent debts for collection action; to begin referring debts quarterly, rather than annually; and to be able to refer eligible losses on guaranteed loans. Agriculture has taken steps toward departmentwide implementation of AWG. Agriculture has completed its AWG implementation plan but still needs to carry out certain elements of the plan, including obtaining from its component agencies specific information on the types of debt subject to AWG and finalizing an agreement with the Department of Veterans Affairs to conduct AWG hearings on Agriculture's behalf. Agriculture has also drafted regulations necessary for implementing AWG, which may not be published until May 2003. Treasury has established a debt collection improvement account but, to date, it has not been activated because no amounts have been made available in Treasury's appropriations to fund the account. Agencies would be allowed to contribute a portion of their debt collections into the account, and amounts could be used to reimburse agencies for certain expenses related to credit management and debt collection and recovery. Because the account has not been activated, it is difficult to assess how effective it might be in improving federal debt collection beyond the debt collection improvements that have resulted directly from DCIA's major debt collection requirements for federal agencies.
GAO-03-202T, Debt Collection: Agriculture Making Progress in Addressing Key Challenges
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United States General Accounting Office:
GAO:
Testimony:
Before the Subcommittee on Government Efficiency, Financial Management
and Intergovernmental Relations, Committee on Government Reform, House
of Representatives:
For Release on Delivery:
Expected at 10 a.m.
Wednesday, November 13, 2002:
Debt Collection:
Agriculture Making Progress in Addressing Key Challenges:
Statement of Gary T. Engel:
Director, Financial Management and Assurance:
GAO-03-202T:
GAO Highlights:
Highlights of GAO-03-202T, testimony before the Subcommittee on
Government Efficiency, Financial Management and Intergovernmental
Relations, Committee on Government Reform, House of Representatives.
Why GAO Did This Study:
In December 2001, GAO testified at a hearing before the Subcommittee
that the Department of Agriculture, primarily the Rural Housing
Service (RHS) and the Farm Service Agency (FSA), faced challenges in
implementing key provisions of the Debt Collection Improvement Act of
1996 (DCIA). The testimony focused on RHS's and FSA's progress in
referring delinquent debt for administrative offset and cross-
servicing and Agriculture's implementation of administrative wage
garnishment (AWG).
During the hearing, Agriculture pledged to place a higher priority on
delinquent debt collection and to substantially improve the
department's implementation of DCIA by December 31, 2002. After the
hearing, GAO made recommendations to Agriculture to help the
department address the implementation problems GAO had identified.
It is with this backdrop that the Subcommittee requested GAO to review
and provide an update on actions Agriculture has taken to resolve
these problems. In addition, the Subcommittee requested GAO to report
on the status of Treasury's implementation of a debt collection
improvement account, a vehicle authorized by DCIA to give agencies
financial incentives to improve their debt collection efforts.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GA0-03-202T].
To view the full report, including the scope and methodology, click on
the link above. For more information, contact Gary T. Engel at (202)
512-3406 or engelg@gao.gov.
What GAO Found:
Recent actions taken by Agriculture demonstrate increased commitment
to DCIA implementation. However, it will take sustained commitment and
priority by top management to fully address the problems we
identified. GAO's findings include the following:
* RHS has worked to address systems limitations that hampered it from
promptly referring debts to Treasury for cross-servicing and is now,
according to Treasury, referring all reported eligible debt. The
agency will begin reporting certain loans' entire unpaid principal
balances on accelerated debt as delinquent, beginning with its report
for the fourth quarter of fiscal year 2002. RHS is working on making
regulatory changes needed for it to refer losses on guaranteed loans
to Treasury's offset program, but the changes are not expected to be
completed until about August 2003.
* FSA has developed an action plan to improve its process and controls
for identifying and referring eligible debts to Treasury. GAO's review
of documents related to the plan indicates that FSA has made progress
toward implementing the improvements. In addition, by December 2002,
the agency expects to be able to begin reporting information for some
codebtors when referring delinquent debts for collection action; to
begin referring debts quarterly, rather than annually; and to be able
to refer eligible losses on guaranteed loans.
* Agriculture has taken steps toward departmentwide implementation of
AWG. Agriculture has completed its AWG implementation plan but still
needs to carry out certain elements of the plan, including obtaining
from its component agencies specific information on the types of debt
subject to AWG and finalizing an agreement with the Department of
Veterans Affairs to conduct AWG hearings on Agriculture's behalf.
Agriculture has also drafted regulations necessary for implementing
AWG, which may not be published until May 2003.
Treasury has established a debt collection improvement account but, to
date, it has not been activated because no amounts have been made
available in Treasury's appropriations to fund the account. Agencies
would be allowed to contribute a portion of their debt collections
into the account, and amounts could be used to reimburse agencies for
certain expenses related to credit management and debt collection and
recovery. Because the account has not been activated, it is difficult
to assess how effective it might be in improving federal debt
collection beyond the debt collection improvements that have resulted
directly from DCIA's major debt collection requirements for federal
agencies.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the Department of
Agriculture's (Agriculture's) actions and plans to resolve certain
implementation problems involving the Debt Collection Improvement Act
of 1996 (DCIA), and the status of the Department of the Treasury's
(Treasury's) use of a special financial incentive provision of the act
to encourage federal agencies to improve their delinquent debt
collection efforts. During a hearing on Agriculture's implementation
of DCIA, which was held before this Subcommittee on December 5, 2001,
we stressed that the department's implementation of DCIA requirements
would have to improve vastly if the debt collection benefits of DCIA
were to be more fully realized. Also during that hearing, Agriculture
officials pledged to give debt collection higher priority and to
substantially improve the department's implementation of the act by
December 31, 2002. Subsequent to the hearing, we made a number of
recommendations to Agriculture to help it address specific DCIA
implementation problems that we identified and discussed at the
hearing.[Footnote 1] It is with this backdrop that you asked us to
review actions taken by Agriculture to resolve the specific DCIA
implementation problems that we identified and discussed. In addition,
given the fact that in recent hearings on DCIA implementation, little
if any mention has been made of the act's financial incentive
provision's merits, you wanted to know whether Treasury has
established a fund or account to implement this provision, and if so,
which federal agencies have received payments from the account and for
what activities.
