Improvements Needed in Certain Loan Management Practices and Certain Aspects of the Management Information System of Farmers Home Administration

Published by the Government Accountability Office on 1971-02-09.

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

CIVIL   DIVISIO?4                                                                                              FE13 3 1971

                    Dear   Mr.   Smith:

                             The General    Accounting          Office   has made a survey                of selected
                    loan management        practices         and certain    aspects      of the           management
                    information      system     of the       Farmers    Home Administration.

                            Our survey work,        performed      at FHA's national          headquarters
                    office     and at the State        office     and one county       office     in Virginia,
                    was directed        toward determining         ways in which the efficj.ency               of
                    operations       at the county       office     level.could      be improved       so as to
                    increase      the time available           to county      office  personnel      for the
                    counseling       and supervision         of borrowers.

                           Our   survey      indicated        that

                           --certain        loan management            activities          could     be per-
                              formed more efficiently                  and effectively             at a
                              centralized         location        thereby        relieving       county
                              office      personnel        of such tasks as collecting
                               loan repayments,            posting      borrower          accounts,     and
                              monitoring        insurance         and tax payments              on secured
                              real     estate,

                           --the      control       over report       requirements       and methods
                               of reporting          at the State        and county      office      level
                               needed improvement.                For example,       numerous      reports
                               being     prepared        manually     by county      and State       office
                               personnel         consisted       of (1) data already          provided
                               as inputs         to the computer          system at the FHA
                               Finance       Office      in St. Louis        or (2) information
                               extracted         from computer-prepared            reports      and pre-
                               sented      in a different          format.

                           We brought        oullpreliminary            observations        concerning      the
                    above matters       to     the attention          of members         of your staff      and
                    were made aware          of certgin        actions       initiated      or taken     by FHA
                    to improve     loan      management        practices          and the management        infor-
                    mation   system.         These actions          included         (1) the implementation
                    of a system for          having      rural     housing        borrowers    remit   loan
repayments        directly         to the F& Finance             Office,    (2) the initia-
tion     of a study to ascertain                 the feasibility         of contracting
with commercial            institutions          for the servicing         of mortgage        loan
accounts      of rural        housing      borrowers,        (3) the initiation          of a
study      to identify         current     requirements          of FKA's management
information         system and the changes               needed to make that            system
more responsive            to management's           needs,      and (4) the creation           of
a reports       task force           to simplify      and streamline          the reporting
function      in FHA.

        In view of the positive         actions     now being    taken    by FHA to
improve      its loan management      practices        and management     informa-
tion    system,    we have discontinued         our survey work until          such
time as FHA has had an adequate              opportunity     to implement       such
changes      as it deems necessary.

         We wish to acknowledge     the cooperation        extended                 to our
representatives      during   this  survey.      Copies    of this                report   are
being      furnished to the Inspector       General,    Department                  of

                                               Sincerely       yours,

                                               Bernard      Sacks
                                               Assistant      Director

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

                                  ‘”           ‘,       -._..                               ,,

                                       UNITE&TATES GENERALACCCWNTU~G
                                                                   OFFICE                                         III11
                                                      WASHINGTON,        D.C.         20548


                                                                                                   FE5 2 5 1971

                 Dear Mr. Smith:                                                                          .

                       The General Accounting   Office has reviewed the practices     followed
                 by the Farmers Home Administrat.ion     (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 FI+Ass 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.            5 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.                                                ,,,,,1

                         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 F&'J county super-
                 visors responsible        for servicing        the 100 loans requesting        their estimates
                 of the loans' collection          potential.        We also requested that the.,county

                                                    50TH ANNIVEliSARY 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 FHAls total farm operating                   loans
         outstanding   of $703.6 million  at that date.

               Our analysis of the estgmates 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-only     loans for'
         which all security    property    had been liquidated.        The county supervisors
         regarded the remaining     91 loans as ftilly     collectible     based on present
         circumstances    for the following    reasons:
‘I                   Reason considered       fully     collectible'       of loans
                     1.   Borrower Is income sufficient
                          to repay loan                                      17

                     2,   Loan ful ly 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 un~collectible.

                At September 33, 1970, FHA had established        an allowance for losses
         of $47.4 million    on farm operating    loans, or 6.4 percent,      of the unpaid
     6   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 Sy 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 FHAls allow-
         ances for losses, we would appreciate   receiving your    comments on our
il       recommendation.
               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
     Y   Farmers Home Administration
         Department of Agriculture