Debt Collection Improvement Act of 1996
Department of Agriculture's Rural Housing Service Has Not Yet Fully Implemented Certain Key Provisions Gao ID: GAO-02-308 February 28, 2002The Debt Collection Improvement Act of 1996 seeks to maximize the collection of billions of dollars of nontax delinquent debt owed to the federal government. The act requires agencies to refer eligible debts delinquent more than 180 days to the Department of the Treasury for payment offset and to Treasury or a Treasury-designated debt collection center for cross-servicing. The Treasury Offset Program, includes the offset of benefit payments, vendor payments, and tax refunds. Cross-servicing involves locating debtors, issuing demand letters, and referring debts to private collection agencies. The Rural Housing Service (RHS) has initiatives to ensure the timely referral of all delinquent debt. However, the agency's failure to make the act a priority has left key provisions of the legislation unimplemented and severely reduced collection opportunities. The agency had referred no direct single-family housing (SFH) loans to the Financial Management Service for cross-servicing. Three major factors delayed implementation. First, RHS's loan-servicing system had not incorporated key features necessary to implement the act's referral provisions. Second, RHS did not refer any debts for cross-servicing while pursuing an exemption from Treasury. Third, amounts reported as delinquent and eligible for consideration for referral were materially understated. RHS had not kept the documentation needed to independently verify the accuracy and validity of the exclusion amounts in its certified fiscal year 2000 year-end report. Accordingly, GAO was unable to determine whether RHS had appropriately excluded $182 million of delinquent loans from referral for offset and for cross servicing as of September 2000.
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Director: Team: Phone:GAO-02-308, Debt Collection Improvement Act of 1996: Department of Agriculture's Rural Housing Service Has Not Yet Fully Implemented Certain Key Provisions
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United States General Accounting Office:
GAO:
Report to the Chairman, Subcommittee on Government Efficiency,
Financial Management and Intergovernmental Relations, Committee on
Government Reform, House of Representatives:
February 2002:
Debt Collection Improvement Act Of 1996:
Department of Agriculture's Rural Housing Service Has Not Yet Fully
Implemented Certain Key Provisions:
GAO-02-308:
Contents:
Letter:
Results in Brief:
Background:
Objectives, Scope, and Methodology:
RHS Has Referred a Minimal Amount of Delinquent Direct SFH
Loans for Cross-Servicing:
Several Obstacles Have Impeded RHS's Implementation of DCIA
Referral Requirements:
RHS Did Not Maintain Documentary Support for Excluding
Delinquent Debts:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix:
Appendix I: Comments from Rural Development:
GAO Comments:
Table:
Table 1: RHS's Direct SFH Loans Delinquent as of September 30, 2000:
[End of section]
United States General Accounting Office:
Washington, D.C. 20548:
February 28, 2002:
The Honorable Stephen Horn:
Chairman:
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations:
Committee on Government Reform:
House of Representatives:
Dear Mr. Chairman:
On October 10, 2001, we testified before your subcommittee on selected
federal agencies' implementation of certain key provisions of the Debt
Collection Improvement Act (DCIA) of 1996.[Footnote 1] That testimony
addressed requirements to refer older delinquent debt to the
Department of the Treasury for offset against amounts the government
might owe the debtors and for additional collection action at
Treasury's central debt-collection facility, operated by the Financial
Management Service (FMS). Our more recent testimony, in early December
2001, focused on progress in this area by two Department of
Agriculture agencies”the Rural Housing Service (RHS) and the Farm
Service Agency (FSA).[Footnote 2]
One of the major purposes of DCIA is to maximize collection of
billions of dollars of nontax delinquent debt owed to the federal
government. Toward this end, DCIA requires that agencies refer
eligible debts delinquent more than 180 days that they have been
unable to collect to Treasury for payment offset and to Treasury or a
Treasury-designated debt collection center for cross-servicing.
Treasury performs payment offset through its Treasury Offset Program
(TOP), which includes the offset of certain benefit payments, vendor
payments, and tax refunds. Cross-servicing involves such actions as
locating debtors, issuing demand letters, and referring debts to
private collection agencies.
The purpose of this report is to expand on the information provided in
our December 2001 testimony regarding RHS's progress and to offer our
recommendations for improving the agency's implementation of the debt-
referral provisions of DCIA. As you know, our prior reports have shown
that agencies have been slow to implement the referral requirements of
DCIA.[Footnote 3] Our testimonies referred to above offered an
overview of agencies' progress during fiscal year 2000 and fiscal year
2001 to the extent that data were available and addressed your request
for information. For this report, we looked at whether (1) RHS was
promptly referring eligible single-family housing (SFH) loans to
Treasury's FMS for collection action, (2) any obstacles were hampering
RHS from referring eligible SFH loans to FMS, and (3) RHS was
appropriately using exclusions from referral requirements.
Results in Brief:
RHS has ongoing initiatives to enhance its capacity to timely refer
all delinquent debt. However, the agency's failure to make DCIA a
priority since its enactment in 1996 has left key provisions of the
act not yet implemented and severely reduced opportunities for
collection as contemplated by DCIA. As of September 30, 2000, RHS
reported that it had referred about $201 million of delinquent direct
SFH loans to TOP for offset. The agency had referred virtually no
direct SFH loans to FMS for cross-servicing, however.