Agriculture's full implementation of certain key provisions of DCIA is
critical to overall federal nontax debt collection. As a major federal
lending agency, Agriculture continues to hold a substantial amount of
delinquent federal nontax debt. As of September 30, 2001, Agriculture
reported holding about $6.2 billion of debt over 180 days delinquent.
In DCIA, the Congress, with key leadership and support from this
Subcommittee, provided agencies, including Agriculture, with a full
array of tools to collect such delinquent debt. Among other things,
DCIA provides (1) a requirement for federal agencies to notify
Treasury of eligible debts delinquent over 180 days for purposes of
centralized administrative offset, (2) a requirement for agencies to
refer such debts to Treasury for centralized collection action known
as cross-servicing, and (3) authorization for agencies to
administratively garnish the wages of delinquent debtors.
The primary emphasis of my testimony today is on corrective actions
taken by two major Agriculture components”Rural Development's Rural
Housing Service (RHS) and the Farm Service Agency (FSA)”to resolve
problems associated with the identification and referral of eligible
delinquent debts to Treasury for collection action since the December
2001 hearing. I will also provide an update of Agriculture's
departmentwide implementation of administrative wage garnishment
(AWG).[Footnote 2] As you recall, we discussed Agriculture's actions
and plans for implementing AWG in context with information dealing
with the extent to which eight other large Chief Financial Officers
(CFO) Act agencies and Treasury's Financial Management Service (FMS)
used or planned to use AWG to collect delinquent federal nontax debt.
Summary:
Today, I am pleased to report that recent actions taken by Agriculture
demonstrate that, overall, it now places a higher priority on DCIA
implementation. RHS and FSA have made progress in addressing the
problems involving identification and referral of eligible debts to
Treasury for collection action that we identified, discussed, and for
which we made recommendations for corrective action. In addition,
Agriculture is making progress in departmentwide implementation of
AWG. However, for Agriculture and its agencies to fully address all of
the DCIA implementation problems that we identified and discussed by
December 2002, or within a reasonable period thereafter, it will take
sustained commitment and priority by top management.
Regarding the DCIA provision to offer agencies financial incentives
for collecting delinquent debt, Treasury established a debt collection
improvement account and has twice requested appropriations authorizing
expenditures from the fund. Thus far, no expenditures have been
authorized. While we support, in principle, the idea of incentives for
effective debt collection, the overall success of DCIA has not
depended, nor should it, upon the availability or use of a financial
incentive. Debt collection is a fundamental aspect of administering
credit programs and DCIA contains specific requirements for federal
agencies that were designed to improve the collection of the
government's delinquent nontax debt. As you know, debt collection has
historically not been a high priority at some credit agencies.
However, largely due to this Subcommittee's oversight of agencies'
DCIA implementation, the envisioned benefit of these requirements has
begun to materialize For example, between fiscal years 1998 and 2001,
Treasury's offset program collected over $10 billion, about 45 percent
of which was federal nontax debt.[Footnote 3] In addition, according
to recent Treasury reports, federal agencies governmentwide referred
about 93 percent of their reported eligible debt as of fiscal year
2001 for cross-servicing compared to 71 percent for fiscal year 2000,
which should bode well for future collections as Treasury has begun to
incorporate AWG into its cross-servicing program.
Scope and Methodology:
To respond to your request, we performed work primarily at RHS, FSA,
and Agriculture's Office of the Chief Financial Officer. We also
performed work at Treasury and conducted interviews with agency
officials at RHS and FSA who are responsible for taking corrective
actions to ensure that all eligible delinquent debt is promptly
referred to Treasury for collection action. We conducted interviews
with Agriculture's CFO and members of his staff regarding
Agriculture's implementation of AWG. To corroborate information we
obtained from interviews, we obtained and reviewed pertinent agency
documents including action plans and implementation schedules. We did
not verify the reliability of certain information that was provided to
us by agencies such as delinquent debt referred to Treasury. We also
did not assess the technical adequacy of the specific systems
enhancements that have been deemed by the agencies as necessary for
addressing the DCIA implementation problems that we identified and
discussed. We conducted interviews with Treasury officials who were
knowledgeable about the debt collection improvement account provision
of DCIA and the status of the account at Treasury. We performed our
work from July through September 2002 in accordance with U.S.
generally accepted government auditing standards.
