oversight

Financial Feasibility of Rural Water and Sewer Systems Should Be Checked More Thoroughly

Published by the Government Accountability Office on 1971-04-21.

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

Farmers Home Admrnrstratlon
Department   of Agrvxlture
                    COMPTROLLER        GENERAL    OF    THE       UNITED     STATES
                                     WASHINGTON    DC         20548




B-114873




To the      President   of the Senate     and the
Speaker       of the House   of Representatives

          This IS our report       pomtmg               out that the fmanclal        fea-
slblllty    of rural     water  and sewer               systems    should      be checked
more     thoroughly       by the Farmers                Home    Admmlstratlon,         De-
partment       of Agriculture.

           Our     review  was made   pursuant   to the Budget                           and Ac-
counting         Act, 1921 (31 U.S.C,   53), and the Accauntrng                             and
Auditing         Act of 1950 (31 U S.C. 67).

          Copies   of this         report     are bemg   sent to the Director,
Office     of Management              and    Budget,  and to the Secretary     of
Agriculture.




                                                   Comptroller                 General
                                                   of the United               States




                            50TH    ANNIVERSARY                192?-       1971 -
                                        %- . I
COMPTROLLERGENERAL'S                                         FINANCIAL    FEASIBILITY       OF RURAL
REPORT TO THE COflGRESS                                      WATER AND SEWER SYSTEMS SHOULD
                                                             BE CHECKED MORE THOROUGHLY
                                                             Farmers    Home Admlnlstration
                                                             Department    of Agriculture        B-114873


 DIGEST
------


WHY THE REVIEW WASMADE

          The Farmers        Home Admlnlstration             (FHA) makes loans   and grants     for the
          construction          and/or    improvement        of water and sewer systems      which prl-
          manly       serve farmers,         ranchers,       farm tenants  and laborers,     and other
          rural     res-rdents,        The loans       and   grants  are made to public     and non-
          proflt      associations.

          The General   Account-rng    Offlce              (GAO) revlewed       the      procedures     and
          practices   of FHA for determlnlng                   the flnanclal          feaslblllty      of pro-
          posed systems   before    disbursing               funds because

             --reports      from county    FHA offices    Indicated that assoclatlons      of-
                 ten lacked     the mInimum   number of users (as established         by FHA)
                 to provide     enough revenue     to repay the loans and

             --there     had been       a rapid     growth      ln   the   number      of systems

          The loans  are repayable             over periods          up to   40 years,        with    annual
          interest  not to exceed             5 percent

          Nhen development          costs of a system ~111 result            -rn high charges      to
          users,      grants     may be made zo reduce        costs to a level         which ~111 re-
          sult     ln a reasonable         user charge    comparable     to user charges       of
          established        systems    of s-imilar    size and cost in communltles           ~7th
          similar      economic     condltlons.       Once a reasonable        user charge     is
          determlned,        the key factor       ln ensuring     a system's      financial   success
          is obtalnlng         the required      number of users         (See ppO 6 and 7 )

          FHA made loans and grants   of about   $1 SllKlon     to 4,668 associations
          from the lncept-ron  of the program  111 1961 to June 1970.       Over 75
          percent  of these funds were advanced    after    1966


FIIVDINGS .Al!JDCONCLUSIONS

          Verifscation        of user data

          Contrary    to 1~s instructions              FHA has disbursed        loan and grant       funds
          before   adequately    determining            that   the assoclatlons         will have the
          mlnimum   number of users to              make their     systems    frnanclally     feasible.

_-- Sheet
Tear
                                                                           APRILZlJ971
                                                       B
     The failure      of associations        to have the necessary       users at the time
     that  the assoclatlons'          systems      go anto operation    1s slgnlflcant,       be-
     cause sufflclent       revenues       may not be generated      to enable      the assocla-
     tlons   to continue      operating      their    systems  and meet repayments       on their
     FHA loans

    In February     1970, 123 assoc-iatlons     were delinquent    $2 mllllon on loans
    of $42 mlll-ron     because they did not have the mlnlmum        number of users
    which FHA had determined       were requ-rred   to flnanclally    support the op-
    eration   of their     systems    (See p. 10.)

     GAO analyzed     FHA and association        records    for 69 assoclatlons         that   had
     received    loan and grant       funds of $29 mllllon.           For 64 associations
     FHA had not independently           venfled    the assoclatlons'        user agreements
     and lists     of potential     users , which had been furnlshed            as evidence
     that the minimum        number of users had been obtained            to fully     support
     the operation     of their     systems

    At the      time   that     the     associations'              systems       were     placed      ln    operation

        --31 assoclatlons     did not                 have   the      required         minimum       number       of    users
           established    by FHA,

        --22    associations          had the         required        number      of     users,      and

        --15 assoclatlons            did      not     have   adequate          records       showing        whether
            they had the        required            number   of users.

    One association            had    its     system       under      construction           at the        time      of GAO's
    fieldwork

    Of the 69 assoclatlons,              48, which had their            systems    ln operation    for
    periods     ranging      up to 57 months,          lacked    suff-rcient      users either   at
    the t-rme that       their     systems       went -into operation         or at the time that
    GAO completed        its review.           In February      1970, 15 of the 48 associations
    were delinquent          $533,000     on loans        of $70 7 mllllon.          In GAO's opinion,
    17 more assoclatlons            eventually       will    become delinquent         on loans  of
    $4.8 mill-ion       because     of the lack of a sufficient                number of users.                                 I
                                                                                                                                I
                                                                                                                                I
    For 32 of the 48 assoclatlons                 for which lnformatlon       was readily avall-
    able,     GAO estimated      that    addlt-ronal     revenues    of $581,000   would have                                   I
                                                                                                                                I
    been collected        during    periods      that  ranged from 3 to 56 months if the                                        I
    assoclatlons       had obtained       the required       minimum    number of users.                                        I
    (See op 11 and 12 )                                                                                                         I
                                                                                                                                I
    IJeed for      f-~rm comtments               from users                                                                     I


    Fl1A needs in establish                  procedures          requiring        that     assoclatlons              obtain
    firm  cZmmitqents    from               prospective          users.

