oversight

Credit Management: Deteriorating Credit Picture Emphasizes Importance of OMB's Nine-Point Program

Published by the Government Accountability Office on 1990-04-16.

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

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     ma
United States
General Accounting Office
Washington, DC. 20548

Accounting and Financial
Management Division

n-236732

April 16,199O

The Honorable John R. Kasich
House of Representatives

Dear Mr. Kasich:

As you requested, this report provides information on federal agencies’ changes in receivable
information between fiscal years 1985 and 1988 and describes the results of our review of
selected federal agencies’ activities to implement OMB'S nine-point credit management
program. Our review showed that while the administration and federal agencies are placing
increased emphasis on credit management, and progress has been made in implementing the
nine-point program, the government’s credit picture continues to deteriorate. Agencies could
further improve their credit management programs by fully implementing credit
management techniques set forth in OMB and Treasury guidance. OMB agreed with this
conclusion and concurred with GAO that legislative changes are needed to help ensure a more
consistent application of the nine-point program.

The report contains recommendations to the Congress for (1) amending the Debt Collection
Act to require agencies, where consistent with program legislation, to use certain credit
management tools which are now optional and (2) requiring agencies to provide it annually
with audited financial information on their receivables and delinquencies. The report also
makes recommendations to the agencies for improving their credit management programs.

As agreed with your office, unless you publicly announce the contents of this report earlier,
we will not distribute it until 30 days from its date. At that time, we will send copies to the
President of the Senate; the Speaker of the House of Representatives; the Director of the
Office of Management and Budget; the Secretaries of Agriculture, Education, Housing and
Urban Development, Veterans Affairs, and the Treasury; the Administrator of the Small
Business Administration; the Commissioner of the Internal Revenue Service; and other
interested parties. Copies will also be available to others on request.

This report was prepared under the direction of Jeffrey C. Steinhoff, Director of Financial
Management Systems Issues, who may be reached on 275-9454 if you or your staff have any
questions. Other major contributors are listed in appendix XI.

Sincerely yours,




Donald H. Chapin
Assistant Comptroller General
                                                                                ,



E$ecutive Summary


             Delinquent debts owed to the federal government remain high and the
Purpose      government’s risk of loss on receivables and guaranteed loans continues
             to grow. While loan receivables decreased 13 percent between fiscal
             years 1985 and 1988, delinquencies increased 33 percent-from
             $14.6 billion to $19.5 billion. In addition, outstanding guaranteed loans
             increased 34 percent between fiscal years 1985 and 1988-from
             $410 billion to $550 billion while defaulted guarantees increased by 84
             percent.

             At the request of Representative John R. Kasich, GAO reviewed activities
             to implement the Office of Management and Budget’s (OMB) credit man-
             agement program for selected programs at the five primary credit agen-
             cies-the Departments of Agriculture, Housing and Urban Development
             (HUD), Education, and Veterans Affairs and the Small Business Adminis-
             tration (SBA). These agencies account for 67 percent of the government’s
             loan receivables and 85 percent of its loan delinquencies. They also
             account for 94 percent of the government’s outstanding loan guarantees.
             (It should be noted that in addition to direct and guaranteed loans, the
             government provides over $4 trillion in other types of credit assistance
             and insurance.) This report identifies changes, and reasons for changes,
             in these agencies’ direct and guaranteed loan data between fiscal years
             1985 and 1988; evaluates agencies’ progress and problems in implement-
             ing the administration’s nine-point credit management program; and
             makes recommendations for improvements.


             The federal government lends or guarantees loans for billions of dollars
Background   for a wide variety of programs, such as housing, farming, education, and
             small businesses. At the end of fiscal year 1988, federal agencies
             reported about $224 billion in loans receivable and $550 billion in guar-
             anteed loans outstanding.

             Because federal loans are made to accomplish congressionally mandated
             objectives and are often made to borrowers who cannot obtain private
             financing, agencies are faced with balancing social and economic goals
             and good credit management practices. Also, in many cases, the govern-
             ment’s risk in making these loans is often much greater than private
             lenders are willing to bear.

             Federal agencies have long had problems in managing their credit pro-
             grams. These problems, which have drawn increased attention because
             of the huge federal deficit, have been highlighted in reports by GAO,
             inspectors general, and others over the past decade. To help combat this


             Page 2                                GAO/AFMD80-12 OMB’s Nine-Point Program
                    ExecutiveSummary




                    situation, OMB placed a high priority on credit management and, in 1986,
                    initiated a nine-point program to improve agencies’ credit management
                    practices. This is a comprehensive credit management policy for improv-
                    ing debt collection, reducing delinquencies, and improving the manage-
                    ment of receivables by focusing on nine initiatives in the credit cycle.
                    The nine-point program involves (1) screening of loan applicants,
                    (2) maintaining files, (3) selling loans, (4) reporting to consumer report-
                    ing agencies, (5) using collection firms, (6) offsetting federal income tax
                    refunds, (7) offsetting federal employees’ salaries, (8) litigating debts,
                    and (9) writing off delinquent debts.


                    Historically, the full magnitude of the government’s credit picture was
Restilts in Brief   not readily discernable because some agencies did not fully report delin-
                    quencies. Although the administration and federal agencies are placing
    /               increased emphasis on credit management, and progress has been made
                    in implementing OMB'S nine-point program, the government’s credit pic-
                    ture has continued to deteriorate over the past 3 years. Some of this
    I               deterioration can be attributed to economic conditions in the farm and
    ~               energy economies. If these conditions continue or develop in other seg-
                    ments of the economy, the government’s credit picture could further
                    deteriorate. Also, deterioration of the government’s credit picture com-
                    pounds the budget deficit.

                    In some instances, agencies GAO reviewed had not fully implemented sev-
                    eral loan origination, account servicing, collection, and write-off initia-
                    tives as specified in OMB'S nine-point program and as generally allowed
                    by the Debt Collection Act of 1982. For example, agencies are not ade-
                    quately screening applicants for delinquent federal debt, and, in some
                    instances, they are not using private collection firms in the normal col-
                    lection process. GAO believes that not using these tools contributes to the
                    rise in delinquencies and adversely affects the government’s ability to
                    make collectible loans and to collect on outstanding loans. Although OMB
                    has established a sound credit management program and both OMB and
                    Treasury instruct agencies to use the nine-point program credit manage-
                    ment tools, agencies are not legislatively required to do so. Credit man-
                    agement programs for the agencies GAO reviewed would be improved if
                    the Congress legislatively required the use of many of these initiatives.
                    Such legislation would also help maintain the past decade’s momentum
                    in improving the government’s credit management. GAO also believes
                    that credit management programs would be improved if agencies pro-
                    vided the Congress audited financial information on their receivables



                    Page3                                  GAO/AFWD-BO-12OMB'sNinePointPmgram
                          Executive summary




                          and delinquencies as well as information on their collection efforts. The
                          Congress could use these data when making budgetary decisions.



Pri/ncipa,lFindings

(JrebitPicture            Federal agencies reported that delinquent loans have increased between
                          fiscal years 1985 and 1988, even though receivables have declined.
Detbriorating and Worse   Delinquent loans as a percent of loans receivable increased from 6 per-
Thzfn Reported            cent in fiscal year 1985 to 9 percent in fiscal year 1988. Delinquent loans
                          are those loans for which the borrower has failed to pay the obligated
                          amount by the specified due date. The amount reported as delinquent is
                          usually the payment or payments past due. Treasury instructions
                          require that for those loans which are more than 180 days past due, the
                          entire amount of the loan-not just the missed payments-be reported
                          as delinquent. Because this requirement is sometimes not complied with,
                          federal agencies’ financial reports do not always accurately disclose the
                          deteriorating credit picture. In particular, GAO estimates that the Farm-
                          ers Home Administration and the Small Business Administration under-
                          stated loan delinquencies by about $9.5 billion and $0.2 billion,
                          respectively, for fiscal year 1988 because they generally did not report
                          as delinquent the entire amount of loans past due over 180 days. Instead
                          they showed only the missed payments as delinquent. Both these agen-
                          cies modified their reporting, as of June 30, 1989, to comply with Trea-
                          sury instructions. In addition, during this period, guaranteed loans
                          increased 34 percent and defaulted guarantees increased 84 percent.


Sound Credit Management   OMB'S emphasis on the credit management problem has resulted in a
                          sound credit management framework which is set forth in the nine-point
Fra/rnework Not Fully     program and OMB and Treasury guidance. Over the past several years,
Im#emented                federal agencies have made progress in certain credit management
   I
   I                      areas, such as screening loan applicants, servicing loan accounts, and
                          implementing delinquent debt collection tools. For example, (1) Treasury
                          issued guidance for agencies to follow in carrying out their credit man-
                          agement programs, (2) HUD developed a system to screen loan applicants
                          to determine if they had previously defaulted on other HUD-insured
                          loans, (3) SBA, HUD, and Education each consolidated some servicing and
                          collection activities, which resulted in improved credit management, and
                          (4) the major credit agencies are generally participating in the tax
                          refund offset program, which resulted in collection of $872 million over


                          Page 4                                 GAO/AF’MD-W-12OMB’r NinePoint Program
                      Executive hmmary




                      the past 3 years. However, much remains to be done to ensure that a
                      comprehensive governmentwide credit management program is fully
                      implemented.

                      One of the most significant problems is that the agencies GAO reviewed
                      are not using all available tools, suggested in OMB and Treasury instruc-
                      tions, which would help ensure implementation of the nine-point pro-
                      gram. In particular, prior to extending credit, agencies were not cross-
                      checking with the Internal Revenue Service (IRS) to determine if a loan
                      applicant is delinquent in paying taxes. Screening of loan applicants is
                      an important step of the credit management cycle because collectibility
                      of debt is often directly impacted by the effectiveness of agencies’ credit
                      extension practices. In addition, other credit management practices sug-
                      gested by OMB and Treasury were not fully implemented by agencies GAO
                      reviewed. For example, in some instances, agencies were not

                  9 requiring that applicants be denied credit if they owed a delinquent fed-
                    eral debt;
                  . adequately monitoring private lenders whose loans were guaranteed;
                  . fully utilizing, in the normal course of the collection process, private col-
                    lection firms;
                  l charging interest, penalties, or administrative costs as required by the
                    Debt Collection Act;
                  l following appropriate write-off procedures; or
                  l reporting closed-out accounts to IRS as income to the debtor.

                      Those agencies GAO reviewed, which had not fully implemented the nine-
                      point credit management program, cited various reasons for not doing
                      so. These reasons consisted of automated system limitations, legislative
                      restrictions, decisions not to implement because of an agency’s belief
                      that a certain credit management tool would not be consistent with the
                      program’s purpose, and failure to revise regulations and procedures.


                      GAO is recommending that agencies fully implement specific credit man-
Recommendations       agement initiatives provided by the administration’s    nine-point
                      program,

                      GAO is also recommending that the Congress amend the Debt Collection
                      Act to require agencies, where consistent with program legislation, to
                      utilize provisions of the act which are now optional and other credit
                      management techniques. In addition, GAO is recommending that the Con-
                      gress require agencies to provide it annually with audited financial


                      Page 5                                QAO/AFMD-@i&12   OMB’r Nine-Point Program
                  JZxecutiveSummary




                  information on their receivables and delinquencies. The Congress could
                  use this information when making budgetary decisions to supply new
                  funds.


                  OMB agreed with the main thrust of the report that agencies need to do
Ag/encyComments   much better in their management of credit, especially the originating
                  and servicing of loans and collecting of delinquent debts. OMB expressed
                  concern over rising delinquencies and defaults and over certain agen-
                  cies’ minimal level of compliance or their noncompliance with the pro-
                  gram. OMB also agreed with the need for legislative changes to help
                  ensure a more consistent application of the nine-point program. Trea-
                  sury believes the report will be helpful in maintaining pressure to
                  improve governmentwide credit management. While Treasury’s Finan-
                  cial Management Service agrees that some legislative changes are
                  needed, it does not believe that all the legislative recommendations pro-
                  posed by GAO are necessary. Further, IRS opposes the use of taxpayer
                  consent forms to obtain tax information on applicants for federally pro-
                  vided or guaranteed loans. GAO disagrees and believes that the legisla-
                  tive recommendations presented in this report would strengthen the
                  government’s credit management program. The major lending agencies
                  included in GAO'S review generally agreed that more needs to be done to
                  improve credit management. They also generally agreed with the
                  improvements recommended. Some agencies stated that they are now
                  addressing some of GAO'S recommendations while, in other instances, the
                  agencies believe that their current procedures or practices are adequate.
                  G+O's analysis of agency comments, however, showed that these proce-
                  dures do not always adequately respond to the problems cited in this
                  report. (See chapters 3,4, and 6.)

                  Both OMB and Treasury believe that agencies need to improve their
                  financial reporting systems. OMB strongly supports the report’s conclu-
                  sion that more needs to be done to improve loan servicing through
                  upgraded financial systems. Also, OMB agreed with GAO'S recommenda-
                  tion that the Congress require agencies to annually provide it with
                  audited financial information on their receivables and delinquencies.




                  Page 6                                GAO/AFMD-90-12OMB's Nine-Point Progmn
Page 7   GAO/AFMD-O-12 OMB’s Nine-Point Program
Cllmtents


Executive Summary                                                                                2

Chapter 1                                                                                       12
I&oduction             Efforts to Improve Credit Management
                       OMB’s Nine-Point Credit Management Program
                                                                                                13
                                                                                                14
                       Objectives, Scope, and Methodology                                       15

C apter 2                                                                                       20
G2vernment Credit      Major Loan Indicators Show Problems in the
                           Government’s Credit Picture
                                                                                                21
Pi&ture Continues to   Credit Picture of Most Major Credit Agencies Deteriorated                25
Deteriorate            Government’s Loan Picture Worse Than Reported                            28
                       Conclusions                                                              29
                       Agency Comments and Our Evaluation                                       30

Chapter 3                                                                                       32
Loan Origination       Screening of Loan Applicants Could Be Improved
                       Some Applicants Not Required to Certify They Do Not
                                                                                                33
                                                                                                36
Prbcedures Need            Owe Delinquent Federal Debts
Stfengthening          Some Applicants Who Owe Delinquent Federal Debts Not                     37
  I                        Denied Credit
                       Some Applicants Not Required to Sign Certification of                    38
                           Knowledge of Debt Collection Practices
                       More Realistic Loan Origination Fees Needed                              39
                       Conclusions                                                              41
                       Recommendations to Agencies                                              42
                       Agency Comments and Our Evaluation                                       42

Chapter 4                                                                                       46
Account Servicing      Servicing and Collection Activities Consolidated
                       Agencies Conducted Loan Asset Sales/ Prepayments
                                                                                                46
                                                                                                47
Needs Continued        Some Agencies’ Monitoring of Lenders and Guaranty                        48
Emphasis                   Agencies Is Inadequate
                       Automated System Problems Hinder FmHA Servicing                          51
                       Conclusions                                                              52
                       Recommendations to Agencies                                              53
                       Agency Comments and Our Evaluation                                       53




                       Page 8                                GAO/AFMD-90-E OMB’s Nine-Point Program
                          Content.8




Chabter 5                                                                                        56
Pro ‘ress Made, but       More Can Be Done to Collect Delinquent Debt                            56
                          Write-off and Close-out Procedures Need to Be                          64
Mor Emphasis                   Strengthened
Nee0 ed on Collecting     Conclusions                                                            67
and Writing Off           Recommendations to Agencies                                            68
                          Agency Comments and Our Evaluation                                     68
Delihquent Debt
                                                                                                 71
    itional Legislation   Credit Management Would Be Improved by Legislatively                   72
                              Requiring Certain Credit Management Tools
                          Credit Management Would Be Improved if IRS Provided                    72
                              Taxpayer Addresses to Agencies Under Authority
                              Other Than Federal Claims Collection Act
                          Need for Reliable Financial Information on Credit                      73
                              Programs
                          Conclusions                                                            74
                          Recommendations to the Congress                                        75
                          Agency Comments and Our Evaluation                                     76

Appendixes                Appendix I: Summary of Changes in Receivable                           78
                              Information
                          Appendix II: Changes in Guaranteed Loans Outstanding                   81
                              and Terminations for Default
                          Appendix III: Comments From the Office of Management                   83
                              and Budget
                          Appendix IV: Comments From the Department of the                       91
                              Treasury’s Financial Management Service
                          Appendix V: Comments From the Department of the                        95
                              Treasury’s Internal Revenue Service
                          Appendix VI: Comments From the Department of                          102
                              Agriculture
                          Appendix VII: Comments From the Department of                         108
                              Education
                          Appendix VIII: Comments From the Department of                        119
                              Housing and Urban Development




                          Page 9                              GAO/AFMD-90-12OMB’s Nine-Point Program
          Contents




          Appendix IX: Comments From the Small Business                           126
              Administration
          Appendix X: Comments From the Department of Veterans                    129
              Affairs
          Appendix XI: Major Contributors to This Report                          133


GIO
  ssary
   les    Table 2.1: Governmentwide Changes in Loan Data                            21
          Table 2.2: Delinquencies as a Percentage of Loans                         25
              Receivable for the Five Major Credit Agencies
          Table I. 1: Change in Loan Receivables Between Fiscal                     78
              Years 1986 and 1988
          Table 1.2: Change in Loan Delinquencies Between Fiscal                    79
              Years 1986 and 1988
          Table 1.3: Change in Loan Write-offs Between Fiscal Years                 80
               1986 and1988
          Table II. 1: Change in Guaranteed Loans Outstanding                       81
              Between Fiscal Years 1986 and 1988
          Table 11.2:Change in Terminations for Default Between                     82
              Fiscal Years 1985 and 1988




          Abbreviations

          CAIVRS     Credit Alert Interactive Voice Response System
          FmHA       Farmers Home Administration
          GAO        General Accounting Office
          GSA        General Services Administration
          HUD        Department of Housing and Urban Development
          IRS        Internal Revenue Service
          OMB        Office of Management and Budget
          SBA        Small Business Administration
          VA         Department of Veterans Affairs


          Page 10                               GAO/AF’MD-90-12OMB’s Nine-Point Program
Page 11   GAO/AFMD-SO-ldOMB’s Nine-Point Prolp‘am
r



    Cha;ter 1

    Irboduction


                   The federal government lends or guarantees loans of billions of dollars
                   for a wide variety of programs, such as for housing, farming, education,
                   and small businesses. At the end of fiscal year 1988, federal agencies
                  reported that loans receivable totaled $224 billion, of which $19.6 bil-
                  lion was delinquent. This represents a decrease of 13 percent in loans
                  receivable and an increase of 33 percent in delinquent loans since fiscal
                  year 1985. In addition, the percentage of the government’s loans receiv-
                  able which were delinquent increased from 6 percent at the end of fiscal
                  year 1985 to 9 percent at the end of fiscal year 1988. Also, between the
                  end of fiscal years 1985 and 1988, loans guaranteed by the federal gov-
                  ernment, which represent potential government liabilities, increased 34
                  percent-from     $410 billion to $550 billion. In addition to direct and
                  guaranteed loans, the government provides over $4 trillion in other
                  types of credit assistance and insurance. Further, the government’s need
                  to effectively manage its credit programs has become acute, considering
                  the growing federal deficits over the past several years.

