Debt Collection Improvement Act of 1996
Department of Agriculture's Farm Service Agency Has Not Yet Fully Implemented Certain Key Provisions Gao ID: GAO-02-463 March 29, 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 Farm Service Agency (FSA) 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 has severely reduced opportunities for collection. FSA lacks effective procedures and controls to identify and promptly refer eligible delinquent debts to Treasury for collection action. GAO identified several obstacles to FSA's establishment and implementation of an effective and complete debt-referral process. In the four states with the highest dollar amounts of federal debt excluded from the Treasury Offset Program, GAO reviewed FSA's use of exclusions from referral requirements because of bankruptcy, forbearance/appeals, foreclosure and Department of Justice litigation. GAO found that about half of the exclusions in these states were inconsistent with established criteria.
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Director: Team: Phone:GAO-02-463, Debt Collection Improvement Act of 1996: Department of Agriculture's Farm Service Agency 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:
March 2002:
Debt Collection Improvement Act Of 1996:
Department of Agriculture's Farm Service Agency Has Not Yet Fully
Implemented Certain Key Provisions:
GAO-02-463:
Contents:
Letter:
Results in Brief:
Background:
Objectives, Scope, and Methodology:
FSA Referred a Significant Amount of Direct Farm Loan Program Loan
Debt to Treasury for TOP, but Not for Cross-Servicing:
Several Obstacles Have Impeded FSA's Implementation of DCIA Referral
Requirements:
FSA Did Not Appropriately Use Exclusions from Referral Requirements:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Sampling Method and Results:
Appendix II: Comments from the Farm Service Agency:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Direct FSA Farm Loan Program Loans Delinquent as of September
30, 2000:
Table 2: Summary of Sample Results for FSA's Excluded Farm Loan
Program Debt:
Table 3: Two-Stage Probability Proportionate to Size Cluster Sample
Results:
Abbreviations:
CNC: currently not collectible:
DCIA: Debt Collection Improvement Act of 1996:
DOJ: Department of Justice:
FSA: Farm Service Agency:
FMS: Financial Management Service:
TOP: Treasury Offset Program:
TROR: Treasury Report on Receivables Due from the Public:
[End of section]
United States General Accounting Office:
Washington, D.C. 20548:
March 29, 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 debts 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, on December 5,
2001, focused on progress in this area by two Department of
Agriculture agencies”the Rural Housing Service 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 FSA'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
DOA.[Footnote 3] Our testimonies referred to above offered an overview
of agencies' progress during fiscal years 2000 and 2001 to the extent
that data were available and addressed your request for information.
For this report, we looked at whether (1) FSA was promptly referring
eligible farm loan program loans to Treasury's FMS for collection
action, (2) any obstacles were hampering FSA from referring eligible
farm loan program loans to FMS, and (3) FSA was appropriately using
exclusions from referral requirements.
Results in Brief:
FSA has ongoing initiatives to enhance its capacity to timely refer
all eligible delinquent debt. However, the agency's failure to make
DCIA a priority since its enactment in 1996 has hindered
implementation of key provisions of the act and severely reduced
opportunities for collection as contemplated by DCIA. As of September
30, 2000, FSA reported that it had referred about $934 million of
delinquent direct farm loan program loans to TOP for offset and that
it had excluded approximately $732 million of delinquent direct farm
loan program loans from referral to TOP. However, FSA reported that it
had referred only $38 million of the approximately $114 million of
debt it reported as eligible for referral to FMS for cross-servicing.
FSA lacks effective procedures and controls to identify and promptly
refer eligible delinquent debts to Treasury for collection action. We
identified the following obstacles to FSA's establishment and
implementation of an effective and complete debt-referral process:
* The agency's automated system lacked the capacity to distinguish
deficiency judgment debts, which are eligible for referral to TOP,
from types of judgment debts that are not eligible for referral. The
agency therefore excluded all judgment debts from referral and missed
opportunities to collect delinquent deficiency judgment debts through
TOP.
* Although the vast majority of farm loan program loans have
codebtors, FSA's automated system could not accommodate information on
codebtors. Because of this limitation, which the agency has recognized
since 1986, FSA did not pursue collection from codebtors or report
their names and taxpayer identification numbers to FMS for collection
action and consequently missed opportunities to collect eligible
delinquent debts through TOP.