We identified three major factors that were delaying implementation of
an effective and complete debt-referral process. First, RHS's loan-
servicing system had not been modified to incorporate certain key
features needed to effectively implement the referral provisions in
DCIA. Because of these limitations, the system could not identify
eligible loans for referral for cross-servicing. Second, RHS did not
refer any debts for cross-servicing while pursuing an exemption from
Treasury. Although Treasury discouraged the exemption request and
ultimately rejected it, RHS referred no delinquent direct SFH loans
for cross-servicing for the extended period during which Treasury
considered the request. Third, our work showed that amounts reported
as delinquent and therefore eligible for consideration for referral
were materially understated. In particular, RHS had included only the
delinquent installment portion of direct SFH loans on reports to
Treasury rather than the entire loan balance, which under RHS policy
becomes due and payable when an installment payment on a direct SFH
loan is delinquent more than 90 days. RHS also had not taken steps to
recognize the losses that it paid on SFH loans to guaranteed lenders
as federal debt and could not apply DCIA debt collection remedies to
them.
Regarding the accuracy of delinquent loan balances excluded from
referral, RHS had not retained the necessary documentation to enable
independent verification of the accuracy and validity of the exclusion
amounts in RHS's certified fiscal year 2000 year-end report.
Accordingly, we were unable to determine whether RHS had appropriately
excluded about $182 million of delinquent SFH loans from referral for
offset through TOP and for cross-servicing as of September 2000.
We are recommending that RHS take several actions to enhance the scope
and improve the timeliness of referrals of delinquent debt under DCIA.
Agriculture's Rural Development mission area, which includes RHS,
stated in its comments on the report that RHS had implemented or was
in the process of implementing three of the four recommendations in
this report. Rural Development disagreed with our recommendation to
report the entire accelerated balance of delinquent direct SFH loans
to FMS as delinquent debt, and, absent any allowable exclusions, as
debt eligible for referral to FMS for collection action. In support of
its position, Rural Development stated that the inclusion of only the
delinquent portion of collateralized installment loans is consistent
with industry standards and reporting the entire amount accelerated
would not represent the amount legally collectible, and would distort
actual risk. Rural Development's response is not consistent with
either RHS's own governing debt collection policy and practices or
Treasury's instructions to federal agencies for reporting accelerated
debt balances on the Treasury Report on Receivables Due from the
Public (TROR).
Background:
RHS is a component of Rural Development, a mission area within
Agriculture that was created when the department was reorganized in
1994. RHS provides a wide array of housing services to rural residents
and often offers more favorable loan terms and conditions than other
federal housing programs. The agency delivers services through an
extensive network of field offices. In September 1997, Rural
Development completed a conversion of its direct SFH loan servicing
from a dispersed nationwide network of more than 2,000 field offices
to Agriculture's new Central Servicing Center. The center is
responsible for servicing the department's entire direct SFH loan
portfolio, which totaled about $17 billion at the close of fiscal year
2000.
Through its SFH programs, RHS provides highly subsidized direct loans
to rural households with very low and low incomes, guaranteed loans to
households with low and moderate incomes, and grants and direct loans
for housing repairs to households with very low incomes.[Footnote 4]
Under the guaranteed SFH loan program, RHS agrees to reimburse
approved private lenders for up to 90 percent of the principal
advanced to a borrower in the event the borrower defaults. In recent
years, RHS's guaranteed SFH loan program has expanded, with the
reported outstanding principal due on the guaranteed SFH loan
portfolio increasing from about $3 billion in fiscal year 1996 to more
than $10 billion at the end of fiscal year 2000.
Objectives, Scope, and Methodology:
Our objectives were to determine whether (1) RHS was promptly
referring eligible SFH loans to FMS for collection action, (2) any
obstacles were hampering RHS from referring eligible SFH loans to FMS,
and (3) RHS was appropriately using exclusions from referral
requirements.
To determine whether RHS is promptly referring eligible SFH loans to
FMS for collection action, we interviewed officials responsible for
identifying eligible SFH loans and referring them to FMS. We also
reviewed pertinent policies, procedures, and reports related to RHS
loan referrals, including Treasury instructions for preparing the TROR
and RHS internal delinquency reports. To determine whether any
obstacles were hampering RHS from referring eligible SFH loans, we
interviewed RHS officials and obtained and reviewed relevant
documents, including the agency's debt-referral schedule and
Agriculture's request to Treasury to exempt delinquent SFH loans from
referral for cross-servicing for up to a year after liquidation of
collateral. We also reviewed responses to questions about RHS's debt
collection practices that you submitted to the deputy secretary of
agriculture in October 2001. We used information from the responses to
clarify or augment our report, where appropriate.
A scope limitation prevented us from determining whether RHS's
exclusions of about $182 million of direct SFH loans from referral
requirements were appropriate. RHS officials told us that the agency
did not retain supporting documentation (a list of individual loans,
including loan amounts, for each exclusion category) for the $182
million of direct SFH loans excluded from referral to FMS. Without
such documentation, we could not independently verify that amounts
excluded for forbearance or appeals, bankruptcy, and foreclosure were
accurate or met established criteria.
We conducted our review from November 2000 through October 2001 in
accordance with U.S. generally accepted government auditing standards.
We did not independently verify the reliability of certain information
that RHS provided to us (e.g., debts more than 180 days delinquent and
debts classified as currently not collectible (CNC)[Footnote 5] and
information in RHS's loan-accounting and loan-servicing systems).
We requested written comments on a draft of this report from the
secretary of agriculture or her designated representative. Rural
Development provided Agriculture's response and Rural Development's
letter is reprinted in appendix I.
RHS Has Referred a Minimal Amount of Delinquent Direct SFH Loans for
Cross-Servicing:
Since the passage of DCIA in April 1996, RHS has referred a minimal
amount of direct SFH loans to FMS for cross-servicing. As of September
30, 2000, RHS reported about $383 million of direct SFH loans
delinquent more than 180 days. Because of a software deficiency that
prevented automated identification of direct SFH loans eligible for
cross-servicing and an agency plan to obtain an exemption from
referring direct SFH loans for cross-servicing, RHS had referred
virtually no delinquent SFH loans for cross-servicing as of September
30, 2000. However, as of the same date, RHS reported having referred
about $201 million of direct SFH loans to FMS for TOP.
