oversight

Farmers Home Administration Did Not Enforce Its Requirements Designed to Ensure the Financial Soundness of Loans to Grazing Associations

Published by the Government Accountability Office on 1971-05-27.

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

Department of Agriculture




BY THE      COMPTROLLER    GENERAL
OF THE      UNITED  STATES
                                 COMPTROLLER     -aAL         OF   THE      UNITED   STATES

                                               WASHINGTON.     D.C.      20548




               B-114873




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

                          This is our report         pointing     out that the Farmers      Home    Ad-
               ministration,          Department       of Agriculture,      did not enforce    its re-
               quirements         designed       to ensure    the financial    soundness    of loans to
               grazing       associations.

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

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




                                                             Comptroller             General
                                                             of the United           States




-me._-----,-                 -
                                   u-- 50TH    ANWKRSARY                  1921 - 1971 --        --             -_
        COMPTROLLERGENERAL'S                                      FARMERS HOME ADMINISTRATION    DID NOT
        REPORTTO THE CONGRESS                                     ENFORCE ITS REQUIREMENTS DESIGNED TO
                                                                  ENSURE THE FINANCIAL SOUNDNESS OF LOANS
                                                                  TO GRAZING ASSOCIATIONS
                                                                  Department of Agriculture   B-114873


        DIGEST
        ------

                                                                [y c ? is
        WHYTHE REVIEW WASMADE                               Q        J
               The Farmers       Home Administration              (FHA) makes loans to nonprofit         associa-
               tions   of-fa.rmers      and ranchers          to finance     the ac!uisitien'and      development
               oP-g?%z~land           for.,th,eir      livestock.        From the inception      of the program
               iiTJZK3     to XZuary--1,          1970,~FHA       loaned  about $78 million      to 342 associa-
               tions.      (See pp. 5 and 6.)

               In a report   to the Congress       on "Review     of Loans to Grazing      Associations"
               (B-114873,  January    4, 1968),     the General      Accounting    Office  (GAO) pointed
               out the need for FHA to establish          certain     minimum loan-closing       require-
               ments to be met or exceeded         by grazing     associations      before loans were
               made, to reduce     the possibility      of defaults      and foreclosures     on loans.
               (See p. 8.)

               In March 1968, FHA issued      revised      instructions       which provided    that FHA
               loan approval   officials  , in a letter         of conditions       to each association
               applying   for a grazing  loan,     establish        the requirements     which  the associa-
               tion must meet regarding     the

                     --minimum    number       of members,

                     --number    of     grazing     units   to       be sold       (i.e.,       rights       to    graze   a specified
                        number   of     animals),       and

                     --initial    cash      contributions            to     be collected         from      each     member.


               The revised            instructions     provided    that           grazing  loans not                be closed
               until  these           loan requirements        had been           met by the grazing                 association.
               (See p. 9.)

               These instructions             were designed               to ensure    that           sufficient       reiources
               were available            to each association                 to enable     it         to repay      its loan,
               meet operating            expenses,  develop               resources,     and          establish       a cash re-
               serve.

               GAO's current    review  was made to determine                               whether       FHA had      effectively
               implemented   such requirements.


        Tear Sheet
1   I
    I
FINDINGSANDCONCLXYIONS
    Loans   still   made where
    cZ0sin.i) conditions not met
   Contrary to its revised instructions,      FHA is still    making loans to graz-
   ing associations   without enforcing the minimum loan-closing        condition
   with respect to the required number of grazing units to be sold by the
   associations.    The sale of the required minimum number of grazing units
   is the most significant     factor in providing reasonable assurance that
   an association's   operations will be financially       feasible, since sales
   of grazing units are the principal     source of income to an association.
   (See p. 10.)

    GAO reviewed the conditions under which 40 loans were closed to        37 graz-               I
    ing associations  in Colorado, Idaho, Montana, and South Dakota.         The                  I
                                                                                                 I
    loans, totaling  about $8 million,   were closed during April 1968     to May
    1970 and represented about 80 percent of the total amount of all         graz-
    ing loans closed by FHA in the four States during that period.         During             I
                                                                                              I
    fiscal years 1969 and 1970, about 44 percent of the FHA grazing        loans              I
    made nationwide were to associations    in the four States.                               I
                                                                                              I
                                                                                             I
    GAO's analysis of FHA's and associations'     records showed that,    at the             I
    time that the loans were closed9                                                         I
                                                                                             I
                                                                                             I
      --21 associations,   which had received loans totaling $4.2 million,                   I
                                                                                            I
         had not sold the number of grazing units determined necessary by                   I
         FHA's financial feasibility  studies and                                           I
                                                                                            I
                                                                                             I
      --FHA's letters    of conditions    for 15 of the 21 associations either               I
                                                                                             I
         had required the sale of fewer grazing units than indicated by its                 I
         financial  feasibility    studies or had failed to specify the number              I
         of grazing units which should have been sold.                                      I
                                                                                            I
                                                                                            I
    FHA's loan-closing   conditions relating   to the minimum number of members             I
                                                                                           I
    and initial   cash contributions  to be collected from members generally               I
    were met by the 21 associations.      [See pB 11.)                                     I
                                                                                           I
                                                                                        I
    Financial status of grazing associations                                            I
    --___- in GAO's earlier review
    covered                                                                            I

                                                                                        i
    GAO reviewed the current financial      status of 16 of the associations            I
    covered in its earlier     review to ascertain the potential  effect of            I
                                                                                        I

    FHA's making loans without the associations'      meeting the required             I
    loan-closing   conditions.     As of January 1967, five of the 16 associa-         I
                                                                                       I              .
    tions were delinquent on their loan payments. FHA, in commenting on                I
    a draft of GAO's earlier     report, had stated its belief that all 16 as-         I
                                                                                       I
    sociations   would be current on their payments and would realize net              I
    operating profits     by the end of calendar year 1968.                           I
                                                                                       I
                                                                                       I
    As of January 1970, seven of the 16 as5ocidtions were delinquent in                I
    :.l;eir lc;3n payments 9 and 72 of the 16 associations sustained operating         I
                                                                                       I
                                                                                      I
                                                                                      I
                                                                                      1               L
                                                                                      I
                                                                                      I
                                                                                      I
                                                                                      I
                                                                                      I
                 losses      in calendar   year 1969.    If such losses  were              to      continue,    addi-
                 tional      grazing   loan payments  could become delinquent.                       (See p.   15.)