1 ing,For   example,
              to obtain
                        FWA does not require
                          from each prospective
                                                                 an association,
                                                                    user
                                                                                             prior     to     loan      clos-



                                                       2
                   --a      cash contnbutlon       to cover          the estimated          cost of connecting     a
                         service  line     from the user's           property    to   the      association's   water
                         or sewer system       and

                   --a        user agreement       which requires    the user to             pay     a mln-rmum monthly
                         rate regardless          of whether   he actually   uses            the     associatxon's    fa-
                         cilities.
                                                                        a
              Also FHA has not established                     a program     for determining,                  on a systematic
              basis, that assoclatlons     are                 enforclng     user agreements                    (See p 16.)
                                                                                                                                  3
              F2.m        comtments        ua the      State    of   Washzngton

              Of the FHA offlces       in the nine States    included    -rn GAO's review,      the
              FHA office    in the State     of Washington   was the only one that       required
              a water    and sewer assoclatlon     to obtain     from each prospective      user,
              prior   to loan closing,      both a cash contribution       and a binding    user
              agreement.

              The cash contr-rbutlon        covered the estimated       cost of connecting     a ser-
              vice line      to the association's     facilities.       The user agreement     re-
              quired     each user to pay a minimum          monthly rate to the association       re-
              gardless      of whether  he actually     used the system.        The cash contnbu-
              tlon    ranged   from $75 to $250,    and the minimum       monthly   rate ranged
              from $5 to $8 75.

              GAO believes    that             these requirements         are   the principal   reasons   that
              the five Washington                  assoclatlons    included       in its review   have had
              no maJor flnanclal                 feasibility    problems.         (See PP. 16 and 17.)

              Inadequate          corrintm~nts       eLsewhere

              For the remaining       64 associations      included    in GAO's review,         FHA State
              offices    had required      42 to obtain    cash contnbutlons.          For 31 assocla-
              tlons   the required      cash contributions        were less than $26 which was
              not sufficient      to cover the cost of connecting            a service    line.

              FHA State          offices   required  38 of the 64 associations                           to     obtain     user
              agreements.             The agreements  obtained,    however,     did                not        commit     the
              prospective            users to use the water     or sewer facilities

             GAO interviewed        142 lndlvlduals      who had signed            user agreements     with
             20 of the 64 associations             and who--at       the t-rme of GAO's fieldwork--
             were not using the associations               facllitles.           For the most part the
             individuals      said that     they had good working            wells     or that  they could
             not afford     the cost of connecting           service      lines     to the assoclatlons'
             facilities.        (See P. 17.)




    Tear
    --     Sheet


I
                                                                3
    The makIng     of loans and grants   to associations       not having    the required
    nnnlmum   number of users is a dlsservlce         to other    rural   communltles
    which need assistance      and which can meet requirements          to make their                           I
    systems   financially   successful                                                                          I
                                                                                                                I
                                                                                                                I
    The demand for assistance                 in flnanclng      systems     has been greater       than         I
                                                                                                                I
    the funds available             during      the past few years.           This fact makes it                I
    Increasingly         important       that     FHA establish      reasonable     user requirements           I
                                                                                                                I
    and procedures          for enforclng          such requirements,         to ensure that     loan           I
    and grant        funds are provided            to only those       assoclatlons     having   flnan-         I
    clally      feasible      systems         (See p 20.)
                                                                                                                I
                                                                                                                I
                                                                                                                I
                                                                                                                I
RECOMMENDATIONSOR SUGGESTIONS                                                                                   I
                                                                                                                I
     FHA should    require  that flnanclal     ass-rstance      be provided       to an asso-                   I
                                                                                                                I
     clatlon   only after   FHA county     and State    loan approval       offlclals    have                   I
     venfled    and documented   in the loan flies         that   the assoclatlon       has
     obtalned

       --the      number     of   users    needed        to make    Its     proposed     system   flnanclally
           feasible,

       --a      cash contnbutlon            from       each prospective         user to cover the estl-
             mated cost of connecting                  a service   line      from his property   to the
             association's      facilltles,             and

       --an enforceable     agreement     from each prospective      user                     commlttlng
          horn to pay a mlnlmum     monthly    rate to the association                         regardless
           of whether   he uses the system.

     FHA should    also establish             procedures     for          determIning,    on a systematic
     basis,  whether    assoclatlons             are enforcIng             user agreements.     (See
     p. 20.)                                                                                                    I
                                                                                                                I
                                                                                                                I
                                                                                                                I
AGENCY ACTIOTJ,SAIJD iXU%SOLWD ISSUES                                                                           I
                                                                                                                I
                                                                                                                I
     The Admlnlstrator          of FHA said that        GAO's recommendations         would help                I
                                                                                                                I
     FHA to further       perfect     its programs       and that  FHA planned        to revise                 I
     its instructIons        on membershlp       requirements,     user cash contnbutlon                        I
                                                                                                                I
     requirements,       and the enforcement          of user agreements.         He said also                  I
     that the new lnstructlons             would be Implemented       after    revlew     by FHA                I
     State     directors    and dlscusslon       at FHA tralnlng      meetings          He expects              I

     that    these actions       will   overcome    the problems    presented       in GAO's re-                I
     port        (Seeapp     I)                                                                                 I
                                                                                                                I
                                                                                                                I
     GAO plans    to review          FHA's revised           Instructions        after    they are Issued,
                                                                                                                I
     to ascertaln    whether,          if properly           implemented,        they    will  provide          I
                                                                                                                I
                                                                                                                I
                                                                                                                I
                                                                                                                I
                                                                                                                I
                                                   4                                                            I
                                                                                                                I
                                                                                                                I
I          assurance    that   Government     funds   are provided        only     to assoclatlons   whose
I
           proposed    water   and sewer    systems     are flnanclally          feasible


    MAT533R7FOR CONSIDERATION BY THE CONGRESS

           GAO 1s bnnglng       this    matter    to the attention       of the Congress     because
           of the lncreaslng        congressional        interest  In the adequacy      of rural   water
           and sewer systems        and because       of the need for FHA to improve         its de-
           terminations     of the financial          feas1blllty    of proposed  rural    water    and
           sewer systems     before     Federal     loan and grant     funds are disbursed.