                  Because of his continuing concern over the increasing delinquent debt
                  owed to the federal government, Representative John R. Kasich
                  requested that we analyze and determine the reasons for changes in the
                  primary lending agencies’ credit picture over the past 3 years. He also
                  asked that we review federal agencies’ progress in implementing the
                  administration’s credit management program. This report addresses
                  (1) changes in the primary federal lending agencies’ loan receivables,
                  loan delinquencies, and guaranteed loans and (2) agencies’ progress and
                  problems in implementing the Office of Management and Budget’s (OMB)
                  nine-point credit management program.

                  The majority of the government’s credit is disbursed or guaranteed
                  through five lending agencies -the Departments of Agriculture, Educa-
                  tion, Housing and Urban Development, and Veterans Affairs, and the
                  Small Business Administration. These agencies’ credit programs include
                  farmer, education, housing, small business, and disaster loans.

                  Some of the federal government’s credit management problems can be
                  attributed to the nature of the loans. Specifically, because federal loans
                  are made to accomplish congressionally mandated objectives and are
                  often made to borrowers who cannot obtain private credit, agencies are
                  faced with balancing social and economic goals and good credit manage-
                  ment practices. Also, in many cases, the government’s risk in making the
                  loans is often much greater than private lenders are willing to bear.
                  However, agencies have had long-standing credit management problems.



                  Page 12                               GAO/AFMLWO-12OMB’s Nine-Point Program
                    Chapter 1
                    Introduction




                    We have stated in a 1986 report,’ that one of the major impediments to
                    effective management of the government’s debts is agencies’ failure to
                    aggressively implement procedures which would more fully utilize avail-
                    able credit management tools. That report concluded that agency credit
                    management efforts are also hampered by accounting systems which do
                    not provide managers with current and accurate information on the sta-
                    tus of debts owed to the government.

                    Since the late 197Os, we issued numerous reports which were instrumen-
                    tal in raising the Congress’ and the administration’s awareness of the
                    credit management problem. The recommendations in these reports cen-
                    tered around the need for the government to use commercial practices to
                    a greater extent to collect its delinquent debts and to improve account-
                    ing for its receivables.


                    The Congress’ and the administration’s concern over the increasing
Eff&%s to Improve   amount of delinquent debts owed to the federal government caused
Crepit Management   increased focus, over the past several years, on managing the govern-
   /                ment’s credit activities. This resulted in credit management legislation
                    and increased emphasis by the administration.

                    One of the most significant pieces of credit management legislation was
                    the Debt Collection Act of 1982, This act, which legislated many of GAO’S
                    previous recommendations, clarified federal agencies’ authority to use
                    collection tools available in the private sector. Also, in 1981, the admin-
                    istration made debt collection a priority and designated OMB as the focal
                    point for debt collection initiatives.

                    Since 1982, the Congress passed additional legislation to strengthen fed-
                    eral agencies’ credit management programs. Some of the most significant
                    legislation included authority to use private sector attorneys and the
                    withholding of tax refunds to collect delinquent federal debts.

                    Also, OMB and the Department of the Treasury became more aggressive
                    in the credit management area. In March 1983, OMB issued Bulletin 83-
                    11, instructing agencies to update their debt collection plans to show
                    how they will implement the Debt Collection Act. Additional guidance
                    was provided in August 1984 when OMB revised Circular A-70, “Policies
                    and Guidelines for Federal Credit Programs.” This circular provided

                    ’ Debt Collection: Billions Are Owed While Collection and Accounting Problems Are Unresolved
                    @AO/A~D _86_3% May 23,1986).



                    Page 13                                            GAO/AFMD-90-12OMB’s Nine-Point Prolpgm
                    Chapter 1
                    Introduction




                    guidance to agencies in proposing new credit programs and reviewing
                    existing credit programs for the purpose of suggesting changes and
                    establishing or adopting management policies. In May 1985, OMB issued
                    Circular A-l 29, “Managing Federal Credit Programs,” which prescribes
                    policies and procedures for managing federal credit programs and col-
                    lecting receivables. In addition, in 1986, OMB and Treasury agreed that
                    Treasury would be primarily responsible for overseeing agencies’ activi-
                    ties to carry out the administration’s credit management initiatives
                    while OMB would continue to establish credit management policy.

                    In 1986, we reported on federal agencies’ efforts to implement the Debt
                    Collection Act of 1982. (See footnote 1.) While we concluded that federal
                    agencies had been slow in using tools which the act provided, the report
                    pointed out the emphasis OMB placed on the credit management area and
                    the increased role in federal credit management being taken by Trea-
                    sury. Since that time, OMB and Treasury have continued to focus on the
                    government’s credit management problem. Despite these efforts, the
                    government’s credit picture continued to deteriorate, as discussed later
                    in this report.

                    Recently, both OMB and Treasury have provided credit management
                    guidance. In November 1988, OMB revised Circular A-129 which
                    expanded on and clarified guidance presented in an earlier version.
                    Also, as part of its Treasury Financial Manual, Treasury issued credit
                    management guidance entitled Managing Government Credit: A Supple-
                    ment to the Treasury Financial Manual. This supplement, issued in Jan-
                    uary 1989, consolidates and expands earlier Treasury credit
                    management guidance into a comprehensive credit management
                    document.


                    OMB'S increased emphasis on credit management, beginning in the early
OMB’s Nine-Point     1980s has resulted in a comprehensive credit management policy
Cr#dit Management   intended to improve debt collection, reduce delinquencies, and improve
PrOgram             the management of receivables. In August 1986, OMB instructed agencies
                    to follow a nine-point credit management program to help ensure imple-
                    mentation of this policy. The nine-point program focuses on credit man-
                    agement initiatives in each of the credit cycle phases-loan origination,
                    account servicing, collections, and write-offs. The nine-point program
                    instructs agencies, unless prohibited by legislation, to implement initia-
                    tives under each of the credit cycle phases. Specific requirements follow.




                    Page 14                                GAO/APMD-90-12OMB’s Nine-Point Program
                                Chapter 1
                                Introduction




Loan:Origination Phase        . Credit applicants are to be screened to determine their credit worthiness
        /                       and financial responsibility, and whether they owe delinquent debts to
                                the federal government. If the applicant owes a delinquent federal debt,
        I                       loan approval is to be withheld until repayment or other arrangements
                                have been made.


Acciunt Servicing Phase       . Using modern business practices and automation, agencies are to estab-
                                lish proper maintenance of files and the proper review and management
    I                           of accounts.
                          l     Agencies are to sell loans to the public without recourse to the federal
                                government.


Lc3la” Collection Phase   . Information on commercial and delinquent2 consumer accounts is to be
                            reported to credit bureaus.
    I                     . Effective collection functions are to be established and private collection
                            firms are to be used to recover seriously delinquent accounts.
                          l Information on delinquent debtors is to be referred to the Internal Reve-
                            nue Service (IRS) so that federal income tax refunds may be offset.
                          l Salaries of federal employees who owe delinquent federal debts are to
                            be offset.
                          l Agencies are to use litigation to collect seriously delinquent debts.


Write-off Phase           . Uncollectible accounts are to be written off, and closed out debt is to be
                            reported to IRS as income to the debtor.


                                Representative John R. Kasich requested that we analyze changes in the
Objixtives, Scope,and           government’s loan data between the end of fiscal years 1985 and 1988
Methodology                     and evaluate the primary lending agencies’ credit management activi-
                                ties. Specifically, our objectives were to (1) identify and determine rea-
                                sons for increases and decreases in the amount of agencies’ loan
                                receivables, delinquencies, write-offs, guaranteed loans outstanding, and
                                terminations for default between the end of fiscal years 1985 and 1988
                                and (2) evaluate agencies’ progress in implementing OMB’S nine-point
                                credit management program.



                                ‘Delinquency is the failure of the debtor to pay an obligation or debt by the date specified in the
                                initial written notification or applicable contractual agreement or to make other satisfactory payment
                                arrangements.



                                Page 16                                              GAO/AFMD-O-12 OMB’s Nine-Point Program
    Chapter 1
    Introduction




    Our review focused primarily on the following programs:

l The Department of Agriculture’s Farmers Home Administration’s (F~HA)
  Rural Housing Program. Under this program, F~HA makes (1) Single
  Family Housing loans to very low, low, and moderate income families to
  purchase or repair homes in rural areas and (2) Multifamily Housing
  loans to provide moderate cost rental housing to persons of very low,
  low, and moderate incomes in rural areas.
. The Department of Education’s Stafford Student Loan and Perkins Loan
  programs. Under the Stafford Loan program, Education provides re-
  insurance1 to state and nonprofit agencies which guarantee loans made
  by lenders. There are three types of individual student loans under this
  program: Stafford, Supplementary Loans for Students, and Parent
  Loans to Undergraduate Students. Under the Perkins Loan Program,
  participating schools make loans to students from revolving funds con-
  sisting of federal and school funds.
. The Department of Housing and Urban Development’s (HUD) Federal
  Housing Administration’s Title I, Single Family Housing, and Multifam-
  ily Housing loan programs, The Title I program insures private lenders
  against losses for financing purchases such as manufactured (mobile)
  homes and property improvements. The Single Family Housing program
  insures mortgages on one- to four-family housing units. The Multifamily
  Housing program insures mortgages on projects such as rental proper-
  ties of five or more units and nursing homes.
. The Small Business Administration’s (SBA) Small Business and Disaster
  Loan programs. Under the Business Loan program, SBA provides direct
  loans or guarantees loans made by private lenders to small businesses.
  Through its Disaster Loan program, SBA provides direct loans to busi-
  nesses and homeowners who suffer uninsured losses as a result of natu-
  ral disasters.
l The Department of Veterans Affairs’ (VA) Guaranty and Vendee Loan
  programs. Under the Loan Guaranty program, VA guarantees loans made
  to veterans and service personnel to purchase, construct, or improve
  homes, Through the Vendee Loan program, VA makes direct loans to pur-
  chasers of VA owned houses acquired because of defaults on guarantee
  loans.




    %Jnder the Stafford Student Loan program, loans are insured by states or private guaranty agencies.
    1Jpondefault, if the debt cannot be collected, the lender is reimbursed by the guaranty agency, which,
    in turn, may be reimbursed by Education. The guaranty agency is then responsible for collecting the
    defaulted loan from the borrower and remitting a portion of the proceeds to Education.



    Page 16                                              GAO/AFMD-90-12OMB’s Nine-Point Program
Chapter 1
Introduction




The above programs were selected because they accounted for 22 per-
cent of the government’s loan receivables and 56 percent of its delin-
quencies as of September 30, 1988. In addition, they accounted for 92
percent of the outstanding loans guaranteed by the federal government
at the end of fiscal year 1988 and 93 percent of the defaulted guaran-
tees during fiscal year 1988.

The majority of FmHA’S delinquencies are generated through its farm
loan programs. While we included farm program information in our
analysis of the changes in receivable data between fiscal years 1985 and
 1988, we did not include FmHA’S farm program in our evaluation of agen-
cies’ efforts to implement the nine-point credit management program.
We excluded the farm program (1) because of Congressional action and
FIIIHA’S interpretation of court decisions which have restricted the
agency’s use of certain credit management tools for these programs,
such as the use of administrative offset to withhold federal payments to
FmHA borrowers and foreclosing on delinquent accounts and (2) because,
in February 1989, we issued a report on FmHA’S farm loan-making poli-
cies and procedures.4

To obtain an understanding of each agency’s credit management activi-
ties, we reviewed and analyzed agencies’ policies, procedures, and regu-
lations for making, servicing, collecting, and writing off loans. We also
reviewed pertinent agency, OMB, and Treasury documents related to the
credit management area. These included guidelines provided to agencies
on specific credit management issues, such as writing off delinquent
debts.

To determine the agencies’ progress in implementing the various initia-
tives of the credit management program, we interviewed officials
responsible for each agency’s credit management program. This
included officials responsible for the agencies’ policies and procedures
for making, servicing, collecting, and writing off loans. We also inter-
viewed OMR and Treasury officials responsible for monitoring agencies’
progress with the credit management program. In addition, we reviewed
agency and Treasury progress reports on the credit management pro-
gram. We also reviewed and analyzed the results of agency credit man-
agement reviews held by Treasury and OMB.



4Farmers Home Administration: Sounder Loans Would Require Revised Loan-Making Criteria (GAO/
m 1 -89-9, February 14, 1989).



Page 17                                         GAO/AFMD-90-12OMB’s Nine-Point Program
 chapter 1
 Introduction




We reviewed pertinent inspector general reports and, where appropri-
ate, discussed credit management issues with responsible program and
inspector general officials. In addition, we reviewed September 1988 and
March 1989 reports of the President’s Council on Integrity and Effi-
ciency on agencies’ credit management activities involving guaranteed
loans. We also reviewed and drew upon information in other GAO reports
involving credit management and the agencies’ Financial Integrity Act
reports.”

To determine the amount of changes in receivables, guaranteed loans,
delinquencies, and write-offs over the past 3 years, we analyzed
unaudited receivable information agencies reported to Treasury and
OMB. We also reviewed and analyzed OMB analyses of these reports and,
where appropriate, compared the information reported by agencies to
their audited financial statements. We discussed the reasons for discrep-
ancies noted and for changes in receivable information over the period
covered with agency, OMB, and Treasury officials.

We performed our fieldwork from July 1988 through June 1989 in
accordance with generally accepted government auditing standards. We
conducted our work at the Washington, D.C., headquarters offices of the
five primary lending agencies, OMB, and Treasury. To obtain a general
understanding of how they made, serviced, and collected loans, we vis-
ited VA’S Washington Regional Office, SBA’S Washington District Office,
and FmHA’S Frederick (Maryland) County Office. We did not evaluate the
agencies’ implementation of the credit management program at the field
office locations.

We obtained official agency comments on a draft of this report from the
Office of Management and Budget; the Department of Treasury’s Finan-
cial Management Service; the Internal Revenue Service; the Departments
of Agriculture, Education, Veterans Affairs, and Housing and Urban
Development; and the Small Business Administration.

Chapter 2 provides loan data for the federal government and the pri-
mary credit agencies and shows changes in this information between the
end of fiscal years 1985 and 1988. Chapters 3 through 5 summarize the




“The Federal Managers’ Financial Integrity Act of 1982 (31 U.S.C. 3512) requires agencies to report
material weaknesses in agency internal control and accounting systems to the President and the Con-
gress each year, along with plans to correct the problems.



Page 18                                             GAO/AFMD-90-12OMB’s Nine-Point Program
    .

.
        Chapter   1
        Introduction




        primary credit agencies’ progress in implementing OMB'S credit manage-
        ment program. Chapter 6 addresses the need for credit management
        legislation.




        Page 19                              GAO/AFMD-99-12OMB’s Nine-Point Pro@am
Chgpter 2

@vernment Credit Fkture Continues
to Deteriorate

              Historically, federal agencies have experienced problems in accounting
              for, controlling, and reporting on debts owed the government. In October
               1978, we reported that the government’s debt collection efforts had
              been hindered by inaccuracies in accounting for and reporting of
              accounts receivable. In 1986, we again reported that federal agencies
              had serious and long-standing problems in the collecting and accounting
              for debts and that delinquent receivables had increased greatly in the
              prior 3 years. Despite recent efforts by OMB, Treasury, and the federal
              agencies to improve credit management, the government’s overall credit
              picture, as well as the credit situation at four of the agencies we
              reviewed, continues to deteriorate. Further, the government’s credit pic-
              ture is worse than reported because two agencies underreported
              delinquencies.

              The government’s deteriorating credit condition is evidenced by several
              factors. Specifically, while loans receivable reported by agencies
              decreased between fiscal years 1985 and 1988, primarily as a result of
              increased write-offs and a shift from direct to guaranteed loans, (1) loan
              delinquencies increased 33 percent, (2) delinquent loans as a percentage
              of loans receivable increased from 6 percent to 9 percent, and (3) guar-
              anteed loan terminations for default increased 84 percent while guaran-
              teed loans outstanding increased 34 percent. In addition, while the
              percentage of loans that were rescheduled increased slightly between
              fiscal years 1985 and 1988, the percent of rescheduled loans which
              returned to delinquent status rose sharply from 2 percent in fiscal year
              1985 to 10 percent in fiscal year 1988.

              The credit picture of the agencies we reviewed, except for SBA, deterio-
              rated in that delinquencies and terminations for default between fiscal
              years 1985 and 1988 increased at a greater rate than loans receivable
              and guaranteed loans outstanding. Other indicators of this worsening
              situation include (1) FmHA allowances for loan and interest losses of
              about $23 billion at the end of fiscal year 1988, (2) large percentage
              increases in Education’s, HUD'S, and VA'S reported delinquencies between
              fiscal years 1985 and 1988, (3) guaranteed loan terminations for default
              at VA and HIJD, increasing 5 times and 3 times, respectively, the rate of
              increase of these two agencies’ outstanding guaranteed loans, and
              (4) VA'S need for increased funding of about $3 billion, since 1980, to
              cover loan losses.

              At the end of fiscal year 1988, the government’s credit picture was
              worse than reported because FmHA and SBA understated delinquencies by
              about $10 billion-50 percent of the total loans receivable delinquencies


              Page 20                               GAO/AFMDPO-12OMB’s Nine-Point Program
                           Chapter 2
                           Qovemment Credit Picture Cmtlnuee
                           to Deteriorat4!




                           reported for the entire federal government. This underreporting, which
                           was caused by failure to follow Treasury instructions for reporting
                           delinquent loan data, masks the severity of the delinquent loans owed to
                           the government. Accurate and consistent reporting of financial informa-
                           tion pertaining to direct and guaranteed loan programs is necessary to
                           reflect an accurate credit picture and, therefore, help policymakers such
                           as the Congress and the administration make credit management
                           decisions.

    I
                           Treasury and OMB require federal agencies to annually submit financial
Major Loan Indicators      reports summarizing their direct and guaranteed loan programs. These
ShoyvProblems in the       reports include the major indicators of the programs’ credit management
Gov@nment’s Credit         picture and information from them is used by the Congress, OMB, and
                           Treasury in monitoring and overseeing agencies’ credit management
Pictjxe                    activities. Specifically, the indicators of the government’s credit picture
                           include loans receivable, loan delinquencies, loan write-offs, guaranteed
                           loans outstanding, and terminations for default. While the amounts for
                           each of these indicators are reported separately, several are related.
                           These indicators and how they relate to each other are described in the
                           glossary.