* Staff in FSA field offices did not routinely update the eligibility
status of delinquent debts in the agency's loan-accounting system. As
a result, the system could not accurately identify loans eligible for
referral, and FSA could not provide accurate debt information to
Treasury, which not only distorts the Treasury Report on Receivables
Due from the Public (TROR) for debt management and credit purposes,
but also distorts key financial indicators such as receivables, total
delinquencies, and loan loss data. In addition, failure to process
closed-out debts delays the agency's reporting of those amounts to the
Internal Revenue Service as income to the debtor.
* FSA temporarily suspended referral of delinquent debts to FMS for
cross-servicing while developing guidelines to implement a new agency
policy that limited cross-servicing referrals to debts delinquent less
than 6 years.
* Even though loans became delinquent relatively evenly throughout the
year, FSA referred delinquent debts to FMS for TOP only once annually,
which delayed some referrals and may have reduced FMS's ability to
collect on delinquent farm loan program debts.
* FSA did not have policies and procedures in place to recognize its
losses on guaranteed farm loan program loans as federal debt and
therefore did not apply DCIA debt collection remedies to those losses.
Regarding the appropriateness of FSA's use of exclusions from referral
requirements, we reviewed the exclusions from referral to TOP because
of bankruptcy, forbearance/appeals, foreclosure, and Department of
Justice (DOJ) litigation made by a sample of field offices in the four
states with the highest dollar amounts of debt excluded from referral
to TOP. Based on our review, we estimated that approximately half of
the exclusions in these four states were inconsistent with established
criteria for excluding debts in bankruptcy, forbearance/appeals,
foreclosure, and DOJ litigation.
We are recommending that FSA take several actions to enhance the scope
and improve the timeliness of referrals of delinquent debt under DCIA.
The administrator of FSA stated in comments on this report that FSA
generally agreed with our findings and recommendations but took issue
with our portrayal of FSA's efforts to collect delinquent debts and
our estimate of the percentage of loans that FSA inappropriately
excluded from referral requirements. We continue to maintain that FSA
did not make compliance with DCIA a priority and therefore missed
collection opportunities. We also affirm the validity of the estimated
error rate for exclusions from referral requirements included in our
report. FSA stated that it has developed an action plan to implement
the remaining DCIA provisions referred to in our report by December
31, 2002. Additional details on FSA's comments and our evaluation are
included in the Agency Comments and Our Evaluation section of this
report.
Background:
FSA was established in 1994 during the reorganization of the
Department of Agriculture and operates through a network of field
offices located across the United States. The agency provides a
variety of services, including providing financial assistance to new
or disadvantaged farmers and ranchers who are unable to obtain
commercial credit at reasonable rates and terms.
FSA loans available to farmers and ranchers include direct or
guaranteed ownership loans and direct or guaranteed operating loans.
Direct ownership loans are for buying farm real estate and making
capital improvements. Direct operating loans, which are made to
beginning farmers and ranchers who are unable to qualify for
guaranteed operating loans, are for the purchase of items to help
daily farm operations. Guaranteed farm loan program loans are for the
same purposes as direct farm loan program loans, but they are made by
private third-party lenders and are guaranteed by FSA for up to 95
percent of the principal loan amount.
Objectives, Scope and Methodology:
Our objectives were to determine whether (1) FSA was promptly
referring eligible farm loan program loans to FMS for collection
action, (2) any obstacles were hampering FSA from referring farm loan
program loans to FMS, and (3) FSA was appropriately using exclusions
from referral requirements.
To address these objectives, we interviewed officials from FSA to
obtain an understanding of the FSA referral process and any obstacles
that were hampering the referral of eligible debts. We reviewed FSA's
policies and procedures on debt referrals and examined the agency's
current and planned efforts to refer eligible delinquent debts. We
obtained and analyzed the TROR for the fourth quarter of fiscal year
2000, which was the most recent year-end report available at the
completion of our fieldwork,[Footnote 4] and other financial reports
prepared by FSA, and held discussions with FSA officials to determine
whether the agency was appropriately using exclusions from referral
requirements. In addition, we reviewed responses to questions about
FSA's debt collection practices that you submitted to the deputy
secretary of agriculture in October 2001 and used information from the
responses to clarify or augment our report, where appropriate.