I
I
I
I
I
I
I
I
I
I

I
I
I   Tear Sheet
I
I
I
I
I
I
                             Contents
                                                                         Page

DIGEST                                                                     1

CHAPTER

   1       INTRODUCTION
                Financing     of FHA water and sewer program
                Organization       of FHA
                Internal     audits   of FHA water and sewer
                   program

   2       IMPROVEMENTS NEEDED IN DETERMINING FINANCIAL
           FEASIBILITY     OF RURAL WATER AND SEWER SYSTEMS               10
                Need to improve verifications         of user
                   data furnished   by associations                       10
                Need to establish    procedures     for requlr-
                   lng firm commitments     from water and
                   sewer users                                            16

   3       CONCLUSIONS, RECOMMENDATIONS, AND AGENCY
           COMMENTS                                                       20
               Conclusions                                                20
               Recommendations to the Administrator,
                 FHA                                                      20
               Agency comments                                            21

   4       SCOPE OF REVIEW                                                23

APPENDIX

   I       Letter      dated February       4, 1971, from the Admin-
              istrator,      Farmers Home Administration,       De-
              partment      of Agriculture,      to the General Ac-
              counting      Office                                        27

   II      Principal      officials        of the Department     of
              Agriculture         responsible      for the administra-
              tion of activities            discussed    in this re-
              port                                                        28
                        ABBREVIATIONS

FHA   Farmers    Home Admlnlstratlon

GAO   General    Accounting    Office

OIG   Office    of the Inspector        General
+-.ww   COIPTROLLERGENERAL'S                         FINANCIAL FEASIBILITY OF RURAL
        REPORTTO THE CONGlBSS                        WATER AND SEWERSYSTEMS SHOULD
                                                     BE CHECKEDMORETHOROUGHLY
                                                     Farmers Home Admlnlstratlon
                                                     Department of Agriculture   B-114873


         DIGEST
        -m--w-

        WHYTHE REVIEW WASMADE
             The Farmers Home Adminlstratlon            (FHA) makes loans and grants for the
             constructlon      and/or improvement       of water and sewer systems which pn-
             manly serve farmers,        ranchers,      farm tenants and laborers,  and other
             rural residents.        The loans and      grants are made to public and non-
             profit    associations.

             The General Accounting Offlce     (GAO) reviewed the procedures and
             practices  of FHA for determlnlng     the financial feaslblllty of pro-
             posed systems before disbursing     funds because

                  --reports     from county FHA offices indicated that associations    of-
                      ten lacked the minimum number of users (as established      by FHA)
                      to provide enough revenue to repay the loans and

                  --there   had been a rapid   growth     in the number of systems.

             The loans are repayable over periods            up to 40 years,   with   annual
             Interest not to exceed 5 percent.

             When development costs of a system ~111 result in high charges to
             users, grants may be made to reduce costs to a level which WI 11 re-
             sult ln a reasonable       user charge comparable to user charges of
             established    systems of similar     size and cost in communltles with
             similar    economic conditions.      Once a reasonable   user charge is
             determined,    the key factor in ensuring a system's financial       success
             is obtaining     the required   number of users.     (See pp. 6 and 7.)

              FHA made loans and grants of about $1 bllllon  to 4,668 associations
              from the inception  of the program in 1961 to June 1970. Over 75
              percent of these funds were advanced after 1966.


        FINDINGS Al!YDCONCLUSIONS
              Verifmation      of user data
              Contrary to its instructions  FHA has disbursed loan and grant funds
              before adequately determining  that the assoclatlons   WI 11 have the
              minimum number of users to make their systems flnanclally     feasible.           .
The failure     of assoclat3ons         to have the necessary        users at the time
that  the associations'         systems      go into   operation   is significant,       be-
cause sufflc-rent     revenues       may not be generated        to enable     the assocla-
tlons   to continue     operating      their    systems    and meet repayments      on their
FHA loans.

In February     1970, 123 associations         were delinquent    $2 million on loans
of $42 mlll-ron     because     they did not have the mlnimum       number of users
which THA had determined           were requtred   to financially    support the op-
eration   of their     systems.       (See p. 10.)

GAO analyzed     FHA and association           records   for 69 assoclatlons          that had
received    loan and grant       funds of $29 million.              For 64 associations
FHA had not Independently           verified      the associations'        user agreements
and lists     of potential     users,      which had been furnlshed           as evidence
that the minimum        number of users had been obtained               to fully    support
the operation     of their     systems

At the      time   that     the    assoclatlons'            systems       were     placed      In     operation

   --31 assoclatlons     d?d not               have   the      required         minlmum       number        of    users
      established    by FHA,

   --22     associat3ons          had the      required        number      of     users,      and

   --15 assoclatlons             did   not     have   adequate          records       showing         whether
       they had the         required         number   of users.

One association            had 3ts     system       under      constructlon           at the         time     of GAO's
fleldwork.

Of the 69 associations,          48, which had their             systems    In operation    for
periods   ranging     up to 57 months,         lacked    sufficient        users either   at
the time that their        systems       went Into     operation       or at the time that
GAO completed      its review.         In February      1970,      15 of the 48 associations
were delinquent       $533,000 on loans of $10.7 mllllon.                     In GAO's opinion,
17 more associations        eventually       will    become delinquent          on loans of
$4.8 mll11on      because   of the lack of a sufficient                 number of users.

For 32 of the 48 associations                 for which Information       was readily    avall-
able,     GAO estimated      that    add-rtlonal     revenues    of $581,000   would have
been collected        during    periods      that  ranged from 3 to 56 months         if the
associations       had obtained       the required       mln-rmum number of users.
{See pp. 11 and 12 )

fleed for     fzrm eorrumtments from users

FHA needs to establish               procedures           requiring        that     assoc?atlons              obtain
firm commitments    from            prospective           users.

For example,    FHA does not require                      an association,             prior     to     loan       clos-
ing,  to obtain   from each prospective                      user


                                                2
  --a      cash contribution to cover         the estimated cost of connecting    a
        serv?ce line from the user's          property   to the assoclatlon's water
        or sewer system and

  --a      user agreement which requires   the user to pay a minimum monthly
        rate regardless   of whether he actually   uses the association's fa-
        al-t-ties.

Also FHA has not establIshed    a program           for determining,   on a systematic
bas'is, that assoclatlons   are enforcing           user agreements.    (See p. 16.)

Fmm commtments       m the State      of Washington

Of the FHA offices   in the nine States Included in GAO's review, the
FHA offIce  In the State of WashIngton was the only one that required
a water and sewer assoclatlon    to obtain from each prospective  user,
prior to loan closing,    both a cash contrlbutlon  and a binding user
agreement.

The cash contribution  covered the estimated cost of connecting     a ser-
vice line to the assoclatlon's   faclllties.    The user agreement re-
quired each user to pay a mInimum monthly rate to the association       re-
gardless of whether he actually    used the system.   The cash contnbu-
tion ranged from $75 to $250, and the minimum monthly rate ranged
from $5 to $8.75.

GAO believes   that these requirements      are the principal  reasons that
the five Washington associations      included in its review have had
no maJor financial    feaslblllty  problems,      (See pp. 16 and 17.)
Inadequate     corrmtmeqts   elsetihere

For the remaining 64 associations          Included in GAO's review,       FHA State
offices    had required   42 to obtain cash contributions.          For 31 assocla-
tlons the required      cash contributions       were less than $26 which was
not sufficient     to cover the cost of connecting        a service   line.

FHA State offices   required  38 of the 64 associations     to obtain user
agreements.    The agreements  obtained, however,    did  not commit the
prospective   users to use the water or sewer facilities.