RHS Using Its Automated Systems to Make Cross-Servicing Referrals:
In December 2001, we testified that, as of September 30, 2000, RHS
reported it had referred to Treasury's offset program $201 million of
direct Single Family Housing (SFH) loans but had not referred any
amounts to Treasury for cross-servicing, primarily due to RHS's
systems limitations. RHS officials told us that since implementing a
new automated centralized loan servicing system in fiscal year 1997,
RHS had been unable to readily identify direct SFH loans that are
eligible for referral to Treasury for cross-servicing. Essentially,
the system did not contain sufficient data to differentiate loans
eligible for cross-servicing from those that were not. For example,
the system needed to be capable of determining the status of any
collateral, because all collateral must be liquidated prior to a
loan's referral to Treasury for cross-servicing. After the hearing, we
recommended that the Secretary of Agriculture direct the Administrator
of RHS to complete development of the software enhancements that will
allow automated identification of loans eligible for cross-servicing
and promptly refer all such loans to Treasury.[Footnote 4]
RHS has completed and implemented the system enhancements necessary
for automated identification of direct SFH loans eligible for cross-
servicing and the prompt referral of such loans. In April 2002, RHS
made its first automated referral of direct SFH loans to Treasury for
cross-servicing. This referral involved about 10,900 loans totaling
about $165.6 million. RHS is currently using its enhanced system to
identify loans eligible for cross-servicing and electronically refer
them to Treasury on a monthly basis. According to RHS documents and
Treasury officials, RHS has referred all of the loans that it has
reported as eligible for cross-servicing. Moreover, an RHS document
indicates and Treasury officials told us that there have been no
significant problems regarding eligibility for cross-servicing for the
loans that RHS has referred since April 2002.
RHS Able to Provide Listing of Excluded Loans for Independent
Verification:
As we stated at the December 2001 hearing, when we attempted to
independently verify specific debts that RHS had excluded from
referral to Treasury's offset program as of September 30, 2000, we
were told by RHS officials that the supporting documentation for the
$182 million of direct SFH loans excluded from referral had not been
saved. We subsequently recommended that the Secretary of Agriculture
direct the Administrator of RHS to maintain supporting documentation,
in an appropriate level of detail that can be made readily available
for independent verification, for all SFH debts reported and certified
to Treasury as excluded from referral for collection action. At a
minimum, the documentation should include, for each exclusion
category, such as foreclosure, the total amount reported as excluded
on the certified Treasury Report on Receivables Due from the Public
(TROR) and a listing of the identities and dollar amounts of the
specific loans excluded.[Footnote 5] Such documentation would
facilitate an efficient independent review to determine whether RHS's
exclusions meet relevant legislative and regulatory criteria. The
Comptroller General's Standards for Internal Control in the Federal
Government states that all transactions and other significant events
need to be clearly documented and that the documentation should be
readily available for examination.[Footnote 6]
During our follow-up review, RHS provided us a detailed listing of
specific direct SFH loans and the loans' corresponding dollar amounts
that had been reported as excluded from referral to Treasury on the
TROR as of September 30, 2001, the last period for which certified
data were available. Although we were not requested to and did not
test the specific loans excluded to determine whether they met
relevant legislative and regulatory criteria, RHS's ability to provide
such listings should facilitate future independent verifications of
the validity of its reported exclusions, and is critical for the
oversight of the agency's DCIA implementation.
Treasury Instructs Rural Development to Report Accelerated Balances
for RHS's Direct SFH Loans:
Treasury is the sole operator of a governmentwide centralized debt
collection center. As such, it is critical that Treasury obtain
accurate information from federal agencies on the status of their
nontax debt, particularly the debt over 180 days delinquent, for which
DCIA was designed in large part to help agencies collect through
centralized collection. During the December 2001 hearing, we stressed
that RHS was only reporting the delinquent installment portion of its
direct SFH loans as delinquent in its TROR. It was not reporting, as
required by Treasury, the accelerated loan balance, which is the total
debt due and payable. In the report we issued after our testimony,
[Footnote 7] we stated that, as a result of such reporting, RHS may
have underreported to Treasury direct SFH loan amounts delinquent over
180 days by about $849 million and direct SFH loan amounts eligible
for Treasury's offset program by about $348 million as of September
30, 2000. We recommended that the Secretary of Agriculture direct the
Administrator of RHS to work with Treasury to resolve any
inconsistencies between RHS's reporting of delinquent debts on its
TROR and Treasury's instructions for such reporting. In addition, we
recommended that absent any modifications to Treasury's instructions
for preparing the TROR, RHS report the entire accelerated balance of
delinquent direct SFH loans to Treasury as delinquent debt and, absent
any allowable exclusions, as debt eligible for referral to Treasury
for collection action.[Footnote 8]
After we made our recommendations, Agriculture and Treasury officials
met to address the inconsistency that existed between RHS's reporting
of delinquent direct SFH loans on the TROR and Treasury's instructions
for such reporting. In a September 2002 letter, Treasury informed
Rural Development that RHS should report the entire unpaid principal
balances as delinquent on the TROR, and requested that such reporting
begin with the TROR for the fourth quarter of fiscal year 2002.
Treasury stated in the letter that once an acceleration notice is sent
to the borrower, which has been RHS's ongoing practice, the entire
debt is due and payable and should be reflected as such on the TROR.
Treasury also stated that its decision was based on consultation with
its legal counsel and recent discussions with Agriculture officials
including its CFO. According to RHS officials, the agency will report
the entire unpaid principal balances for its direct SFH loans that
have been accelerated beginning with the TROR for the fourth quarter
of fiscal year 2002.
Efforts Under Way, But RHS Will Not Be Able to Refer Guaranteed Losses
in the Immediate Future:
At the December 2001 hearing, we stated that RHS had not referred
losses on its guaranteed SFH loans to Treasury for collection action.