              Changes in
                           Dollars in millions
                                                                                                 Fiscal year
                                                                                               1985          1986          %EAZ
                           Loans receivableb                                              $258,195          $223,944            - 13
                           Loans receivable delinquenciesb                                  14,642            19,463              33
                           Loan write-offsb                                                  1,180            21,167          1,694
                           Guaranteed loans outstanding                                    410,442           549,966              34
                           Terminations for default                                          6.077            11,195              84
                           aAmounts for loans receivable, loans receivable delinquencies, and guaranteed loans outstanding are a8
                           of the end of the fiscal year. Amounts for loan write-offs and terminations for default are totals for the
                           fiscal year.
                           bThe loans receivable, delinquency, and write-off amounts were adjusted to include VA’s defaulted guar-
                           anteed loans, which VA reported as accounts receivable rather than loans receivable According to a VA
                           official, defaulted guaranteed loans will be reported as loans receivable in the future as required by
                           Treasury instructions.
                           Source: Agencies’ Reports on Accounts and Loans Receivable Due From the Public as of
                           September 30, 1988; OMB debt collection reports; “Special Analysis F” of the Budget of the United
                           States Government, Fiscal Year 1987; “Special Analysis F” of the Budget of the United States Govern-
                           ment, kscal Year 1990: and the Management of the United States Government (for fiscal years 1
                           and 1990).




                           Page 21                                                GAO/AF’MB9O-12 OMB’e Nine-Point Frograrn
                            chapter2
                            Government Credit Picture Continues
                            to Deteriorate




                            Table 2.1 shows the governmentwide changes in reported direct and
                            guaranteed loan data between fiscal years 1986 and 1988. In addition to
                            the loan amounts shown in this table, federal agencies are owed interest
                            due on loans. GAO'S Policy and Procedures Manual for Guidance of Fed-
                            eral Agencies, Title 2, requires agencies to record interest when it is
                            earned. Even when regular loan payments are not made, interest is to
                            continue to be recorded until the debt is officially declared in default or
                            a debt modification action is taken. Agencies record this interest as
                            accounts receivable rather than as part of loans receivable. This infor-
                            mation is not included in table 2.1 because agency financial reports sent
                            to Treasury do not separate interest associated with loans from other
                            types of accounts receivables, such as taxes. We were, therefore, unable
                            to quantify the amount of loan interest recorded as accounts receivable.

                            Although reasons for increases and decreases in these major indicators
                            are as varied as the individual credit programs, certain causes apply
                            governmentwide or to several major programs. Specifically, increased
                            loan write-offs and greater emphasis on guaranteeing loans, rather than
                            making direct loans contributed to the decrease in loans receivable. Also,
                            the recent economic difficulties in the agriculture and energy economies
                            contributed to the increases in loan delinquencies. If these conditions
                            continue or develop in other segments of the economy, the government’s
                            credit picture could further deteriorate. Also, deterioration of the gov-
                            ernment’s credit picture compounds the budget deficit.


Delinquencies and Write-    Delinquent loans are those loans for which the borrower has failed to
off$ Continue to Increase   pay the obligated amount by the specified due date. The amount
                            reported as delinquent is usually the payment or payments past due. In
                            1986, we reported that between 1982 and 1986, delinquencies increased
                            at a greater rate than receivables. We found a similar situation during
                            this review. As shown in table 2.1, between fiscal years 1986 and 1988,
                            loans receivable decreased 13 percent while delinquencies increased 33
                            percent. In addition, during this time, loan write-offs increased by 1,694
                            percent, most of which was attributable to a fiscal year 1988 HUD write-
                            off in its Low Rent Public Housing program. Appendix I shows govern-
                            mentwide changes, between fiscal years 1986 and 1988, in loans receiva-
                            ble, delinquencies, and write-offs. OMB and Treasury officials attributed
                            these governmentwide changes to (1) the increase in defaulted guaran-
                            teed loans as part of the government’s loans receivable portfolio,
                            (2) loan asset sales which resulted in the government selling its best
                            loans, and (3) more accurate reporting of receivable and delinquency
                            data by agencies.


                            Page 22                                GAO/AFMD-90-12 OMB’s Nine-Point Program
                           Chapter 2
                           Government Credit Picture Continues
                           to Deteriorate




                           In addition, our analysis showed that between fiscal years 1987 and
                            1988, the amount of delinquencies remained relatively constant. Trea-
                           sury officials attributed this to the increased use of credit management
                           tools. However, between fiscal years 1987 and 1988, the amount of
                           loans delinquent over 360 days increased by 6 percent. This is signifi-
                           cant because generally the longer a debt is outstanding, the more diffi-
                           cult the collection of that debt will be. Further, between fiscal years
                           1986 and 1988, delinquent loans as a percentage of total loans receiva-
                           ble rose from 6 percent to 9 percent.

                           We also found that between fiscal years 1986 and 1988, loan write-offs
                           increased from $1.2 billion to $2 1.2 billion. Most of the increase is attrib-
                           utable to a fiscal year 1988 write-off of $17.4 billion in HUD'S Low Rent
                           Public Housing program. However, write-offs other than those associ-
                           ated with the Low Rent Public Housing program increased by about 223
                           percent. While some of this increase is attributable to economic prob-
                           lems in certain industries, such as energy and agriculture, OMB and Trea-
                           sury officials believe that a substantial portion is a result of increased
                           emphasis in this area by their agencies. For example, over the past sev-
                           eral years, OMB has encouraged agencies to identify and write off uncol-
                           lectible accounts and for the past 2 years has established specific annual
                           numerical write-off goals for each major credit agency.


GuarlanteedLoans and       Between fiscal years 1986 and 1988, terminations for default increased
Terdinations for Default   at more than twice the rate of guaranteed loans outstanding. During this
                           time period, total guaranteed loans outstanding grew from $410 billion
Are j ncreasing            to $660 billion (34 percent). Similarly, the government’s contingent lia-
                           bility (the amount actually guaranteed) increased 38 percent to about
                           $469 billion in fiscal year 1988. Guaranteed loans outstanding include
                           the total unpaid principal of the loan, even though the government may
                           guarantee less than 100 percent. OMB includes the full principal because
                           by guaranteeing a portion of the loan, the government helps ensure the
                           repayment of the entire loan. Also, in programs where the federal gov-
                           ernment partially guarantees a loan, the private lender is at risk only
                           when the value of the collateral and the guarantee combined are less
                           than the full principal. However, except for VA, most of the loan guaran-
                           tee programs guarantee close to 100 percent of the loan. As of Septem-
                           ber 30, 1988, VA'S contingent liability was 44 percent of its guaranteed
                           loans outstanding.

                           Guaranteed loan terminations for default also increased significantly-
                           at a rate more than double that of the guaranteed loan increase. In fiscal


                           Page 23                                  GAO/APMD-!I@12 OMB’s Nine-Point Program
                   Chapter 2
                   Government Credit Picture Continues
                   to Deteriorate




                   year 1986, reported terminations were $6.1 billion, but they rose to
                   $11.2 billion during fiscal year 1988, an increase of 84 percent. In fiscal
                   year 1988, about 30 percent of the terminations for default resulted in
                   the establishment of a direct loan by the agency, and about 66 percent
                   resulted in the acquisition of property. Appendix II further details the
                   changes, between fiscal years 1986 and 1988, in guaranteed loan data
                   by major program.


Re$cheduledLoans   Rescheduling a loan involves changing the existing terms of the debt to
Increased          facilitate repayment. Generally, a rescheduled loan will have, at least
                   initially, more favorable loan terms than the original agreement so that
                   the borrower can meet his or her immediate obligations. OMB directs that
                   rescheduling be considered only if it is in the best interest of the govern-
                   ment and recovery of the debt is reasonably assured. Rescheduling may
  1                also be required by legislation. For financial reporting purposes, a
                   rescheduled loan is taken out of delinquent status and returned to cur-
                   rent status until the borrower does not meet the terms of the new agree-
                   ment. Agencies separately report rescheduled loans on their Reports on
                   Accounts and Loans Receivable Due From the Public. While they are not
  /                required to separately report the allowance for losses associated with
                   these loans, agencies such as FmHA consider them when establishing
                   their loss reserves.

                   Rescheduled loans represented a slightly greater percentage of loans
                   receivable at the end of fiscal year 1988 than at the end of fiscal year
                   1986. In fiscal year 1988, 14.8 percent of outstanding loans receivable
                   were rescheduled loans while in fiscal year 1986 the percentage was
                   13.1. More significantly, the number of rescheduled loans which
                   returned to delinquent status rose sharply from 2 percent to 10 percent
                   between fiscal years 1986 and 1988. Further, in fiscal year 1986,3.8
                   percent of delinquent loans had been rescheduled at least once. By the
                   end of fiscal year 1988, however, this increased to 18.3 percent. While
                   we recognize that rescheduling is an acceptable practice because it may
                   result in the recovery of all or a portion of the amount owed, reschedul-
                   ing loans that later return to delinquent status can delay the use of
                   alternative collection efforts and mask the severity of the government’s
                   potentially troubled loans.




                   Page 24                                GAO/AFMD-90.12 OMB’s Nine-Point Program
            .
                                                                                                                         U‘
                                                                                                                              “.



                                         Chapter 2
                                         Government Credit Picture Continues
                                         to Deteriorate




                                         Most of the government’s direct and guaranteed loans are concentrated
Cre it Picture of Most                   in five agencies: the Departments of Agriculture, Education, Housing
Maj%r Credit Agencies                    and Urban Development, and Veterans Affairs, and the Small Business
Dettjriorated                            Administration. As of September 30,1988, these agencies accounted for
                                         67 percent of the loans receivable, 86 percent of loan delinquencies, 94
                                         percent of the outstanding guarantees, and 96 percent of the termina-
                                         tions for default. Therefore, the effectiveness of these agencies’ credit
                                         management policies and procedures has a major impact on the govern-
                                         ment’s overall credit picture. As shown by several indicators in appen-
                                         dixes I and II and as summarized in this segment of the report, the credit
                                         situation at each of these agencies, except for SBA, deteriorated between
                                         fiscal years 1986 and 1988. In particular, except for SBA, delinquencies
                                         and terminations for default increased at a greater rate than loans
                                         receivables and guaranteed loans outstanding. This deteriorating condi-
                                         tion is further evidenced by table 2.2 which shows the percentage of
                                         loans that was delinquent in fiscal years 1986 and 1988 for each of the
                                         five major credit agencies,

Table 2.2: Dellnquencler as a
Percentage of Loan8 Receivable for the   Figures   in percent
Five MaJor Credit Agencier@lb                                                                                                      Fiscal year
                                         Major credit agencies                                                                     1985        1988
                                         Department     of Agriculture                                                              3.5         4.4
       1I
       /                                 Department     of Education                                                               22.6        45.8
       I                                 Department     of Housing       and Urban Development                                      3.0        11.9
                                         Small Business     Administration                                                         29.9        24.1

       /                                 Department     of Veterans      Affairsc                                                  42.7        57.8
                                         aThe percentages in this table were calculated from unaudited data prepared by OMB and the individ-
                                         ual agencies. While we did not verify the amounts used to calculate these percentages, we have con-
                                         cerns about the reliability of some of these amounts. For example, as discussed in this report, FmHA, a
                                         major component of Agriculture, significantly understated its fiscal year 1988 delinquencies. Further, our
                                         audit of FmHA’s fiscal year 1988 financial statements showed that the allowance for losses was about
                                         32 percent of the outstanding loan principal.
                                         bThose agencies which primarily guarantee loans (such as Education) will generally have a higher delin-
                                         quency rate than agencies which disburse direct loans since their receivables were originally defaulted
                                         private lender loans.

                                         ‘The loans receivable and delinquency amounts used to calculate VA’s fiscal year 1985 and 1988 per-
                                         centages were adjusted to include VA’s defaulted guarantees which VA reported as accounts receiva-
                                         ble rather than loans receivable.
                                         Source: Calculated by GAO using agencies’ Reports on Accounts and Loans Receivable Due From the
                                         Public as of September 30, 1988, OMB debt collection reports, and the Management of the United
                                         States Government (for fiscal years 1987 and 1990).


                                         As mentioned previously, financial problems experienced in the farm
                                         economy are reflected in Agriculture’s loan programs. Between fiscal



                                         Page 26                                                 GAO/AFMD-90-12 OMB’s Nine-Point Program
Chapter2
Qovernment Credit P&we        C!mtinuee
to DetA?riorate




years 1986 and 1988, Agriculture’s loans receivable decreased 7.3 per-
cent while loan delinquencies increased 16.8 percent. Also, terminations
for default for Agriculture’s guaranteed loan programs increased at a
greater rate than outstanding guarantees.

The Farmers Home Administration’s loan programs have the most acute
problems in Agriculture’s portfolio. While F~HA accounts for 60 percent
of Agriculture’s loans receivable, it accounts for 90 percent of its delin-
quent debt. Recent GAO reports further detail F~HA farm program loan
portfolio problems.1 For example, F~HA’Sfiscal year 1988 financial state-
ment@ disclosed that its allowances for interest and loan losses were
$23.3 billion, or 37 percent of its portfolio. F~HA is currently reviewing
thousands of farm program loans where the borrower requested debt
restructuring as provided for in the Agricultural Credit Act of 1987.
This act requires F~HA to place a priority on “writing dowrP3 delinquent
farm loans as an alternative to foreclosure. In March 1988, I+JHAesti-
mated that about $9 billion in write-offs would result from the applica-
tion of this act.

While the Department of Education’s total loans receivable decreased 26
percent between fiscal years 1986 and 1988, delinquencies increased 61
percent during the same time. More pertinent to Education, guaranteed
loans outstanding increased 33 percent while terminations for default
(which generally become delinquent loans receivables) increased 41 per-
cent from $1 billion to $1.4 billion. These increases are primarily due to
defaults from the large number of guaranteed loans made in the late
1970s and early 19809, fewer federal dollars available for grant pro-
grams, increases in higher education costs, and a policy which has
targeted Stafford loans to lower middle and lower income individuals.
Education loans are inherently risky because they are not secured, have
no creditworthiness criteria, and place little risk on the lenders, guar-
anty agencies, and schools.




2Financial Audit: Farmers Home Administration’s Financial Statements for 1988 and 1987 (GAO/
     D9037- , J anuary 26,lQQO).
3This is when a loan is restructured to provide for a write-down of debt to the recovery value of the
collateral where the return to the government under the restructured debt is at least as great as the
return from involuntary liquidation.



Page 26                                              GAO/AFMD-BO-12OMB'sNinePointProgram
Chapter2
Govemment Credit Picture Continues
to Deteriorate




Problems in the HUD and VA housing programs were similar. Specifically,
in these agencies’ housing programs, delinquencies, and terminations for
default increased at greater rates than receivables and guaranteed
loans. For example, VA'S guaranteed loan terminations for default
increased at almost 6 times the rate of its outstanding guaranteed loans,
while HUD'S terminations increased at more than triple the rate of its
outstanding guaranteed loans. Housing loans at these agencies are par-
ticularly subject to risk due to economic conditions, such as recessions,
unemployment, and changes in interest rates. A March 1989 President’s
Council on Integrity and Efficiency report4 on guaranteed loans found
that increases in HUD'S Federal Housing Administration and VA housing
defaults were a result of several factors, such as poor economic condi-
tions and deficiencies in agency policy implementation.

In November 1989,” we testified that HUD’S Federal Housing Administra-
tion’s default and foreclosure rates were persistently high in economi-
cally stressed regions, particularly the Rocky Mountain and Southwest
regions. Also, we projected that if house prices appreciate at least 6 per-
cent per year and economic conditions remain generally favorable, the
insurance fund for the Single Family Housing program will likely remain
solvent. However, if house prices appreciate at less than 6 percent, the
fund will be stressed, and if the rate is only 2 to 4 percent, the fund
likely will not be able to survive without US. Treasury assistance. Simi-
larly, our audit of VA'S fiscal year 1988 financial statements” disclosed
that VA'S loan guaranty fund needed increased funding, primarily due to
the weakened financial condition in the energy and agricultural sectors
of the economy: From fiscal year 1980 through fiscal year 1988, VA's
loan guaranty fund received about $3 billion in appropriations and
transfers from other funds. Further, VA estimates that the fund will need
an additional $1.34 billion in appropriations and transfers in fiscal years
1989 and 1990.

The Small Business Administration in the past 3 years experienced the
most favorable changes of the five major credit agencies. SBA'S loan
delinquencies decreased more (23 percent) than its loans receivable
(4 percent). Similarly, terminations for default decreased by 2 percent

4President’s Council on Integrity and Efficiency: Coordinated Review of Guaranteed Loans, Segment
II, Compilation of Significant Guaranteed Loan Issues Identified by Audits, Investigations, and Other
Reviews (March 20,1989).
“Impact of FHA Loan Policy Changes (GAO/T-RCED-90-17, Novemberl6, 1989).
“Financial Audit: Veterans Administration’s Financial Statements for Fiscal Years 1988 and 1987
(GAOIAFMD -89 _69 , September 16, 1989).



Page 27                                              GAO/AFMD-90-12 OMB’s Nine-Point Program
                     Chapter 2
                     Government Credit Picture Continues
                     to Deteriorate




                     while the agencies’ outstanding guaranteed loans increased 11 percent.
                     Thus, fewer loans are delinquent or in default status relative to the
                     amount of receivables and outstanding guaranteed loans. Also, loans
                     receivable write-offs increased a relatively modest 7 percent compared
                     to the overall increase of 1,694 percent. Although SBA does have a high
                     rate of delinquencies to loans receivable (24 percent in fiscal year 1988),
                     this is due to the high risk nature of the loans which are primarily made
                     to businesses unable to obtain private financing.

I
                     Agencies have attempted for years, without success, to develop systems
    ernment’s Loan   to solve their problems in accounting for receivables. Our accounting
     re Worse Than   system and financial statement audits, as well as inspector general
                     reviews, have consistently disclosed serious weaknesses in agencies’ sys-
                     tems that account for and control receivables. Agency managers need
I                    accurate and reliable information to determine the value and collec-
                     tibility of debts owed the government. The managers do not always get
                     such information. For example, on their financial reports to Treasury,
                     three agencies- FmHA, SBA, and HUD understated delinquencies because
                     they did not follow Treasury reporting instructions. The government’s
                     loan portfolio is, therefore, in worse condition than indicated by some
                     agencies’ financial reports.