Table 1: RHS's Direct SFH Loans Delinquent as of September 30, 2000:
Loans more than 180 days delinquent, including loans classified as
currently not collectible (CNC):
Loan amounts: $383 million.
Less: exclusions allowed by DCIA[A]:
Loan amounts: $182 million.
Loans eligible for TOP:
Loan amounts: $201 million.
Loans referred to FMS for TOP:;
Loan amounts: $201 million.
Loans referred to FMS for cross-servicing:
Loan amounts: 0.
[A] Exclusions were for bankruptcy, forbearance/appeals, and
foreclosure.
Source: Treasury Report on Receivables Due from the Public for fourth
quarter 2000 (September 30, 2000).
[End of table]
Beginning in April 2001, RHS began manually referring a small number
of direct SFH loans”approximately 100 a month”to FMS for cross-
servicing. However, this effort, discussed in more detail later in
this report, is an extremely limited measure and results in referrals
of only a small fraction of the agency's eligible delinquent SFH loans.
Several Obstacles Have Impeded RHS's Implementation of DCIA Referral
Requirements:
Since DCINs enactment, several obstacles have seriously impeded RHS's
implementation of the act's referral requirements. Because of a
software deficiency that has existed since fiscal year 1997,
Agriculture's automated loan-servicing system cannot identify loans
that are eligible and should be referred for cross-servicing. As a
result, RHS referred virtually no direct SFH loans to FMS for cross-
servicing through September 30, 2000, and only minor amounts through
September 30, 2001. An additional obstacle was RHS's application for”
and unrealistic expectation of receiving”an exemption from Treasury
that would have allowed the agency to delay referring direct SFH loans
to FMS for cross-servicing for up to a year after liquidation of a
loan's collateral. Based on its expectation that the exemption request
would be approved on an after-the-fact basis, RHS classified all of
its delinquent direct SFH loans as excluded from referral requirements
in its September 30, 2000, TROR. Finally, RHS understated loan amounts
that are eligible for referral in two respects. First, the agency
included in its reporting of delinquent debts only the delinquent
portions of installment loans rather than the total unpaid loan
balances as required by Treasury. Second, RHS did not take action
until recently to recognize losses on guaranteed SFH loans as nontax
federal debt. Until these steps are completed, RHS cannot use the
collection tools provided under DCIA to pursue collection directly
from debtors on guaranteed SFH loans.
System Limitations Hampered Identification and Referral of Loans for
Cross-Servicing:
During fiscal years 1996 and 1997, RHS converted its loan-servicing
system, which serviced a portfolio of more than 700,000 direct SFH
loans, from a decentralized servicing network of more than 2,000 field
offices to a single, automated loan-servicing location”Agriculture's
Central Servicing Center. The main automated system is a commercial
off-the-shelf loan-servicing system that required modification if it
was to perform the unique functions associated with the direct SFH
loan program, such as identifying direct SFH loans eligible for cross-
servicing. If the system is to perform this function, it must, for
example, be capable of determining the status of any collateral,
because all collateral must be liquidated prior to a loan's referral
to FMS for cross-servicing. According to RHS officials, RHS has been
unable since the conversion to readily identify direct SFH loans that
are eligible for referral to FMS for cross-servicing because the
necessary software was not completed prior to conversion. RHS
nevertheless completed the conversion in fiscal year 1997 because the
agency did not want to delay implementation of the new system. RHS
plans to complete the system software in April 2002 and has stated
that the software modifications will facilitate identification of
loans for cross-servicing.
In April 2001, while we were performing our fieldwork, RHS began an
interim process to manually identify direct SFH loans eligible for
cross-servicing. Agency officials advised us, however, that relatively
few referrals for cross-servicing are likely to be made before
completion of the software because the interim manual process is
tedious and labor-intensive. According to RHS's debt-referral
schedule, only about 100 to 200 loans are to be referred each month,
and as of September 30, 2001, the agency had referred 599 direct SFH
loans to FMS for cross-servicing. The current manual process creates
an overwhelming challenge for the agency because of the large volume
of loans potentially eligible for cross-servicing. RHS officials said
that all direct SFH loans eligible for TOP will have to be reviewed
for cross-servicing eligibility. As of September 30, 2000, RHS had
referred 23,032 direct SFH loans to FMS for TOP. According to RHS's
debt-referral plan as of the completion of our fieldwork, the agency
intends to refer about 30 percent of eligible direct SFH loans to FMS
for cross-servicing in fiscal year 2002. The 30 percent referral level
takes into account the increased rate of referrals RHS expects will
result from the planned April 2002 completion of loan-servicing
software that will permit automated identification of direct SFH loans
eligible for cross-servicing.
RHS Delayed Direct SFH Loan Referrals while Seeking an Exemption:
RHS made no attempts prior to April 2001 to manually identify and
refer direct SFH loans eligible for cross-servicing. According to
agency officials, RHS did not attempt manual identification because
the agency was in the process of requesting an exemption from Treasury
that would allow it to service direct and guaranteed SFH loans
internally for up to 1 year after liquidation of collateral.
Liquidation could, in some cases, occur years after a loan became
delinquent.
Treasury officials told us that the department had informal
discussions with Agriculture officials concerning the planned request.
They said Treasury discouraged Agriculture from submitting a formal
request because Treasury did not believe an exemption was warranted.