RHS officials told us that the agency could not pursue recovery from
the debtor or utilize DCIA debt collection tools because under the SFH
guaranteed loan program, no contract existed between the debtor and
RHS. Consequently, RHS did not recognize the losses that it paid to
guaranteed lenders as federal debt and could not apply DCIA debt
collection remedies to them. We were particularly concerned about DCIA
debt collection remedies not being available for RHS's guaranteed SFH
losses because, according to RHS, through September 30, 2000, such
losses totaled about $132 million.[Footnote 9] After the hearing, we
recommended that the Secretary of Agriculture direct the Administrator
of RHS to finalize and implement necessary regulatory changes and
modifications to lender agreements so that losses on guaranteed SFH
loans could be treated as federal debt and referred to Treasury for
collection action.[Footnote 10]
RHS is currently working on making the regulatory changes that are
needed to refer losses on guaranteed SFH loans to Treasury's offset
program; however, the agency will not be able to refer such losses
until regulatory action is completed and guaranteed loan applications
are modified. According to a RHS official, to expedite the regulatory
recognition of losses on guaranteed SFH loans as federal debt,
Agriculture is currently incorporating the regulatory changes that are
needed into the draft final rule for the Section 502 Guaranteed Rural
Housing Program. It is important to note, however, that the Office of
Management and Budget (OMB) has determined that the final rule for
this program will constitute a "significant regulatory action." As
such, the rule will be subject to a more lengthy clearance process
that will involve OMB review in the final rulemaking stages. [Footnote
11] According to a schedule provided by Agriculture, which includes
internal agency review as well as OMB review, publication of the final
rule for the Section 502 Guaranteed Rural Housing Program is expected
by about August 2003.
Given that the aforementioned regulation is not expected to be
finalized for a considerable time, it is important to note that, as of
our fieldwork completion date, RHS also had not modified the
guaranteed loan applications for the SFH guaranteed loan program that
are needed to establish a contractual relationship between the debtor
and RHS so that losses stemming from SFH guaranteed loans can be
recognized as federal debt and be subject to the debt collection
provisions of DCIA. Initially, an RHS official stated that RHS planned
to make changes to the applications when the final rule for the
guaranteed loan program is issued. However, we pointed out that that
approach could possibly delay RHS's ability to recognize guaranteed
loan losses as federal debt, and we suggested that RHS change the
guaranteed loan applications as soon as practicable so that once the
rule goes into effect, it may be able to be applied retroactively to
cover as many guaranteed loans as possible. As a result, according to
an RHS official, RHS consulted with its Office of General Counsel and
obtained approval for changing the guaranteed loan applications prior
to the issuance of the final rule.[Footnote 12] Currently, RHS is in
the process of revising its guaranteed loan application form to
include an acknowledgement that any claim paid by RHS on a guaranteed
loan would be subject to provisions of the DCIA.
Once the regulations are finalized and RHS makes the necessary
modifications to the guaranteed loan application, the agency will need
to be able to promptly refer guaranteed losses to Treasury's offset
program. Given the fact that the SFH guaranteed loan program continues
to grow significantly, thereby increasing the number of loss claims
being processed each year, automated tracking of guaranteed loan
losses and referring them to Treasury will be critically important.
RHS has initiated a project to automate the tracking of SFH loss
claims from lenders and payments made to lenders to cover such claims,
which it plans to complete in April 2003. It is important to note,
however, that the project does not cover the process for the automated
referral of guaranteed losses to Treasury. According to RHS officials,
this automated referral process will not be covered until RHS
initiates the second phase of the current project after April 2003,
and which is estimated to take an additional 9 to 12 months to
complete. However, RHS currently tracks guaranteed losses, and RHS
officials stated that referrals to Treasury could be done manually if
the automated enhancements needed to make such referrals are not
complete.
FSA Has Initiated Actions to Improve Its Process and Controls for
Identifying and Referring Debts:
At the December 2001 hearing, we stated that FSA did not have a
process or sufficient controls in place to adequately identify direct
farm loans eligible for referral to Treasury. We emphasized that, as a
result, amounts of direct farm loans FSA reported to Treasury as
eligible for referral were not accurate and, for certain loans, not
only distorted the TROR for debt management and credit policy purposes
but also distorted key financial indicators such as receivables, total
delinquencies, and loan loss data. Specifically, FSA automatically
excluded from referral all judgment debts without any review to
identify and refer deficiency judgments, which are eligible for
Treasury's offset program and should be referred.[Footnote 13] We
emphasized that, as of September 30, 2000, FSA's judgment debts
totaled $295 million, and our inquiries prompted the agency to
initiate a manual process to identify deficiency judgments eligible
for referral.[Footnote 14]
Moreover, FSA's Program Loan Accounting System did not contain current
information from the detailed loan files located at the numerous FSA
county field offices that would be key to determining a farm loan's
eligibility for referral to Treasury. In addition, there were no
monitoring or review procedures in place to help ensure that FSA
personnel routinely updated the detailed loan files that are the
source of such key information. The severity of this problem was
reflected in the results of our statistical sample of loans that had
been excluded by FSA in four large states.[Footnote 15] Based on our
review of this sample, we estimated that about one-half of the
excluded loans in the four states had been inappropriately placed in
exclusion categories by FSA as of September 30, 2000.[Footnote 16] One
of the most frequently identified inappropriate exclusions pertained
to amounts that had been discharged in bankruptcy. Such exclusions
involved debts that FSA should have written off and closed out, in
many instances, several years prior to our test date. In addition, the
written-off and closed-out amounts for such debts should have been
reported to IRS as income to the debtor in accordance with the Federal
Claims Collection Standards and OMB Circular A-129.[Footnote 17]
After the hearing, to address these problems, we recommended that the
Secretary of Agriculture direct the Administrator of FSA to develop
and implement (1) automated system enhancements to make the Program
Loan Accounting System capable of identifying all judgment debts
eligible for referral to Treasury for collection action, (2) oversight
procedures to ensure that FSA field offices timely and routinely
update the Program Loan Accounting System to accurately reflect the
status of delinquent debts, including whether the debts are eligible
for referral to Treasury for collection action, and (3) oversight
procedures to ensure that all debts discharged through bankruptcy are
promptly closed out and reported to the IRS as income to the debtor in
accordance with the Federal Claims Collection Standards and OMB
Circular A-129. We also recommended that FSA continue to manually
identify deficiency judgments eligible for referral until the system
enhancements for automated identification were completed and
implemented.[Footnote 18]
FSA has developed an action plan to improve its process and controls
for identifying and referring eligible debts to Treasury and, based
upon our review of documents provided by FSA, the agency has made
progress toward implementing such improvements. As of our fieldwork
completion date, FSA was using its Program Loan Accounting System and
system-generated reports to better track the status of FSA's
delinquent debts, including judgment debts, for the purpose of meeting
the DCIA referral requirements. Specifically, FSA was generating an
enhanced debt report to include various types of debts under FSA's
farm loan programs, including judgment debts, to facilitate field
office review of debts to determine eligibility for referral to
Treasury. In September 2002, FSA provided its field offices the
initial enhanced debt report and directed the field offices to review
the debts for accuracy. FSA plans to routinely use the enhanced debt
report in such field office reviews in the future.