                     FmHA and SBA understated delinquencies because they did not report
                     delinquent loans in accordance with Treasury instructions. For financial
                     reporting purposes, Treasury requires agencies to report as delinquent
                     the entire principal amount of loans which are over 180 days delin-
                     quent. Reporting these loans as delinquent is important to provide a
                     realistic picture of the future collectibility of the agency’s portfolio. For
                     example, when classifying loan risk, OMB and Treasury consider a loan
                     delinquent 120 days or more to be a loss. Contrary to Treasury require-
                     ments, F~HA and SBA report only those payments missed as delinquent
                     on their financial reports, unless their field offices have formally
                     required a borrower to remit the entire loan principal. We estimate that,
                     because of this, FmHA'S fiscal year 1988 delinquencies were understated
                     by about $9.6 billion and SBA'S were understated by $222 million. Both
                     SBA and FIIIHAmodified their reporting to comply with Treasury instruc-
                     tions as of June 30,1989.

                     Treasury also requires that agencies show on their financial reports
                     debts in litigation as delinquent. However, HUD understated delinquen-
                     cies in its September 30, 1988, financial report to Treasury by $1.2 bil-
                     lion because it did not report such debts as delinquent. HUD disclosed


                     Page 28                                 GAO/~-90-12     OMB’s Nine-Point Program
              Chapter 2
              Govemment Credit Picture Continues
              to Deteriorate


                                                                                                  \




              this in a footnote, and OMB adjusted HUD'S amounts to reflect the correct
              delinquency in its fiscal year 1990 report to the Congress on debt collec-
              tion. In its June 30, 1989, report to Treasury, HUD accounted for debts in
              litigation as delinquent. Further, in the case of HUD, our financial audit
              of the Federal Housing Administration’s financial statements showed
              that fiscal year 1988 losses were $4.2 billion,7 which is almost five times
              its originally reported amount of $858 million.

              Accurate and consistent data on credit programs is important so that the
              Congress, the administration, and federal agencies can make informed
              decisions on, and be able to properly control, the government’s credit
              programs. As we stated in our 1986 report on debt collection,R due to
              accounting systems that are antiquated, error prone, and time-
              consuming to operate and reconcile, many agencies were unable to gen-
              erate accurate and reliable accounting information on receivables.
              Although progress has been made in this area, we reported in November
              1988” that agencies needed basic information to control and collect bil-
              lions in accounts and loans receivable owed the government.

    I
    I
              Historically, the full magnitude of the government’s credit picture has
Conqlusions   not been readily discernable because some agency financial reports did
    /
              not fully disclose this worsening condition. Due to accounting system
              limitations and policy decisions, three agencies did not comply with
              Treasury’s instructions in preparing credit activity financial reports.
              This has resulted in these agencies significantly understating delinquen-
              cies at the end of fiscal year 1988. Accurate, consistent, and meaningful
              data are essential if managers and policymakers, such as the Congress
              and OMB, who are responsible for overseeing governmentwide credit
              management and debt collection, are to make sound decisions about the
              government’s credit programs.

              Despite OMB’S nine-point program and the increased emphasis on cor-
              recting the government’s credit management problems by OMB, Treasury,
              and the federal agencies, the credit picture for the federal government



              71988 Financial Audit: Federal Housing Administration (GAO/T-AFMD-89-17, September 27, 1989).

              “Debt Collection: Billions Are Owed While Collection and Accounting Problems Are Unresolved
                        - _ , May23,1986J
              (GAo/mD8635
              ?%umcial Management Issues (GAO/OCG-89-7TR, November 1988).



              Page 29                                            GAO/AFMD-99-12 OMB’e Nine-POW Program
                      chapter2
                      Government Credit Picture Chthuee
                      to Deteriorate




                      and for each of the major credit agencies, except SBA, continues to dete-
                      riorate. This deterioration is indicated by delinquencies and termina-
                      tions for default increasing at a greater rate than loans receivable and
                      guaranteed loans outstanding. Because of the nature of government loan
                      programs, whereby loans are disbursed to or guaranteed for borrowers
                      who cannot obtain private financing, the government’s loan portfolio is
                      inherently risky. While some of the worsening credit picture can be
                      attributed to economic conditions in certain segments of the economy,
                      some of the deterioration is the result of agencies’ failure to fully imple-
                      ment the nine-point program, as discussed later in this report. The wors-
                      ening credit picture at Agriculture, HUD, and VA is primarily attributed to
                      the difficulties in the agriculture and energy sectors of the economy in
                      the past decade. Education’s deteriorating credit condition was primar-
                      ily due to defaults from the large number of loans made in the late
                      1970s and early 198Os, relatively fewer federal dollars available for
                      grant programs, increases in higher education costs, and a policy which
                      has targeted Stafford loans to lower middle and lower income individu-
                      als. If these conditions continue or develop in other segments of the
                      economy, the government’s credit picture could further deteriorate.
                      Also, deterioration of the government’s credit picture compounds the
                      budget deficit.


                      Treasury commented that management of guaranteed loans differs from
Agency Comments and   that of direct loans. This is because the agency is not dealing directly
Our Evaluation        with the borrower, but with and through private sector lenders who
                      must be appropriately monitored. In addition, Treasury commented that
                      defaulted guarantees will continue to increase until the government
                      implements improvements in guaranteed loan management. To address
                      this problem, a special task force is currently developing recommenda-
                      tions for improving guaranteed loan management, which will be pre-
                      sented to the Federal Credit Policy Working Group, a high-level working
                      group of the Economic Policy Council responsible for reviewing major
 /                    federal credit policy issues. We realize that, for the above reasons, agen-
                      ties face different problems in managing guaranteed loans than they do
                      with direct loans. Because of this and the huge number of guaranteed
                      loans and the potential losses to the government associated with them,
                      we fully support the administration’s efforts to develop recommenda-
                      tions for better management of guaranteed loans.

                      Both OMB and Treasury believe there is a need for improved financial
                      reporting systems which can produce accurate and timely credit man-
                      agement data. In particular, Treasury commented that having agencies


                      Page 30                                GAO/AFMJI-90-12 OMB’s Niue-Point Program
.




    Chapter 2
    Government Credit Picture Continues
    to Deteriorate




    improve their financial reporting systems and move toward accrual
    based financial statements is critical in order to quantify risk exposure
    and have “early warning” of potential financial disaster.

    Treasury also commented that the changes in loans receivable informa-
    tion emphasized in our report indicate a deterioration in the agencies’
    portfolios and highlighted reasons, discussed in the report, for the
    decrease in loans receivable. Treasury also pointed out that improved
    agency reporting resulted in the government’s financial situation
    appearing worse in the short run.




    Page 31                                GAO/AF’MD-90-12 OMB’s Nine-Point Program
Chapter 3

LkmnOrigination Proeedures
&ed Strengthening

              The first phase of the credit cycle -loan origination-is    critical because
              an agency’s policies, standards, and procedures for extending credit
              have a direct affect on the future collectibility of debt and the ultimate
              cost to the government. Credit extension encompasses steps taken by
              agencies to ensure that loans are made to eligible applicants, the loan
              will be repaid, and the government’s interests are protected.

              Under its nine-point credit management program, OMB instructs federal
              agencies to screen applicants for federal direct or guaranteed loans for
              credit worthiness and financial responsibility and to determine if they
              owe delinquent debt to the federal government. OMB Circular A-129 and
              the Treasury Financial Manual credit supplement provide guidance for
              agencies to use in extending credit. While agencies are not legislatively
              required to follow Circular A-129 and the Treasury Financial Manual
              credit supplement, OMB and Treasury consider these documents to be
              statements of federal policy which federal agencies should follow unless
              specifically prohibited by legislation. In regard to loan origination, OMB
              and Treasury instruct agencies to (1) screen applicants to determine
              their credit worthiness, ability to repay, and delinquency on other fed-
              eral debt, (2) include in loan forms a borrower’s certification that he or
              she does not owe a delinquent federal debt, (3) withhold credit to appli-
              cants found to be delinquent on federal debts, (4) inform applicants of
              the federal government’s collection policies and procedures for delin-
              quent debts and require borrowers to sign a certification that such infor-
              mation was provided, and (5) assess loan origination fees to defray
              agency servicing and collection costs and as great a portion as possible
              of estimated loan losses.

              Most agencies we reviewed had procedures which required the screening
              of loan applicants to determine eligibility, credit worthiness, and if the
              applicant owed a delinquent debt to the agency making the loan. How-
              ever, most agencies did not (1) prescreen to determine if the applicant
              was delinquent on federal debts at other agencies, (2) require that credit
              be denied if an applicant owed a delinquent debt to another federal
              agency when denial would be consistent with program legislation, or
              (3) require borrowers to certify that they were informed of federal debt
              collection practices. Further, most agencies we reviewed did not charge
              loan origination fees that covered the government’s cost of making the
              loan. This was primarily because of legislation which set the amount of
              or prevented the charging of such fees.

              The importance of effective loan origination procedures was highlighted
              in a March 1989 President’s Council on Integrity and Efficiency report


              Page 32                                GAO/AFMD-90-12OMB’s Nine-Point Program
                       Chapter 3
                       Loan mtlon      Procedures
                       Need Strengthening




                       on guaranteed loans.1 The Council’s analysis of over 5,000 audits, inves-
/
                       tigations, and reviews conducted by inspectors general and others over
                       the past 3 years on the government’s home mortgage programs showed
                       that weaknesses in loan origination practices by guarantee lenders were
                       the most common findings reported.

1                                                                                                                   --

                       Except for Education, each of the agencies we reviewed generally
       of Loan         required that credit bureau reports be obtained prior to extending loans.
licants Could Be       Also, except for FmHA’S Single Family Housing loans, each of the agen-
                       cies included in our review was generally screening applicants to deter-
                       mine if they owed delinquent debts to the agency making the loan.
                       However, none of the agencies included in our review was routinely
                       cross-checking with other federal agencies, including IRS, to determine if
                       applicants owed past due federal debt. Agencies’ automated system
                       capabilities do not permit this type of prescreening.

                       OMB’S Circular A-129 and the Treasury Financial Manual credit supple-
                       ment set forth several mechanisms for screening loan applicants. These
                       include

                   . using credit bureau reports to obtain applicants’ past payment history;
                   l matching loan applicants with internal agency files to determine if an
                     applicant owes delinquent debts to the agency making the loan; and
                   . matching applicants with IRS delinquent tax files to determine if an
                     applicant owes delinquent taxes.

                       Credit bureau reports are used to verify applicant information, check
                       for credit worthiness, and are a primary means for agencies to deter-
                       mine if an applicant has a delinquent federal debt with another agency.
                       Education was the only agency we reviewed which did not require that
                       credit bureau reports be used for screening loan applicants. This is
                       because credit worthiness is not a criterion for receiving a Stafford or
                       Perkins loan under the Higher Education Act of 1965, as amended.z



                       ‘President’s Council on Integrity and Efficiency: Coordinated Review of Guaranteed Loans, Segment
                       II, compilation of Significant Guaranteed Loan Issues Identified by Audits, Investigations, and Other
                       Reviews (March 20, 1989).

                       ‘Under the Stafford Student Loan program, state or private nonprofit guaranty agencies guarantee
                       loans made by participating lenders to eligible borrowers. Under the Perkins Loan program, each
                       participating school establishes and maintains a revolving loan fund from which the institution
                       extends loans to eligible students. Each fund consists of federal and school funds.



                       Page 33                                              GAO/AFMD-99-12OMB’s Nine-Point Program
chapter 3
Loan O@nation Pmcedures
Need Strengthening




However, because of increased emphasis on credit management, Educa-
tion has in the past supported legislation that would make credit worthi-
ness a criterion for loan applicants over 21 years of age. Specifically, for
these applicants, Education has supported requiring credit bureau
reports and cosigners for those with poor credit ratings. Education has
pursued this approach because many of those applying for student loans
are young and thus have not yet established a credit history. We support
Education’s position. Such an approach would be more practical than
obtaining credit bureau reports on all applicants. Because loans are
made by private lenders and insured by guaranty agencies, it is impor-
tant that their input be obtained in establishing procedures for obtaining
this information.

Concerning agencies’ efforts to screen applicants in-house, HUD'S system
for doing this is automated and has features that could be effectively
used by other agencies. In 1987, HUD implemented a system for screening
applicants under its Single Family Housing program. Title I loans were
added in 1988.:) Lenders participating in these HUD programs are
required to use this system to determine if applicants have previously
defaulted on other HIJD insured loans. HUD estimated that this system
had resulted in the avoidance of $508 million in claims and $182 million
in losses through the end of fiscal year 1988. Because of the success of
HUD'S new system, OMB and Treasury are taking steps to include other
agencies’ delinquent loans in the system and make information in the
system available to these agencies and guarantee lenders participating
in their programs. The objective in expanding this system is to give all
participating agencies and lenders participating in their programs a
means of prescreening a loan applicant’s credit rating with the federal
government. The first agency to be included will be the Department of
Veterans Affairs because its loan programs are similar to HUD’S.

We believe that an expanded CAIVRS will be a feasible and valuable
screening mechanism for federal credit agencies. However, before this
system can be expanded, several legal questions as to whether the Pri-
vacy Act permits agencies to share information envisioned under the
expanded CAIVRS must be resolved. In April 1989, HUD requested OMB'S
opinion on the applicability of the Privacy Act to the expanded system.
In January 1990, OMB responded that the Privacy Act does not bar HUD


“The Credit Alert Interactive Voice Response System (CAIVRS) allows authorized lenders to match,
through telephone access,loan applicants against HUD’s file of delinquent debtors, The system
checks an applicant’s social security number as entered by the lender against those on HUD’s delin-
quent debtor file. The lender is then advised if a match has been made.



Page 34                                              GAO/AFMD-90-12 OMB’s Nine-Point Progmn
    Chapter3
    LoanOrl@nationProcednres
    Need fhwgthening




I
    from expanding CAIVRS to become the governmentwide prescreening
I   mechanism.

    F~HA screening of Single Family Housing loan applicants to determine if
    they owe delinquent debts to F~HA could be improved. A March 1989
    inspector general report found that 81 of 113 County Offices reviewed
    did not comply with F~HA procedures in approving loans for debtors
    with prior FmHA defaulted loans. Further, the inspector general reported
    that borrowers had received new loans after defaulting on prior E~HA
    loans. FmHA acquired, or is in the process of acquiring, property from 39
    percent of these debtors. To address this problem, I%HA had imple-
    mented a system whereby field office staff could utilize a computer
    inquiry screen to check applicants for prior FWA debts. However,
    County Supervisors are not required to use this system, and according to
    FmHA officials, most supervisors are not using it. In early 1990, FmHA
    plans to publish regulations requiring County Supervisors to use this
    system as part of its prescreening process. Further, this system does not
    identify certain critical information, such as loans which have been
    unsatisfactorily settled. A modification to identify unsatisfactorily set-
    tled debt was deferred so resources could be redirected to implement
    farm program legislation. This is currently scheduled for implementa-
    tion during May 1991,

    Although the agencies in our review, except F~HA, screen applicants
    internally for delinquent debt, none check with other federal agencies.
    OMB’S and Treasury’s goal to include other federal agencies in HUD’S
    internal screening system is an attempt to overcome automated system
    limitations which prevent agencies from checking with other federal
    agencies to determine if an applicant owes a delinquent federal debt.
    This is especially important since a study by SBA indicated that credit
    bureau reports, currently a primary source for federal agency delin-
    quent debt information, only showed known delinquent federal debt
    information less than 25 percent of the time.

    Another potentially useful screening tool is to match loan applicants
    against IRS’ delinquent tax files because (1) there is a large number
    (approximately 18.5 million) of delinquent taxpayer accounts and (2) IRS
    delinquencies are not reported to credit bureaus. However, no agency
    matched loan applicants against IRS delinquent tax files. The Debt Col-
    lection Act of 1982 specifically provides this authority to federal
    agencies.




    Page36                                GAO/AFIKDW12OMB’sNinc+PointProgram
                      Chapter 3
                      Loan Orighation Procedures
                      Need Strengthening




                      In 1986, we reported that this tool was not being used and at that time
                      was not practical primarily because of IRS' long response time. Since
                      then, little progress has been made toward developing this tool into a
                      viable credit management screening option. Agencies are still not using
                      this tool because of IRS' inability to provide this information promptly.
                      IRS’response time ranges between 1 and ‘2 months, which according to
                      officials at three of the five major federal credit agencies, is too long for
                      their loan approval processes. Also, an IRS official informed us that
                      agencies are not anxious to use this tool because of the stringent secur-
                      ity requirements for protecting tax data.

                      As an alternative to the current IRS screening procedures, guarantee
                      lenders as well as federal agencies have another option for obtaining tax
                      information. Under 26 U.S.C. section 6103(c) of the Internal Revenue
                      Code, if the applicant consents, tax information can be obtained from
                      IRS. According to an official in IRS' Office of Disclosure, information
                      obtained under this section of the code is not subject to the same secur-
                      ity requirements as that obtained without the loan applicant’s consent.
                      An IRSofficial informed us that this is often used by lenders when
                      processing private sector loans but he could not estimate how long it
                      took private lenders to obtain this information under section 6103(c).
                      We believe that screening loan applicants against IRSdelinquent tax
                      accounts would provide agencies with valuable information to use in
                      making loan decisions.


                      Another means to help ensure that agencies do not knowingly extend
SdmeApplicants Not    credit to applicants who owe delinquent federal debts is to have the bor-
R&quired to Certify   rower certify that he or she is not delinquent on other federal debts. OMB
They Do Not Owe       Circular A-l 29 and the Treasury Financial Manual credit supplement
                      instruct federal agencies to modify credit application forms to include a
Delinquent Federal    statement as to the applicant’s status on federal tax and nontax debts.
Debts
                      HUD'S Single Family Housing and Title I programs, SBA, and VA require
                      loan applicants to certify that they are not delinquent on other federal
                      debts. In addition, HUD and FI~IHA require participants on Multifamily
                      Housing loans to certify that no mortgage on a project in which they
                      have been involved has ever been in default, assigned to the govern-
                      ment, or foreclosed. However, Education and F~HA for its Single Family
                      Housing program do not require applicants to certify that they are not
                      delinquent on a federal debt. According to an Education official, such a
                      certification is not required because it is not part of the eligibility
                      requirements for receiving a student loan. However, a May 1988 opinion


                      Page 36                                 GAO/AFMD-W-12OMB’s Nine-Point Program
                      Chapter 3
                      Loan Origination Procedures
                      Need Strengthening




                      from Education’s Office of General Counsel concluded that Education
                      can (1) require applicants to certify that they are current on federal
                      financial obligations and (2) direct guarantee lenders to consider
                      whether a delinquent debt owed to the federal government demon-
                      strates a lack of credit worthiness. FmHA maintains that its current loan
                      application for the Single Family Housing program, which requires all
                      debts to be listed and warns that false statements could result in fines or
                      imprisonment, is sufficient. However, FIIIHA plans to include such a certi-
                      fication the next time its application is revised.