Nevertheless, Agriculture submitted a formal request for an exemption
on behalf of RHS in November 2000. Although Treasury officials stated
that the department had never formally or informally approved the
request, RHS reported in its September 30, 2000, TROR that Treasury
had approved the request. In the TROR, RHS classified all eligible
direct SFH loans as exempted by Treasury from cross-servicing.
Treasury issued a formal denial of the exemption request on May 14,
2001. The denial was based in part on the fact that other agencies
with similar delinquent loans were referring the loans for cross-
servicing and that RHS had not identified any new or unique collection
tools applicable to its SFH loans that would justify different
treatment. RHS officials said that they contacted Treasury in January
2001 to acknowledge that the statement regarding the approval of the
exemption request in the September 30, 2000, TROR was incorrect.
However, in subsequent quarterly TROR submissions through June 30,
2001, RHS continued to report significant direct SFH loan amounts as
exempted by Treasury from cross-servicing.
RHS Did Not Consider the Full Range of Debt for DCIA:
RHS did not consider the full range of debt that should have been
subject to DCIA referral requirements in two important areas. First,
RHS reported as delinquent debt only the delinquent portion of
installment loans rather than the total unpaid loan balances. Second,
RHS did not take the necessary steps to recognize losses on guaranteed
SFH loans as nontax federal debt and therefore did not report them and
could not attempt to collect on them using tools authorized by DCIA.
RHS Did Not Report Accelerated Loan Balances as Delinquent Debt:
When a direct SFH installment loan becomes more than 90 days delinquent,
RHS notifies the debtor by certified mail that the entire loan balance
is accelerated and that the full outstanding loan balance is due and
payable. The notice also stipulates RHS's intent to foreclose on the
loan unless the agency receives full payment of the indebtedness
within 30 days of the date of the letter. According to instructions
for preparing the TROR that Treasury provided to all agencies subject
to DCIA requirements, the entire amount of the debt is to be recorded
as delinquent if any part of it has been delinquent more than 180
days, provided the debtor has been notified that the entire amount is
due (or accelerated). Absent any exclusions allowed by DCIA or
Treasury, Treasury's instructions call for agencies to report the
entire unpaid loan amount as eligible for referral for collection
action.
However, RHS reports only the delinquent installment portion of the
loans as delinquent in its TROR and does not report the accelerated
loan balances as delinquent debt. Similarly, RHS reports only the
delinquent installment portion as eligible for referral to TOP. RHS
officials said they do not believe it is appropriate to refer more
than the delinquent portion of direct SFH loans to FMS. They said they
are concerned that if RHS referred amounts greater than the delinquent
installments before liquidation of collateral at foreclosure, the
agency would risk collecting amounts in excess of those due from
borrowers. This situation should not arise, however, because DCIA
allows any debt to be temporarily excluded from referral if its
collateral is being liquidated as part of foreclosure proceedings.
Therefore, under its practices and Treasury's requirements, RHS should
report all amounts due and payable and refer them to FMS for
collection action unless the loans are in foreclosure or meet other
exclusion criteria.
As previously stated, at the end of fiscal year 2000, RHS reported
that about $383 million of direct SFH loans were more than 180 days
delinquent and that approximately $201 million of the loans were
eligible for and had been referred for offset through TOP. Based on
our review of RHS's internal delinquency records by not including
accelerated loan balances RHS may have understated delinquent direct
SFH loan amounts reported to Treasury by about $849 million and direct
SFH loan amounts eligible for offset through TOP by about $348
million. Underreporting delinquencies distorts the TROR for debt
management and credit policy purposes. It also distorts key
governmentwide financial indicators, including total delinquencies
outstanding, on which the president, the Congress, and the Office of
Management and Budget rely to make important budget and management
decisions. In addition, by underreporting direct SFH loan amounts
eligible for referral for offset through TOP, RHS is forgoing
opportunities to maximize the collection of delinquent debt.
RHS Did Not Refer Losses on Guaranteed SFH Loans to Treasury for
Collection:
Guaranteed SFH loans”as well as related losses”have been significant
since the enactment of DCIA in 1996. In recent years, the program has
expanded, with the reported outstanding principal due on the
guaranteed SFH loan portfolio increasing from about $3 billion in
fiscal year 1996 to more than $10 billion at the end of fiscal year
2000. The reported amount paid out in losses over the same period rose
from about $3.2 million in fiscal year 1996 to about $60.5 million in
fiscal year 2000.
Since DCIA was enacted in 1996, none of the approximately $132 million
in such losses on RHS's guaranteed SFH loan program have been referred
to FMS for collection action. According to RHS officials, 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. As a result, the agency
did not recognize the losses that it paid to guaranteed lenders as
federal debt and could not apply DCIA debt-collection remedies to them.
In January 1999, Agriculture's Office of Inspector General (OIG)
reported that RHS was not referring its losses on guaranteed SFH loans
to FMS for collection. At that time, the OIG identified the need for
RHS to recognize the losses as federal debts and begin referring them
to FMS for collection. However, as of September 30, 2000, RHS still
had no policies and procedures to recognize losses on guaranteed SFH
loans as federal debts and to refer such debts to FMS for TOP and
cross-servicing. As a result, RHS has missed opportunities to collect
millions of dollars the agency has paid to lenders to cover guaranteed
losses.
RHS officials told us that the agency is now working with
Agriculture's Office of General Counsel and OIG to amend program
regulations and has recently initiated action to develop policies for
future referral of losses on guaranteed SFH loans to FMS for
collection action. However, RHS's efforts to make necessary regulatory
changes and modifications to lender agreements are still under way and
have yet to be implemented. Therefore, RHS continues to miss
opportunities to collect from borrowers the amounts it has paid to
cover losses on guaranteed SFH loans. Because the size of the
guaranteed SFH loan program and related losses are significant and
growing, it is critical that RHS promptly complete development and
begin implementation of policies and procedures to refer eligible
guaranteed SFH loan debts to FMS for collection action.