In addition, actions are being taken to improve field office oversight
for DCIA implementation. Beginning in August 2002, county field
offices must provide their respective state offices with documentation
for loans that they determine are ineligible for Treasury's offset
program because of bankruptcy, foreclosure, or litigation.[Footnote
19] The state offices, in turn, are responsible for making the final
decision regarding the loans' eligibility for referral and for
actually excluding the loans from referral. In addition, FSA has
amended its National Internal Review Guide to include specific
procedures that are designed to help ensure that state offices, among
other things, establish monitoring systems to accurately track
borrowers in foreclosure, bankruptcy, and litigation. The procedures
are intended to facilitate the timely and routine updating of
information in the Program Loan Accounting System to accurately
reflect the status of delinquent debts, including whether the debts
are eligible for referral to Treasury for collection action, and that
all debts discharged through bankruptcy are promptly closed out and
reported to IRS. FSA's policy is to perform its national internal
reviews at state offices not less than every 2 years, and the new
procedures should improve FSA's implementation of DCIM delinquent debt
referral requirements. It is important to note, however, that specific
actions in FSA's action plan that are needed to (1) ensure field
offices are routinely reviewing accounts for Treasury's offset program
and cross-servicing referral eligibility; (2) ensure that field
offices routinely monitor the status of accounts and properly code
them for foreclosure, bankruptcy, and litigation; and (3) ensure
discharged bankruptcy accounts are promptly closed out, removed from
the farm loan debt portfolio, and appropriately reported to the IRS as
discharged debts, have target completion dates of September 2003.
Efforts Under Way at FSA to Begin Referring Codebtors to Treasury:
We stated at the December 2001 hearing that even though FSA reported
having referred $934 million of direct farm loans to Treasury's offset
program as of September 30, 2000, the agency has lost opportunities
for maximizing collections on this debt because it does not refer
codebtors. We emphasized that the vast majority of direct farm loans
have codebtors and pointed out that FSA's Program Loan Accounting
System did not have the capacity to record more than one debtor and
that the necessary system modifications to record more than one
taxpayer identification number had not been made. After the hearing,
we recommended that the Secretary of Agriculture direct the
Administrator of FSA to monitor planned system enhancements to the
Program Loan Accounting System to ensure that capacity to record and
use codebtor information is available and implemented by December
2002.[Footnote 20]
FSA has acknowledged the need to refer codebtors. Its action plan
includes time frames for developing and testing the systems
enhancements deemed necessary for recording and reviewing relevant
information needed for referring debts to Treasury's offset program,
including the codebtor's name, address, and taxpayer identification
number. Based on our review of documents provided by FSA, the agency
has established a codebtor code for its system and has begun to input
codebtor information. According to FSA, as of our fieldwork completion
date, 254 loans with codebtors totaling about $8.3 million had been
identified for initiating the due process required for referral to
Treasury's offset program in December 2002. Given that the vast
majority of the agency's direct farm loans have codebtors, FSA has a
substantial challenge ahead to obtain the required information to
refer all eligible debt for codebtors to Treasury's offset program.
[Footnote 21]
Quarterly Referrals to Treasury's Offset Program to Begin in December
2002:
As we noted at the December 2001 hearing, data provided by FSA
officials showed that about $400 million of new delinquent debt became
eligible for Treasury's offset program during calendar year 2000.
Although FSA officials acknowledged that debts became eligible
relatively evenly throughout the year, debts eligible for offset were
being referred to Treasury only once annually, during December. As a
result, a large portion of the $400 million of debt likely was not
promptly referred when it became eligible. FSA agreed that quarterly
referrals could enhance possible collection of delinquent debts by
getting them to Treasury earlier. After the hearing, we recommended
that the Secretary of Agriculture direct the Administrator of FSA to
monitor effective completion of the planned automated system
modifications to refer eligible debt to Treasury's offset program on a
quarterly, rather than annual, basis.[Footnote 22]
FSA plans to make quarterly referrals to Treasury's offset program and
intends to make the first such referral in December 2002. In August
2002, FSA issued guidance to the field offices for review of eligible
debts for the December 2002 referral.[Footnote 23] In September 2002,
FSA informed its field offices that quarterly referrals are now
required, and the agency has determined that the same due process
notification and referral process that has been used annually will be
used quarterly, except under a shorter time frame.