GAO interviewed     142 Individuals    who had signed user agreements with
20 of the 64 associations        and who--at the time of GAO's fieldwork--
were not using the assoclatlons'        facllltles.      For the most part the
individuals     said that they had good working wells or that they could
not afford the cost of connecting service           lines to the associations'
facllitxes.      (See P* 17.)




                                          3
    The maklng of loans and grants to associations     not having the required
    mlnlmum number of users 1s a disservice   to other rural conununltles
    which need assistance   and which can meet requirements    to make their
    systems financially   successful.

    The demand for assistance ln financing              systems has been greater than
    the funds available          during the past few years.        This fact makes it
    increasingly       important     that FHA establish     reasonable  user requirements
    and procedures       for enforcing      such requirements9     to ensure that loan
    and grant funds are provided            to only those associations      having flnan-
    clally    feasible     systems.      (See p. 20.)


RECOMVENDATIONS
              OR SUGGESTIONS
    FHA should require that financial   assistance be provided     to an asso-
    ciation  only after FHA county and State loan approval offlclals      have
    verified  and documented ln the loan files    that the association   has
    obtained

      --the number of users needed to make its            proposed   system financially
          feasible,

      --a     cash contnbutlon        from each prospective   user to cover the estl-
            mated cost of connecting a service        line from his property   to the
            assoclatlon's   facllitles,     and

      --an enforceable   agreement from each prospective  user committing
         him to pay a mlnlmum monthly rate to the assoclatlon   regardless
         of whether he uses the system.

    FHA should also establish   procedures for         determining, on a systematic
    basis, whether assoclatlons    are enforcing        user agreements.  (See
    p. 20.)


AGENCYACTIONS AND UNRESOLVEDISSUES
    The Admlnlstrator      of FHA said that GAO's recommendations would help
    FHA to further     perfect  its programs and that FHA planned to revise
    its instructions     on membershlp requirements,      user cash contribution
    requirements,     and the enforcement    of user agreements.      He said also
    that the new lnstructlons       would be implemented after review by FHA
    State directors     and dlscusslon    at FHA training   meetings.    He expects
    that these actions will overcome the problems presented in GAO's re-
    port     (See app. I >

    GAO plans to review FHA's revised         instructions     after they are issued,
    to ascertain whether, if properly         implemented,     they will provide
    assurance that   Government funds are provided     only to assoclatjons   whose
    proposed water   and sewer systems are financially     feasible.


MATTERSFOR COiVSIDERATIONBY THE COIVGRESS
    GAO IS bringing    this matter to the attention      of the Congress because
    of the increasing     congressional    interest in the adequacy of rural water
    and sewer systems and because of the need for FHA to improve its de-
    termlnatlons    of the flnanclal    feaslblllty   of proposed rural water and
    sewer systems before Federal loan and grant funds are disbursed




                                     5
“=@   --




                                             CHAPTER 1


                                           INTRODUCTION

                  The Farmers Home Administration           is authorized    by sec-
           tion 306 of the Consolidated         Fakmers Home Administration
           Act of 1961, as amended (7 U.S.C. 1926), to make grants and
           direct    and insured    loans to public     and nonprofit     assocla-
           tlons to finance      the improvement      and/or construction      of
           water and sewer systems which primarily             serve farmers,
           ranchers,    farm tenants     and laborers,     and other rural     rest-
           dents.

                   In considering       an association's       request   for loan and
           grant assistance,         FHA evaluates       the reasonableness     of the
           user rates proposed by an association                 and makes determlna-
           tlons regarding        the minimum number of users required            to fl-
           nanclally    support      the system.

                    Under FHA instructions,     grants may be provided      to an
           association       when the development     cost of a system will      re-
           sult in high charges to users.           Grant assistance     is pro-
           vided to reduce the association's           proJect  costs to a level
           which will      permit a reasonable     user charge that will     be
           comparable      to user charges of established       systems of slml-
           lar size and cost in communities          with similar    economic con-
           ditions.       Once a reasonable    user charge is determined,        ob-
           taining     the required     number of users becomes the key fac-
           tor In ensuring       the financial    success of a water or sewer
           system.

                     Our detailed    review of the effectiveness           of FHA's
           policies      and procedures      for determining       the financial      fea-
            sibility     of water and sewer systems placed emphasis on the
            steps taken by FHA, prior           to disbursing      Government funds,
            to ensure that associations           obtained    the minimum number of
           users which FHA had determined             were required      to financially
            support the operation          of the systems.       We identified      this
           area as being in need of improvement               in our survey of FHA's
           water and sewer program in two States;                the survey did not
           indicate      any significant      problems with respect          to FHA's de-
           terminations        of rates the assoclatlons         should charge users.



                                                   6
      The 1961 act provides          that

      --water     and sewer loans to associations          be made at an
         interest    rate not to exceed 5 percent          per annum,

      --loans     be made only when FHA determines     that associa-
          tions   are unable to obtain    sufficient credit  else-
          where   to finance  their actual needs at reasonable
          rates   and terms,

      --loans     be repaid   over    a period   not   to exceed   40 years,

      --the maximum principal   loan indebtedness    together
         with grant assistance  not exceed $4 million      for         any
          association at any one time, and

      --the amount of grant assistance    not exceed 50 percent
          of development costs of the water and/or sewer sys-
          tem.

FINANCING       OF FHA WATER AND SEWER PROGRAM

          FHA records show that,     from inception     of the water and
sewer program in 1961 to June 30, 1970, FHA made loans and
grants totaling        about $865 million     and $134 million,    re-
spectively,       to about 4,668 associations       to finance  the im-
provement       and/or construction     of rural   water and sewer fa-
cilities.        For fiscal   year 1971, FHA expects to make loans
of about $126 million         and grants of about $20 million        to
about 900 associations.

       Direct   loans are financed    with Treasury borrowings  and
are made from FHA's Direct       Loan Account up to a maximum
amount established     by the Congress for the program in an-
nual appropriation     acts.    Grant funds are appropriated   an-
nually    by the Congress.

        Insured   loans are made from FHA's Agricultural          Credit
Insurance      Fund.   After  making these loans at an interest
rate--established       by law--not  exceeding     5 percent,    FHA sells
the associations'       notes to investors     for periods    ranging
from 1 to 25 years and guarantees          repayment    of the loans.

        To make the notes attractive  to investors,    FHA pays
interest    on the notes at rates that are competitive     with

                                            7
 interest  rates being paid for private           capital.         Effective
 February  15, 1971, FHA was paying         interest       on   associations'
notes sold to investors        at rates   ranging      from     5-3/4 to
 6-3/4 percent --the higher      interest     rate being        paid to inves-
 tors purchasing    the notes for 10 to 25 years.                 Proceeds
from the sales of the notes are placed               in the     fund and are
used to finance     additional     loans.