                      To require a certification regarding delinquencies on other federal debts
                      would impress upon the borrower the importance of repaying govern-
                      ment loans. In addition, Circular A-129 provides agencies with an
                      optional sample certification statement. Adopting this statement would
                      require minimal effort on the part of the agencies or the borrower and,
                      in our opinion, would help the agency assess the applicant’s ability and
                      willingness to repay.

   I
   I
                      OMB Circular A-129 and the Treasury Financial Manual credit supple-
Son$eApplicants Who   ment instruct federal agencies to suspend processing of applications for
Owk Delinquent        federal direct or guaranteed loans when applicants are found to be
Federal Debts Not     delinquent on a federal debt. Processing is not to be continued until the
                      debt is paid in full or satisfactory repayment arrangements are made.
Der/ied Credit        SBA and HUD procedures generally require that credit be denied to appli-
                      cants delinquent on federal debts, until the delinquency is resolved.
                      However, FIIIHA Rural Housing loan procedures, Education procedures,
                      and VA procedures do not prohibit making or guaranteeing loans to
                      applicants who have delinquent federal debts.

                      Agencies we reviewed have various reasons for their policies. According
                      to FmHA officials, the County Supervisor decides whether to extend Sin-
                      gle Family Housing credit to an applicant who owes a delinquent federal
                      debt. County Supervisors are required to deny credit to applicants with
                      unsatisfactorily settled F~HA debts; however, FIGA's Single Family
                      Housing regulations do not address other federal debts. Also, F~HA'S
                      Multifamily Housing regulations do not require that credit be denied
                      based on delinquent federal debts, Education believes it does not have
                      legislative authority to deny credit based solely on delinquent accounts
                      an applicant may have with another federal agency. According to VA
                      officials, even though not specifically stated in its regulations, it is VA'S
                      policy not to make or guarantee a loan to applicants who owe delinquent
                      federal debts. The decision to make a loan to a delinquent federal debtor


                      Page 37                                 GA0/APMD-ftO-12 OMB’s Nine-Point Program
                       Chapter3
                       Loan Origination  Procedurea
                       Need Strengthening




                       is made by the regional office after considering whether or not the delin-
                       quent debtor has arranged a satisfactory repayment schedule. In com-
                       menting on our report, VA stated that it would revise its instructions to
                       deny credit to applicants who are delinquent on federal debts.

                       We recognize that in some instances, such as Education loans, legislation
                       may not allow agencies to deny loans to applicants who already owe
                       delinquent federal debts. However, we believe that, agencies, where
                       allowed by program legislation, could improve the probability of collect-
                       ing loans if they denied loans to applicants who are found to be delin-
                       quent on any federal debts.


                       To ensure that borrowers understand actions the federal government
Soye Applicants Not    may take in the event of default and to impress upon the borrowers the
Required to Sign       consequences of not repaying loans, Circular A-129 and the Treasury
Cefiification of       Financial Manual credit supplement instruct agencies and lenders to
                       have borrowers sign a cert&ation which details the government’s
Knowledge of Debt      delinquent debt collection policies and procedures. SBA, VA, FITIHA, and
Collection Practices   HUD'S Single and Multifamily Housing programs require borrowers to
                       sign such a certification. While the other agencies included in our review
                       maintain that they verbally or otherwise inform borrowers of these poli-
                       cies and procedures, borrowers under HUD'S Title I program and Educa-
                       tion’s Stafford and Perkins loan programs are not required to sign a
                       certification that they have been fully advised of the government’s debt
                       collection policies and procedures.

                       HUD requires lenders participating in the Title I program to provide a
                       written notice to borrowers of HUD'S role in collecting delinquent Title I
                       loans. However, the notice does not include all actions that the federal
                       government can take in collecting the debt, and the borrower is not
                       required to sign the notice. HUD plans to require such a signature in the
                       future, but because this will require a regulatory change, the depart-
                       ment has not established a target date for its implementation.

                       In addition, Education does not require borrowers to certify that they
                       have been fully advised of the government’s debt, collection policies and
                       procedures. Education officials advised that they do not require such a
                       certification because they believe that current written disclosures pro-
                       vided by lenders are adequate. However, these disclosures do not specif-
                       ically list each of the actions that the federal government can take in the
                       event of default. Further, in 1988, we reported that an option for reduc-
                       ing potential defaults in Education’s Stafford Loan program would be to


                       Page 38
                   chapter 3
                   LOanOri@nation Procedures
                   Need Strengthening




                   require borrowers to sign such a certification4 This is especially applica-
                   ble to loan applicants who are relatively young and may be first-time
                   borrowers.

                   Although borrowers can be informed of these procedures without sign-
                   ing such a certification, requiring this certification would better impress
                   upon the borrower the importance of repaying a federal debt.


                   Chapter 2 discussed changes in loans receivable information which indi-
e Realistic Loan   cate that the government’s credit picture continued to deteriorate
        Fees       between fiscal years 1985 and 1988. One way of helping to reduce the
                   government’s losses is to charge loan origination fees. OMB Circular A-
                    129 instructs agencies to assess loan origination fees on direct and guar-
                   anteed loans in order to defray servicing and collection costs and to
                   cover as great a portion as possible of the estimated loan losses. How-
                   ever, in some instances agencies we reviewed do not charge fees, usually
                   because of legislative requirements, and most fees charged generally do
                   not compensate the government for the costs it bears when borrowers
                   default. Several agencies have recognized this, but proposals to increase
                   fees have generally been rejected by the Congress.

                   Loan origination fees are not assessed on FIIIHA’S Multifamily Housing
                   loans because of legislation which prohibits such fees. SBA’S fiscal year
                    1989 and 1990 appropriation acts prohibit SBA from establishing new
                   loan fees. Prior to 1989, SBA did not charge loan origination fees for its
                   Disaster Loan program because it believed such a fee would be contrary
                   to the program’s purposes. An official in SBA’S Disaster Assistance Divi-
                   sion explained that because these loans are made with subsidized funds
                   to help disaster victims, SBA believes that loan origination fees are inap-
                   propriate. In addition, fees are not assessed on FKIHA’SSingle Family
                   Housing loans. FI~IHA plans to draft procedures to assess a $75 loan origi-
                   nation fee on Single Family Housing loans, but no implementation date
                   has been set.

                   While Education charges a legislatively set 5 percent origination fee on
                   Stafford loans, it is not authorized to charge such fees under the Parent
                   Loans to Undergraduate Students and Supplementary Loans for Stu-
                   dents programs. Education officials stated that these loans are not sub-
                   sidized as much as Stafford loans, and Education, therefore, does not

                   “GuaranteedStudentLoans:Potential Default and CostReductionOptions(GAO/HRD-88-62BR,
                   January 7,198s).



                   Page 39                                     GAO/AFMD-W-12OMB’eNine-Point Program
Chapter 3
Loan Originntion Procedures
Need Strengthening




need the fees to offset program costs. However, Education guarantees
lenders a minimum rate of return based on the Treasury bill rate. In
addition, over the past several years, the loan volume and defaults
under these programs have substantially increased. In our 1988 report
on potential default and cost reduction options (see footnote 4), we pre-
sented the charging of loan origination fees for these programs as an
option for reducing the federal costs involved in administering the Staf-
ford Loan program. Proposed legislation5 would establish a 5-percent
loan origination fee for both the Parent Loans to Undergraduate Stu-
dents and Supplementary Loans for Students programs.

Both SBA, for its business loans, and VA charge legislatively set loan origi-
nation fees. The SBA fee is set at two percent of the loan amount. How-
ever, the Congress has rejected proposals to increase this fee which is
insufficient to defray administrative costs and estimated loan losses.
The Veterans’ Benefits Amendments of 1989 (Public Law 101-237, effec-
tive January 1, 1990) gave VA authority to generally charge a fee of 1.25
percent of the total loan amount.

HUD charges insurance premiums which vary by program. In May 1989,
we reported” that the insurance fund for the Single Family Housing pro-
gram is in sound financial condition despite significant losses in geo-
graphic areas experiencing economic problems. However, charges under
the Title I Manufactured Home Loan program have not been sufficient
to offset claim losses and, in October 1989, HUD revised its method of
collecting premiums on these loans in order to correct this problem. Most
of the premium charge is now collected during the early years of the
loan when the risk of default and claim losses are greatest. While premi-
ums for the fund which insures Multifamily Housing loans have gener-
ally not been sufficient to cover costs, HUD has not increased the
premiums because, according to HUD officials, the program is not
intended to be self-sufficient.

We realize that due to the nature of government loan programs, fees
may not cover all costs. However, loan origination fees can be used to
help defray agency administrative costs and estimated loan losses. This
would be especially beneficial to the government during a period where
it is facing a huge deficit. Periodic reviews of the adequacy of agency

“The Stafford Student Loan Default Prevention and Management Act of 1989, S. 668, was introduced
March 16, 1989, and passed the Senate on March 17, 1989.

“Financial Management: Federal Housing Administration’s Accounting Methods and Section 203(b)
Program (GAO/Am --89 Z@'iR, May 6,198Q).



Page 40                                           GAO/AFMJ&VO-12 OMB’s Nine-Point Program
              Chapter 3
              Loan origination Procedures
              Need Strengthening




              loan origination fees could support fee adjustment proposals to the Con-
              gress. This would help ensure that such fees cover, to the extent feasi-
              ble, administrative costs and loan losses while not adversely affecting
              program goals.


              Although the five agencies we reviewed progressed in implementing the
Conclusions   nine-point program initiatives addressing loan origination, they have not
               adequately utilized some significant loan origination tools. In particular,
              one agency was not effectively screening loan applicants to determine if
              they owed delinquent debts to the agency making the loan; two agencies
              did not require applicants to certify that they did not owe delinquent
              debts to the federal government; three agencies’ procedures did not spe-
              cifically require that credit be denied to applicants who owed delinquent
   /          debts to the federal government; and two agencies did not require bor-
              rowers to certify that they were aware of the government’s debt collec-
              tion policies and procedures. Because loan origination is a critical phase
              of the credit management cycle, it is important that agencies use all
              available credit management tools when extending credit. Together
              these tools provide agencies with a solid framework for protecting the
              government’s interests by helping to ensure the future collectibility of
              loans.

              An example of an effective loan origination tool is the HUD in-house
              screening system which we believe may be a potentially viable system
              for governmentwide screening for nontax delinquent debt. However, a
              system is not available which would effectively and promptly screen
              loan applicants against IRS’ delinquent tax files. Because of the large
              number of delinquent tax accounts, we believe the government’s ability
              and effectiveness in screening loan applicants could be greatly improved
              by resolving impediments preventing the matching of loan applicants
              against IRS’ delinquent tax accounts. Matching loan applicants against
              these accounts would not only provide agencies with information to be
              used in the loan making decision, but could also help encourage delin-
              quent taxpayers to bring their accounts up to date by informing them
              that additional credit will not be extended until the tax delinquency is
              resolved.

              Also, loan origination fees charged by agencies we reviewed are gener-
              ally not sufficient to cover administrative costs and estimated loan
              losses. In some cases, these fees are not intended to cover these costs.
              Further, in some instances, fees were not charged. Although we realize
              that it may be unrealistic to expect loan origination fees to cover all


              Page 41                                GAO/AFMD90-12 OMB’s Nine-Point Program
                          chapter3
                          Loan (h4glnatlon   Procedures
                          Need Strengthening




                          costs associated with government lending programs, we believe that the
                          government’s credit management could be improved if agencies charged
                          fees for all programs where legislatively allowed.


                          To improve loan origination procedures, we recommend that the Direc-
Redommendationsto         tor of the Office of Management and Budget and the Secretary of the
Ag$ncies                  Treasury, in conjunction with the Internal Revenue Service and affected
                          agencies, resolve impediments to prescreening loan applicants against
                          delinquent tax accounts.

                          We also recommend that

                      .
                      the Secretary of the Department of Education and the Administrator of
                      the Farmers Home Administration require program managers or private
                      lenders to modify loan applications to include an applicant’s certifica-
                      tion that he or she is not delinquent on federal debt;
                    . the Secretary of the Department of Veterans Affairs-for       VA'S Loan
                      Guaranty program- and the Administrator of Farmers Home Adminis-
                      tration-for   F~HA'S Rural Housing programs-require      program mana-
                      gers to deny credit to any loan applicant found to be delinquent on a
                      federal debt, until the debt is satisfactorily resolved;
                    . the Secretaries of the Departments of Education and Housing and Urban
                      Development require that program managers and private lenders mod-
                      ify loan applications to include a signed borrower’s certification that the
                      borrower has been advised of and understands the government’s debt
                      collection practices.

  1

                          OMB commented that (1) effective loan origination   is critical to prevent-
Agency Comments and       ing future losses, (2) there is a need for more agency compliance with
Our Evaluation            prescreening requirements, (3) federal assistance should generally be
                          denied to applicants who owe delinquent federal debts, and (4) loan
                          origination fees should cover servicing and collection costs. Treasury
                          believes that continued implementation of the nine-point program is
                          essential if long-term permanent changes are to be made in the federal
                          government’s financial management practices. We agree with Treasury’s
                          assessment, and our report emphasizes this major point.

                          VA agreed to revise existing instructionsto deny credit to applicants who
                          have outstanding federal debts unless they provide evidence that the
                          debts have been paid in full or a repayment plan is established.



                          Page 42                                 GAO/AFMD-90-12 OMB’s NinePoint Program
Chapter 3
Loan Origlnntion Procedures
Need Strengthening




Education partially agreed with our recommendation that loan applica-
tions be modified to include applicants’ certifications that they are not
delinquent on federal debt. Education commented that it will conduct
some analysis to determine the effectiveness of implementing this pro-
posal, but stated that it is concerned about the burden this would impose
on the total student loan population. In our opinion, the additional bur-
den imposed by asking loan applicants to sign statements that they are
or are not delinquent on a federal debt would be minimal.

HUD agreed with our draft report recommendation to obtain tax data
from IRS. SBA commented that it could require applicants to consent to its
obtaining tax data, but that the processes for obtaining such information
from IRS must be implemented to allow loan applications to be processed
promptly. VA stated that it would explore this option. In addition, OMB
commented that agencies should begin cross-checking against IRS delin-
quent tax files and stated that it is working with IRS on a prototype
match to identify and resolve specific operational problems and quan-
tify benefits, including the use of taxpayer consent forms.

IRS, however, opposed the use of taxpayer consents to obtain tax infor-
mation in this manner, IRS expressed its concern over the impact that
disclosing tax information can have on taxpayers’ confidence in the tax
system and discussed several criteria it believes should be met before
such disclosures are made. It also expressed its belief that it is unlikely
that this information can be obtained more quickly with taxpayer con-
sent than under the current procedures. In addition, it discussed its con-
cern about the added burden this would impose on IRS. It said that
agencies receiving tax information pursuant to a taxpayer consent are
not required to safeguard the information and that they are not subject
to penalties for unauthorized disclosure. IRS added that agencies should
be strongly committed to safeguarding this information. Further, it
raised legal concerns associated with this procedure. On this latter point,
in Tierney v. Schweiker, 718 F. 2d 449 (D.C. Cir. 1983), the court struck
down the notice-and-consent form used by the Social Security Adminis-
tration in administering the Supplemental Security Income benefit pro-
gram because (1) it did not meet IRS’ procedural requirements and (2) it
did not provide for knowing and voluntary consent.

We realize that the procedures we are proposing raise privacy and confi-
dentiality issues. However, the fact remains that IRS has a wealth of
information that we believe should be used by federal agencies and lend-
ers participating in their loan programs in making loans. Also, as
pointed out in this report, the government’s credit situation continues to


Page 43                                GAO/-30-12     OMB’s NinePoint Program
Chapter 3
Loan Oriation    Procedures
Need Strengthening




deteriorate, and the risk to the government from its credit programs
continues to grow. We believe that one means of helping to reduce this
risk is to screen applicants against delinquent tax accounts. Further, the
mechanism established in response to the Debt Collection Act of 1982
for federal agencies to obtain this information is not working because it
does not provide federal agencies with this information promptly. Also,
lenders of guaranteed loans originated in the private sector are denied
access to IRS data. Utilization of the consent we are proposing would pro-
vide additional information for private sector lenders to use in making
loan decisions. Moreover, the Tierney court recognized the possibility
for the legal use of consent forms. In this regard, the court stated that
“we intimate no views on whether another form-one which contains
no veiled threats and sets forth the substantive and procedural rights of
Benefits recipients- could result in knowing and voluntary consent.”
Federal agencies and lenders would, of course, need to be mindful of the
procedures set forth in Tierney.

In commenting on this issue, IRS stated that it would be willing to work
with federal agencies to obtain this information as quickly as possible
using currently available systems. This is in conformance with our rec-
ommendation that IRS, OMB, Treasury, and affected agencies resolve the
impediments which prevent the current system from providing agencies
with such information promptly. The key point in this issue is that fed-
eral agencies and their lenders be able to obtain this information
promptly.

Even though IRS is willing to work with federal agencies to provide this
information more expeditiously, developing the mechanism for doing
this on a governmentwide basis will take some time. Agencies are mak-
ing direct loans and private lenders are continuing to make government
guaranteed loans without the benefit of cross-checking with IRS to deter-
mine if the applicant owes a delinquent tax account. Because of IRS’ con-
cerns, we are modifying our original recommendation that certain
agencies use the consent form for obtaining tax information to be used
in the loan origination process and are now recommending that the Con-
gress require that the consent form be utilized on a test basis to evaluate
its effectiveness. (See chapter 6.) Such a test has been used to determine
the effectiveness of the tax refund offset program and the use of private
sector attorneys to collect delinquent federal debts.

HUD agreed with our recommendation that loan applications be modified
to include a borrower’s signed certification that he or she has been
advised of and understands the Government’s debt collection practices.


Page 44                                GAO/m90-12     OMB’s Nine-Point Program
Chapter 3
Loan Origination Procedures
Need Strengthening




The Department also agreed to modify those applications that do not
require this. Agriculture responded that FIIIHApublished regulations
requiring borrowers to sign a certification statement that they have
been advised of and understand the government’s debt collection prac-
tices. While Education disagreed with our recommendation that loan
applications be modified to include a signed borrower’s certification that
the borrower has been advised of and understands the government’s
debt collection practices, it is implementing procedures which partially
comply with the recommendation, namely drafting regulations which
require further disclosures to the borrower. However, it is not clear
whether Education will require the borrower to sign a certification
acknowledging that he or she has been advised of and understands these
collection practices. As we point out in the report, requiring signed certi-
fications would better impress upon the borrower the importance of
repaying a federal debt.




