Procedures for Making Recreational Loans to Individuals

Published by the Government Accountability Office on 1971-03-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Dear Mr. Smith:

       The General Accounting Office has reviewed the procedures and
practices     of the Farmers Home Administration          (FDA), Department of
Agriculture,      for making recreational       loans to individuals       under FDA's
farm operating,        farm ownership, and farm recreational         loan programs,
The review was undertaken         in conjunction     with our review of FDA's
procedures     and practices    for making loans to public and nonprofit
organizations       for the development      of rural recreational      projects.
A draft     of our proposed report to the Congress on the results                of
that review was furnished         to you , for review and comments on
February 18, 1971.

         Our review of loans to individuals              included an examination        of
the authorizing       legislation,      related     FHA policies      and procedures
and selected loan files,           and discussions        with FDA State and county
officials     and borrowers.        We included in our review loans totaling
$705,000 made to 16 individuals              located in Arkansas, Delaware,
Georgia, Missouri,        New Mexico, North Carolina,             and Virginia,      FDA
did not adequately        follow its instructions             in approving    loans for
nine of the 16~individuals           receiving      recreational      loans totaling
$374,470,       Approval    of recreational        loans for certain       of the nine
individuals       was questionable      on more than one basis.

       On the basis        of our review,     we concluded     that   there   is a need
for   FHA to:

          --prepare     more realistic     farm and home plans in deter-
             mining the financial        soundness of recreational loans            to
          . individuals;

          --r&ire      borrowers     to meet loan approval      conditions
             before   Government     funds are disbursed;;     and

          --take steps to assure that         only eligible     borrowers     are
      .      approved for recreational        loans.

     Specific comments on each of these above areas and our recom-
mendations are presented under the following  captions,
     1      .


             FHA instructions       require    county supervisors      to develop annual
     farm and home plans with loan recipients,               as a basis for determin-
     ing (1) the adequacy of the borrower's              resources and the suitability
     of his proposed operations,            (2) the probable      income, expenses and
     net returns       from the proposed operations,         and (3) the financial
     feasibility       of the loan requested.         The instructions      state that par-
     ticular     attention    should be given to borrowers who have both major
     production       and financial      management problems.        Various FHA bulletins
     reinforcing       these instructions       state that field      staffs must be
     realistic      in estimating      income and expenses when developing         annual
     farm and home plans with loan recipients.

             In   the case of six individual      borrowers,   FHA made loans on the
     basis of      farm and-home plans which did not realistically            present the
     potential       of the borrowers'   operAtions     for developing     the recreational
     projects      to be financed by the loans,         An example follows     where the
     borrower      received   loans which were apparently       considered    to be
     feasible      on the basis of unrealistic       income and expense goals.

             A borrower in New Mexico received     11 FHA farm operating      and
     ownership loans from 1960 through 1967 amounting to $83,270, for both
     farming and recreational      purposes,   Since 1962, the borrower received
     seven loans totaling     $54,650 to develop a recreational      facility     con-
     sisting    primarily of fishing    ponds, cabins, and picnic-camping       areas0

            Prior to making the recreational        loans to the borrower, FHA's
     development       plan for the recreational    project showed that the pro-
     ject's    typical     year operation  would have an annual gross income of
     $35,000, operating        costs of $13,00O,and a net income of $22,000,
     before depreciation,        repayment of the loans, and profit.

           The following table compares the planned and actual income and
     expenses for the recreational  enterprise  as shown on the borrower"s
     annual farm and home plans for 1963 through 1968.

                    Planned                                           Actual
          i                            .Nct      -                             .      Net --
            Gross                    income       Gross                             income
Year      income       Expenses       (loss)
                                     -"m-        -income            gsenses         (loss)

1963     $ 1,400       $ 1,976       $ (5761      $      194        $1,115         $( 921)     .
1964       8,800         4,860        3,940              195         1,053          ( 858)
1965       7,600         2,980        4,620              974         1,621          ( 647)
1966       9,630         3,255        6,375           1,228          1,646          ( 418)
1967      11,775         5,175        6,600              866         3,475          (2,609)
1968      27,750        16,120       11,630           2,226             a/              G
       g/Actual  recreational    expenses and net income for
          1968 were not available    in the FHA files.

       Although the borrowerrs financial   statements for 1963 through
1966 showed he was losing money from his recreational         enterprise,
FHA's farm and home plans, as indicated      above, continued     to show an
increase in the planned net income.      FE-IArecords also showed that
from 1963 through 1966, the borrower -had a net loss from farming

       By 1967, the borrower was delinquent            on 5 lams which he received
to develop the recreational         project,       Nevertheless,    FHA made two addi-
tional    loans totaling     $27,780 of which $25,460 was for the recreational
project,      In December 1968, the county supervisor             advised the borrower
by letter     that "***It    appears that nothing we have planned has improved
the recreation       income,    Each year ,the delinquencies        keep increasing,,
It now appears that you should be on the lookout for a buyer for your
property,**"         FHA records showed that the recreational            project    was
not suitably      located to attract      tourists    and State residents        and that
this was one of the major causes why the project                 was not a financial

       At the time of our fieldwork,  the borrower was delinquent     on all
eight of his FHA loans outstanding--    seven were for the recreational
project,    As of September 26, 1969, unpaid principal   and interest    on
the eight loans totaled about $85,000,

YEED TO REQUIRE BORROWERSTO P'ET LOAN                          -.