        RECOMMENDATIONS
                      OR SUGGESTIONS

                 GAO proposed        that the Administrator           of FHA have established        a program
I   I
                 for monitoring,          at the FHA State      and county    offices,      the closing    of
                 grazing     loans.       The program    should    include   evaluations,        made on a sys-
                 tematic     basis,     of the adequacy      of the established         loan-closing     conditions
                 and of whether         these conditions       had been met by the associations.               The
                 evaluations        should     be made prior    to the closing       of loans so that       Govern-
                 ment funds will          not be disbursed      until    the potential      fiscal   soundness
                 of grazing       associations      has been determined.           (See p. 17.)


        AGENCYACTIONS AND UNRESOLVEDISSUES
                 The Administrator           of FHA said        that   FHA was changing      its     regulations        for
                 grazing  loans to         require  that

                       --each     letter    of conditions  establish       the minimum number of members
                          required,      the number of grazing       units    to be sold,   and the amount
                          to be collected        for each grazing     unit    prior  to loan closing;

                       --the   number of grazing      units        to be sold be the      number      determined
                           by FHA's financial    feasibility          study;  and

                       --no loan to a grazing          association    be closed    until FHA's district
                          supervisor     had certified       by memorandum    to the FHA State director
                          that    all loan-closing      conditions    had been met.

                 In a bulletin dated           March 8,        1971 (see app.     II),    the Administrator         ad-
                 vised the FHA State           directors        of the revised     requirements.

                The Administrator        also said that        FHA was taking        positive      steps to improve
                its line     supervision     over county      office     operations.          He stated   that FHA
                had increased        the number of district          supervisor      positions       by 78 during
                fiscal   year 1971 and that          this  action      would reduce       the number of county
                offices    reporting     to district      supervisors.


        MATTERSFOR CONSIDERATIONBY TflE CONGRESS

                 GAO is bringing      this   matter        to the attention of the           Congress   to advise
                 it of the further       measures        taken by FHA as a result            of GAO findings     to
                 provide  greater     assurance        of the financial          soundness of loans made to
                 grazing  associations.



        Tear   Sheet
                          Contents
                                                                 Page

DIGEST                                                             1

CHAPTER

  1        INTRoDUmI0N
               Organization     of FHA
               Statutory    authority   and administrative
                 requirements      for grazing loans
               Financing of FHA"s grazing loans

  2        SUMMARYOF EARLIER GAO REPORT TO THE
           CONGRESSON FHA'S GRAZING LOAN PROGRAM                   8

  3        CONTINUED FAILURE TO ENFORCELOAN-CLOSING
           CONDITIONS INCREASES LIRELIHOOD OF LOAN
           DELINQUENCIES                                          10

  4        CURRENT STATUS OF LOANS TO GRAZING ASSOCIA-
           TIONS DISCUSSED IN GAO'S EARLIER REPORT TO
           THE CONGRESS                                           15

  5        CONCLUSIONS, PROPOSAL, AND AGENCYACTJONS               17
              Conclusions and GAO proposal                        17
              Agency actions                                      17

APPENDIX

   I       Letter     dated March 10, 1971, from the Adminis-
              trator,     Farmers Home Administration, Depart-
             ment of Agriculture,      to the General Account-
              ing Office                                          21
   II      FHA bulletin     dated March 8, 1971, from the
             Administrator,      Farmers Home Administra-
             tion,   Department of Agriculture,     to FHA
             State directors,      outlining FHA's revised
             requirements     for closing loans to graz-
             ing associations                                     22
                                                                  Page

          Loan repayment status on January 1, 1970,
            of loans made to 16 grazing associations
            in Colorado included in prior report                   23

  IV      Schedule of net operating  results of loans
            made to 16 grazing associations  included
            in prior report for grazing seasons 1965
            through 1949                                          25

      V   Principal      officials     of the Department of
             Agriculture        responsible    for the adminis-
             tration     of activities      discussed in this
             report                                               26

                            ABBREVIA'I'IOMS

          Farmers Home Administration

GAO       General   Accounting    Office
COMPTROLLER GENERAL'S                                  FARMERS HOME ADMINISTRATION    DID NOT
REPORT TO THE CONGRESS                                 ENFORCE ITS REQUIREMENTS DESIGNED TO
                                                       ENSURE THE FINANCIAL SOUNDNESS OF LOANS
                                                       TO GRAZING ASSOCIATIONS
                                                       Department of Agriculture   B-114873


DIGEST
_-----


WHYTHE REVIEW WASMADE
     The Farmers      Home Administration            (FHA) makes loans to nonprofit      associa-
     tions   of farmers    and ranchers          to finance     the acquisition   and development
     of grazing     land for their        livestock.        From the inception    of the program
     in 1963 to January 1,        1970,       FHA    loaned  about  $78   million to 342 associa-
     tions.     (See pp. 5 and 6.)

     In a report            to the Congress       on "Review      of Loans to Grazing      Associations"
     (B-114873,           January    4, 1968),     the General       Accounting     Office (GAO) pointed
     out the         need for FHA to establish            certain     minimum loan-closing       require-
     ments to          be met or exceeded         by grazing      associations      before loans were
     made, to          reduce     the possibility      of defaults       and foreclosures     on loans.
     (See p.         8.)