RHS Did Not Maintain Documentary Support for Excluding Delinquent
Debts:
DCIA permits debts to be excluded from referral for cross-servicing
and offset if they are in forbearance, under appeal, in litigation at
the Department of Justice, in bankruptcy, or in foreclosure. In August
2000, we reported that governmentwide, 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.[Footnote 6]
FMS officials said that they expect agencies to retain applicable
information to justify exclusions of debt from referral. In addition,
the Comptroller General's Standards for Internal Controls 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 7]
When we attempted to verify RHS's reported exclusions from referral as
of September 30, 2000, RHS officials told us that supporting
documentation (a list of individual loans and loan amounts that were
excluded in each exclusion category) for the $182 million of direct
SFH loans excluded from referral for offset through TOP had not been
saved. In addition, the chief of the financial accounting branch said
she was not aware of any requirement to retain such data. Because we
had no information on which individual loans had been excluded, we
were unable to determine whether the agency's reported exclusions for
bankruptcy, forbearance/appeals, and foreclosure met relevant
legislative and regulatory criteria.
Conclusions:
Through its failure to comply fully with DCIA debt collection
requirements, RHS continues to miss opportunities to maximize
collection on delinquent SFH loans. Although more than 5 years have
passed since DCINs enactment, RHS has referred a minimal amount of its
direct SFH loans for cross-servicing and has yet to refer any losses
on its growing guaranteed SFH loan program. RHS has identified and
referred direct SFH loans eligible for TOP but significantly
understated loan amounts eligible for referral by not including
accelerated direct SFH loan balances. RHS also did not take the steps
necessary to recognize losses on guaranteed SFH loans as federal debt
subject to the provisions of DCIA. In addition, RHS's failure to
retain a listing of specific loans and loan amounts excluded from
referral for offset through TOP effectively eliminates the possibility
of independent verification of excluded debt”a critical internal
control technique.
Recommendations for Executive Action:
To improve RHS's compliance with DCIA, we recommend that the secretary
of agriculture direct the administrator of RHS to take the following
actions:
* Work together with FMS to resolve any inconsistencies between RHS's
reporting of delinquent debts on its TROR and Treasury's instructions
for such reporting. Absent any modifications to Treasury's
instructions for preparing the TROR, report the entire accelerated
balance of delinquent direct SFH loans to FMS as delinquent debt and,
absent any allowable exclusions, as debt eligible for referral to FMS
for collection action.
* Finalize and implement necessary regulatory changes and
modifications to lender agreements to recognize losses on guaranteed
SFH loans as federal debt and promptly refer such debt to FMS for
collection action.
* Complete development of the software enhancements that will allow
automated identification of loans eligible for cross-servicing, and
promptly refer all such loans to FMS for cross-servicing.
* 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 (e.g., foreclosure), the total
amount reported as excluded on the certified TROR and a listing of the
identities and dollar amounts of the specific loans excluded.
Agency Comments and Our Evaluation:
A draft of this report was provided to the secretary of agriculture
for her or a designee's review and comment. Agriculture's Rural
Development mission area, which includes RHS, provided the
department's comments. The following discussion highlights Rural
Development's most significant comments and our evaluation. Rural
Development's letter is reprinted in appendix I.
Rural Development disagreed with our findings that RHS has failed to
make DCIA a priority and delayed implementation of certain key
provisions. Our position remains unchanged. The details in the body of
our report demonstrate RHS's lack of progress. Most importantly, 5
years after the passage of DCIA, RHS had not established an adequate
framework or systems capacity to effectively carry out its
responsibilities.
Rural Development stated that the department and the agency were
committed to fully implementing the recommendations provided by GAO
and that it had already established an aggressive schedule for doing
so. The agency specifically stated that it had implemented or was in
the process of implementing three of our four recommendations. Rural
Development disagreed with our recommendation to report the entire
accelerated balance of delinquent direct SFH loans to FMS as
delinquent debt consistent with Treasury's instructions for preparing
the TROR. Rural Development stated that the inclusion of only the
delinquent portion of collateralized installment loans is consistent
with industry standards for delinquency reporting and reporting the
entire amount accelerated would not represent the amount legally
collectible, and would distort actual risk of loss.
Rural Development's response is not consistent with either RHS's own
governing debt collection policy and practices or Treasury's
instructions to federal agencies for reporting accelerated debt
balances on the TROR. As stated in this report, when a direct SFH
installment loan becomes more than 90 days delinquent, RHS is to
notify the debtor by certified mail that the entire loan balance is
accelerated and that the full outstanding loan balance is due and
payable. The notice also stipulates RHS's intent to foreclose on the
loan unless the agency receives full payment of the indebtedness
within 30 days of the date of the letter. According to instructions
Treasury provided to all agencies subject to DCIA requirements, the
entire amount of the debt is to be recorded as delinquent if any part
of it has been delinquent more than 180 days, provided the debtor has
been notified that the entire amount is due (or accelerated). By
failing to follow instructions developed by Treasury for reporting
accelerated debt balances, RHS is forgoing opportunities to maximize
the collection of delinquent direct SFH loans.
Beyond the requirements of DCIA debt collection initiatives, RHS's
underreporting of debts that are due and payable and delinquent more
than 180 days distorts the TROR for debt management and credit policy
purposes. Such underreporting distorts key governmentwide financial
indicators, including total delinquencies outstanding, on which the
president, the Congress, and OMB rely to make important budget and
management decisions. Therefore, RHS should report on the TROR all
debt amounts more than 180 days delinquent that are due and payable.