To determine whether FSA's use of exclusions from referral
requirements was appropriate, we used statistical sampling techniques
to select 15 FSA field offices from the four states with the highest
dollar amounts of reported debt excluded from TOP as of September 30,
2000. Using electronic and hard-copy files obtained from Agriculture,
we reviewed all 263 loans from the 15 selected offices that were more
than 180 days delinquent and had been reported as excluded from
referral to FMS as of September 30, 2000, for bankruptcy,
forbearance/appeals, foreclosure, and DOJ litigation. (Appendix I
contains additional information on the sampling method and the
results.) Based on the results of our review, we estimated the
percentage of loans inappropriately excluded as of September 30, 2000,
in the four states from which the sample offices were drawn. Because
we found numerous errors in the exclusion categories we tested, we did
not test other reported exclusions from referral to FMS for cross-
servicing, such as internal offset.[Footnote 5]
We did not review FSA's process for identifying and referring debts to
Treasury for cross-servicing because the agency had suspended all such
referrals in April 2000 pending development of guidelines to implement
a new referral policy. FSA issued the new guidelines in July 2001 and,
according to an Agriculture official, the first referral to FMS under
this new policy was made in September 2001. We did not review
implementation of FSA's new guidelines, since the procedures were
implemented near the completion of our fieldwork.
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 FSA provided to us, such as debts more than 180 days delinquent
and debts classified as currently not collectible (CNC)[Footnote 6]
and information in FSA'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. The written
response from the administrator of FSA is reprinted in appendix II.
FSA Referred a Significant Amount of Direct Farm Loan Program Loan
Debt to Treasury for TOP, but Not for Cross-Servicing:
As of September 30, 2000, FSA reported having about $8.7 billion in
direct farm loan program loans. As shown in table 1, the agency
reported about $1.7 billion of direct farm loan program loans more
than 180 days delinquent, including debts classified as CNC, as of
September 30, 2000. Of this amount, FSA reported referring about $934
million to TOP and excluding about $732 million from referral to TOP.
FSA reported that it had referred only $38 million of loans to FMS for
cross-servicing as of September 30, 2000. It is FSA's policy to refer
delinquent loans for cross-servicing only if collateral has been
liquidated and a deficiency remains. In addition, as discussed in more
detail later in this report, FSA suspended cross-servicing referrals
from April 2000 until September 2001 while it developed and
implemented a new cross-servicing referral policy.
Table 1: Direct FSA Farm Loan Program Loans Delinquent as of September
30, 2000:
Loans more than 180 days delinquent, including loans classified as CNC:
Loan amounts (in millions of dollars): $1,666.
Less: exclusions allowed by DCIA[A]:
Loan amounts (in millions of dollars): $732.
Loans eligible for TOP[B]:
Loan amounts (in millions of dollars): $934.
Loans referred to FMS for TOP:
Loan amounts (in millions of dollars): $934.
Loans referred to FMS for cross-servicing:
Loan amounts (in millions of dollars): $38.
[A] The vast majority of the reported exclusions, $694 million, were
for bankruptcy, forbearance/appeals, foreclosure, and DOJ litigation.
[B] in addition to loans excluded from referral to TOP, FSA reported
other exclusions from referral to FMS for cross-servicing, including
loans eligible for internal offset, as of September 30, 2000.
Source: Treasury Report on Receivables Due from the Public for fourth
quarter 2000 (September 30, 2000).
[End of table]
Several Obstacles Have Impeded FSA's Implementation of DCIA Referral
Requirements:
Since MIAs enactment, several obstacles have impeded FSA's
implementation of the act's referral requirements. Loan system
limitations have resulted in the automatic exclusion of certain types
of debts without any review for eligibility and the inability to
pursue collection from codebtors through TOP. FSA's failure to ensure
that field offices routinely updated the status of delinquent loans
has led to inappropriate exclusions from referral and inaccurate
reporting of delinquent and eligible debt amounts to Treasury. A
change in referral policy led to a suspension of all delinquent loan
referrals to FMS for cross-servicing. FSA's policy of referring
delinquent debt to FMS only once a year resulted in delayed referrals
and may have reduced collections. Finally, FSA did not take action
until recently to recognize losses on guaranteed farm loan program
loans as nontax federal debt. According to FSA, until certain steps,
such as software implementation, are completed, FSA cannot use the
collection tools provided under DCIA to pursue collection directly
from debtors on guaranteed farm loan program loans.