     In March 1968, FHA issued revised          instructions       which    provided  that   FHA
     loan approval     officials  , in a letter      of conditions       to each association
     applying     for a grazing  loan,  establish        the requirements       which the associa-
     tion    must meet regarding    the

         --minimum        number       of   members,

         --number        of     grazing     units  to    be sold      (i.e.,       rights     to   graze   a specified
            number       of     animals),      and

         --initial        cash      contributions        to    be collected         from    each    member.


     The revised              instructions     provided    that       grazing  loans not            be closed
     until  these             loan requirements        had been       met by the grazing             association.
     (See p. 9.)

     These instructions               were designed           to ensure    that   sufficient           resources
     were available              to each association             to enable     it to repay          its loan,
     meet operating              expenses,  develop           resources,     and establish            a cash re-
     serve.

     GAO's current    review  was made                  to determine           whether      FHA had effectively
     implemented   such requirements,
FINDINGSAI/D CONCLUSION.7
    Loans s ti /7, made where
    c2osin.g conditions not met
    Contrary to its revised instructions,       FHA is still    making loans to graz-
    ing associations   without enforcing the minimum loan-closing         condition
    with respect to the required number of grazing units to be sold by the
    associations.    The sale of the required minimum number of grazing units
    is the most significant      factor in providing reasonable assurance that
    an association's    operations will be financially       feasible, since sales
    of grazing units are the principal      source of income to an association.
    (See p. 30.)

    GAO reviewed the conditions    under which 40 loans were closed to      37 graz-
    ing associations  in Colorado, Idaho, Montana, and South Dakota.         The
    loans, totaling  about $8 million,   were closed during April 1968      to May
    1970 and represented about 80 percent of the total amount of all         graz-
    ing loans closed by FHA in the four States during that period.          During
    fiscal years 1969 and 1970, about 44 percent of the FHA grazing         loans
    made nationwide were to associations     in the four States.

    GAO's analysis of FHA's and associations'       records showed that,   at the
    time that the loans were closed,

      --21 associations,   which had received loans totaling $4.2 million,
         had not sold the number of grazing units determined necessary by
         FHA's financial feasibility  studies and

      --FHA's letters    of conditions    for 15 of the 21 associations either
         had required the sale of fewer grazing units than indicated by its
         financial  feasibility    studies or had failed to specify the number
         of grazing units which should have been sold.
    FHA's loan-closing   conditions  relating   to the minimum number of members
    and initial   cash contributions  to be collected   from members generally
    were met by the 21 associations.       (See p. 11.)

    Financial status of qPazing associations
    covered in GAO's earlier review

    GAO reviewed the current financial      status of 16 of the associations
    covered in its earlier     review to ascertain the potential   effect of
    FHA's making loans without the associations'       meeting the required
    loan-closing   conditions.     As of January 1967, five of the 16 associa-
    tions were delinquent on their loan payments.        FHA, in commenting on
    a draft of GAO's earlier      report, had stated its belief that all 16 as-
    sociations   would be current on their payments and would realize net
    operating profits     by the end of calendar year 1968.

    As of January 1970, seven of the 16 associations   were delinquent in
    their loan payments, and 12 of the 16 associations   sustained operating


                                         2
    losses in calendar year 1969. If such losses were to continue, addi-
    tional grazing loan payments could become delinquent. (See p. 15.)


RECOMMENDATIONS
              OR SUGGESTIONS

    GAO proposed that the Administrator     of FHA have established a program
    for monitoring,   at the FHA State and county offices,     the closing of
    grazing loans.    The program should include evaluations,      made on a sys-
    tematic basis, of the adequacy of the established      loan-closing    conditions
    and of whether these conditions    had been met by the associations.       The
    evaluations   should be made prior to the closing of loans so that Govern-
    ment funds will not be disbursed until the potential       fiscal   soundness
    of grazing associations    has been determined.   (See p. 17.)


AGENCYACTIONS AND UNRESOLVEDISSUES

    The Administrator of FHA said that     FHA was changing its    regulations    for
    grazing loans to require that

      --each letter of conditions   establish the minimum number of members
         required, the number of grazing units to be sold, and the amount
         to be collected for each grazing unit prior to loan closing;

      --the number of grazing units to be sold be the number determined
         by FHA's financial feasibility study; and

      --no loan to a grazing association     be closed until FHA's district
         supervisor had certified    by memorandum to the FHA State director
         that all loan-closing    conditions had been met.

    In a bulletin dated March 8, 1971 (see app. II), the Administrator           ad-
    vised the FHA State directors of the revised requirements.

    The Administrator   also said that FHA was taking positive     steps to improve
    its line supervision over county office operations.        He stated that FHA
    had increased the number of district     supervisor positions by 78 during
    fiscal year 1971 and that this action would reduce the number of county
    offices reporting to district    supervisors.

MATTERSFOR CONSIDERATIONBY THE CONGRESS

    GAO is bringing this matter to the attention   of the Congress to advise
    it of the further measures taken by FHA as a result of GAO findings to
    provide greater assurance of the financial   soundness of loans made to
    grazing associations.
                              CHAPTER 1

                            INTRODUCTION

       In a report to the Congress on "Review of Loans to Graz-
ing Associations"      (B-114873, January 4, 19681, the General
Accounting Office pointed out the need for the Farmers Home
Administration     to establish   certain minimum loan-closing  re-
quirements     to be met or exceeded by grazing associations    be-
fore Federal loans were made, to reduce the possibility        of
defaults    and foreclosures    on loans.