As agreed with your office, unless you announce its contents earlier,
we plan no further distribution of this report until 30 days after its
issuance date. At that time, we will send copies to the chairmen and
ranking minority members of the Senate Committee on Governmental
Affairs and the House Committee on Government Reform and to the
ranking minority member of your subcommittee. We will also provide
copies to the secretary of agriculture, the inspector general of the
Department of Agriculture, the administrator of the Rural Housing
Service, and the secretary of the treasury. We will then make copies
available to others upon request.
If you have any questions about this report, please contact me at
(202) 5123406 or Kenneth Rupar, assistant director, at (214) 777-5714.
Arthur W. Brouk was also a key contributor to this assignment.
Sincerely yours,
Signed by:
Gary T. Engel:
Director:
Financial Management and Assurance:
[End of section]
Appendix I: Comments from Rural Development:
Note: GAO comments supplementing those in the report text appear at
the end of this appendix.
USDA:
United States Department of Agriculture:
Rural Development:
Rural Business-Cooperative Service:
Rural Housing Service:
Rural Utilities Service:
Washington, DC 20250:
January 29, 2002:
To: Gary T. Engel:
Director, Financial Management and Assurance:
United States General Accounting Office:
From: [Signed by] Michael E. Nerud:
Deputy Under Secretary:
Rural Development:
Through: [Signed by] Sherie Hinton Henry:
Director:
Financial Management Division:
Subject: Debt Collection Improvement Act of 1996 Department of
Agriculture's Rural Housing Service Has Not Yet Fully Implemented
Certain Key Provisions: Audit Number: GAO-02-308:
Thank you for providing the Department and mission area with your
Draft Report on the above subject matter. We appreciate the input on
how the Rural Housing Service (RHS) (herein referred to as "Agency")
can further enhance its ability to collect debts owed to the Agency
and Federal Government. We ask that a copy of this response be
included in your final Report.
As Deputy Secretary James R. Mosely testified on December 5, 2001, the
Department, mission area, and Agency are all committed to fully
implementing the recommendations provided by our Office of Inspector
General (01G) and the General Accounting Office (GAO) and had already
established an aggressive schedule to accomplish these goals. The
Agency has met each milestone under the schedule and will continue to
do so.
The Agency has and continues to take its responsibilities under the
Debt Collection Improvement Act of 1996 (DCIA) seriously. Further,
this Agency continually seeks ways to improve the performance of its
loan portfolio. We view ourselves as stewards of the taxpayers
resources and, as such, must take all actions necessary to ensure that
we manage our loan programs effectively and efficiently. To this end,
DCIA is just one tool in a federal lender's overall portfolio
management toolbox since DCIA emphasizes the collection of defaulted
debts. This Agency has spent considerable time and effort improving
the underwriting and servicing of Single Family Housing (SFH) loans to
ensure that our portfolio does not reach this point. This not only
reduces the potential for default, but also ensures a healthy rural
America by increasing successful homeownership.
Prior to passage of the DCIA, the Agency had commenced a major
reorganization and restructuring of our debt collection practices for
our SFH portfolio that is the subject of this Report. These
initiatives have saved the taxpayers in excess of $250 million above
and beyond tools available under DCIA. While the Agency does not
dispute that further enhancements to our debt collection procedures
can be implemented, we respectfully disagree with GAO's findings that
we have failed to make DCIA a priority and have delayed implementation
of certain key provisions.
In 1996, the Agency established its Centralized Servicing Center (CSC)
in St. Louis, MO. Prior to its establishment, the Agency serviced its
SFH portfolio through a network of approximately 800 Field Offices.
Servicing of the portfolio was not always consistent, and other work
performed by Field Offices often took precedence over loan servicing.
With CSC, the Agency now has a state-of-the-art service center,
comparable, and, in many areas, better than those used by the private
sector, that is dedicated to improving the performance of our
portfolio. This initiative improved the performance of the portfolio,
creating more successful homeowners, and reducing losses and costs to
the government and taxpayer. We believe this is the true intent and
spirit of debt collection policies of the government.
We support the DCIA's objective to maximize collection of delinquent
debts, and to minimize the costs of debt collection. The Agency has
taken aggressive action to meet these goals. The overall gross
delinquency rate on the direct SFH portfolio has shown a continuous
downward trend, from 21% in fiscal year 1998 to a low of 14% in fiscal
year 2001. Although our borrowers don't qualify for Federal Housing
Administration (FHA) financing, our delinquency net of foreclosure
(FHA's reported measure) is less than FHA's Adjustable Rate Mortgage
delinquency. The Agency has also made significant improvement in
collections under the Treasury Offset Program (TOP). TOP collections
increased from $2 million in 1996 to $31 million in 2001. Much of this
success can be credited to the creation of a state-of-the-art
Centralized Servicing Center. RHS has received high marks from GAO and
several Congressional staff who have visited the Center and lauded its
effectiveness and efficiency in debt collection.
With regard to GAO's specific comments, the commercial off-the-shelf
system used by RHS does, in fact, allow identification of loans
eligible for cross-servicing. However, an automated process is needed
to speed the review process and to avoid redundant data entry for both
submitting debts for cross-servicing. The Agency did not proceed
earlier with these system enhancements since we were engaged in
negotiations with Treasury over possible approval as a Debt Collection
Center and it was not in the Government's best financial interest to
unnecessarily modify a system if the exemption requests were approved.
