Need To Evaluate Collectability of Outstanding Loans

Published by the Government Accountability Office on 1971-02-25.

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

                                                               f.-~~~   ~ ,~     LM089335
                                WASHINGTON, D.C.   20548


                                                                         FEB 25 1971

        Dear Mr. Smith:

             The General Accounting Office has reviewed the practices followed
        by the Farmers Home Administration (FHA) in establishing and accounting
        for allowances for losses on uncollectible loans-for FHA's various loan

             In a report issued to the Congress on improvements needed in FHA's
        financial statements of the Emergency Credit Revolving Fund (ECRF),
        B-114873, December 30, 1970,,we commented that we were unable to evalu-
        ate the reasonableness of the allowances for losses on loans receivable,
        interest receivable, and judgments receivable as shown in the ECRF
        financial statements. We pointed out that FHA's accounting system did
        not provide adequate information on which to base an evaluation of the
        collectibility of outstanding loans.

             During our audit of FHA's financial statements of the ECRF, the FHA
        Assistant Administrator for Management requested the program directors
        at the headquarters office to initiate, on a semiannual basis, a review
        of the percentage rates used to establish allowances for losses for FHA's
        various loan programs. Although these semiannual reviews have resulted
        in some changes in percentage rates, the changes were made without the
        benefit of any input from FHA field office personnel concerning the col-
        lectibility of outstanding loan receivables. Ih our opinion, more real-
        istic percentage rates for establishing allowances for losses could be
        developed if FHA county supervisors participated in periodic evaluations
        of the collectibility of outstanding loans and the data collected from
        such evaluations were used as a basis for establishing the overall per-
        centage rates for the various loan programs.

             To demonstrate the extent to which county supervisors could con-
        tribute to the process of developing more realistic percentage rates, we
        obtained certain information 'from the files in the Finance Office in
        St. Louis on 100 farm operating loans. The'loans were selected on a
        random sample basis. We mailed questionnaires to the FHA county super-
        visors responsible for servicing the 100 loans requesting their estimates
        of the loans' collection potential. We also requested that the county

                             50TH ANNIVERSARY      1921-1971
supervisors provide us data on the borrowers' delinquency status, esti-
mated income and expenses, and net worth and on the property serving
as security for the loans.

     The 100 loans had balances outstanding totaling $400,680 at
September 15, 1970, as compared to FHA's total farm operating loans
outstanding of $703.6 million at that date.

     Our analysis of the estimates made by the county supervisors showed
that there was an estimated potential for loss of $32,363 on nine loans.
Seven of these nine loans were classified as collection-onlyloans for'
which all security property had been liquidated. The county supervisors
regarded the remaining 91 loans as fully collectible based on present
circumstances for the following reasons:

          Reason considered fully collectible'    of loans

          1.   Borrower's income sufficient
               to repay loan                         17

          2.   Loan fully secured by borrower
               assets                                21

          3.   Borrower's income sufficient
               and loans fully secured by
               borrower assets                       36

          4.   Loans were paid in full between
               sample date and response from
               county supervisor                     10

          5.   Miscellaneous reasons                  7

                    Total loans                      91

     Consequently, on the basis of the county supervisors' estimates,
$32,363 or 8.1 percent, of the outstanding loans of $400,680 included
in our sample may be uncollectible.

     At September 30, 1970, FHA had established an allowance for losses
of $47.4 million on farm operating loans, or 6.4 percent, of the unpaid
principal balance for farm operating loans of $743 million. Although the
8.1 percent indicated by our limited random sample may not be representa-
tive of the entire program, a differential of even 1 percent in the per-
centage rate used to establish the allowance for losses for farm operating
loans could change the net income reported on the financial statement for
the program by over $7 million.

     We believe that bringing the knowledge of the county office person-
nel to bear in arriving at percentage rates to be used in establishing
allowances for losses on loans would be an important supplement to the
judgments presently being made by FHA officials at the Finance Office
and the headquarters office in Washington.


     Until such time as an adequate financial management system is
designed to generate necessary data to use in arriving at estimates of
losses, we recommend that FHA establish a periodic review process which
will utilize the experience and knowledge of the county office person-
nel in determining the estimated collectibility of loans. This review
process could be accomplished in conjunction with the county office's
annual review of delinquent and problem loans and collection-only loans.
The data accumulated by the field offices could be forwarded to the
Finance Office to be analyzed and tabulated for use as appropriate in
adjusting the percentage rates used in establishing the allowances for
losses for FHA's various loan programs.

     While we plan to do no further audit work relating to FHA's allow-
ances for losses, we would appreciate receiving your comments on our

     We wish.to acknowledge the cooperation extended our representatives
during our review. A copy of this letter is being sent to the Office of
the Inspector General, Department of Agriculture.

                                    Sincerely yours,

                                    Bernard Sacks
                                    Assistant Director

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