       These requirements,      concerning the number of grazing
units to be sold, the number of members required,            and the
amount of operating     capital    required,  were designed to pro-
vide greater assurance that an association          had sufficient
resources to be capable of successful         operation.     Our cur-
rent review was made to determine whether FHA had effec-
tively   implanented   such requirements.      The finding    and rec-
ommendation included in the 1968 report are discussed in de-
tail   in chapter 2.

       Our review was made at the FHA headquarters       office in
Washington,     D.C., and at the FHA State and county offices      in
Colorado,    Idaho, Montana, and South Dakota.      We reviewed the
pertinent    policies,  procedures,   and practices  under which
FHA made loans to grazing associations        and examined FHA and
association     records pertaining  to 40 loans in the four
States.     We also examined into the financial     status of the
grazing associations     included in our earlier    review.

ORGANIZATION OF FHA

        FHA maintains    41 State offices--which        serve the 50
 States, the District       of Columbia, Puerto Rico, and the
Virgin 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 super-
,vision of an FHA county supervisor,          are located throughout
the country and serve all agricultural            counties.     Applica-
tions for all loans are made initially            to the county or
State offices.        County office   operations     are subject to


                                    4
review     by the district      supervisor    or other   FHA State    offi-
cials.

       Under FHPi instructions,  grazing loans up to $350,000
may be aTproved by the FHA State director       and loans of
$350,000 or more are reviewed by the FHA headquarters        office
before the loans are approved by the State director.         The
instructions     also state that the FHA county supervisor    is
responsible    for determining  whether all loan-closing    condi-
tions have been met by an association      before Federal funds
are disbursed.

STATUTORYAUTHORITY AND_
ADMINISTRATIVE REQUIREMENTS
FOR GRAZING LOANS

        Section 306 of the Consolidated Farmers Home Adminis-
tration    Act of 1961, as amended (7 U.S.C. 19261, authorizes
FHA to make or insure loans to nonprofit     associations    of
farmers and ranchers to finance the acquisition        and develop-
ment of grazing land for their livestock.      The act provides
that

         --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,
            and

         --maximum principal  loan indebtedness   not exceed .
            $4 million for any association   at any one time.

       As defined by FHA, a grazing association    is a member-
ow-ned, maber-operated,     and member-managed nonprofit  as-
sociation   of family farmers and ranchers,   organized to ac-
quire and develop grazing land to provide seasonal grazing
for livestock     belonging to its members. FHA defines a
family-size    farm or ranch operation  as one in which the


                                        5
family provides the entire management and more than          50 per-
cent of the labor for the operation.

        Grazing association   loans are designed to help small
farmers and ranchers increase their income by improving
their    livestock quality,   providing more stable operations
and more bargaining      power in the marketplace,   strengthening
their rural community, and increasing       their  share in land
equity.

      Grazing associations     derive their income principally
from the sale of grazing units to their members. By pur-
chasing grazing units,      a member acquires the right to graze
a specified   number of cattle     (or other animals) on associa-
tion lands during that grazing season.         Grazing units are
equivalent   to a specified    number of steers,    heifers, or
other types of animals and are usually sold on a seasonal
basis at a monthly grazing fee.        In some cases, FM has
placed a limit   on the number of grazing units which may be
purchased by any one association       member.

FINANCING OF FHA'S GRAZING LOANS

       Grazing loans made from the inception      of the program
in 1963 to January 1, 1970, totaled      $78 million.      At Janu-
ary 1, 1970, grazing loans of about $76 million         were out-
standing to 342 associations.      At that date, 37 of the as-
sociations,   or 10.8 percent,   were delinquent     in the amount
of $2.3 million    on their loan payments.     FHA   advised  us in
March 1971 that the delinquencies     had been reduced by
$1.4 million    as a result of its loan-servicing      action taken
with respect to one loan.

      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 annual
appropriation   acts.   The last direct     loan for grazing pur-
poses was made in 1968; no direct       loans are planned to be
made in the remainder of fiscal     year 1971 or in fiscal     year
1972.

      Insured loans are made from FHA's Agricultural   Credit
Insurance Fund. After making these loans at an interest       rate
not to exceed 5 percent per annum, as established    by law,

                                 6
FHA sells the associations'       loan notes to investors      for pe-
riods ranging from 3 to 25 years and guarantees repayment
of the loans.     To make the notes attractive       to investors,
FHA pays interest    on the loan notes at rates that are com-
petitive  with interest     rates being paid for private       capital.
Effective  February 15, 1971, FHAwas paying from 5.75 per-
cent to 6.75 percent;     the higher interest     rate was to be
paid to investors    purchasing     the notes for periods of 10 to
25 years.




                                     7
                               WTER2

         SuMlyIEiRY
                  OF EARLIER GAO REPORTTO THE CONGRESS

                   ON FHAsS GRAZING LOAN PROGRAM

      Cur earlier review, made in calendar year 1967, covered
loans made by FHA to 21 grazing associations    in Colorado
during the 1965 and 1966 grazing seasons.     The review indi-
cated a need for FHA officials   to set minimum requirements
to be met or exceeded by grazing associations    before loans
were closed,

        Pursuant to its instructions,        FNA was setting    loan re-
quirements      for associations    regarding    the minimum number of
members, the number of grazing units to be sold, and the
amount of paid-in      capital   contributions      from membership
fees.     These requirements     were designed to ensure that suf-
ficient     resources would be available       to each association    to
enable it to repay its loan, meet operating             expenses, de-
velop resources,      and establish     a cash reserve.

        For the 21 loans covered in our earlier    review, FHA
had reduced the established     requirements  when the associa-
tions were unable to meet them. Further,        FHA had made loans
totaling    $12.8 million to 16 of the 21 associations,    with-
out requiring    them to meet even the reduced loan require-
ments.