Page 45                                GAO/AFMD-Q&l2 OMB’e Nine-Point Pmgram
Chajpter 4

Account Servicing NeedsContinuedEmphasis


                      After credit is extended, agencies must service accounts in a manner
                      that best protects the government’s investment. Servicing encompasses
                      those actions required to maintain accounts in current status. OMB'S nine-
                      point credit management program instructs agencies to use modern busi-
                      ness techniques and automation to establish proper maintenance of files
                      and proper review and management of accounts. The nine-point credit
                      management program also directs agencies to sell loan assets to the pub-
                      lic without recourse.* OMB Circular A-129 sets forth several servicing
                      standards for federal agencies such as routine billing and up-to-date
                      loan file documentation reflecting accurate payment histories. In addi-
                      tion, OMB Circular A-129 states that agencies should require lenders of
                      federally guaranteed loans to maintain loan servicing documentation
                      consistent with the circular.

                      Agencies’ progress in improving servicing of loan accounts varied. Three
                      of the agencies we reviewed had particular success in lowering delin-
                      quencies by consolidating servicing and collection activities at regional
                      centers. Also, four of the programs conducted loan asset sales or allowed
                      prepayments during fiscal years 1987 and 1988, which served to reduce
                      government servicing actions by transferring them to the private sector.
                      On the other hand, several of the agencies were not adequately monitor-
                      ing private sector servicing of guaranteed loans. In addition, FKIHA’Sser-
                      vicing was hampered by inadequate automated systems.


                      HUD, SBA, and Education each consolidated routine servicing and collec-
&$vicing and          tion activities into regional centers for their Title I, Disaster, and Perkins
C+ection Activities   and Stafford Loan programs, respectively. According to these agencies,
Ckpsolidated          consolidation resulted in increased loan servicing efficiencies. For exam-
                      ple, HUD'S consolidation of 13 offices into one regional servicing and col-
                      lection center resulted in a 70 percent increase in collections as well as
                      reductions in staff years, travel costs, and write-offs, SBA and Education
                      also attributed improved credit management, such as increased collec-
                      tions and reduced staff hours, to the consolidation of operations. We did
                      not verify the efficiencies reported by HUD, SBA, and Education.

                      FmHA, which has over 1,900 County Offices, has not pursued efforts to
                      consolidate servicing and collection activities into regional centers. How-
                      ever, with OMB'S encouragement, F~HA has agreed to study the feasibility


                      ‘When a loan is sold without recourse, the federal government does not guarantee future payments of
                      interest and/or principal on the loan to the purchaser.



                      Page46                                             GAO/AFMD9O-12OMWsNinePointProgra1n




                                                                   ,
                      Chrrpter 4
                      Account Servidng Needs continued Emplmh




                      of separating staff responsibilities between loan origination and servic-
                      ing functions at the County Offices. This is because OMB is concerned
                      about the internal control implications of FIMA’S current organizational
                      structure in which the same individual can be responsible for approving,
                      servicing, and collecting loans. One option for doing this could be to
                      remove the routine servicing and collection activities from the County
                      Offices and consolidating them into regional centers. Because of suc-
                      cesses reported by SBA, HUD, and Education and the large number of
                      FKIHAfield offices, F~HA could use this study as a vehicle to assess the
                      feasibility of consolidating servicing and collection actions.

   1
   ,
                      One of the nine-point credit management program initiatives is for agen-
     ties Conducted   ties to sell loan assets to the public without recourse. In January 1986,
      Asset Sales/    the administration initiated a pilot sale of selected federal loan assets as
Prerbaylnents         part of the President’s fiscal year 1987 budget request. The goal of the
                      pilot sale was federal credit reform and financial management improve-
                      ments with an ancillary goal of generating budget receipts. OMB expects
                      administrative savings from selling loan assets without recourse because
                      the sales would transfer servicing and collection activities to the private
                      sector. Under the pilot loan sale program, the administration also
                      offered borrowers the opportunity to prepay their loans. The adminis-
                      tration plans to continue its sale of loan assets where this proves cost-
                      effective for the government.

                      Over the past several years, we have reported on various facets of the
                      government’s loan asset sales2 Our reports focused on requirements in
                      OMB'S loan asset sale guidelines that would have had a major impact on
                      the marketability of the loans and the ability to maximize net sale pro-
                      ceeds. In addition, we disclosed that the total amount of principal and
                      interest payments forgone by selling a loan is generally worth more than
                      the revenue derived from the sale, that loan sales are likely to have
                      some positive impact-albeit     difficult to quantify-on  credit manage-
                      ment, and the loan asset sales will not resolve our fundamental deficit
                      problem.

                      OMB Circular A-129 requires federal agencies to set forth loan asset sale
                      plans in their annual budget submissions to OMB which explain sale

                      “Loan Asset Sales: OMB Policies Will Result in Program Objectives Not Being Fully Achieved (GAO/
                           D-86-79 September 26,199s); Loan Asset Saks: An Assessment of Selected Sales (GAO/AFMD
                      88-24, Febn&y 19,lSSS); Federal Assets: Information on Completed and Proposed Saks (GAO/
                      RCED-88-214FI3, September 21,1988); Borrower Loan Prepayments: OMB Guidelines Need To Be
                      Strengthened (GAO/AFMD-89-19, January 11,1989).



                      Page 47                                           GAO/AF’Mb9O-12 OMB’s Nine-Point Program
                        Chapter 4
                        Account Servicing Needs Continued Emphasie




                        plans and expected improvements to be realized. During fiscal years
                         1987 and 1988, F~HA, HUD, SBA, and VA conducted loan asset sales and/or
                        prepayments in the programs we reviewed. For these programs, in fiscal
                        years 1987 and 1988, loans valued at $4.8 billion were sold or prepaid
                        for $3.3 billion. Generally these sales resulted in the transfer of servic-
                        ing responsibilities to the private sector. Education did not sell any of its
                        student loans because of anticipated low returns (estimated at up to 2
                        cents per dollar). In fiscal years 1989 and 1990, SBA has been legisla-
                        tively prohibited from conducting loan asset sales.

   1


                        The federal government’s emphasis on guaranteed rather than direct
SorneAgencies’          loan programs has increased the importance of establishing and imple-
Monitoring of Lenders   menting effective lender monitoring procedures. OMB Circular A-129 and
an(l Guaranty           the Treasury Financial Manual credit supplement instruct federal agen-
                        ties to monitor lenders to ensure that they meet the same loan servicing
Agkncies Is             standards required of direct loan programs. However, neither document
Inadequate              provides specific guidance to the agencies as to how to accomplish this
                        requirement. Further, the March 1989 President’s Council on Integrity
                        and Efficiency report concluded that agencies need to improve their con-
                        trols over lenders and to require that lenders (1) fulfill their loan
                        processing, servicing, and supervision responsibilities and (2) file accu-
                        rate and prompt claims for loan losses. While agencies generally have
                        procedures to monitor lenders, including guaranty agencies, we believe
                        that Education, SBA, and VA could improve their lender monitoring. We
                        have previously reported on problems in HUD’S lender monitoring in its
                        Single Family Housing program.3 However, we did not perform a
                        detailed analysis of HUD’S monitoring because of an ongoing GAO review
                        on this specific issue. In addition, we did not review &HA’S lender moni-
                        toring practices because the Rural Housing program has very few guar-
                        anteed loans.

                        Agencies have not been given specific guidance on monitoring lenders.
                        While OMB Circular A-129 instructs agencies to establish lender perfor-
                        mance goals and to monitor lender actions, it does not cite specific meth-
                        ods for doing so. Similarly, the Treasury Financial Manual credit
                        supplement states that agencies should ensure that lenders exercise due


                        “Stronger Internal Controls Over HUD Single-Family Mortgage Insurance Programs Would Discourage
                        Fraud (GAO@FED 86-4, May 13,1986);                         : Agency Actions To Discourage Single
                        pamily Mortgage Insurance Fraud (GAO/                    , June 3, 1986); Internal Controls: Weak-
                        nessesin HUD’s Single Family Housing Appraisal Program (GAO/RCED-87-166, September 30,
                        1987).



                        Page 48                                            GAO/AFMD-90-12 OMB’s Nine-Point Program
’


    Chapter 4
    Account 8ervkhg NeedsContimd Emphasis




    diligence* in servicing direct loans; however, guidelines for doing so are
    not provided. Treasury is currently studying guaranteed loan programs
    and will address the need for lender performance and monitoring guide-
    lines. This project is expected to be completed in early 1990.

    Guaranteed loans insured by Education have risen sharply over the past
    several years- from $36.8 billion as of September 30, 1985, to approxi-
    mately $47.6 billion at the end of fiscal year 1988. However, Education
    has reduced its monitoring of lenders and has not met its guaranty
    agency monitoring goals. Guaranty agencies are responsible for adminis-
    tering the Stafford Student Loan program within their respective states,
    encouraging participation by lenders and verifying that lenders use due
    diligence to collect on all claims filed under the guarantee provisions. In
    November 1986, Education issued regulations requiring guaranty agen-
    cies to follow specific due diligence procedures in collecting defaulted
    loans. As part of its monitoring activities, Education conducts on-site
    reviews of lenders, guaranty agencies, and schools. In a January 1988
    report,” we reported that Education’s on-site reviews of lender activities
    had decreased steadily- from over 800 lender reviews in fiscal year
    1981 to fewer than 200 such reviews in fiscal year 1987. Education offi-
    cials told us that the agency increased its monitoring to 325 lender
    reviews during fiscal year 1988 and that the reduction from 1981 was
    due to a lack of staff and other resources. In commenting on a draft of
    this report, Education stated that it completed 519 lender reviews in fis-
    cal year 1989 and that guaranty agencies conducted about 700 lender
    reviews during fiscal years 1988 and 1989.

    In addition to monitoring lenders, Education monitors the activities of
    the guaranty agencies because of their important responsibilities just
    outlined. While Education has a goal of reviewing each guaranty agency
    at least every other year, it reviewed 10 guaranty agencies in fiscal year
    1988 and 13 guaranty agencies during fiscal year 1989. This represents
    about 48 percent of its goal. Education, however, plans to increase its
    guaranty agency reviews to 24 in fiscal year 1990. The importance of
    closely monitoring guaranty agencies is evidenced by an April 1988 Edu-
    cation inspector general report which detailed inadequate recordkeeping
    and documentation at some of these agencies. According to the Treasury


    4Due diligence is defined as practices at least as extensive and forceful as those generally practiced
    by financial institutions.
    “Guaranteed Student Loans: Potential Default and Cost Reduction Options (GAO/HRD-88-52BR,
    January 7, 1988).



    Page 49                                                GAO/APMD-90-12OMB’s Nine-Point Program
Chapter 4
Account Sexvicing Needs Continued Emphasis




Financial Manual credit supplement, adequate documentation provides
the foundation for all servicing and collection activities.

We believe that regular site visits are an effective method of monitoring
guarantee lenders as well as guaranty agencies to ensure compliance
with Education’s requirements. In order to allow Education to perform
more on-site reviews, Congress passed legislation which allowed Educa-
tion to increase its staff by 90 positions to conduct reviews of lenders,
guaranty agencies, and schools during fiscal year 1989.

According to OMB, because SBA'S credit programs are moving from direct
to guaranteed loans, the agency needs to direct its future credit manage-
ment efforts towards ensuring that lenders follow OMB Circular A- 129
prescreening and servicing provisions. As part of its efforts to monitor
lenders, SBA procedures require their field offices to make annual visits
to lenders with more than three outstanding loans. These visits are to
include a review of at least 10 percent of each lender’s SBA guaranteed
loan portfolio. However, an SBA fiscal year 1988 review of internal con-
trols at the field offices found that 21 of the 67 offices reviewed did not
comply with SBA'S procedures. SBA assesses the risk of adverse impact of
not performing lender visits as high. According to SBA officials, the
agency does not have sufficient staff to visit lenders regularly. In addi-
tion, SBA'S fiscal year 1988 Federal Managers’ Financial Integrity Act
report identified field office staffing inadequacies as a material weak-
ness. We believe that SBA'S credit management program could be
improved if SBA performed annual on-site lender visits.

Although VA guarantees loans made by thousands of lenders, it has no
formal written agreements with these institutions. Further, the other
guarantee programs in our review require formal, written, lender agree-
ments. OMB believes that lender agreements are necessary and estab-
lished a fiscal year 1989 goal for VA of developing a standardized loan
contract for guarantee lenders and assessing penalties for lenders that
fail to service loans in accordance with the contract. VA maintains that
formal agreements with lenders are not necessary because its current
lender certifications on their loan documents are sufficient. However,
these certifications only list prescreening requirements, not servicing or
collection policies and procedures that lenders must follow. In our opin-
ion, formal written agreements protect the government’s interest by
requiring participating lenders to comply with specific servicing require-
ments Such agreements could also prescribe specific penalties for lend-
ers who do not meet government servicing standards.



Page 60                                      GAO/AFMD-90-12 OMB’s Nine-Point Program
Chapter 4
Account Servicing Needs Continued Emphaab




In addition to the above, a March 1989 VA inspector general report stated
that VA'S Regional Offices were not enforcing lender servicing require-
ments. The review found that VA was not applying available limitations
or sanctions to improve lender compliance with VA requirements. For
example, in the case of poor lender performance, VA can reduce or refuse
to pay lender claim costs; however, VA did not reduce claim costs in any
of the Inspector General’s sample cases although evidence of poor per-
formance was found. In addition, the Inspector General found that VA
Regional Office officials did not effectively monitor or control lender
actions in about 72 percent of the cases reviewed.


OMB Circular A-129 requires agencies to (1) ensure that efficient mecha-
nisms are in place to collect and record payments and (2) provide sup-
port for servicing activities. Effective automation is essential to
properly manage large loan portfolios because manually updating and
retrieving accurate account data can hinder credit management effec-
tiveness. Although each of the major credit agencies we reviewed had
problems with automated systems, we found that FmHA'S automated sys-
tem problems were a major impediment to progress in the credit man-
agement area. Long-standing automated systems problems, such as the
systems’ inability to generate accurate and up-to-date account informa-
tion, necessitate FmHA'S reliance on extensive manual operations and are
a major cause of the agency not fully implementing the prescreening,
servicing, and collection provisions of the nine-point credit management
program and OMB Circular A-l ‘29. Weaknesses in FTIIHA'S servicing caused
by system problems are addressed in the remainder of this section.
Examples of FmHA prescreening and collection activities that are
impaired by automated system problems are further discussed in chap-
ters 3 and 5, respectively.

Since 1982, the Agriculture Inspector General has issued several reports
detailing problems with FmHA'S automated systems, such as untimely
and inaccurate data on loan transactions and delinquencies, incorrect
charging of interest on loans, and an inability of systems to generate
management information on collection activity. In addition, Agricul-
ture’s fiscal year 1989 Federal Managers’ Financial Integrity Act report
identifies several material weaknesses in the Rural Housing program,
which either relate to automated system problems or a lack of auto-
mated capabilities, For example, the fiscal year 1989 report states that
the Rural Housing “existing accounting system does not serve the
Agency’s needs in respect to fundamental accounting and financial con-
trol functions.”


Page 61                                     GAO/APMD-90-12 OMB’s Nine-Point Program
              Chapter 4
              Account Servicing Needs Continued Emphasis




              EmHA recognizes the loan servicing limitations of its current system. For
              example, an FmHA issue paper discussing the feasibility of an automated
               collection system pointed out that field offices’ ability to contact bor-
               rowers promptly has been hampered because of the lack of automation
               and the present system of distributing delinquency reports 30 days after
              payments are due. According to the Treasury Financial Manual credit
               supplement, rapid and aggressive action on delinquent accounts is criti-
              cal for successful debt collection. Also, due to system constraints, there
              are time lags between when a payment is received and when it is posted
              to the borrower’s account. This time lag, up to 8 days for Single Family
              Housing borrowers, restricts FmHA'S implementation of credit manage-
              ment initiatives because the account balances might not reflect actual,
              up-to-date information, For example, due to this time lag, FmHA requires
              its field offices to verify the status of accounts to be sent to credit
              bureaus because the agency cannot rely on the accuracy and complete-
              ness of its account data. Also, FI~IHA field offices must verify the account
              status (such as whether an account has a pending bankruptcy) of all
              accounts sent for IRStax refund or federal employee salary offset
              because the automated system may not be up-to-date. F~HA implemented
              this verification procedure in 1987 in order to reduce the number of bor-
              rower complaints and erroneous offsets. FmHA is attempting to alleviate
              some of these problems through various automation projects. However,
              an August 1988 Agriculture inspector general report detailed a lack of
              progress due to the lack of effective and efficient software and training.
              in addition, in a July 1989 letter to F~HA, OMB expressed concern about
              FmHA'S automation because the agency has spent millions of dollars and
              considerable staff time on systems that are now obsolete and inadequate
              to handle loan servicing functions, Currently, FmHA is planning to rede-
              sign, replace, or enhance its automated systems at an estimated cost of
              at least $100 million over the next 5 to 7 years.


              OMB'S Circular A-129 and the Treasury Financial Manual credit supple-
Conclusions   ment set forth sound guidance which agencies’ can use to implement the
              nine-point credit management program initiatives related to account ser-
              vicing. While the agencies we reviewed had progressed in improving
              account servicing, several had not effectively utilized certain account
              servicing techniques which are basic to effectively implementing OMB'S
              nine-point credit management program. Specifically, three agencies are
              not monitoring lenders or guaranty agencies sufficiently to ensure their
              compliance with OMB Circular A-129.




              Page 62                                      GAO/APMD-90-12 OMB’s Nine-Point Program
                      Chapter 4
                      Account Servicing Needs Continued Emphasis




                      Several of the agencies in our review reported increased loan servicing
                      and collection efficiencies as a result of consolidating these activities at
                      a few sites. In our opinion, the consolidation of servicing and collection
                      activities is a potential means of effectively utilizing agency credit man-
                      agement resources, especially for those agencies which have a large
                      number of field locations.

                      Automated systems are essential to effectively service loan portfolios
                      that have a large number of accounts. However, because of long-
                      standing system problems, FmHA’S account servicing activities have been
                      hampered. Although FmHA recognizes this problem, its progress in cor-
                      recting it has been slow.


                      To improve servicing activities, we recommend that the Administrator
Recommendationsto     of the Farmers Home Administration address the feasibility of consoli-
Agencies              dating servicing and/or collection activities into regional centers. This
   b/                 should be part of FmHA’S planned review of its County Office organiza-
   ,                  tional structure.

                      To improve lender monitoring, we recommend that the Secretary of the
                      Department of Education and the Administrator of the Small Business
                      Administration require program managers to implement the procedures
                      set forth in their agencies’ regulations, such as regularly scheduled site
                      visits. We also recommend that the Secretary of the Department of Vet-
                      erans Affairs require program managers to develop and use formal
                      lender agreements which include specific lender requirements and pen-
                      alties for not achieving these requirements.


                      OMB strongly supported the report’s conclusion that more needs to be
Agehcy Comments and   done to improve loan servicing through upgraded financial systems and
Our jWaluation        other improvements, such as consolidation of servicing centers. It also
                      agreed with the need for strong management controls for guaranteed
                      loans, including guidelines for lender performance and monitoring.