During this timeframe, however, the Agency continued to collect
significant dollars on delinquent debt. RHS will refer all eligible
debt for cross-servicing by the end of 2002. [See comment 1]
We disagree with GAO's conclusion that Rural Development does not
maintain documentary evidence to support the delinquent debt
exclusions reported in the Treasury Report on Receivables (TROR). GAO
based its conclusion on a one-time event that occurred because of
changes that were being implemented in Rural Development's reporting
process. For the September 2000 reporting period, Rural Development
made significant improvements to the report used to extract the
statistical information needed for the TROR. [See comment 2]
The program used to extract the information reported on the September
2000 TROR was subsequently implemented and was used in the preparation
of the December 2000 TROR. These files are currently retained and
support the delinquent debt exclusions. GAO was given the opportunity
to review these files during their audit, and they declined. In
addition, Rural Development personnel suggested to GAO several
alternative techniques for evaluating the reasonableness of TROR
exclusions reported in September 2000. This included reviewing the
software program logic used to create the December 2000 and subsequent
TROR reporting files and testing the accuracy of the reported
exclusions. The auditors declined to undertake these reviews.
With regard to the SFH Guaranteed loan program, GAO reports that the
Agency "had not taken steps to recognize the losses that it paid on
SFH loans to guaranteed lenders as a federal debt and could not apply
DCIA debt collection remedies to them." This statement is not
accurate. The Agency has recognized this opportunity and has already
begun the process to promulgate rules to implement this enhancement.
[See comment 3]
As background, the SFH guarantee program is a fairly new program that
began in 1991 as a pilot. Recognizing the significant costs
experienced by the Department of Housing and Urban Development (HUD)
and Department of Veterans Affairs (VA) of having defaulted federally
guaranteed loans assigned to the federal government and the potential
for acquisition of the property, the Agency established the program
differently. Rather than acquire loans and properties, the Agency made
the decision to require the lender to be responsible for the entire
liquidation process including property acquisition and disposition.
The Agency relationship is strictly with the lender”no relationship
was established between the homeowner and Agency. This saves the
Agency millions of dollars in not having to liquidate loans, acquire
government inventory and dispose of properties.
The Agency later became aware that because the philosophy underlying
the establishment of the program (again prior to enactment of DCIA)
did not include a contractual relationship with the homeowner, we were
precluded from using DCIA tools to collect a non-federal debt. The
Agency is amending its forms and regulations to establish this
relationship for future loan guarantees.
The GAO Report contends that the Government has lost the opportunity to
collect millions of dollars because it cannot use the tools under
DCIA. While we support the use of DCIA to collect upon these losses,
the estimated recovery purported by OIG and GAO is grossly overstated.
To date, $21.5 million in SFH direct loans have been referred to
Treasury for cross-servicing. Treasury has collected only $34,000 to
date, or less than $2 for each $1,000 referred. The vast majority of
which was collected through TOP, rather than actual account servicing.
[See comment 4]
In response to your specific recommendations, we offer the following:
GAO Recommendation: Report the entire accelerated balance of
delinquent direct SFH loans to FMS as delinquent debt in accordance
with Treasury's instructions for preparing the TROR, and, absent any
allowable exclusion, as debt eligible for referral to FMS for
collection action.
Rural Development Response: [See comment 5] We disagree. The inclusion
of only the delinquent portion of collateralized installment loans is
consistent with industry standards for delinquency reporting.
Reporting the entire amount accelerated would distort any comparison
of delinquency with industry standards, would not represent the amount
legally collectible, and would distort actual risk. Nonetheless, even
if the entire accelerated balance were reported, those balances would
not be eligible for cross-servicing until foreclosure actions were
completed and the collateral liquidated. When foreclosure action is
completed, we currently report the entire remaining loan balance due
as delinquent on the TROR.
Regarding referrals for TOP, the GAO report states that RHS may have
understated amounts eligible by not reporting the entire accelerated
balance. The report suggests that if we are concerned about legal
collectibility, we can exclude loans in foreclosure until collateral
disposition from TOP. However, in order to maximize collection, we
already refer loans in foreclosure, but only the portion that is
delinquent. Laws in many States allow the customer to cure the
delinquency (without paying the entire accelerated balance) and
remove the account from foreclosure. Additionally, a pre-foreclosure
offset in some states (e.g. California) would preclude a subsequent
foreclosure. We believe that our current use of offset to collect the
delinquent amount due, prior to engaging in costly foreclosure action
is more in line with the stated objectives of DCIA. If we waited until
after collateral is liquidated in foreclosure to refer any remaining
amount due to TOP, we would be foregoing opportunities to maximize the
collection of delinquent debt. We would also lose the opportunity to
minimize potential losses and the amount of money the customer must
bring to the table to retain homeownership.
For example, GAO's recommendation would mean that a customer in
foreclosure who owes a total of $25,000 and is $2,000 delinquent on
their loan, would be able to receive a $2,100 income tax refund
because (based upon GAO's recommendation) the data would be excluded.
Following the method currently used by the Agency, the $2,000
delinquency would be reported under TOP, and the $2,000 would be
collected under TOP. [See comment 6]
GAO Recommendation: Finalize and implement necessary regulatory
changes and modifications to lender agreements to recognize losses on
guaranteed SFH loans as federal debt and promptly refer such debt to
FMS for collection action.
Rural Development Response: The Agency is in the process of finalizing
and implementing necessary regulatory changes and modifications to
lender agreements to recognize losses on guaranteed SFH loans as a
federal debt.
GAO Recommendation: Complete development of the software enhancements
that will allow automated identification of loans eligible for cross-
servicing and prompt referral of all such loans to FMS for cross-
servicing.