FSA Excluded Deficiency Judgment Debts from Referral Because of System
Limitations:
Of the $694 million of debt reported by FSA as excluded from referral
for bankruptcy, forbearance/appeals, foreclosure, and DOJ litigation,
about $295 million consists of judgment debts, including deficiency
judgments, which are court judgments requiring payment of a sum
certain to the United States.[Footnote 7] According to FSA officials,
deficiency judgments”unlike some other types of judgment debts”are
eligible for TOP and should be referred to FMS. However, FSA's Finance
Office in St. Louis automatically excluded all judgment debts for
direct farm loan program loans from referral to FMS because of
automated system limitations. Although the system does contain
information indicating which debts are judgment debts, it cannot
currently accommodate information on subcategories of judgment debts.
Therefore, FSA staff cannot use the agency's automated system to
identify deficiency judgments for referral. On account of our
inquiries, FSA officials initiated a special project in May 2001 to
manually identify all deficiency judgment debts for direct farm loan
program loans so that such debts could be referred to FMS.
FSA Cannot Report Codebtor Information to FMS Because of System
Limitations:
Even though FSA reported having referred $934 million of direct farm
loan program loans to FMS for TOP as of September 30, 2000, the agency
has lost and continues to lose opportunities to maximize collections
on these loans because it does not report information on codebtors to
FMS. According to FSA officials, the vast majority of direct farm loan
program loans have codebtors, who are also liable for loan repayment,
but FSA's automated loan system cannot record more than one taxpayer
identification number for each loan. Because taxpayer identification
numbers are required for referrals to FMS for TOP, FSA cannot refer
codebtors on farm loan program loans to FMS. An FSA official said that
the agency first recognized the need to have codebtor information in
the system in 1986 to facilitate debt collection but that higher-
priority systems projects have precluded FSA from completing the
necessary enhancements to allow the system to accept more than one
taxpayer identification number per debt. FSA was planning to
incorporate this modification in the new Farm Loan Program Information
System scheduled for implementation in fiscal year 2005, but during
the December 5, 2001, testimony before your subcommittee, the agency
committed to make the change by December 2002.
FSA Did Not Routinely Update Referral Eligibility Status of Direct
Farm Loan Program Loans:
FSA field offices across the country make determinations as to whether
direct farm loan program loans are in bankruptcy, forbearance/appeals,
or foreclosure and therefore should be excluded from referral to FMS.
The status of these loans changes over time, and information on the
loans must be updated as changes occur if exclusion determinations are
to be continuously accurate. Our review of selected excluded loans
indicated that personnel in the FSA field offices we visited did not
routinely update the eligibility status of farm loan program loans in
FSA's Program Loan Accounting System. Without up-to-date information
on loan status, the system cannot accurately identify which loans are
eligible for referral.
One of the most frequently identified inappropriate exclusions
pertained to amounts that had been discharged in bankruptcy, which
should not have been included in delinquent debt. Farm loan managers
in some of the FSA field offices we visited said they had not closed
out many direct farm loan program loans discharged in bankruptcy
because making new loans has been a higher-priority use of their
resources. In addition, FSA did not provide sufficient oversight to
help ensure that field office personnel adequately tracked the status
of discharged bankruptcies and updated the loan files and debt records
in the Program Loan Accounting System.
Delays in promptly closing out discharged bankruptcy debts not only
distort the TROR for debt management and credit policy purposes, but
also distort key financial indicators such as receivables, total
delinquencies, and loan loss data. The information is therefore
misleading for budget and management decisions and oversight. Aside
from erroneously inflating reported loans receivable and delinquent
loan amounts, failure to process closed-out debts delays the agency's
reporting of those amounts to the Internal Revenue Service as income
to the debtor.[Footnote 8]
FSA Temporarily Suspended Cross-Servicing Referrals:
FSA suspended cross-servicing referrals in April 2000 pending
development of guidelines implementing a new policy to refer only
debts less than 6 years delinquent to FMS for cross-servicing.
According to agency officials, FSA adopted the new policy in response
to discussions they had with Agriculture's Office of the General
Counsel that addressed a conflict between Farm Loan Program
regulations and FMS policy. These officials stated that the Office of
the General Counsel decided that FSA must adhere to Farm Loan Program
regulations, which specify a 6-year delinquency limit for cross-
servicing referrals, despite the fact that, according to FMS
officials, FMS accepts debts for cross-servicing that are more than 6
years delinquent.