Significant Actions Taken by FSA to Be Able to Refer Guaranteed Losses
to Treasury's Offset Program:
At the December 2001 hearing, we pointed out that FSA had paid out
about $293 million in losses for guaranteed farm loans since fiscal
year 1996, but like RHS, FSA had missed opportunities to potentially
collect millions of dollars related to guaranteed loan losses because
they were not treated as federal debt. We also noted while performing
work at FSA that the agency had revised its guaranteed loan
application applicable to guaranteed loans made after July 20, 2001,
to include a section specifying that amounts FSA pays to a lender as a
result of a loss on a guaranteed loan constitute a federal debt. After
the hearing, because FSA needed to make revisions to its Guaranteed
Loan Accounting System to classify guaranteed farm loan losses as
federal debt, we recommended that the Secretary of Agriculture direct
the Administrator of FSA to monitor planned system enhancements to the
Guaranteed Loan Accounting System to ensure that the software needed
to implement the revisions to the lender agreement to establish
guaranteed loan losses as federal debt is completed. In addition, we
recommended that once FSA establishes guaranteed loan losses as
federal debt and deems them to be eligible for referral to Treasury,
FSA timely refer such debt to Treasury for collection action in
accordance with DCIA.[Footnote 24]
FSA has issued the final regulations for recognizing claims paid on
guaranteed farm loans as federal debt and is currently making needed
systems modifications to refer such losses to Treasury's offset
program. According to FSA officials, the July 2002 regulations apply
to guaranteed farm loans made after July 20, 2001, the date of the
revised guaranteed loan application. FSA has established December 2002
as the milestone date for completing the automated systems capability
to refer eligible losses to Treasury's offset program and, according
to FSA officials, the agency is on schedule. According to FSA
officials, as of our fieldwork completion date, the agency has not
paid any loss claims associated with guaranteed farm loans made under
the July 20, 2001, revision of the guaranteed loan application, and
does not expect to experience such losses in the near future because
the loans are relatively new.[Footnote 25] However, it is important to
note that if FSA experiences such losses, it has procedures for the
manual referral of guaranteed loan loss debt to Treasury's offset
program.
Agriculture Is Working toward Departmentwide Implementation of AWG:
At the December 2001 hearing, we stated that Agriculture and eight
other agencies we surveyed still had not utilized AWG as authorized by
DCIA to collect delinquent nontax debt even though experts had
previously testified before this Subcommittee that AWG could
potentially be an extremely powerful debt collection tool. We noted
that the agencies, including Agriculture, needed to develop the
required regulations to implement AWG. In addition, we emphasized that
Agriculture had not established specific dates for implementing AWG
and was among five surveyed agencies that said they intended to
implement AWG in the future but had no written implementation plan for
doing so. After the hearing, we recommended, among other things, that
the Secretary of Agriculture direct the CFO to complete and finalize
regulations for conducting AWG and prepare a comprehensive written
implementation plan that clearly defines, at a minimum, the types of
debt that will be subject to AWG, the policies and procedures for
administering AWG, and the process for conducting hearings, which are
required by Treasury. We also recommended that, when practicable, (1)
AWG be used in conjunction with other debt collection tools and (2)
debts be referred to Treasury prior to 180 days delinquent when
relying on Treasury to perform AWG.[Footnote 26]
Agriculture agrees that AWG has the potential to be a powerful tool
for collecting delinquent federal debts and has taken actions to
develop needed regulations and has completed a departmentwide AWG
implementation plan. As of our fieldwork completion date, Agriculture
had drafted AWG regulations and incorporated them into the overall
debt collection regulations for the department, which are currently
being revised.[Footnote 27] Agriculture also plans to work with OMB to
determine whether Agriculture's regulatory revisions for debt
collection should be considered a "significant regulatory action."
According to Agriculture's implementation plan, if the regulatory
revisions are determined to be a "significant regulatory action," they
will require a more lengthy review process resulting in a target date
of May 2003 for final publication.
In addition, Agriculture's implementation plan contains other
milestone dates that need to be met and key elements that are needed
to implement AWG. In accordance with the implementation plan, the
CFO's office has obtained from component agencies their best estimates
of the number of AWG cases they are likely to have each year for loans
and administrative debt along with a corresponding estimate for the
number of requests for hearings. Agriculture plans to have the
Department of Veterans Affairs conduct AWG hearings on Agriculture's
behalf and has had discussions with Veterans Affairs regarding such
services.
To actually perform AWG, Agriculture plans to rely upon Treasury's
cross-servicing program for the vast majority of its debt types for
specific debts of $100 or more.[Footnote 28] Agriculture believes that
Treasury's private collection agency contractors already have the
knowledge, expertise, and resources to seek out debtors, verify
employment sources, and pursue debt collection through AWG. Because of
Agriculture's reliance upon Treasury to perform AWG as part of cross-
servicing, the CFO's office plans to incorporate into Agriculture's
due process notifications to delinquent debtors, which are mailed
prior to debt referrals to Treasury, the potential use of AWG as part
of cross-servicing. In addition, the CFO's office plans to work with
Agriculture's component agencies to refer debts for cross-servicing
prior to the 180-day threshold, when practicable. These steps could
serve to accelerate collections of delinquent debt.
Although Agriculture has completed its departmentwide AWG
implementation plan, components of the plan still need to be carried
out. For example, the CFO plans to obtain individual AWG
implementation plans from Agriculture's agencies that include each
agency's timetable for implementation, written policies and
procedures, and types of debt subject to AWG. In addition, Agriculture
still needs to work with its agencies to provide Treasury with
authorization to use AWG as part of cross-servicing and to complete
the agreement with Veterans Affairs to conduct AWG hearings on
Agriculture's behalf.