       From inception      of the water and sewer program in 1961
to December 31, 1969, FHA returned,            due to lack of Federal
funds,    5,935 applications     to associations     which had re-
quested    loan and grant assistance       totaling   $964 million.
At December 31, 1969, FHA estimated            that about $11 billion
was required    to meet the national       need for adequate      rural
water and sewer facilities.

ORGANIZATION       OF FHA

        FHA maintains       41 State offices--which        serve the 50
States,       the District     of Columbia,     Puerto Rico, and the Vir-
gin Islands --and about 1,700 county offices.                   Each FHA
State office         is headed by an FHA State director             who is re-
sponsible        for all program operations        within    his territorial
Jurisdiction.          The FHA county offices,        each under the su-
pervision        of an FHA county     supervisor,     are located      through-
out the country          to serve all agricultural        counties.

       Appllcatlons    for all loans and grants        are made ini-
tially   to the county or State offices.         County office        op-
erations     are subJect   to review   by the district     supervisor
or other State office       officials.

        Under FHA instructions,      water and sewer loans up to
 $350,000 may be approved by the FHA State directors          and
loans of $350,000 or more are reviewed          by the FHA headquar-
ters office     before    the loans are approved by the State di-
rectors.      Development    grants  in excess of $75,000 are re-
viewed by the FHA headquarters          office before the grants  are
approved     by the State directors.

INTERNAL AUDITS OF FHA
WATER AND SEWER PROGRAM

      The Office     of the Inspector  General   (OIG), Department
of Agriculture,      has not made a detailed   audit   of FHA's
water and sewer program.      In fiscal   year 1969, OIG made a
survey of all FHA's assoclatlon       loan programs    and ldentl-
fled weaknesses    In FHA's management of these programs,          ln-
cludlng  the water and sewer program.        Due In large measure
to our audit   of FHA's water and sewer program,        OIG decided
to concentrate   Its audit  effort    on FHA's recreation     loan
program.




                                     9
                                    CHAPTER 2


                 IMPROVEMENTS NEEDED IN DETERMINING

                        FINANCIAL     FEASIBILITY       OF

                     RURAL WATER AND SEWER SYSTEMS

     Contrary to its instructions      FHA has disbursed  loan
and grant funds to associations      before adequately   determin-
ing that the associations      will have the minimum number of
users to make their    systems financially    feasible.

      More specifically,         FHA did not (1) verify        indepen-
dently    the listings      of potential      users or user agreements
furnished    by associations        applying     for water or sewer loans
and grants to finance          the improvement       and/or construction
of water and/or sewer systems nor (2) require                  the associa-
tions to obtain        firm commitments from the potential             users
of the proposed water and/or sewer systems.                   The failure     of
associations      to have the necessary users at the time their
systems go into operation           is significant       because sufficient
revenues may not be generated             to enable the associations
to continue     operating     their   systems and meet repayments            on
their    FHA loans.

      At February     2, 1970, 270 associations            were delinquent
$3.3 million     on outstanding    loans totaling            $77 million.
Of these associations,        123 were delinquent            $2 million    on
outstanding    loans of $42 million      because          they did not have
a sufficient     number of users to financially               support the
operation    of their    systems.

NEED TO IMPROVE VERIFICATIONS OF
USER DATA FURNISHED BY ASSOCIATIONS

      FHA instructions       require   that,       before Federal     funds
are disbursed,       an association      have      a minimum number of
users to support       the operations       of     its water or sewer sys-
tem.    FHA considers      this requirement           necessary   to reason-
ably ensure that an association             will      be able to operate     its
system successfully.            The successful          operation   of the sys-
tem includes     repayment of its loan,              payment of current     op-
erating   expenses,      and establishment           of a cash reserve.

                                       10
        Our review      indicated        that,     as evidence     that an asso-
ciation      had obtained       the minimum number of users needed
to financially         support      its system,       FHA usually       accepted
from the association            either      a list    of potential       users or a
statement       that the association             had obtained      a certain      num-
ber of signed user agreements                  from potential        users.     A
signed user agreement             does not necessarily           represent       a firm
commitment        on the part of a potential              user to use a com-
pleted    system.        (See p. 16 for our comments on the need to
obtain    firm commitments            from potential       users.)

        We selected        69 associations        which had been advanced
loans totaling          $26.3 million      and grants        totaling      $2.7 mil-
lion    during      the period     August 1963 to February              1970 for the
development        of rural     water and/or        sewer systems in nine
States     and analyzed       their    loan and grant applications               and
related      documents      supporting     their      system proposals.          In
making our selection            we generally        included      associations
which (1) had 50 or more users,                  (2) had been in operation
for various        periods    of time,     and (3) were delinquent              on
repaying      their     FHA loans.

        Our analysis       of records       maintained    by FHA and the as-
sociations      showed that,       for 64 of the 69 associations,          FHA
had not made independent             verificatrons      of user listings     or
user agreements         furnished     by the associations       to show that
they would have the required                mInimum number of users to
fully    support    the operations          of their   systems.    Our analysis
showed further        that,     at the time the systems for the asso-
ciations    were placed         In operation,

       --31 associations          did not have            the required        minimum
          number of users         as established             by FHA,

       --22 associations          had the         required       number     of users,
          and

       --15 associations      did not have adequate  records  show-
          ing whether    they had the required   number of users.

One association   had its           system        under      construction      at the
time of our fieldwork.

     Our analyses   showed also that,     of the 69 associations,
48, which had their    systems in operation     for periods   ranging


                                             11
up to 57 months,  had lacked   sufficient     users    either                    at the
time that their  systems   had gone into     operation      or                 at the
time that we had completed    our fieldwork.

         Of the 48 assoclatlons,                  15 were delinquent      $533,000       on
outstanding          loans     of $10.7 million           as of February      1970 and
17, in our opinion,               will     eventually      become delinquent       on
outstanding          loans     of $4.8 million          because    of the lack of
sufficient         users.        For 32 of the 48 associations              for which
information         was readily          available,      we estimated     that    addi-
tional      revenues       of $581,000          would   have been collected        during
periods       ranging      from 3 to 56 months             rf the assoclatlons         had
obtained        the required          minimum number         of users.

        The following      three       examples     illustrate     FHA’s practice
of dlsburslng        the loan funds         before      adequately   determlnlng
whether    the associations           will    have the necessary        users    to
make their      systems    financially         feasible.