In July 2001, FSA issued revised guidelines to implement the new
policy and is now reviewing loans at more than a thousand FSA field
offices to determine the loans' eligibility for referral under the new
policy. According to an Agriculture official, FSA made the first
referral under the new policy in September 2001. Agency officials told
us they eventually plan to make cross-servicing referrals quarterly
but will refer delinquent loans more frequently until the backlog
resulting from the referral suspension is cleared.
Some Delinquent Loans Were Not Referred Promptly Because FSA Refers
Debts to TOP Only Once a Year:
According to data provided by FSA officials, about $400 million of new
delinquent debt became eligible for TOP during calendar year 2000. FSA
officials stated that the debts became eligible relatively evenly
throughout the year, but the agency refers debts eligible for TOP only
once annually, during December. Consequently, a large portion of the
$400 million of debt likely was not promptly referred when it became
eligible. As we have previously testified, industry statistics have
shown that the likelihood of recovering amounts owed on delinquent
debt decreases dramatically as the age of the debt increases.[Footnote
9] Thus, the old adage that "time is money" is very relevant for
referrals of debts to FMS for collection action. FSA officials told us
that the agency agrees that quarterly referrals could enhance
collection of delinquent debts and is working on automated system
modifications to refer debts quarterly to TOP. FSA plans to have a
quarterly referral process ready for implementation in August 2002.
FSA Did Not Refer Losses on Guaranteed Farm Loan Program Loans to
Treasury for Collection Action:
Guaranteed farm loan program loans”as well as related losses”have been
significant since the enactment of DCIA in 1996. The outstanding
principal due on guaranteed farm loan program loans was about $8
billion as of September 30, 2000; as of that date, FSA had paid out
about $293 million in losses on guaranteed farm loan program loans
since fiscal year 1996.
Since DCINs enactment, FSA has referred none of its losses on
guaranteed farm loan program loans to FMS for collection action.
According to FSA officials, the agency could not pursue recovery from
guaranteed farm loan program debtors or use DCIA debt collection tools
because under the guaranteed farm loan program, no contract existed
between these debtors and FSA. As a result, the agency did not
recognize the losses that it paid to guaranteed lenders as federal
debt and did not apply DCIA debt collection remedies to them.
In June 2000, Agriculture's Office of Inspector General reported that
FSA was not referring its losses on guaranteed farm loan program loans
to FMS for collection and identified the need for FSA to recognize the
losses as federal debts and begin referring them to FMS for collection
action. However, as of September 30, 2000, FSA still had no policies
and procedures to recognize losses on guaranteed farm loan program
loans as federal debts and to refer such debts to FMS for TOP and
cross-servicing. As a result, FSA has missed opportunities to collect
millions of dollars that the agency has paid to lenders to cover
guaranteed losses.
FSA officials told us that the agency has revised the loan application
forms 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. FSA
expects that software needed to implement the revisions to the
Guaranteed Loan Accounting System should be completed around mid-2002
and in place before any loss claims are paid on guaranteed loans made
after July 20, 2001.
FSA Did Not Appropriately Use Exclusions from Referral Requirements:
As of September 30, 2000, FSA had excluded $732 million of delinquent
loans from referral to FMS for TOP. FSA cited bankruptcy,
forbearance/appeals, foreclosure, and DOJ litigation as the reasons
for about $694 million, or 95 percent, of these exclusions. About $295
million of the exclusions were judgment debts. As we noted earlier,
FSA excluded all judgment debts from referral because of automated
system limitations, despite the fact that deficiency judgment debts
are eligible for referral. We also noted that we found exclusion
errors caused by FSA's failure to ensure that loan status was
routinely updated. As a result of inappropriate exclusions and
exclusion errors, FSA failed to maximize its collection of delinquent
loans and provided inaccurate TROR data to federal agencies that rely
on such information for policy and oversight purposes.
Using statistical sampling, we selected 15 FSA field offices in
California, Louisiana, Oklahoma, and Texas”the four states with the
highest dollar amounts of debt excluded from TOP. We reviewed
supporting documents for all 263 loans from these offices that were
more than 180 days delinquent and had been excluded from referral to
FMS as of September 30, 2000, to determine the extent to which
exclusions in the four states were consistent with established
criteria for excluding loans in bankruptcy, forbearance/appeals,
foreclosure, and DOJ litigation.[Footnote 10] Based on the results of
our review, we estimate that as of September 30, 2000, FSA had
inappropriately placed about 575 loans, or approximately half the
excluded loans in the four selected states, in exclusion categories.