      Since the loan requirements         were designed to ensure
that sufficient      resources would be available        to each associa-
tion to enable it to operate successfully,            we concluded
that FJ3A's practice      of making loans to an association         before
the prescribed     requirements     were met or exceeded or of re-
ducing its requirements       could impair the operations        of the
association     and possibly    could result     in default   of the
loan and foreclosure       by FHA. Although the 21 associations
had been in operation       a relatively     short time at the time
of our review, five of the 16 associations            that did not
meet FHA's reduced requirements          were delinquent    in making
payments on their      loans as of January 1967. The status of
the 16 associations       as of January 1, 1970, is discussed on
page 15.


                                    8
        Because the grazing association        loan program was a rel-
atively    new undertaking    for FHA, we pointed out that early
corrective    action could reduce the possibility            of defaults
and foreclosures     on future loans.     We recommended that FJ3A
establish    procedures to provide that, on an individual              loan
basis, minimrrm requirements      be established       for the number
of association     members, the number of grazing units to be
sold, and the amount of paid-in        capital     contributions     and
that loans not be closed until       these minimum requirements
had been met.

       In J%rch 1968, FHA revised        its instructions     for making
grazing loans to associations.           The revised instructions
provided that FHA loan approval          officials,    in a letter  of
conditions   to each association        applying for a loan, estab-
lish the requirements   which the        association    must meet re-
garding the

      --minimum    number of members,

      --number    of grazing   ,units   to be sold,   and

      --initial  cash contributions        to be collected     from each
         member.

       The revised instructions      provided also that the number
of grazing units required       to be sold be the number estimated
to be available     during a typical     year's operations.  The in-
structions    provided further    that grazing loans not be closed
until    these loan requirements     had been met by the grazing
association.
                               CHARTER3

    CONTINUED FAILURE TO ENFORCELOAN-CLOSING CONDITIONS

          INCREASES LIKELIHOOD OF LOAN DELINQUENCIES

       Contrary to its revised instructions,          FHA still    is mak-
ing loans to grazing associations          without enforcing     the min-
imum loan-closing       conditions   designed to ensure that associ-
ations will generate sufficient         revenues to repay their FHA
loans and meet their annual operating           expenses,     FHAs fail-
ure to require the associations         to meet such conditions       has
resulted    in its making grazing loans to associations           which,
at their very inception,         did not appear to be capable of
successful     operations.

       The loan-closing   conditions  established under FHA's
revised instructions     are to be determined on the basis of a
financial    feasibility  study of the grazing project   by the
FHA county supervisor     and are to be set forth in FHA's proj-
ect summary and operating      budget reports supporting  the
loan.

       FHA officials     have advised us that the most significant
consideration      in determining     the financial   feasibility    of a
grazing association       is whether the association       has sold the
required    number of grazing units.         The number of grazing
units sold denotes grazing needs.            Such sales are the prin-
cipal source of income to the association.             According to
FHA's revised instructions,         the number of grazing units re-
quired to be sold should be the number estimated               to be
available    during a typical      year's operations    after the graz-
ing project     is fully    developed,

      We reviewed 40 loans, totaling      $8 million,   which were
made during the period April 1968 through May 1970 to 37
grazing associations    in Colorado,   Idaho, Montana, and South
Dakota.    The 40 loans represented    about 80 percent of the
total   amount of all grazing loans made by FHA in the four
States during this period.      During fiscal     years 1969 and
1970, about 44 percent of the FHA grazing loans made nation-
wide were to associations    in the four States.



                                   10
       Of the 40 loans,Zl,       totaling    $4,2 million,     were made
without    requiring    the associations      to sell the number of
grazing units which FHA's financial             feasibility    studies had
indicated    would be necessary for the associations              to repay
the loans and meet operating           expenses.     FHA9s loan-closing
conditions     relating    to the minimum number of members and
the initial      cash contributions       to be collected    from members
generally    were met by the 21 assocfations,

       The following   table shows the number of grazing units
required to be sold by the 21 associations,          as specified       in
FHAes feasibility    studies and letters       of conditions,       and the
number of grazing units actually        sold at loan closing,          Anal-
ysis of the table shows that FHA's letters          of conditions       for
15 of the 21 associations      either   required the sale of fewer
grazing units than indicated       by its financial      feasibility
studies or failed    to specify the number of grazing units
which should have been sold.
              Number of grazing units
                required to be sold                  Number of grazing
            Feasibility        Letter                  units sold at
Loan           study        of conditions              loan closing
  1              3,300                                    2,800
  2              3,600              2,730                 2,895
  3              1,850                                    1,375
  4              1,610                                    1,565
  5              4,500              4,;oo                 3,775
  6              2,270              2,270                 2,170
  7              1,150              1,074                 1,074
  8                 360                360                   330
  9              2,475              1,200                 1,200
 10                 716                500                   500
 11                 325                320                   320
 12            . 1,200                                       910
 13                 800                                      600
 14              1,650                                    1,600
 15              1,114                                    1,000
 16              1,539               1,539                1,212
 17              3,018               2,952                2,795
 18                 315                 290
 19              1,590               1,400                1,400-l/3
 20              1,225               1,225                   175
 21                 780                 780                  702


                                     11
       The following three examples illustrate   the extent to
which the financial    operations of the 21 associations   may
be impaired by losses in revenue because of the failure      to
sell the required number of grazing units prior to loan
closing.




                               12
Association   A

      FHA made a loan to this association         of/$559,000     in
February 1969 to purchase and develop 9,325 acres of land
for grazing purposes.        FHA's financial   feasibility     study
of the proposed project       showed that the association       would
have an annual capacity       of 2,475 grazing units--l,200         cows
and 1,700 yearlings--     and that it must obtain a typical
year's income of $93,075 by charging grazing fees of $42.50
a cow and $24.75 a yearling       to meet annual loan repayments
and operating    expenses and to establish       a cash reserve.       In
its letter    of conditions,    however, l?HA required     that only
1,200 units be sold as a condition         to closing the loan.