Assoclatlon       A

        FHA made a loan of $846,000          to        this    association       in De-
cember 1967 to finance         the construction              of a water       system.
As a condition      to closing     the loan,           FHA required        that    the
association     have at least      735 water           users    and that      each user
be assessed     an average     monthly   rate          of about      $9 when the
system became operational.

         FHA closed       the loan on the basis       of the association’s
statement,         in writing,    to the FHA county        supervisor     that    735
individuals          had executed    user agreements.         The county      super-
visor      told   us that,     at loan closing,     he had not determined
whether        the association      actually    had obtained       signed   user
agreements        from 735 individuals.

        Our review      showed that         only     538 individuals        had actually
signed    user agreements          and that        the agreements        did not rep-
resent    firm     commitments      by the potential             users   to use the
completed       water   system.       In December          1968,    2 months    after    the
system went into         operation,         the association           had only 122 wa-
ter users,       and, 8 months        after      operations       began,    the asso-
ciation      had only 351 users.

          We estimated     that     the   association’s        revenue      was about
$30,000      less than     anticipated        over     a ‘/-month    period    as a

                                              12
result   of the assoclatlon's      not having    the mlnlmum number
of users.     On February     2, 1970, the   association    was delln-
quent about $7,500 on Its FHA outstanding             loan balance   of
about $834,000.

Association        B

      FHA made a loan of $1,530,000         In March 1966 and a sub-
sequent   loan of $608,000     in April    1967 to this  association
to fxnance    the construction     of a water system.     As a condl-
tlon to closing    the loan,     FHA required   that the assoclatlon

       --obtain        signed   user   agreements   from   at least     1,895
          users,

       --obtain  a cash contrlbutlon       of $5 from each potential
          user as a good faith     deposit   to be used to pay a part
          of the cost of operating      the system in the first      year,
          and

       --assess   each user an average monthly              rate   of   $6.75
          when the system became operatlonal.

       FHA closed      the loan on the basis of the assocration's
statement,     in writing,      to the FHA county supervisor       that the
association      had obtained     the required     number of user agree-
ments and cash contributions.              The county supervisor     told
us that,    at loan closing,        he had not determined     whether     the
association      actually     had obtained    slgned user agreements        and
cash contributions         from 1,895 potential      users.

        Although   FHA and the assoclatlon's       records     did not show
the number of users who had signed user agreements                prior   to
loan closing,      our review     showed that the association        had
collected      cash contrlbutlons      from only 1,546 users.        When
the system became operational            in June 1967, the association
had only 438 users,         and, 32 months after     operations    began,
it had 1,822 users.

       We estimated     that the revenue collected      by the assocla-
tlon during     the first    32 months of operation     was about
$82,000 less than anticipated         as a result   of the assocla-
tion's   not having     the required   mlnlmum number of users.
On February     2, 1970, the assoclatlon      was delinquent    about


                                           13
$95,000       on its     FHA   outstanding        loan   balances      of about
$2,084,000.

Association          C

       FHA made a loan of $327,000            in December 1968 and a sub-
sequent loan of $50,000 in August 1969 to thus association
to purchase      existing       water and sewer facilities   and to con-
struct   additional       facilities.       As a condltlon to closing
the loan,     FHA required          that the association

          --obtain      signed user agreements            from   at least     580 water
             users     and 164 sewer users,

          --obtain  a cash contribution       of $5 from each potential
             user as a good faith     deposit   to be used to pay a
             part of the cost of operating        the system in the first
             year, and

          --assess   each user an average monthly                   rate   of $4.25
             when the system became operational.

       Records at the FHA county office       did not contain       any
information     to indicate   that the county    supervisor,     prior
to loan closing,      had determined  whether    the association        had
obtained    signed user agreements    and cash contributions          from
744 potential     users.

        Our review    showed that,   when the system went into op-
eration     in September    1969, the association       had obtained
only 354 signed agreements         and that the agreements        did not
represent     firm commitments     on the part of the potential
users to use the completed         water system.       Only 192 potential
users had paid the required         cash contribution.       In December
1969, 3 months after        the system went into operation,          the
association       had only 354 water users and 114 sewer users.

       We estimated       that the association's         revenue during     the
first    3 months of operation          was about $3,300 less than antic-
lpated     as a result      of the association's       not having   the re-
quired     number of users.         This association,       in our opinion,
eventually     will    become delinquent        in repaying    its FHA loans
If it does not obtain          an additional      number of users or If it
does not substantially           increase    the user rates,


                                             14
         FHA State officials         responsible     for the 69 systems In-
cluded in our review            generally     agreed that FHA should have
verified     llstlngs        of users or user agreements      furnlshed   by
the associations           to ensure that the assoclatlons         would have
the minimum number of users needed for their                 systems to be
fxnanclally        feasible.




                                     is
NEED TO ESTABLISH PROCEDURES FOR REQUIRING
FIRM COMMITMENTS FROM WATER AND SEWER USERS

        To provide     reasonable    assurance      that an association
will    have a sufficient       number of users for its water and/or
sewer system for the system to be financially                    feasible,
FHA needs to establish          procedures     requiring     that associa-
tions    obtain    firm commitments      from individuals          who express
desires     to install     and connect     service     lines   from their           ,
properties      to the association's        water or sewer lines.                In
this respect      FHA does not require          each association,          prior
to loan closing,         to obtain   from each prospective           user

       --a cash contribution      to cover the estimated        cost of
          connecting   a service    line  from the individual's
          property   to the association's     water or sewer system
          and

       --a user agreement         which requires     the user to pay a
          minimum monthly       rate to the association       regardless
          of whether      the individual    actually    uses the associa-
          tion's  facilities.

Also, FHA has not established               procedures    for     determining,
on a systematic  basis,   that           the associations         are enforcing
user agreements

          Of the FHA offices          in the nine States        included    in our
review,      the FHA State office           in Washington       was the only one
that required         a water and sewer association               to obtain    from
each prospective          user--prior       to loan closing--both          a cash
contribution        covering      the estimated      cost of connecting          a
service      line   from the user's         property     to the association's
facilities        and a user agreement          committing      the user to pay
a minimum monthly          rate to the association            regardless     of
whether      he actually      used the system.

       The five Washington    State water and/or        sewer associa-
tions   included  in our review    required     each potential    user
to (1) make a cash contribution         ranging    from $75 to $250 to
cover the cost of a connecting        line    to the system and
 (2) pay a minimum monthly     user rate ranging       from $5 to
$8.75.