Treasury's Debt Collection Improvement Account Has Not Been Activated:
DCIA includes a voluntary "gainsharing" provision that allows agencies
to deposit a limited and defined portion of their debt collections
into a special fund account maintained and managed by Treasury. The
law provides that deposits into the special fund are available to the
Secretary of the Treasury for gainsharing purposes only in amounts
provided in advance in appropriations acts.[Footnote 29] The Secretary
may make payments from amounts appropriated to agencies for purposes
related to credit management, debt collection, and debt recovery.
[Footnote 30] However, because collections are routinely deposited
into the general fund of the Treasury, appropriations would be
required in order to implement this incentive provision.
Treasury has established a debt collection improvement account that
can be activated if its appropriations authorize the expenditure.
[Footnote 31] To date, only the Small Business Administration (SBA)
has requested funding for gainsharing through Treasury's debt
collection improvement account. Based on SBA's requests, Treasury's
appropriation requests for fiscal years 1998 and 1999 included
language for funding the debt collection improvement account for up to
$384,000 and $3 million, respectively. However, the Congress made no
amounts available in Treasury's appropriations to fund the account.
According to Treasury, because the debt collection improvement account
has never been utilized, it is difficult to assess how effective the
account could be in enhancing federal agencies' debt collection or
what changes, if any, should be made in the financial incentive area
to improve debt collection governmentwide.
Although the effectiveness of DCINs gainsharing provision cannot be
fairly assessed at this time, it is important that the provision be
kept in proper perspective relative to the overall effectiveness of
DCIA in improving the federal government's debt collection efforts.
DCIA contains specific requirements for federal agencies to improve
collection of their nontax debts, namely referral of certain
delinquent debts to Treasury for centralized collection. While the
pace of implementation has been slow, and collection opportunities
have been lost, progress is being made.
Mr. Chairman, this concludes my prepared statement. I would be pleased
to respond to any questions you or other Members of the Subcommittee
may have.
[End of section]
Footnotes:
[1] U.S. General Accounting Office, Debt Collection Improvement Act of
1996: Department of Agriculture Faces Challenges Implementing Certain
Key Provisions, [hyperlink, http://www.gao.gov/products/GAO-02-277T]
(Washington, D.C.: Dec. 5, 2001).
[2] DCIA authorizes both federal agencies that administer programs
that give rise to delinquent nontax debts and federal agencies that
pursue recovery of such debts, such as Treasury, to administratively
garnish up to 15 percent of a debtor's disposable pay until the debt
is fully recovered. Disposable pay means that part of the debtor's
compensation (including, but not limited to, salary, bonuses,
commissions, and vacation pay) from an employer remaining after the
deduction of health insurance premiums and any amounts required by law
to be withheld.
[3] In addition to delinquent nontax federal debt, Treasury's offset
program collects child support obligations and state income tax debt
on behalf of states and tax levies for the Internal Revenue Service
(IRS).
[4] U.S. General Accounting Office, Debt Collection Improvement Act of
1996: Department of Agriculture's Rural Housing Service Has Not Yet
Fully Implemented Certain Key Provisions, [hyperlink,
http://www.gao.gov/products/GAO-02-308] (Washington, D.C.: Feb. 28,
2002).
[5] [hyperlink, http://www.gao.gov/products/GA0-02-308].
[6] See U.S. General Accounting Office, Standards for Internal Control
in the Federal Government, [hyperlink,
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.:
Nov. 1999), p.15. This standard is critical for the oversight of
agency DCIA implementation as the act permits debts to be excluded
from referral to Treasury for offset and/or cross-servicing if they
are under appeal, in forbearance, in litigation at the Department of
Justice, in bankruptcy, or in foreclosure. In August 2000, we reported
that agencies were excluding from referral the vast majority of debts
reported delinquent more than 180 days under DCIA or Treasury
exclusion criteria. We cautioned that the reliability of the amounts
reported as excluded needed to be independently verified on a periodic
basis. See U.S. General Accounting Office, Debt Collection: Treasury
Faces Challenges in Implementing Its Cross-Servicing Initiative,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-234] (Washington,
D.C: Aug. 4, 2000).
[7] [hyperlink, http://www.gao.gov/products/GAO-02-308].
[8] [hyperlink, http://www.gao.gov/products/GA0-02-308].
[9] RHS's guaranteed SFH losses have continued to increase to about
$258 million through the third quarter of fiscal year 2002.
[10] [hyperlink, http://www.gao.gov/products/GAO-02-308].
[11] Under Executive Order 12866, which was adopted during the
previous Administration, OMB reviews all significant regulatory
actions to ensure consistency with the principle of good regulatory
analysis and policy. At both the proposed and final stages of a major
rulemaking, OMB is provided up to 90 days to review an agency's
rulemaking package, including the draft rule, the cost-benefit
analysis, and any other supporting materials. During the 90-day review
period, professional analysts at OMB scrutinize the agency's work and
often work with an agency to improve the analysis and/or draft rule.
There are ultimately three possible outcomes of an OMB review: (1)
clearance for publication in the Federal Register, (2) withdrawal by
the agency for further consideration, or (3) return by OMB to the
agency for reconsideration.
[12] As will be discussed later, FSA modified its guaranteed loan
applications for guaranteed farm loans to establish a contractual
relationship between FSA and the debtor approximately 1 year prior to
finalizing its regulation for recognizing losses on such loans as
federal debt. According to FSA officials, all losses on guaranteed
loans made after the applications were modified are considered federal
loans and subject to DCIA collection remedies.