[Footnote 11] As part of our sample, we reviewed supporting documents
for 52 bankruptcies that had been discharged before September 30,
2000. In fact, many had been discharged several years before that
date. For example, one loan with a balance due of about $325,000 was
reported as more than 180 days delinquent and had been excluded from
referral because of bankruptcy. Our review of the loan file at the FSA
field office showed that a bankruptcy court had discharged the debt in
1986. Therefore, the debt should not have been included in either the
delinquent debt amount or exclusion amount reported to Treasury as of
September 30, 2000.
Because of the large number of errors we found in the bankruptcy,
forbearance/appeals, foreclosure, and DOJ litigation exclusion
categories, we did not test other reported exclusions from referral to
FMS for cross-servicing, such as loans being internally offset.
Conclusions:
Although DCIA was enacted in 1996, FSA continues to face major
obstacles to complying fully with the act. FSA lacks sufficient
processes and controls to adequately identify and promptly refer all
direct farm loan program loans eligible for referral to FMS. Automated
system limitations, which have existed for years and have delayed
FSA's compliance with the act, have still not been corrected, even
though they have prevented referral and potential collection of
substantial amounts of eligible delinquent debt. The failure of FSA
field offices to routinely update delinquent loan information has led
to erroneous exclusions from referral and inaccurate reporting of debt
to Treasury. FSA's policy of referring debts to TOP only once a year
has allowed debts to age unnecessarily and has likely reduced their
collectibility. FSA has only recently taken action to establish
procedures to refer losses on guaranteed loans to FMS; therefore,
opportunities to collect on losses of about $300 million since DCIA
was enacted may have already been lost. If FSA is to make significant
progress in collecting on millions of dollars of delinquent farm loan
program loans, the agency must give higher priority to fully complying
with the debt collection provisions of DCIA.
Recommendations for Executive Action:
To improve FSA's compliance with DCIA, we recommend that the secretary
of agriculture direct the administrator of FSA to take the following
actions:
* Develop and implement automated system enhancements to make the
Program Loan Accounting System capable of identifying all judgment
debts eligible for referral to FMS for collection action. In the
interim, continue with the manual project to identify judgment debts
eligible for referral to FMS.
* 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.
* Develop and implement 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. Aside from
requirements for database integrity, this is critical to determining
allowable collection action, including whether debts are eligible for
referral to FMS for collection action.
* Develop and implement oversight procedures to ensure that all debts
discharged through bankruptcy are promptly closed out and reported to
the Internal Revenue Service as income to the debtor in accordance
with the Federal Claims Collection Standards and Office of Management
and Budget Circular A-129.
* Monitor effective completion of the planned automated system
modifications to refer eligible debt to TOP on a quarterly, rather
than annual, basis by August 2002.
* Monitor planned system enhancements to the Guaranteed Loan
Accounting System to ensure that the software is completed that is
needed to implement the revisions to the loan application forms to
establish guaranteed loan losses as federal debt.
* Once guaranteed loan losses are established as federal debt and are
deemed eligible for referral to FMS, timely refer such debt to FMS for
collection action in accordance with DCIA.
Agency Comments and Out Evaluation:
In written comments on a draft of this report, the administrator of
FSA generally agreed with our findings and recommendations. The
administrator stated that FSA has developed an aggressive action plan
to implement the remaining DCIA provisions mentioned in our report by
December 31, 2002. FSA's letter is reprinted in appendix II.
While FSA agreed with our finding that it had inappropriately placed
several loans in various exclusion categories allowed by DCIA, it
disagreed with our estimated error rate of about 50 percent in the
sample population of 1,187 loans. FSA stated that its own internal
review of 967 loans in the four states that were included in our
review resulted in an error rate of 35.7 percent.
Our sample was statistically selected and resulted in a valid
projected error rate of about 50 percent for the states covered by our
test work. To substantiate our work for each error identified during
our testing, we asked FSA farm loan managers to sign a statement as to
whether they agreed with the GAO sample results and conclusion that
the exclusion was inappropriate. In all but 3 of the 113 errors we
identified, the managers agreed with our conclusions and, as a result,
said they planned to take action to correct the errors.