      Although,   at the time that the loan was closed, the
association    had sold the 1,200 grazing units required,     it
had obtained only $51,000 of the annual grazing income of
$93,075 which W's       financial feasibility  study had indi-
cated would be necessary to sustain its operations.

      An FHA State official  advised       us that FHA should have
assured itself   that the association       had sold the 2,475
units prior to loan closing.

Association   B

      FHA made a loan to this association        of $498,000 in
September 1969 to purchase and develop 17,836 acres of land
for grazing purposes.      FHA's financial    feasibility   study
of the proposed project     showed that the association      had to
obtain a typical    year's income of $50,085 by charging a
grazing fee of $31.50 for 1,590 grazing units to meet
annual loan repayments and operating        expenses and to estab-
lish a cash reserve.      In its letter    of conditions,   however,
FJU required   that only 1,400 units be sold as a condition
to closing the loan,

      Although,   at the time that the loan was closed, the
association    had sold the 1,400 grazing units,    it had ob-
tained only- $44,100 of the annual grazing income of
$50,085 which FHA's financial     feasibility  study had indi-
cated would be necessary to sustain its operations.




                                    13
       The F'HA county supervisor     advised us that hc. had not
been aware that under WA instructions         the association    was
required   to sell the number of grazing units estimated         to
be available    in a typical   year's operation,    as set forth    in
the financial     feasibility  study.    The FEA State director
advised us that the association        should have been required
to sell the 1,590 units and that the State office          should
have determined whether this requirement         was met prior   to
loan closing.

Association   C

       F'HA made a loan to this association        of $323,000 in
April 1968 to expand its existing          grazing operations,
F'H.A"s financial    feasibility     study of the proposed project
showed that the association          had to obtain a typical   year's
income of $153,000 by charging a grazing fee of $34 for
4,500 grazing units to meet annual loan repayments and
operating    expenses and to establish        a cash reserve.   In its
letter    of conditions,      H-U required  that 4,500 units be
sold as a condition       to closing the loan,

       At the time that the loan was closed, however, the
association   had sold only 3,775 of the 4,500 grazing units.
Thus the association    had obtained only $128,350 of the
grazing income of $153,000 which FHA's financial     feasibility
study had indicated    would be necessary to sustain its opera-
t ions 0

       We noted that,   at the time of our fieldwork,    the as-
sociation   had sold about 20,000 of its original      49,100
acres of grazing land and that it was negotiating        for the
sale of another 7,000 acres.        The FRA county supervisor
told us that the association's       objectives were to reduce
its landholdings     to match the demand for grazing,    to reduce
its outstanding    loan balance and annual loan payments, and
to reduce its operating      expenses.




                                   14
                                  CHAPTER4

       CURRENT STATUS OF LOANS TO GRAZING ASSOCIATIONS

      DISCUSSED IN GAO'S EARLIER REPORT TO THE CONGRESS

       We reviewed the financial     status of the Colorado graz-
ing associations      covered during our earlier       review, to as-
certain    the potential    effect of making loans without         the
associations'     meeting the required    loan-closing      conditions.
As of January 1967, five of the 16 grazing associations                 that
had not met the reduced loan-closing         requirements     estab-
lished by FHA were delinquent       on their    loan payments,        FHA,
in commenting on a draft of our earlier           report,   had stated
its belief    that all 16 associations      would be current       on their
their loan payments and would realize         net operating      profits
by the end of calendar year 1968.

      As of January 1970, of the 16 associations,    seven were
delinquent  on their loan payments in the amount of $264,534,
seven were current on their   loan payments, and two were
ahead on their loan payments.     The loan repayment status of
each of the 16 associations   is shown in appendix III.

      Further,  due partly     to the failure    of the associations
to obtain the required      grazing income, 12 of the 16 associa-
tions sustainedoperating       losses in calendar year 1969,        If
such losses were to continue,        additional   loan payments could
become delinquent.       The following     table summarizes the re-
sults of the operations      of the 16 associations      through the
1969 grazing season.       Details   on the results    of the opera-
tions are shown in appendix IV.

                                      Results of operations
                                        Number       Number
                      Total            with net    with net
                   associations       operating   operating
          Year      operating          profits       losses

          1965            10                  2             8
          1966            16                  4            12
          1967            16                  5            11
          1968            16                 11             5
          1969            16                  4            12
       Eight loans, totaling    $531,750, were made to seven of
the 16 associations     after FHA issued its revised instruc-
tions in March 1968. For six of the eight loans, the asso-
ciations    had not9 prior to loan closing,       sold the number of
grazing units which FHA had established         in its financial
feasibility    studies.    FHA State officials     in Colorado were
unable to explain why the associations         had not been required
to sell the established      number of grazing units before the
loans were closed.




                                16
                               CHAPTER5

           CONCLUSIONS, PROPOSAL, AND AGENCYACTIONS

CONCLUSIONS AND GAO PROPOSAL

     Although FHA had issued revised instructions         in MYarch
1968, our review showed that numerous loans still        were being
made to grazing associations    without   requiring   them to meet
the prescribed  loan-closing   conditions    designed to ensure
that the loans are financially     sound.

       We have concluded that there is a need for FHA offi-
cials at the national       headquarters  office      to take additional
steps to ensure that FHA loan-closing           requirements     are prop-
erly established      and enforced by FJ3A State and county of-
fices.     In our opinion,    the fact that 12 of the 16 grazing
associations     included in our earlier      review incurred       net
operating    losses in calendar year 1969 indicates           the impor-
tance of strict      adherence to established       minimum require-
ments as a condition       to the closing of loans.