                                          16
        For 32 other water and/or          sewer assoclatlons       in the
State of WashIngton,       slmllar      cash contributions       were re-
qulred.       The average cash contrlbutlons           paid by the users
belonging      to the 37 associations        amounted to $178.          We be-
lieve     that the requirements       imposed on potential        users by
the FHA State office       in Washington        are the principal        rea-
sons that the five Washington            State assoclatlons       included     in
our review       have had no maJor problems        with respect       to the
financial      feaslblllty   of their     water and/or      sewer systems.

        For the remaining   64 assoclatlons              included     In our    re-
view,    FHA had not required

        --22 assoclatlons        to obtain    any cash contributions.
           Of the 42 assoclatlons         which were required      to obtain
           cash contrlbutlons,       31 required     contrlbutlons    under
           $26 which was not sufficient          to cover the cost of
           connecting     a service    line.

        --26 associations        to obtain   user agreements.     The user
           agreements      for the remaining      38 associations  gener-
           ally  did not commit signers         to use the water or
           sewer facilities.

          We lntervlewed   142 indlvlduals          who had signed user
agreements        with 20 of the 64 assoclatlons          and who, at the
time of our fieldwork,         were not using the associations'                   fa-
cillties.         For the most part these lndlvlduals               advised      us
that they were not using the assoclat1on.s'                 facllltles         be-
cause they had good working             wells     or they could not afford
the cost of connecting         service       lines   from their       properties
to the assoclatlons'        facilities.

      The following     two examples    illustrate    the lack of firm
commitments     from users and the need for FHA to establish
procedures    requiring    assoclatlons     to obtain   firm commit-
ments from potential       users.

Assoclatlon      D

       FHA made a loan of about $1.3 mllllon         to this assocla-
tlon In February    1968 to finance    the construction      of a
water   system.  As a condltlon     to closing   the loan,    FHA re-
quired   that the assoclatlon    have at least     1,150 signed user


                                           17
agreements.     Records at the FHA county office        did not show
whether   the required     number of user agreements     had been ob-
tained   at the time of the loan closing      In February       1968.
The system was completed        and went into operation      in Novem-
ber 1969.     In February    1970, 3 months after    operations       be-
gan, FHA records      showed that only 608 individuals         were us-
lng the association's       system.

       We interviewed     six individuals     who had signed user
agreements     but who were not using the system as late as
March 1970.       Of the six individuals,       five stated   that they
had good water supplies        from their    own ground wells     and
that they had no intentions          of using the association's
water system.       The other individual      stated  that he had not
developed    his property     and therefore    had no need to obtain
water from the association.

        We noted that the agreements         signed by these individ-
uals had not required           them to pay a minimum monthly        rate to
the association        regardless    of whether   they actually      used
the system.       The cash contribution        of $5 required     from each
potential     user was not based on the estimated            cost of con-
necting     a service     line from the individual's       property     to the
association's       water system.

       We estimated     that revenue collected       by the association
during   the first    4 months of operation        was about $16,000
less than anticipated        as a result     of the association's      not
having   the required      number of users.       On February     2, 1970,
the association     was delinquent       $20,648 on its FHA outstand-
ing loan balance      of $1,251,000.

Association     E

        FHA made a loan of $175,000 and a grant of $175,000 to
this   association     in May 1968 to finance        the construction       of
a water system.        As a condition     to closing      the loan and
grant,    FHA required    that the association         have at least    180
signed user agreements.          At the time of the loan closing            in
May 1968, the association,          however,   had obtained      agreements
to use the system from only 143 individuals,                 and in Novem-
ber 1969, a year after        the system became operational,           only
115 of the 143 individuals         were using the association's
system.


                                      18
        We interviewed          13 of the 28 lndlvlduals                   who were not
usrng      the system,       to obtain         their   reasons       as to why they
were not using          the assoclatlon’s            facllltles.             Of the 13 In-
dxviduals,        six stated       that      they had adequate              supplles      of
water      from their      ground      wells      and had no current               need to
purchase       water    from the association,                 four    stated       that   they
could     not afford       either      the monthly         user rate         or the cost
of installing         servrce      lines       from their        properties          to the
association’s         water     lane,     and three         stated      that    they would
use the system In the near future.

         We noted      that     the agreements           signed      by these    lndlvld-
uals     had not required            them to pay mlnlmum monthly                 rates    to
the association           regardless          of whether        they actually        used
the system.          The cash contribution                 of $5 required        from each
potential       user was not based on the estimated                        cost of con-
necting       a service      line      from an lndivldual’s             property       to the
association’s          water      system.         This assoclatlon,          In our open-
Ion,     will   become delinquent               in repaying        its  FHA loan if
there     IS no substantial              increase      in the number of users             or
In the user rate.




                                               19
                                CHAPTER 3


       CONCLUSIONS, RECOMMENDATIONS, AND AGENCY COMMENTS

CONCLUSIONS
       FHA made loans and grants for financing        the improve-
ment and/or construction       of water and/or sewer systems to
associations      which did not have the minimum number of users
necessary     for the systems to be operated     successfully.       The
making of loans and grants to associations         not having the
required     mrnimum number of users IS a disservice        to other
rural    communities   which need loan and grant assistance        and
which have the required       users to make their water and sewer
systems financially      successful.

      As noted on page 8, the demand for assistance            in fi-
nancing water and sewer systems has been greater           than the
funds available   during the past few years.        This fact makes
it increasingly   important   that FHA establish     reasonable
user requirements    and procedures   for enforcing      such require-
ments, to ensure that loan and grant funds are provided
only to those associations     having financially      feasible
systems.

RECOMMENDATIONS TO THE ADMINISTRATOR,           FHA
       To provide    greater    assurance that an association's
proposed system is sound and financially            feasible,     FHA
should revise     its instructions       to require   that financial
assistance --loans      and grants-- be provided      to an associa-
tion under the water and sewer program only after               FHA
county and State loan approval           officials  have verified     and
documented in the loan files          that an association      has ob-
tained

      --the required       number of users   to make its    proposed
          system financially     feasible,
      --   a cash contribution  from each prospective    user to
           cover the estimated  cost of connecting    a service
           line from the user's property  to the association's
           facilities,    and


                                    20
       --an enforceable   user      agreement from each prospective
          user, which commits       the user to pay at least a mlnl-
          mum monthly rate to       the assoclatlon regardless    of
          whether he uses the       system.

Also FHA should establish          procedures     for      determlnlng,    on a
systematic  basis, whether         assoclatlons         are enforclng     user
agreements.

AGENCY COMMENTS

        The Administrator,     FHA, advised us by letter          dated
February    4, 1971 (see app. I), that our recommendations
would help FHA further        perfect    its programs and that FHA
planned to reinforce       Its instructions       relating     to water and
sewer loans and grants with regard to membershlp requlre-
ments, user cash contrlbutlon          requirements,       and the enforce-
ment of user agreements.          He stated that the revised          in-
structzons    would be Implemented         after  review by FHA State
directors    and discussion      at FHA tralnlng       meetings   In Febru-
ary 1971.