Since the FSA review was performed subsequent to our tests, we cannot
comment on the validity of FSA's internal assessment of the reported
results. In addition, since many of the loans in our sample had been
inappropriately excluded for years, corrections made subsequent to our
testing but prior to FSA's review would likely have resulted in a
lower error rate at the time of FSA's work. In any case, it is
important to note that the 35.7 percent error rate cited by FSA from
its internal assessment is still unacceptable, and we remain firm in
our recommendation that FSA develop and implement 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.
FSA also took issue with our report's reference to possible missed
collection opportunities. It stated we had not given FSA sufficient
credit for collections totaling millions of dollars of delinquent debt
using various collection tools. Our point is that FSA's mentioned
successes could have been much greater had it made DCIA a higher
priority and thus implemented certain key provisions much sooner. Our
position remains unchanged. The details in the body of our report
demonstrate lack of adequate progress. Most important, 5 years after
the passage of DCIA, FSA had not yet established an adequate framework
or systems capacity to effectively carry out its responsibilities for
collecting large sums of delinquent debt.
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 Farm Service
Agency, 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) 512-3406 or Kenneth R. Rupar, assistant director, at (214) 777-
5714. Key contributors to this report are listed in appendix III.
Sincerely yours,
Signed by:
Gary T. Engel:
Director:
Financial Management and Assurance:
[End of section]
Appendix I: Sampling Method and Results:
We first identified the four states (Texas, California, Louisiana, and
Oklahoma) with the highest dollar amounts of debt excluded from TOP.
From the four states, we drew a multistage cluster sample of 15 field
offices (population 123) using probability proportionate to size, a
sampling method in which larger clusters (in this case, offices) have
a higher probability of being selected than smaller clusters. Our debt
population consisted of all FSA debt more than 180 days delinquent
that had been excluded from referral to Treasury as of September 30,
2000. We reviewed all excluded debt (263) at the 15 sample offices.
Table 2 identifies the four states selected, the number of offices
selected in each state, the number of excluded debts at the selected
offices in each state, and the number of errors found at the selected
offices in each state.
Table 2: Summary of Sample Results for FSA's Excluded Farm Loan
Program Debt:
State: California;
Number of offices selected: 3;
Number of excluded debts: 103;
Number of exclusion errors found: 17.
State: Texas;
Number of offices selected: 6;
Number of excluded debts: 85;
Number of exclusion errors found: 59.
State: Oklahoma;
Number of offices selected: 3;
Number of excluded debts: 34;
Number of exclusion errors found: 16.
State: Louisiana;
Number of offices selected: 3;
Number of excluded debts: 41;
Number of exclusion errors found: 21.
Total:
Number of offices selected: 15;
Number of excluded debts: 263;
Number of exclusion errors found: 113.
[End of table]
Based on our review, we estimate that 48.5 percent ± 15.7 percent of
the population were inappropriately excluded from Treasury referral.
When projecting these errors to the population of 1,187, we are 95
percent confident that the errors in the population are from 389 to
761 debts. Table 3 shows the two-stage probability proportionate to
size cluster sample results.
Table 3: Two-Stage Probability Proportionate to Size Cluster Sample
Results:
Sample plan: Stage 1:
Total items in the population (for all field offices in the four
states with the highest dollar amounts of debt excluded from TOP):
1,187;
Total number of primary sample units (county/field offices with
debtors in the four states): 123;
Number of secondary sample units selected: 15.
Sample plan: Stage 2:
Total number of items sampled in all clusters (county)[A]: 263.
[A] One hundred percent of the debtors in each office selected were
reviewed.
[End of table]
[End of section]
Appendix II: Comments from the Farm Service Agency:
USDA:
United States Department of Agriculture:
Farm and Foreign Agricultural Services:
Farm Service Agency:
Operations Review and Analysis Staff:
Audits, Investigations, State and County Review Branch:
1400 Independence Avenue, SW:
Stop 0540:
Washington, DC 20250-0540:
March 19, 2002:
To: Gary T. Engel, Director:
Financial Management and Assurance:
From: [Signed by] James R. Little:
Administrator:
Subject: U. S. General Accounting Office (GAO) Draft Report No. GAO-02-
463, "Debt Collection Improvement Act (DCIA) OF 1996: Department of
Agriculture's Farm Service Agency Has Not Yet Fully Implemented
Certain Key Provisions"
The Farm Service Agency (Agency) would like to thank you for the
opportunity to review and comment on your draft report. In general,
the Agency agrees with your findings and recommendations. However, the
Agency takes issue with several points. Although your report makes
reference of possible missed collection opportunities as a result of
annual referral to Treasury Offset Program, it does not mention any of
the positive actions that the Agency has taken to reduce delinquent
debt. We believe the GAO report does not portray a balanced picture of
what this Agency is doing to collect the delinquent debts it is owed.