        We proposed in a draft of this report that the Adminis-
trator    of F'HA require     that a program be established       for mon-
itoring,    at the State and county offices,          the closing of
grazing loans,        We suggested that the program include eval-
uations,    made on a systematic         basis, of the adequacy of the
established     loan-closing      conditions    and of whether these
conditions     had been met by the associations.          We proposed
also that the evaluations          be made prior    to the closing of
loans so that Government funds would not be disbursed until
the potential      fiscal    soundness of grazing associations        had
been determined.

AGENCYACTIONS

       The Administrator  of FHA advised us by letter           dated
March 10, 1971 (see app. I>, that FHA was changing              its reg-
ulations   for grazing loans to require  that

      --each letter   of conditions   establish  the minimum num-
         ber of members required,   the   number of grazing units
         to be sold, and the amount to be collected       for each
         grazing unit prior to loan closing;

                                    17
      --the number of grazing units to be sold be the number
          determined by FHA"s financial feasibility study; and

      --no loan to a grazing association       be closed until
         FHA's district     supervisor had certified   by memoran-
         dum to the FHA State director     that all loan-closing
         conditions     had been met,
       The Administrator     advised us also that FHA was taking
positive   steps to improve its line supervision              over county
office   operations,      He stated that FHA had increased the
number of district       supervisor    positions    by 78 during fiscal
year 1971 and that this action would reduce the number of
county offices     reporting     to district     supervisors.

       In a bulletin    dated March 8, 1971 (see app. II>, the
Administrator     advised the FHA State directors  of the revised
requirements.
.




    APPENDIXES




      19
                                                                                                         APPENDIX I


                                      UNITED    STATES      DEPARTMENT             OF      AGRICULTURE

                                                 FARMERS      HOME       ADMINISTRATION

                                                         WASHINGTON.        D.C.   20250



    OFFICE   OF THE   ADMINISTRATOR




                                                                                          MAR 10 1971
         p/Lr. Bernard Sacks
         Assistant Director
         Civil Division
         General Accounting            Office
         Washington,, D. C.

         Dear l!!b~. Sacks:

         We appreciate the opportunity                   to review the draft                   report    forwarded with
         your January 8 letter.

         We are changing our regulations                   to require:

             1. Each letter   of conditions will establish the minimum number
         of memberships to be issued, the number of grazing units to be sold, and
         the amount to be collected   for each grazing unit prior to loan closing,
         The number of grazing units to be sold will be the number on which
         economic feasibility  is based.

             2. No grazing association loan will be closed until the Farmers
         Home Administration  district supervisor has certified by memorandum
         to the state director that all loan closing requirements have been met,

         We are taking positive    steps to improve our line supervision over
         county office operations.      During this fiscal year, we have increased
         the number of district    supervisor positions by 78. This will reduce
         the number of county offices reporting to the district     supervisor to
         about six or seven.

         The draft report mentions that as of January 1, 1970, about $2.3 million
         of the $76 million  then outstanding was delinquent.   Over $1.4 million
         of the delinquency represented one loan on which we had declared the
         entire amount due and payable as a servicing   action.  Security for
         this loan has been,Told to a third party and the loan is now e'urrent,




-
         Administrator
                                                              21
                                                                                                                                    .

                                                                                              F'HA Bulletin         No. 3$91(442)
                                             UNITED     STATES        DEPARTMENT              OF      AGRICULTURE

                                                         FARMERS        HOME       ADWIINI5TRATIQN

                                                                   WASHIN6TON.       D.C.     20250



OFFlCE   OF   THE   ADM,NISTRATOR




                                                                                              March 8, 1971




         Subject:                   Loans to Grazing Associations

                    To:             All   State Directors,             FXA


         Each letter of conditions will establish  the minimum number of
         memberships to be issued, the number of grazing units to be sold,
         and the amount to be collected for each grazing unit prior to loan
         closing.   The number of grazing units to be sold will be the number
         on which loan feasibility   is based,

         Loans to grazing associations   will not be closed until the district
         supervisor has certified   by memorandum to the state director     that
         all loan approval requirements have bten met. Each such memorandum
         will certify  the required number of members has been obtained, all
         grazing units have been sold, and the initial    cash contribution     for
         each such g=razing unit has been collected.
         A signed copy of the memorandum will                                      be provided             the county
         supervisor for the loan file.
         The above requirements                        are applicable                to all           loans not yet closed.

         This requirement                     is being incorporated                    into        FHA Instruction       442.2.




         JAMES V. SMITH
         Administrator




         This bulletin                    expires     June 30, 1971.

                                                                          22
                                                                                APPENDIX III

                       LOAN REPAYMENT STATUS ON JANUARY 1, 1970,              OF

                           LOANS MADE TO 16 GRAZING ASSOCIATIONS

                             IN COLCRABC INCLUDED IN PRIOR REPORT




                                                                   Statuson January 1, 1970,
                             Amount of loans                            of total   loans
                         As of            As of                    On      Ahead of       Behind
Association        prior    reoort   current  review           schedule    schedule      schedule

      A            $       875,140        $      875,140                                   $ 72,944
      B                    879,130               888,130             X
      C                    700,900               740,650                                         494
      D                    840,350               730,303a            X
      E                    884,700               902,200                                     23,534
      F                    740,500               740,500                      $1,384
      G                    737,000            1,067,OOO                        6,425
      H                    677,400               739,000             X
      I                    590,600               590,600                                      7,927
      J                    405,500               405,500             X
      K                    742,500               742,500                                     13,273
      L                    640,300               640,300                                     14,861
      M                 1,379,770             1,702,770                                     131,501
      N                 1,844,670             1,844,670              X
      0                    322,330               322,330             X
      P                    550,000               650,000             X

       Total       $12,810,790            $13,581,593                          $7,809      $264,534

aOriginal  loan        has been reduced       because    of sale   of part   of the land   included
 in the original         association.