       The Admlnlstrator        stated also that it was his expecta-
tlon that,    through    these revised     lnstructlons  and training
meetlngs with field        staffs,    FHA would overcome the problems
presented   In our report.

       The Admrnrstrator       stated   further

       --that      FHA was giving   a high prlorlty   In the admlnls-
           tratlon    of its programs to the strengthening      of pro-
           gram terms and conditions       and was putting  heavy stress
           on the supervision      of loans and

       --that,   In terms of the total      outstanding loans for
          water and sewer systems, FHA had a good history         In
           loan collections   and that a preponderance     of 11-s bor-
          rowers were operating     successfully.

He also polnted     out that     FHA had issued new and Improved
requirements    for posltlve      user verlfrcatlon while our re-
view was in process.

       We agree that,    on an overall       basis,  FHA's history of
loan   collections   under Its water        and sewer program has
generally       been satisfactory.      As polnted      out on pages 10
and 12, however,        many borrowers      are delinquent     on their   loan
because      they lack sufflclent      users    to financially    support
their     systems.

        Our review     further     revealed       a number        of associations
which,     in our opinion,       would      eventually        become delinquent
on their     loans   If they drd not obtain               additional       users     or
Increase     their   user rates.          We believe        that,    if loans      con-
tlnue    to be made without          adequate       determlnatlons         regarding
the sufflclency        of users,      the rate        of loan dellnquencles
under    the program       will  increase.

        The improved       user verlflcatlon         requirements     referred
to by the Admlnlstrator             were included       In a bulletin       issued
to field     perso’nnel’ln      August      1970,   subsequent     to the com-
pletion    of our fieldwork           and discussions        of our findings
with    FHA headquarters        offlclals’.

         The bulletin,        which    expires       In July     1971,      provldks
that     the FHA county         or dlstrlct        supervisors        verify       user
agreements       signed     by rural       residents       who have expressed               a
desire      to support      a proposed        water    or sewer system.               Verlfl-
cation      can be done by making             personal      contacts        or by send-
ing verlflcation          letters     to the rural          residents.           This type
of requirement         should     be incorporated            In FHA’s revised            in-
structions.

      We plan       to review     FHA’s revised       lnstructlons         after  they
are Issued,       to ascertain        whether,   if  properly        implemented,
they will     provide      assurance       that Government        funds    are pro-
vided   only to assoclatlons             whose proposed        water    and sewer
systems    are flnanclally          feasible.




                                              22,
                                     CHAPTBR
                                      --- eL" 4

                                SCOPE OF .-REVIEW
                                            .-__
        Our review     was made at the FHA headquarters              office   in
Washington,      B.C.,   and at the FHA State offices             at Little
Rock, Arkansas;        Gainsville,        Florxda,    Atlanta,   Georgia,
Orono, Maine,       Jackson,      Mississippi;      Ralexgh,    North Carolina,
Portland,     Oregon, and Wenatchee,             Washington.     Each State
office    is responsible        for FHA act1vatae.s         rn one or more
States.

        We reviewed       the pertinent         policies     and procedures       un-
der which FHA makes loans and grants                     to public      and nonprofit
associations        for the improvement            and/or    construction      of
rural    water and sewer facilities.                   We examined FHA and as-
sociation      records      relating      to 69 associations          in 9 States--
Arkansas,      Florida,       Georgia,      Maine, Missnssippi,          North Caro-
lina,     Oregon, Vermont,           and Washington--and         interviewed      142
individuals       who had signed user agreements.                   We also re-
viewed loan delinquency               reports    on the 270 water and sewer
associations        reported       delinquent      as of February        2, 1970.




                                           23
APPENDIXES




     25
                                                                                                            APPENDIX I

                                     UNITED      STATES        DEPARTMENT            OF     AGRICULTURE

                                                  FARMERS        HOME    ADMINISTRATION

                                                            WASHINGTON        DC    20250



=,CE   OF THE   ADMINISTRATOR




                                                                                                 FEB 4, 1971
         Mr. Bernard Sacks
         AssIstant   Director
         C3vll Dlvislon
         general Accounting                   Offlce
         Washington, D. C


         Dear Irir          Sacks.

         We appreciate the opportunity    to review and comment on the draft of
         your report to the Congress on "Improvements    Needed in DetermInIng
         the Flnanclal Feaslblllty    of Rural Water and Sewer Prolects."

         We are glvlng a high priority    In the admlnlstratlon       of the FHA
         programs to the strengthening    of program terms and condltlons            and
         we are putting   heavy stress on the supervlslon       of the loan.       In terms
         of the total outstanding,    we have a good history      m loan collections
         and a preponderance   of our borrowers    are operating     successfully.
         Your recormnendatlons will help to further     perfect    our programs.

          As you know, we issued new and Improved requirements       for posltlve
          user verlflcatlon    while this audit was m process and we plan to
          further    relnforce our lnstructlons    m the areas of membership, user
          cash contrlbutlon    requirements,    and user agreement enforcement.

          Our revised lnstructlons   ~111 be circulated                                      for review by state    dlrec-
          tors and ~111 be dlscussed at the tralnlng                                        meetings In February.    '
         'Followrng  these meetings, the lnstructlons                                       wrll be Implemented.

          It 1s my expectation   that through revised lnstructlons   and tralnlng
          meetings with field   staffs,  we will overcome the problems presented
          in your draft report.

           Sincerely,
                   ,



            dmmlstrator


                                                                         27
APPENDIX II


   PRINCIPAL   OFFICIALS   OF THE DEPARTMENT OF AGRICULTURE

     RESPONSIBLE FOR THE ADMINISTRATION        OF ACTIVITIES

                   DISCUSSED IN THIS REPORT


                                              Tenure    of office
                                              From
SECRETARY OF AGRICULTURE
    Clifford  M. Hardln                Jan.      1969          Present
    Orville  L. Freeman                Jan.      1961          Jan.    1969
ASSISTANT SECRETARY OF AGRICULTURE
  FOR RURAL DEVELOPMENT AND CON-
  SERVATION
     Thomas K. Cowden                  Apr.      1969          Present
     John A. Baker                     Mar.      1961          Jan.    1969
ADMINISTRATOR, FARMERS HOME
  ADMINISTRATION
    James V. Smith                     Jan.      1969          Present
    Howard Bertsch                     Apr.      1961          Jan.    1969




                                                          US    GAOWash.   D C


                               28