                      Treasury agreed that agencies need to fully implement appropriate
                      credit management tools and monitor their lenders. However, it pointed
                      out that credit management often competes with program operations for
                      scarce resources. While we recognize that agencies have many compet-
                      ing priorities and limited resources, we believe that the magnitude of the
                      government’s credit management problem, in particular the potential
                      losses that could result from the increasing shift to guaranteed instead


                      Page 63                                      GAO/AFMD-90-12 OMB’s Nine-Point Program
Chapter 4
Account Servicing Needs Continued Emphasis




of direct loans, dictates that credit management and program operations
complement instead of compete with each other.

OMB agreed that, to protect the government’s interests, formal written
agreements should be required from lenders receiving federal guaran-
tees. VA, however, commented that it is not necessary to incorporate
lender agreements into the loan guaranty program because of the certifi-
cations lenders must make on the various forms VA requires and because
VA can adjust or deny a claim based on a breach of these certifications.
However, as we point out in this report, these certifications only list
prescreening requirements and do not address servicing and collection
policies and procedures lenders must follow. Also, VA'S Inspector General
found that the agency was not applying available sanctions to improve
lender compliance because of a lack of specific lender servicing require-
ments in VA'S regulations. We believe lender agreements would be a valu-
able mechanism for specifying lender requirements and for holding
lenders accountable. Since VA guarantees such a large number of loans
(in fiscal year 1988, VA guaranteed 234,709 loans valued at $17.3 bil-
lion), we believe that the added legal weight of signed agreements
between VA and the lenders specifying responsibilities, rights, and sanc-
tions will further protect the government’s financial interest.

Agriculture commented that it believed our section on F~HA'S automated
systems did not accurately and fairly present all pertinent facts. Agri-
culture stated that significant improvements have been made in modern-
izing its automated systems and cited specific examples such as the
installation, in the field offices, of multifunction workstations. Our
report is not intended to be an overall analysis of FmHA'S automated sys-
tems but includes a section on FmHA'S systems as they pertain to the
agency’s implementation of credit management initiatives. Although
FmHA may have progressed in modernizing its automated systems, we
believe that there are still significant internal control and credit manage-
ment problems associated with those systems. For example, Agricul-
ture’s Federal Managers’ Financial Integrity Act report, dated
December 28, 1989, states that FI~IHA has not implemented software mod-
ifications for OMB Circular A-l 29 requirements such as assessing admin-
istrative costs, reporting to credit bureaus, classifying loans, screening
applicants, reporting to IRS, and writing off loans. Further, OMB and
Treasury have identified F~HA'S automated systems as an impediment to
implementing credit management initiatives.

Agriculture also took issue with our statement that FI~IHA'S automated
systems could not generate accurate and up-to-date account balances.


Page 64                                      GAO/AFMD-90-12 OMB’s Nine-Point Program
    chapter 4
    Account Servicing Needs Continued Empludm




,   FmHA field offices do not verify account balances prior to FmHA authoriz-
    ing IRStax refund offsets. However, because this information may not be
    in the automated system, field offices verify account statuses, such as
    whether a borrower has a pending bankruptcy, before referring
    accounts to IRS.F~HA implemented this verification procedure in 1987 in
    order to reduce the number of borrower complaints and erroneous off-
    sets. Also, field offices must manually verify accounts prior to referring
    delinquent accounts to credit bureaus. This is primarily because FITIHA
    cannot rely on the accuracy and completeness of its account data
    because of the up-to-8-day delay in posting borrower payments, dis-
I   cussed in this chapter.

    Education agreed with our recommendation that program managers be
    required to implement the procedures set forth in their agencies’ regula-
    tions, such as requiring regularly scheduled site visits, In its comments,
    SBA reiterated its policy of regularly scheduled field office site visits to
    lenders. As discussed in the report, an SBA review of field office internal
    controls disclosed that 21 of the 67 offices reviewed did not comply with
    this policy. Therefore, we believe our recommendation to SBA is valid.




    Page 55                                     GAO/AF’MD-90-12 OMB’s Nine-Point Program
fiogress Made,but More EmphasisNeededon
C/ollectingand Writing Off Delinquent Debt

                      It is imperative that federal agencies make every reasonable effort to
                      collect delinquent debt. The Debt Collection Act of 1982 and other legis-
                      lation gave agencies tools to implement successful delinquent debt col-
                      lection procedures. Also, OMB'S nine-point credit management program
                      instructs federal agencies to (1) report accounts to credit bureaus,
                      (2) offset federal income tax refunds, (3) offset federal employee sala-
                      ries, (4) refer accounts to private collection firms, and (6) refer accounts
                      to the agencys’ general counsel or the Department of Justice for litiga-
                      tion. OMB directs agencies to use these delinquent debt collection tools
                      within their overall collection strategy where they are most appropriate.
                      In addition to collection tools, the nine-point credit management pro-
                      gram instructs agencies to write off accounts that have been identified
                      as uncollectible and to report closed-out debt to IRSas income to the
                      debtor. Further, the Debt Collection Act of 1982 generally requires agen-
                      cies to assess delinquent debtors interest, penalties, and administrative
                      costs.


                      In 1986, we reported that agencies were slow in implementing the Debt
More Can Be Done to   Collection Act of 1982. Though progress in implementing this act dif-
Cqllect Delinquent    fered by agency, we found that most agencies were not (1) reporting
D@bt                  delinquent accounts to credit bureaus, (2) offsetting federal income tax
                      refunds or federal employee salaries, (3) using private collection firms,
                      or (4) assessing delinquent debtors interest, penalties, and administra-
                      tive costs. Further, some agencies were not reporting closed-out
                      accounts to IRS as income to the debtor.

                      During this review, we found that, generally, the agencies we reviewed
                      made progress in implementing these initiatives though more can be
                      done to collect and write off delinquent debt. Since 1986, the agencies
                      we reviewed made the most credit management progress in reporting
                      accounts to credit bureaus and in offsetting federal income tax refunds
                      and federal employee salaries. Although the use of private collection
                      firms has increased, referrals of more accounts earlier in the collection
                      process would improve agencies’ collection activities. Also, several
                      projects have been undertaken to improve the litigation of delinquent
                      federal debt claims and decrease the litigation backlog. Limited prog-
                      ress, however, has been made in assessing interest, penalties, and
                      administrative costs on delinquent debts.




                      Page 56                                GAOjAFMD-96-12 OMB’s Nine-Point Program
                            Chapter 6
                            Progress Made, but More Empha.& Needed
                            on Collecting and Wrking Off
                            Delinquent Debt




Eligibjle Accounts          The Debt Collection Act of 1982 allows federal agencies to report delin-
Genedally Reported to       quent consumer debt to credit bureaus after certain procedures’ are sat-
                            isfied. Use of this tool is intended to encourage delinquent debtors to
Credik Bureaus              make their accounts current, discourage current debtors from becoming
                            delinquent, and provide information to federal credit granting agencies
                            to identify applicants who are already delinquent on federal debts. Also,
                            OMB Circular A-129 instructs federal agencies to report all commercial
                            and delinquent consumer accounts in excess of $100 to credit bureaus.
                            All of the agencies in our review, except F~HA, reported accounts to
                            credit bureaus.

                            In April 1989, E~HA published regulations describing its procedures for
                            reporting delinquent Single Family Housing accounts to credit bureaus.
                            FI~IHA will report only accounts sent to IRS for tax refund offset. In fiscal
                            year 1988, these accounts totaled about seven percent of the eligible
                            delinquent Single Family Housing accounts. F~HA plans to report only
                            those accounts sent to IRS for tax refund offset because automated sys-
                            tem constraints require manual verification of all accounts to be sent to
                            credit bureaus. This manual verification is necessary since the agency
                            cannot rely on the accuracy and completeness of its account data. When
                            its modified automated system for Single Family Housing is fully opera-
                            tional, FmHA plans to report all delinquent Single Family Housing
                            accounts to credit bureaus. FmHA began to report Multifamily Housing
                            accounts to credit bureaus in November 1989. As discussed in chapter 3,
                            since agencies are not cross-checking with other federal agencies but are
                            obtaining credit reports, full credit bureau reporting by all agencies is
                            currently the most effective means for agencies to identify applicants
                            who are delinquent on federal debt.


Offset Programs Generally   Federal agencies can use several different offset tools to collect delin-
Succ$3sful                  quent debt. For example, IRSis authorized, until 1994, to offset taxpayer
                            refunds to satisfy delinquent federal debts. Also, the Debt Collection Act
                            of 1982 authorizes federal agencies to offset salaries of federal employ-
                            ees who owe delinquent federal debt. OMB Circular A-129 instructs fed-
                            eral agencies to use these tools.

                            One of the most successfully implemented delinquent debt collection
                            tools is federal income tax refund offset. Treasury reported that since

                            ‘For example, agencies must notify delinquent consumer debtors in writing 60 days prior to referral
                            that the debt is delinquent and that it will be referred to credit bureaus unless appropriate repayment
                            arrangements are made.



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Progrem Made, but More Emphasis Needed
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Delinquent Debt




inception of the program in 1986 through December 1988, the govern-
ment collected $872 million. In 1988 alone, $349 million was collected in
this program. We found that income tax refund offset was implemented
for all of the programs we reviewed with consumer accounts except for
VA'S Vendee loans (loans made to purchasers of VA property inventory)
and some of Education’s Stafford loans. Agencies cannot use federal
income tax refund offset to collect delinquent commercial debt because
IRS has not developed the capability to offset those accounts. In com-
menting on this report, IRS stated that it is developing a test to determine
the feasibility of a business refund offset program. However, it stated
that because of the extensive administrative and system modifications
to the current debtor master file that would be necessary, it is unlikely
that a business offset program would be operational for 1992.

Because VA Vendee loans were not part of VA'S automated receivable sys-
tem, the agency could not offset federal income tax refunds.” In Novem-
ber 1988, VA modified its system and plans to use federal income tax
refund offset in accordance with OMB requirements in 1990.

While Education accounted for about 72 percent of the government’s tax
refund offset collections, many delinquent Stafford loan program loans
were not referred to IRSfor offset. This was because Education generally
relied on the guaranty agencies to select accounts to be assigned to Edu-
cation for IRS offset purposes. Prior to fiscal year 1990, Education did
not mandate the assignment of guaranty agency accounts to Education
for IRS offset purposes because it did not have the systematic capability
and capacity to track these accounts and collect them by other means.
To the extent that Education can more efficiently collect than guaran-
tors, it intends to exercise its mandatory assignment option when it is in
the Federal fiscal interest to do so.

Another frequently used delinquent debt collection tool is federal
employee salary offset. As of November 1988, the government collected
$68 million in voluntary repayments and offsets of federal employee
salaries. We found that all of the programs we reviewed with consumer
accounts, except HUD'S Single Family Housing program, had imple-
mented federal employee salary offset.




?rior to 1989, this also prevented VA from reporting accounts to credit bureaus, using private collec-
tion firms, and offsetting federal employee salaries for vendee loan accounts.



Page 58                                              GAO/AF’MD-90-12 OMB’s NinePoint Program
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Progress Made, but More JSmphaeia Needed
on Collecting and Writing Off
Delinquent Debt




The Debt Collection Act of 1982 allows federal agencies to use private
collection firms to recover debts owed to the government. In addition,
OMB Circular A-129 states that all accounts 6 months or more past due
should be turned over to a collection firm unless the account is in an
internal workout group,:’ eligible for offset, or in litigation.

Except for Education which separately contracts with private collection
firms, the General Services Administration (GSA) contracts for the ser-
vices of collection firms and makes them available to federal agencies.
We previously reported4 that some agencies were reluctant to use pri-
vate collection firms because of their belief that (1) agency staff could
collect the debt better, (2) collection agencies would not be sensitive to
the programs’ goals and objectives, and (3) collection agencies would
concentrate on collecting easier debt.

Agencies have referred accounts to private collection firms sporadically.
For example, our May 1987 report on private collection firms,” disclosed
that during the first year of the GSA debt collection contract, agencies
were slow in referring accounts to private collection firms. Specifically,
in fiscal year 1986, more than 94 percent of the accounts referred were
referred in the final 3 months of the fiscal year. In our current review,
we found that during fiscal year 1988, more than 70 percent of the
accounts referred were in the final 3 months of the fiscal year instead of
during the normal collection process. In addition, although SBA and VA
refer accounts to private collection firms, they do not routinely refer
them after 6 months, as instructed by OMB Circular A-12.9. To realize
optimum benefits from private collection firms, it is important that
accounts be referred in the normal course of collection activities instead
of concentrating referrals at the end of the fiscal year.

Education was the only agency extensively using private collection
firms. For example, Education has been using private collection firms
since 1981, and through fiscal year 1988, had referred over 1.6 million
accounts valued at $2.4 billion. However, Education has not referred
accounts to private collection firms since November 1988. Education’s
contracts with collection firms, which expired November 1989, stipulate

“A group within an agency whose sole purpose is to resolve, or attempt to resolve, seriously delin-
quent debts.
4Debt Collection: Billions Are Owed While Collection and Accounting Problems Are Unresolved
GWAFMD        -86-39 , May 23,1986).

“Debt Collection: First Year Collection Efforts Under the GSA Contracts (GAO/AFMD-87-23, May 16,
1987).



Page 69                                              GAO/AFMD-90-12 OMB’s Nine-Point Program
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Progress Made, but More Emphasis Needed
on Collecting and Writing Off
Delinquent Debt




that accounts will not be referred during the final year of the contracts.
This is to give the collection firms ample time to work the accounts that
were referred in the prior years and return all accounts to Education by
the expiration of the contracts, While Education initially established the
award date for February 1989, it now plans to award the contracts in
early 1990. This was primarily because of delays on the part of the con-
tractor developing Education’s new debt collection system and Educa-
tion’s delays in awarding the new debt collection contracts. According to
Education officials, in an attempt to better monitor and control contrac-
tor performance and to create competition among the private collection
firms, the Department will require private collection firms, under the
new contracts, to maintain accounts on its new debt collection system.

While Treasury encouraged the use of the GsA-contracted private collec-
tion firms in the interim, Education decided not to do this. Education
officials informed us that GSA collection contractors were not used dur-
ing this transition period because Education did not want to place
accounts with these contractors and then have the accounts returned
and placed with the new Education contractors. Further, the officials
stated that they could not require the GSA contractors to maintain the
accounts on the new Education debt collection system. Since Education
does not plan to award the new private collection firm contracts until
early 1990, the agency’s decision not to use the GSA contractors will
mean that no newly-acquired Education accounts were referred to pri-
vate collection firms for over 1 year.

FIIIIIA does not utilize collection firms. FmHA believes that its fiscal year
1987, 1988, 1989, and 1990 appropriation acts prohibit such use by stat-
ing that unless otherwise provided in the act, none of the funds appro-
priated or otherwise made available in the act could be used by the
Farmers Home Administration to employ or otherwise contract with pri-
vate debt collection agencies to collect delinquent payments. However,
GAO (see footnote 5) and Agriculture’s Office of the General Counsel
agree that this appropriations authority neither prohibits nor requires
F~HA to use GSA'S debt collection contractors.

Also, IIUL)does not use private collection firms for its Single and Multi-
family Housing programs. HUD chose to continue to use its own staff to
collect delinquent Single and Multifamily Housing program loans
because it believes it is more efficient. However, HUD does use private
collection firms for its Title I program. In April 1989, HUD advised OMB
and Treasury that it would continue to expand its use of private collec-
tion firms.


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                                Chapter 5
                                Progress Made, but More Emphasis Needed
                                on Collecting and Writing Off
                                Delinquent Debt




                                We fully support the continued use of private collection firms and OMB'S
                                directive that they be used earlier in the debt collection process. Using
                                private collection firms is an effective means of providing agencies with
                                additional resources for improving their debt collection capabilities at
                                no cost to the agency (since the contractors’ fees can be passed to the
                                debtor). Agencies could improve their credit management programs if
                                they routinely referred accounts in the normal course of their collection
                                activities.


Initia ives Implemented to     OMB’S  nine-point credit management program and OMB Circular A-l 29
Reduce Litigation Backlog      instruct agencies to promptly refer seriously delinquent accounts to the
      1                        agencies’ General Counsel or the Department of Justice. As we testified
                               in April 1988,” one of the most serious problems facing debt collection is
                               a backlog of litigation. By the end of fiscal year 1988, Justice had 84,340
       ,                       accounts worth $7.6 billion referred from agencies. Also, in fiscal year
       I                       1988 alone, Justice collected $479 million on delinquent agency debt. In
       I                       addition, the general counsel’s office at four of the five major credit
       I                       agencies litigate certain accounts.
       /
       /                       Due to recent concerns over the litigation backlog at the Department of
      I                        Justice, several initiatives have been undertaken by Justice and some of
      //
                               the credit agencies to alleviate this problem. The following are examples
     /                         of some of the steps taken during fiscal years 1987 and 1988 to address
     I/
                               this problem:

                             . Justice started a 3-year pilot program to evaluate the use of private
                               attorneys required by the Debt Collection Amendments (P.L. 99-578).
                             . In conjunction with this pilot program, Justice contracted for a comput-
                               erized system, the Central Intake Facility, to receive all data on debts
                               for the pilot districts. This facility is designed to serve as a data bank
                               for all debts *Justice receives for litigation.
                             . ,Justice increased VA’S authority to litigate debts to $5,000.
                             . Agriculture’s Office of the Inspector General is working with Justice to
                               test the use of contract investigators in assisting with cases.




                               “Justice Department: Impediments Faced in Litigating and Collecting Debts Owed the Government
                               (GIGO/T-GGD-88-26, April 15, 1988).



                               Page 6 1                                          GAO/APMD-90-12 OMB’s Nine-Point Program
                           Chapter 6
                           Prognw Made, but More Emphaeie Needed
                           on Collecting and Writing Of’f
                           Delinquent Debt




Interest, Penalties, and   Unless otherwise prohibited by statute or contract, the Debt Collection
Administrative Costs       Act of 1982 generally requires agencies to assess delinquent debtors
                           (1) a minimum interest rate based on the average investment rate for
Ge;ClerallyNot Charged     the Treasury tax and loan accounts, (2) a penalty charge of up to 6 per-
                           cent per annum for accounts more than 90 days past due, and
                           (3) charges to cover the costs of processing and handling delinquent
                           debt. In 1986, we reported that agencies were not collecting such inter-
                           est, penalties, and administrative costs on delinquent debt. Since that
                           time, the agencies we reviewed have made limited progress in this area.
                           While none of the agencies in our review charged interest, penalties, and
                           administrative costs as specified in the Debt Collection Act of 1982 or
                           other applicable legislation, some agencies did assess some charges.