                                                    23
                                  SCHEDULE         OF NET          OPERATING            RESULTS     OF LOANS               MADE TO

                                      16 GRAZING           ASSOCIATIONS             INCLUDED        IN      PRIOR          REPORT

                                                FOR GRAZING            SEASONS            1965    THROUGH           1969




                                         1965      grazing          season                                      1966          grazing          season
                              Reoorted                                        Adiusted               Reoorted                                            Adiusted
                             protit      or                  GAO             proiit      or         profit      or                                      proiit      or
                               loss(-)                   adjust-               loss(-)                loss(-)                     adjust-                 loss(-)
                                    from                ments                       from                   from                    ments                       from
Association
--                           operations              (note    a)             operations             operations                  (note     a)            operations

           A               -527,130                  $       -           -$27,130                  -$11,640                    $        -           -$11,640

           B                      1,860                    -850                  1,010                     6,630               -11,220                       4,590

           C                 -16,910                                         -16,910                     -1,960                -14,040                  -16,000

           D                                       -17,690                   -18,580                       6,780              -17,020                   -10,240

           E                 -12,200                                         -12,200                 -4,200                                              -4,200

           F                 -16,670                       -680              -17,350                 - 7,890                    -9,960                  -17,850

           G                      1,770                                           1,770                           590           -6,730                    -6,140

           H                 .-11,370                                        -11,370                        5,950                                            5,950

           :                   -2,900                 -3,060                   - 5,960                   17,000                 -4,600                     12,400

           J                      6,490            -10,040                     -3,550                    10,960               -14,340                     -3,380

           F:                                                                                                     750               -350                           400

           L                                                                                             -6,360                     -230                  -6,590

           M                                                                                             13,760               -40,800                   -27,040

           N                                                                                             70,360               -80,520                   -10,160

           0                                                                                         -2,810                                               -2,810

           P                                                                                               9,250                -9,590                       -340

a
    The GAO adjustments                were     principally              for     items      recorded         as operating          income       which
    (1) represented              membership         fees       and assessments                which       should     have     been recorded               by
    the associations              as invested           capital;           (2) were         gains       on sale      of land      or easements,
    which      were    nonrecurring           items,         and not          income      from      grazing       association         operations;
    and (3) xere           Government        reimbursements                  for     land     improvements,             such    as wells         and
    fencing,        made under         Great     Plains          contracts           with     the Soil         Conservation          Service,
    which       should     have     been recorded              by the associations                    as a reduction            of the cost            of
    fired      assets      or as donated            capital.             Adjustments            also      were    made to reported              profits
    for     accrued      interest        payments         due FHA and not shown                       in the associations'                 financial
    statements.
                                                                                                               APPENDIX IV




         1967 Rrazing season                       1968 arazinn    season                      1969 araziw     season
-Reported                 Aojusted       Reported                      Adiusted       Reported                     Adjusted
profit    or       GAO   profit    or   proiit      or       GAO      proiit    or   profit     or       GAO      profit    or
 loss(-)        adjust-    loss(-)        loss(-)          adjust-      loss(-)        loss(-)         adjust-
                                                                                                          <         loss(-)
     from         ments       from            from          ments          from           from          ments          from
operations     (note a) operations      operations       (note a) operations         operations      (note a) operations
-S22,690      S     770   -$21,920      -S19,280       -S5,250       --$24,530       -$26,990       -$3,110      --$30,100
    2,970      -3,460          -490         7,750          -600           7,150         10,020       -2,710           7,310
  -5,250                    -3,250        -2,160           8,200          6,040          8,720       -6,480           2,240
  -6,680       -1,100       -7,780          5,990        -5,070              920         3,490       -1,400           2,090
    1,180         -960           220     -11,790                      -11,790          -8,650        -1,110        - 9,760
  -2,220       -1,180       -3,400          3,220        -3,860           -640           3,750       -5,840        - 2,090
  -.1,970      -3,240       -5,210          9,700        -5,760           3,940          3,680       -6,170         -2,490
    9,230      -1,500         7,730        13,530       -1,500           12,030      -12,640         -7,550       -20,190
    8,980    -16,340        -7,360          5,140        -5,130                 10     -8,670        -2,030       -10,700
    8,010      -4,410         3,600        11,710       -9,350            2,360          9,920       -6,190           3,730
    7,670      -9,130       -1,460          5,180            -20          5,160        -1,470        -6,000         -7,470
   10,080    -22,710       -12,630          5,370        -1,680           3,690         13,950     -15,740          -1,790
    6,730     -3,510          3,220     -33,040          -2,580       -35,620         -70,120        -2,500       -72,620
- 29,040       -8,520      -37,560          6,820                         6,820      -46,180                      -46,180
  -3,290                    -3,290        -3,560                        - 3,560        -1,340           -400        -1,740
    9,750                     9,750         9,340       -3,540            5,800      -10,710            -790      -11,500




                                                                      25
APPENDIX V


   PRINCIPAL OFFICIALS OF THE DEPARTMENTOF AGRICULTURE

     RESPONSIBLE FOR THE ADMINISTRATION OF ACTIVITIES

                 DISCUSSED IN THIS REPORT


                                           Tenure of office
                                           From            -To
SECRETARYOF AGRICULTURE:
   Clifford  M. Hardin              Jan.      1969      Present
   Orville  L. Freeman              Jan.      1961      Jan.    1969

ASSISTANT SECRETARYOF AGRICULTURE
  FOR RURAL DEVELOPMENTAND CON-
  SERVATION:
    Thomas K. Cowden              Apr.        1969      Present
    John A. Baker                 Mar.        1961      Jan.    1969

ADMINISTRATOR, FARMERSHOME AD-
  MINISTRATION:
    James V. Smith                  Jan.      1969      Present
    Howard Bertsch                  Apr.      1961      Jan.    1969




                                                     U.S.   GAO   Wash..   D.C.


                            26