Rural Development Response: The Agency is in the final stages of
completing development of the software enhancements that will allow
automated identification of debts eligible for cross-servicing and
prompt referral of all such loans to FMS for cross-servicing.
GAO Recommendation: Maintain adequate supporting documentation to
allow independent verification of 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
the total amount reported as excluded on the certified TROR and a
listing of the identities and dollar amounts of the specific loans
excluded.
Rural Development Response: Rural Development policy is to maintain
sufficient documentary evidence to support the delinquent debt
exclusions reported in the TROR. These files are available for GAO's
independent verification. [See comment 7]
The following are GAO's comments on Rural Development's letter dated
January 29, 2002.
1. RHS's comments misrepresent its system's ability to identify and
promptly refer eligible debts to FMS for collection purposes. As
stated in this report, RHS officials told us that RHS has been unable
since converting to a commercial off-the-shelf loan-servicing system
during 1996 and 1997 to readily identify direct SFH loans that are
eligible for referral to FMS for cross-servicing because the necessary
software was not completed prior to conversion. In order for RHS's
automated system to identify direct SFH loans eligible for cross-
servicing, it must, for example, be capable of determining the status
of any collateral because, according to RHS's requirements, all
collateral must be liquidated prior to a loan's referral to FMS for
cross-servicing. It was for this reason that RHS had to initiate an
interim manual process, which RHS officials characterized as tedious
and labor-intensive, to identify direct SFH loans eligible for cross-
servicing until planned completion of loan-servicing software in April
2002 that is intended to permit automated identification of direct SFH
loans eligible for cross-servicing.
Rural Development's contention that RHS did not proceed earlier with
the required systems enhancements needed to promptly refer eligible
debts to FMS for cross-servicing because negotiations were taking
place with Treasury over possible approval as a Debt Collection Center
is not consistent with Treasury's perspective on allowing RHS to
service its own loans. As stated in this report, according to
Treasury, Treasury/FMS received a formal request to exempt SFH loans
from cross-servicing from Agriculture in November 2000. However, prior
to the submission of the formal request to Treasury, FMS had informal
discussions with Agriculture officials concerning the request, wherein
FMS did not encourage the submission of the formal request because it
was felt an exemption was not warranted. According to Treasury
officials, Treasury never approved a proposal to exempt RHS SFH loans
from cross-servicing, either formally or informally.
2. RHS acknowledges that the supporting documentation for the
September 30, 2000, TROR was not available. Although RHS contends that
the missing documentation was a one-time event due to changes that
were being implemented in Rural Development's reporting process, we
could not consider reviewing other time periods because, as agreed
with the requester, we were asked to review exclusions as of September
30, 2000, the most recent period as of the date of our fieldwork for
which data were certified as accurate by the agency.
We could not consider the alternative techniques suggested by Rural
Development personnel, such as study the software program logic used
to create the December 2000 TROR, because none of the suggested
techniques would result in a list of individual loans that were
included in each exclusion category as of September 30, 2000. Such a
list was needed in order for us to select a statistical sample of
loans to test for the appropriateness of exclusions that the agency
certified as accurate as of that date.
3. As stated in this report, DCIA was enacted in 1996 and through the
completion of our fieldwork, none of the approximately $132 million in
losses incurred on RHS's guaranteed SFH loan program have been
referred to FMS for TOP and cross-servicing. The agency recognizes the
opportunity to recover such losses using the remedies available
through DCIA and has begun the process to promulgate rules to
recognize such losses as federal non-tax debts. However, as of
September 30, 2000, RHS still had no policies and procedures to
recognize losses on guaranteed SFH loans as federal debts and to refer
such debts to FMS for TOP and cross-servicing.
4. We did not provide an estimate of the amount of guaranteed losses
that may be recovered through TOP and cross-servicing. Rather, as
stated in this report, RHS continues to miss opportunities to collect
from borrowers the amounts it has paid to cover losses on guaranteed
SFH loans. Moreover, such lost opportunities not only involve
collection through cross-servicing but TOP as well, which, according
to Rural Development in its response, involved collections of $31
million in 2001 on debts other than guaranteed losses.
5. See our discussion in the "Agency Comments and Our Evaluation"
section.
6. This example provided by Rural Development is not consistent with
RHS's procedures for accelerating direct SFH loans and Treasury's
instructions for reporting accelerated debts on the TROR. See our
discussion in the "Agency Comments and Our Evaluation" section for
additional details. In view of RHS's response on this matter, we have
modified our first recommendation to RHS to include working together
with FMS to resolve any inconsistencies between RHS's reporting of
delinquent debts on its TROR and Treasury's instructions for such
reporting.
7. See comment 2.
[End of section]
Footnotes:
[1] U.S. General Accounting Office, Debt Collection Improvement Act of
1996: Agencies Face Challenges Implementing Certain Key Provisions,
[hyperlink, http://www.gao.gov/products/GAO-02-61T] (Washington, D.C.:
Oct. 10, 2001).
[2] 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).
[3] 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), and U.S. General Accounting Office, Medicare: HCFA Could Do
More to Identify and Collect Overpayments, [hyperlink,
http://www.gao.gov/products/GAO/HEHS/AIMD-00-304] (Washington, D.C.:
Sept. 7, 2000).
[4] Very-low-income households have incomes at or below 50 percent of
their area's median income; low-income households have incomes above
50 percent and at or below 80 percent of their area's median income;
and moderate-income households have incomes above 80 percent and at or
below 115 percent of their area's median income.
[5] CNC debts are debts the agency has written off for accounting
purposes but has not discharged. Collection action can still be taken
on such debts.
[6] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-234].
[7] U.S. General Accounting Office, Standards for Internal Control in
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov.
1999), p. 15.
[End of section]
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