Since the implementation of the Debt Collection Improvement Act in
1996, the Agency has collected millions of dollars on delinquent debt.
Below is a break down of some of the collections:
* Internal Administrative Offset Program: Collections totaled $104
million.
* Voluntary Payments (From FLP due process letter): Collections
totaled $210.5 million.
* Treasury Offset Program: Collections totaled $11.6 million.
* Cross-Servicing Program: Collections totaled $185,000.
* Salary offset (pilot): Collections totaled $15,775.
The Agency also recovered $6.5 million on guaranteed loans after the
final loss payments were paid to the lenders. This is because the
private lenders continue collection action after final liquidation.
After the Agency implemented the above programs, the delinquent Farm
Loan debt decreased from $3.3 billion to $1.6 billion, a reduction of
$1.7 billion, in just 5 years. As a result of this improvement in the
Farm Loan Program's portfolio, the GAO, in their report dated May 16,
2001, removed the Farm Loan Program from the high-risk list.
The Agency agrees that there were some improperly flagged cases, and
appreciates GAO's bringing this to our attention. However, the Agency
disagrees with GAO's findings on the error rate for Exclusions from
the Referral Requirements. GAO concluded that half the excluded loans
were inappropriately coded. Based on the Agency's review of the cases
in the four States sampled by GAO, 35.7 percent of the cases were not
flagged properly. There were 967 accounts flagged in those States as
cases involved in bankruptcy, forbearance/appeals, and foreclosure.
The flags needed to he corrected on 345 cases. It is important to note
that only 35 of those cases were eligible for referral to Department
of Treasury (Treasury); the others fell into other excluded
categories. Therefore, only 10 percent of the incorrectly flagged
cases, and only 3.6 percent of the flagged cases in those States were
eligible to be referred to Treasury. The Agency continues to monitor
the proper flagging of cases to ensure that all eligible debts are
timely referred to Treasury for collection.
Implementation of the DCIA is a complex and lengthy process. The
approach that the Agency took to implement DCIA was to implement those
phases that would provide the greatest impact on reducing
delinquencies first. While we agree that the Agency has not completely
implemented all the provisions of DCIA, we believe that we have taken
aggressive action as evidenced by the above information. The Agency
has also developed an aggressive action plan to implement the
remaining provisions mentioned in your report by December 31, 2002.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Kenneth R. Rupar, (214) 777-5714.
Acknowledgments:
Other key contributors to this report were Arthur W. Brouk, Sharon 0.
Byrd, Richard T. Cambosos, Michael D. Chambless, Michael S. LaForge,
and Gladys E. Toro.
[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 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] The most recent year-end TROR should contain the most reliable
information available because Treasury requires that agency chief
financial officers (or their designees) certify year-end data as
accurate.
[5] Loans eligible for referral to FMS for TOP may not be eligible for
referral to FMS for cross-servicing. Additional exclusion categories
apply to referrals for cross-servicing. Loans being offset internally
and certain loans with collateral, for example, are eligible for
referral to TOP but not for cross-servicing.
[6] 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.
[7] A deficiency is the remaining indebtedness after foreclosure and
after all collateral has been sold.
[8] The Federal Claims Collection Standards, which were last updated
in November 2000, and Office of Management and Budget Circular A-129
both require agencies, in most cases, to report closed-out debt
amounts to the Internal Revenue Service as income to the debtor.
[9] U.S. General Accounting Office, Debt Collection: Treasury Faces
Challenges in Implementing Its Cross-Servicing Initiative, [hyperlink,
http://www.gao.gov/products/GAO/T-AIMD-00-213] (Washington, D.C.: June
8, 2000).
[10] Field offices in these four states serviced about $272 million,
or about 39 percent, of the total debts excluded by FSA from referral
to FMS as of September 30, 2000, for bankruptcy, forbearance/appeals,
foreclosure, or DOJ litigation.
[11] We estimate that 48.5 percent ± 15.7 percent of the population
were inappropriately reported as exclusions from referral to TOP.
Projecting the errors in the sample to the population of 1,187 loans,
we are 95 percent confident that the errors in the population are from
389 to 761 loans.
[End of section]
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