       FHA ihstructions       require  that    loans not be closed until  the loan
applicant    has met all      loan closing     conditions,  Contrary to this

                                                                                          - 3 -.
requirement,   FHA made recreational   loans to three           individuals   who did
not meet certain   of FHA*s loan closing conditions.               One example fol-

       A borrower in New Mexico received          an FK4 loan totaling        $54,500
in January 1968 to finance the development of a girls                   summer camp.
As a condition      to closing the loan, FBA required           the borrower to sell
25 horses.      The county supervisor      established     this condition       after
making an analysis       of the borrower's     financial    records.       The analysis
indicated    that the large number of horses maintained               by the borrower
was the cause of the borrower having an adverse financial                   position.
The FHA State office       and county office      determined      that the sale of
25 horses was necessary to ensure the financial               feasibility     of the
recreational     project   and repayment of the loan.

       At the time FHA closed the loan, the borrower had not sold the
horses and at the time of our fieldwork,      the borrower had increased
the size of the herd.     He was also delinquent   on two annual loan
installment   payments to FHA.       '


       The Consolidated  Farmers Home Administration      Act of 1961
17 U.S.C. 19211 provides     that loans be made only when FHA determines
that a loan applicant     is unable to obtain sufficient        credit    elsewhere
to finance his actual needs at reasonable        rates and terms.         FHA
instructions    provide that such determinations      be made by the county
supervisor   before a loan applicant    is considered    eligible      for FHA

        FHA instructions    provide also that a loan applicant     must, after
receiving     a farm operating     and/or farm ownership loan, become an
operator    or owner-operator      of an adequate or less than adequate family
farm,     An adequate family farm is defined by FHA as a farm of suffi-
cient size and productivity          to enable a farm family to have a reasona-
ble standard of living,         The farm must be managed by the family and
the labor must be primarily         furnished  by the family.

        On the basis of these instructions,         it appears that four of the
borrowers      included     in our review were ineligible    for recreational
loans.      Two examples follow where loans were made under two different
situations'even         though the borrowers'  eligibility     appeared questionable,

           . Example 1

             In May 1969, F&I made a $30,000 recreational       loan to a borrower
       in the State of Arkansas,     The borrower's application      showed that he
       owned property  valued at $97,175, had total debts of $23,400 and a
       net worth of $73,775.    In view of this borrower's      substantial  net
       worth, it appears that he should have been able to obtain financing
       from other sourceso

              The only documentation     in the FHA loan file indicating   that the
       borrower was unable to obtain financing        from another source was a
ill’   letter   from the Federal Land Bank stating       that it did not make loans
iI     to finance recreational     projects.

             Example 2

              FHA made farm operating    and farm ownership loans totaling
       $175,640 to two brothers      for farming purposes and to finance the
       development   of a recreational     project in the State of Virginia, Of
       the $175,640, FHA records show that $135,000 was used for the
       recreational   project,   which consisted of cabins, campsites, and
       hiking and horseback trails,

             At the time both brothers requested FHA loan assistance  in
       April 1965, they owned adjacent farm land in the State of Virginia
       but only one of the brothers was farming his land,   The other brother,
       who was not farming his land, resided and worked in the 'State of

              In September 1965, the Administrator,          FHA, authorized     the FHA
       State Director      in Virginia      to approve the loans subject to the State
       office    assuring    itself    that the loans be made to eligible      applicants
       who would continue to farm as well as operate the recreational                  pro-
       ject,     FHA records did not include any information,           however, to show
       that the State Director          had assured himself    that the one brother,        who
       resided and worked in the State of Delaware, would operate his farm
       and the recreational         project   jointly  with his brother    in Virginia
       after    the,FHA loans were made,

              At the time we completed our fieldwork:in    1970, the one brother
       was still    residing  and working in Delaware,  FHA records show the
       brothers   received   a total of $175,640 of loan funds as follow,

                                    Brother            Brother
  Loans                 Date       (Delaware)         (Virginia)            Total

Operating             12/13/65       $17,500             $17,500          $ 35,000
Ownership              4/13/66        60,000               58,000          118,000
Operating              5/ 5/67                              3,640            3,640
Operating              7/28/67          8,500               8,500           17,000
Ownership              1/ 8/69                           2,000m-             2,000




       We believe      that there is a'need for closer adherence to exist-
ing FHA instructions            by county and district    supervisors      in making
recreational       loans to individuals.        FHA instructions      for the making
of recreational        loans     appear to be adequate regarding        the procedures
for (1) preparing         annual farm and home plans, (2) closing             loans, and
(3) determining        the eligibility      of applicants    for FHA assistance,
The procedures        should be followed and loans should not be closed
until    determinations         have been made that recreational        loans are
financially      feasible,       credit  is not available    elsewhere,      and appli-
cants are eligible           for the loans.


     We recommend that the State office        officials     be required to
take necessary action to see that (1) realistic           farm and home plans
are prepared,      (2) loan closing conditions    are met before Federal
funds are disbursed,       and (3) adequate determinations      are made regard-
ing the eligibility       of loan applicants.

      We wish to acknowledge the cooperation"your   field              staffs have
extended to our representatives.   We would Appreciate                being advised
of the action
          1    you plan to take on our recommendation.

             Copies    of this    report   are'being          furnished                 to   the   Inspector
     General,      Department     of Agriculture.

                                                       Sincerely               yours,

                                                                  -i3-, -c., i I r”3. pj )
                                                       Bernard      Sacks

     Mr. James V, Smith,         Administrator
     Farmers    Home Administration
     Department    of Agriculture



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