[13] A judgment may represent a judicial declaration that a debtor is
personally indebted to a creditor for a sum of money. Judgments may
include (1) judgment liens, (2) foreclosures, and (3) foreclosures and
deficiency judgments. Deficiency judgments require payment of a sum
certain to the United States and are intended to cover the shortfall
between the amount owed the United States and the proceeds from the
foreclosed property securing the loan.
[14] According to FSA, the agency manually identified 280 judgment
debts totaling over $20 million through June 2002 that were eligible
for referral to Treasury's offset program, and subsequently referred
the debts to the program.
[15] Using statistical sampling, we selected and reviewed supporting
documents to determine whether farm loans that selected FSA county
field offices in California, Louisiana, Oklahoma, and Texas had
excluded from referral to Treasury were consistent with established
criteria dealing with bankruptcy, forbearance/appeals, foreclosure,
and litigation. Field offices in these four states serviced about $272
million, or about 39 percent, of the total debts FSA excluded from
referral to Treasury as of September 30, 2000, for bankruptcy,
forbearance/appeals, foreclosure, or litigation.
[16] We estimated that 48.5 percent ± 15.7 percent of the population
were inappropriately reported as exclusions from referral to
Treasury's offset program. When projecting these errors to the
population of 1,187 loans, we were 95 percent confident that the
errors in the population were between 389 and 761 loans.
[17] Federal Claims Collection Standards and OMB Circular A-129
require agencies to report the discharge of the debts, also known as
close out, to the IRS in accordance with the requirements of 26 U.S.C.
6050P and 26 CFR 1.6050P-1.
[18] U.S. General Accounting Office, Debt Collection Improvement Act
of 1996: Department of Agriculture's Farm Service Agency Has Not Yet
Fully Implemented Certain Key Provisions, [hyperlink,
http://www.gao.gov/products/GAO-02-463] (Washington, D.C.: March 29,
2002).
[19] FSA maintains a state office in each state, usually in a state
capital or near a state land-grant university. State offices, among
other things, provide administrative support and oversight to county
servicing offices, which are designed to be a single location where
customers can access the services provided by FSA.
[20] [hyperlink, http://www.gao.gov/products/GA0-02-463].
[21] We noted during our fieldwork that FSA officials were unaware of
the requirement to report discharged or closed-out debts to IRS as
income for codebtors as required by 26 U.S.C. 6050P and 26 CFR 1.6050P-
1. According to FSA officials, FSAs Office of General Counsel has
agreed that reporting discharged debts for codebtors to IRS could be
done, and FSA is currently researching its systems capability for such
reporting.
[22] [hyperlink, http://www.gao.gov/products/GA0-02-463].
[23] As of the completion date of our fieldwork, FSA documents
indicated that the initial quarterly referral in December 2002 could
potentially bring the total direct farm loans in Treasury's offset
program to over 35,000 loans totaling about $1.5 billion.
[24] [hyperlink, http://www.gao.gov/products/GA0-02-463].
[25] According to FSA, as of July 24, 2002, $2.3 billion of guaranteed
farm loans had been made under the revised guaranteed loan application.
[26] U.S. General Accounting Office, Debt Collection Improvement Act
of 1996: Status of Selected Agencies' Implementation of Administrative
Wage Garnishment, [hyperlink, http://www.gao.gov/products/GAO-02-313]
(Washington D.C.: Feb. 28, 2002).
[27] Agriculture is currently revising its debt collection
regulations, which are contained in 7 CFR part 3, in order to ensure
that they reflect implementation of all aspects of DCIA, including
AWG, and are consistent with the Federal Claims Collection Standards,
issued by Treasury and the Department of Justice in November 2000.
[28] According to Agriculture, certain agency debts are exempt from
cross-servicing. For example, Food Stamp Program debts are held by the
states, which Agriculture considers to be third parties. These debts
are serviced and/or collected by third parties, and thus are exempt
from the requirement to transfer to Treasury for cross-servicing by 31
CFR 285.12. Agriculture plans to analyze these debts to see if the AWG
process is doable and feasible economically as many such debts involve
very low dollar amounts. Agriculture intends to determine the
feasibility of using AWG to collect Food Stamp Program debt by
December 2002. Currently, Agriculture is surveying its component
agencies to identify other types of debt that may be exempt from cross-
servicing.
[29] Agencies may contribute amounts equal to 5 percent of their
collections in a fiscal year less their baselines, which are generally
5 percent of their collections in the previous year or 5 percent of
their average annual amounts collected in the previous 4 years,
whichever is greater. OMB in consultation with Treasury may adjust an
agency's contribution amount to reflect the level of effort in credit
management by the agency. An indicator of this effort is based on two
factors: (1) the number of days between a debt being delinquent and
referral to Treasury for collection (or an exemption from referral
obtained) and (2) the ratio of delinquent debts to total receivables
for a given program and the change in the ratio over a period of time.
The amounts agencies transfer to Treasury's debt collection
improvement account would be available to reimburse the agencies only
to the extent and in amounts provided in advance by Treasury's
appropriations.
[30] Credit management, debt collection, and debt recovery expenses
cover activities such as account servicing, data processing equipment,
delinquent debt collection, measures to minimize delinquent debt,
sales of delinquent debt, asset disposition, and training of personnel
involved in credit and debt management.
[31] The account is the Gainsharing Receipts Debt Collection
Improvement Account, which is a receipt account that has been
established by Treasury in accordance with OMB procedures. Treasury's
FMS would monitor and manage the account for administrative purposes
and record the gainsharing funds for each agency.
[End of section]