                           Although VA charges interest and administrative costs under the author-
                           ity of the Veterans’ Rehabilitation and Education Amendments of 1980,
                           it does not charge the rate required by this law, This law specifies the
                           interest rate and administrative costs to be charged to VA’S delinquent
                           debtors. To the extent not precluded by the terms of the loan agreement,
                           the law requires that interest be accrued based on Treasury’s borrowing
                           rate, which for calendar year 1989 was 7 percent. However, as we
                           reported in 1986 (see footnote 4), 1987,7 1988: and 1989,” VA charges
                           delinquent debtors four percent interest because of automated system
                           constraints. VA determined that extensive reprogramming would be nec-
                           essary to change to the interest rate prescribed by law, and this modifi-
                           cation is expected to be completed by 1991. In our report on VA’S fiscal
                           year 1987 financial statements (see footnote S), we recommended that
                           VA reevaluate the priority given the computer software reprogramming
                           workload to determine whether the modification to change the interest
                           rate can be implemented earlier than 1991.

                           The Veterans’ Rehabilitation and Education Amendments also require VA
                           to charge delinquent debtors the administrative costs of collecting delin-
                           quent debt. To comply with this law, VA establishes an annual average
                           cost of collecting delinquent debt which is added to the delinquent
                           accounts monthly. VA also charges delinquent debtors the cost of litiga-
                           tion Although VA does not charge the specific delinquent debtor the cost

                           7Financial Audit: Veterans Administration’s Financial Statements for Fiscal Year 1986 (GAO/
                           AF’MD _87 _38 , duly 29, 1987).

                           HFinancial Audit: Veterans Administration’s Financial Statements for Fiscal Years 1987 and 1986
                           (m/AFMD      _89 - 23 , November 30,1988).

                           “Financial Audit: Veterans Administration’s Financial Statements for Fiscal Years 1988 and 1987
                           (GAO/mD      -89 -69 , September l&1989).



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Delinquent Debt




of using a private collection firm, a VA official told us that this cost is
included in the annual average cost of collecting delinquent debt applied
to delinquent accounts monthly. VA does not charge delinquent debtors a
penalty because the Veterans’ Rehabilitation and Education Amend-
ments of 1980 do not provide for charging such a cost.

None of the other agencies in our review charged delinquent debtors
additional interest as required by the Debt Collection Act. Also, only
IWHA and HUD'S Single and Multifamily Housing programs charged delin-
quent debtors a penalty. In August 1988, Education published regula-
tions to assess an administrative charge on delinquent debt; however,
according to an Education official, the agency will not implement the
additional administrative charge until after the new private collection
firm contracts are awarded.

The Debt Collection Act requires agencies to charge delinquent debtors
the administrative costs related to collecting delinquent debts. In addi-
tion, OMB Circular A-129 instructs agencies to add the cost of private
collection firms to the delinquent amount referred to the collection con-
tractor. Except for Education, HUD (for its Single and Multifamily IIous-
ing programs), and SBA, agencies we reviewed were not assessing
delinquent debtors administrative costs. In particular, only Education
charges delinquent debtors the administrative costs of using private col-
lection firms. However, HUD'S Single and Multifamily Housing programs
charge other types of administrative costs. HUD'S Title I program does
not assess administrative costs because they are not provided for in the
original loan agreement. HUD officials informed us that the Department
is revising its Title I regulations to permit HUD'S administrative cost to be
assessed to debtors. Currently, SBA attempts to recover the cost associ-
ated with liquidating the assets of defaulted borrowers. In addition, MA
plans to assess delinquent debtors the cost of using private collection
firms in 1990 after its automated system is modified.

Although FI~IHA does not use private collection firms, the agency plans to
assess other administrative charges such as a fee for using federal
income tax refund offset. However, substantial automated system
changes are needed prior to assessing such costs, but the modification to
make these changes is inactive due to resources being redirected to
implement provisions of the Housing and Community Development Act
of 1987 and other automation priorities. The target date for implement-
ing these changes is August 1991. Assessing interest, penalties, and
administrative costs on delinquent debt is important as a deterrent



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                          Chapter 6
                          Prugresa Made, but More Emphasis Needed
                          on Collecting and Writing Off
                          Delinquent Debt




                          against delinquencies and would help offset the costs of attempting to
                          collect overdue accounts.


                          At the end of fiscal year 1988, federal agencies reported over $14 billion
Write-off and Close-      in loans delinquent 360 days or more. This accounts for 6.4 percent of
o t Procedures Need       the loan receivables and represents an increase of 36.6 percent since the
t 4 Be Strengthened       end of fiscal year 1986. Because of their age, many of these delinquen-
                          cies are candidates for write-off. Since the probability of collection
                          decreases as debts become older, good financial, program, and credit
                          management dictates that delinquent accounts be periodically and sys-
                          tematically reviewed for write-off and close-out. Effective write-off and
   /                      close-out procedures ensure proper accounting for the costs of credit
 I/,                      programs and allow agencies to focus efforts on delinquent accounts
                          with the greatest potential for collection. In addition, the nine-point
                          credit management program instructs agencies to write off accounts
                          that have been identified as uncollectible and to report closed-out
                          accounts to IRSas income to the debtor.

                          OMB Circular A-129 and the Treasury Financial Manual credit supple-
                          ment provide a two-step process as guidance for writing off and closing
                          out accounts upon which collection activity has been terminated pursu-
                          ant to the Federal Claims Collection Standards. In the first stage, agen-
                          cies need to identify and remove uncollectible accounts through
                          termination and write-off. The second stage involves closing out written-
                          off accounts. Close-out consists of the administrative tasks which
                          remain after termination and write-off, including, for example, report-
                          ing written-off debt to IRS as income to the delinquent debtor.

                          The agencies included in our review have instituted write-off and close-
                          out procedures to varying degrees. However, in some instances, agen-
                          cies’ credit management programs could be strengthened by improving
                          write-off and close-out procedures. We found that F~HA (for its Single
                          Family Housing program), Education, and HUD need to further empha-
                          size write-off procedures. Also, FmHA, SBA, VA (for its Veterans Loan
                          Guaranty program), and HUD (for its Single Family and Multifamily
                          Housing programs) do not report closed-out accounts to IRS as income to
                          the debtor.


More Emphasis Needed on   Although all agencies in our review have instituted write-off proce-
Write-off Procedures      dures, we found that FmHA'S Single Family Housing program, Education,
                          and HUD need to place more emphasis on them. In addition, in 1988, the


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Progress Made, but More Emphaeia Needed
on Collecting and Writing Off
Delinquent Debt




President’s Council on Integrity and EfficiencyI” found that the write-off
provisions of OMB Circular A-129 were not properly adhered to by fed-
eral agencies. Specifically, some agencies (1) did not properly establish
claims, (2) did not write off seriously delinquent debt, and (3) prema-
turely wrote-off accounts before all collection efforts had been
exhausted. An August 1988 Treasury task force on write-offs reported
that write-off guidelines and regulations were frequently confusing, not
sufficiently detailed, and not properly applied. The Treasury Financial
Manual credit supplement issued in Januarv 1989 provided comprehen-
                       --                                  ”




sive guidance on write-offs and close-outs.

If an FmHA Single Family Housing debtor is unable to pay his/her loan in
full, RIIHA will pursue a debt settlement. This settlement may include
accepting less than the outstanding principal of the loan or writing off
the debt. In August 1988, the Agriculture Inspector General reported
that information submitted by debtors was seldom verified prior to
processing and approving applications for debt settlement, and proce-
dural guidelines were not sufficient to ensure effective and consistent
processing of debt settlement cases. Further, the report questioned deci-
sions to write off portions of farm and Single Family Housing debts
when the debtor appeared to have the capability to repay all or a part of
the amount owed in the two states reviewed. FmHA agreed to revise its
debt settlement regulations in response to the report’s recommendations.

Education, as well as the guaranty agencies participating in the Stafford
loan program, have written off few loans. This was primarily because
Education has not established write-off procedures for guaranty agen-
cies and the Department’s procedures do not comply with OMB Circular
A-l 29. For example, for the accounts assigned from guaranty agencies,
Education procedures do not differentiate between written-off and
closed-out accounts. In commenting on a draft of this report, Education
stated that Education and guarantors have been reluctant to write-off
defaulted student loans because data shows that defaulted student
loans, unlike other consumer loans, often become more collectible with
age. Also, Education commented that it has drafted a directive setting
forth its policy decision to write-off all loans which have reached the
Federal statute of limitations (6 years) and close-out all loans which
have reached the period of limitations for administrative offset (10
years). Education recently provided guaranty agencies with write-off

 “‘President’s Council on Integrity and Efficiency: Coordinated Review of Guaranteed Loans, Segment
I, Implementation of the Administration’s Nine Point Credit Management Program (September 15,
iT3mjT----



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                           Delluquent Debt




                           procedures and is currently revising its internal write-off and close-out
                           procedures, which it plans to finalize in 1990.

                           While HUD writes off Title I debt, it does not write off debts under the
                           Single and Multifamily Housing programs. Write-offs were not made in
                           these programs because prior to 1988, HUD'S procedures did not provide
                           for a receivable being established for properties acquired by HUD
                           through foreclosure. Thus, there was no amount to write off. In 1988,
                           HUD published regulations to establish receivables in the Single Family
                           Housing program for the difference between the amount owed by the
                           debtor and the value of the acquired property. Currently, HUD is con-
                           ducting a pilot program to determine the best method to implement
                           these regulations. After the pilot, appropriate delinquent debts will be
                           written off.


Cldsed-Out Accounts Need   The Internal Revenue Code requires taxpayers to include some dis-
to Be Reported to IRS      charged debts in their calculations of gross income. This requirement
                           includes debts closed out by federal agencies. Therefore, except in cer-
                           tain cases, such as Title 11 bankruptcy, IRS considers federal agencies
                           closed-out debt income which the taxpayer should report. When federal
                           agencies report closed-out debt, IRS matches this data against individual
                           tax returns to determine if the debtor reported the closed-out debt as
                           income which is then taxable. OMB Circular A-129 and the Treasury
                           Financial Manual credit supplement direct agencies to report closed out
                           accounts to IRS. HUD for its Title I program, VA for its vendee loan pro-
                           gram, and Education report closed-out accounts to IRS as income to the
                           debtor. However, F~HA, SBA, VA (for its Veterans Loan Guaranty pro-
                           gram), and HUD (for its Single and Multifamily Housing programs) do not
                           report closed-out accounts to IRS.

                           Agencies cite various reasons for not reporting closed-out accounts to
                           IRS. FmHA does not report these accounts to IRS as income to the debtor
                           because federal agencies are not specifically required by legislation to
                           do so. Further, FmHA believes that reporting closed-out accounts to IRS as
                           income to the debtor would generate negative public reaction. However,
                           in commenting on our report, FmHA agreed to begin reporting closed-out
                           accounts to IRS as income to the debtor early in 1990. While SBA has not
                           reported closed-out debts to IRS, it intends to do so early in 1990.
                           Although VA manually reported some closed-out Veterans Loan Guar-
                           anty accounts to IRS as income to the debtor, it suspended this reporting
                           in June 1988 because of several state law suits which challenge the
                           validity of establishing certain debts. (Vendee loans, however, are


                           Page 66                                   GAO/AFMD-90-12 OMB’s Nine-Point Program
          Chapter 5
          Pmgreas Made, but More Emphasis Needed
          on Collecting and Writing Off
          Delinquent Debt




          reported.) As previously mentioned, HUD is currently conducting a pilot
          program to close out Single Family Housing debts.

 I
          Although the agencies we reviewed have progressed since 1986 in imple-
dusions   menting delinquent debt collection tools, some significant debt collection
          and write-off procedures have not been adequately utilized. Specifically,
          except for FmHA, agencies we reviewed are reporting delinquent
          accounts to credit bureaus. Also, the five major credit agencies have
          been generally successful in implementing the IRSincome tax refund and
          federal employee salary offset programs. However, IRScannot accept
          commercial accounts for offset because of a lack of system capability.

          In addition, agencies we reviewed have not fully utilized private collec-
          tion firms. While referrals have been made, these have not been done as
          a routine step in the collection process. Although Education has exten-
          sively used private collection firms in the past, because of contracting
          and automated system problems, accounts have not been referred since
          November 1988. Although two agencies included in our review assessed
          penalties, four assessed some administrative costs, and one assessed
          interest, the agencies in our review have generally not assessed legisla-
          tively required interest, penalties, and administrative costs on delin-
          quent debts. The use of these charges would serve as an incentive to
          delinquent debtors to repay and as a deterrent to future delinquencies.
          Also, these charges would generate revenue to the government which
          would offset at least some of the costs associated with collecting from
          delinquent debtors.

          Three agencies included in our review have generally not established
          proper procedures for identifying and systematically writing off uncol-
          lectible debts, and four agencies did not report closed-out debt to IRSas
          income to the debtor. The guidance provided by OMB, Treasury, and the
          Federal Claims Collections Standards is sufficient for agencies to estab-
          lish appropriate write-off and close-out procedures. It is essential for
          federal agencies to develop close-out procedures which cease collection
          activity on written off debts and report these debts, when appropriate,
          to IRS as income to the debtor. Removal of such accounts from agencies*
          receivables would allow agencies to place increased resources on those
          accounts which have a higher potential for collection. Also, the report-
          ing of closed-out accounts to IRS, where appropriate, would provide for
          collecting the taxes applicable to the extra income realized by the debtor
          when a debt is closed out.



          Page 67                                  GAO/APMD-o-12   OMB’e Nine-Point Program
                          Chapter 5
                          Progress Made, but More Emphasis Needed
                          on C4.lecting and Writing OfY
                          Delinquent Debt




                          To improve debt collection and appropriately       write off uncollectible
Recommendationsto         accounts, we recommend that:
  encies
                      .    The Administrator of the Farmers Home Administration require pro-
                          gram managers to report eligible delinquent Rural Housing accounts to
                          credit bureaus as soon as practicable.
                      .   The Secretary of Education require the guaranty agencies to temporar-
                          ily assign delinquent accounts to Education so that these accounts can
                          be referred by Education to the Internal Revenue Service for federal
                          income tax refund offset.
                      .   The Secretaries of Housing and Urban Development and Veterans
                          Affairs and the Administrator of the Small Business Administration
                          require program managers to refer delinquent accounts to private collec-
                          tion firms in the normal course of their collection activities and in
                          accordance with OMB Circular A-l 29.
                    .     The Secretaries of the Departments of Education, Housing and Urban
                          Development, and Veterans Affairs and the Administrators of the Small
                          Business Administration and the Farmers Home Administration (for its
                          Rural Housing loans), assess interest, penalties, and administrative costs
                          on delinquent debts, pursuant to the Debt Collection Act or other appli-
                          cable statutes.
                    .     The Secretary of Housing and Urban Development and the Administra-
                          tors of the Small Business Administration and the Farmers Home
                          Administration (for its Rural Housing loans), report closed-out accounts
                          to the Internal Revenue Service as income to the debtor.


                          OMB agreed that agencies cannot relax their efforts to recover delinquent
Agency Comments and       debts and strongly emphasized its support for the continued use of debt
Otir Evaluation           collection tools such as tax refund offset, salary offset, referral of delin-
                          quent debtors to credit bureaus, and use of private collection firms. In
                          particular, it agreed that private collection firms can be used more
                          extensively and commented that Treasury will be reviewing delinquent
                          debts due agencies to ensure full and timely referral. HUD agreed with
                          our recommendation to refer delinquent debts to private collection firms
                          in the normal course of its collection activity. SBA commented that it
                          believes its philosophy of conducting a maximum internal collection
                          effort prior to referring an account to a private collection firm is valid.
                          The agency cited its extensive and effective field office network and
                          that less than 1 percent of the dollar amount of all accounts referred
                          was collected. SBA commented that after field office personnel have pur-
                          sued all avenues available to them and consider a debt no longer collec-
                          tible, they refer the account to a collection agency. We believe that if SBA


                          Page 68                                   GAO/AFMD-!IO-12 OMB’s Nine-Point Program
Chapter 5
Progress I&de, but More EmphaarS Needed
on Collecting and Writing Off
Delinquent Debt




exhausts all collection efforts before referring accounts to collection
firms, then it can not reasonably expect private collection firm to have a
high collection rate. We also believe that SBA should comply with OMB'S
requirement to refer accounts 6 months past due. SBA pointed out that,
early in 1990, it would begin making more referrals of accounts at those
field offices with high delinquency rates.

VA commented that it is referring debts to private collection agencies in
the normal course of its collection activities and that OMB and Treasury
have allowed VA to refer accounts 1 year past due. As we discussed in
this report, agencies have tended to sporadically refer accounts to pri-
vate collection agencies. As we pointed out, most of the accounts during
the first year of the program and during fiscal year 1988 were referred
during the last 3 months of the fiscal year instead of evenly throughout
the year. Also, during fiscal year 1989, VA referred accounts to private
collection firms in only 4 of 12 months. As pointed out in Treasury’s
comments to this report, agencies are faced with limited resources, and
credit management activities often compete with program operations for
these scarce resources. We believe that use of private collection firms
can help compensate for these limited resources. We support OMB'S
requirement that agencies routinely refer accounts to private collection
firms after they are 6 months overdue. As we stated in the report, we
believe that this will optimize the benefits associated with using private
collection firms.

HUD agreed with our recommendation to charge interest, penalties, and
administrative costs in accordance with the Debt Collection Act. VA
stated that it is currently responding to this recommendation under our
 1986 report. (See footnote 4.) We addressed this issue again because it
has been almost 4 years since this recommendation was made. SBA cited
its current policy of charging interest on all loans. However, the interest
and penalties referred to by SBA are the normal interest charges associ-
ated with the loan and are not the additional interest and penalty
charges required by the Debt Collection Act of 1982. F~\HA commented
that it recently amended regulations to authorize collection of a fee for
processing insufficient fund checks, but implementation is dependent
upon software changes. While Education neither agreed nor disagreed
with this recommendation, it stated that in fiscal year 1990, it will begin
charging an administrative fee of $3 per account per month to default-
ers to cover servicing costs. It also commented that, in many cases, Edu-
cation can not assess penalties because the vast majority of promissory
notes do not have a provision which allows the loan holder to assess



Page 69                                   GAO/~90-12   OMB’s Nine-Point Program
Chapter 5
Pmgrem Made, but More Fmphah   Needed
on CoIleetIng and WrMng Ofl
Delinquent Debt




penalties. This is one of the major reasons why we have made this rec-
ommendation. The Debt Collection Act was passed in 1982, but these
loan agreements have not been revised to allow for the assessment of
penalties required under the Act. We realize that Education is concerned
that such penalties may become a disincentive to repayment, but the
Congress specifically required the assessment of such penalties in the
Debt Collection Act of 1982.

Education agreed with our recommendation to require guaranty agen-
cies to temporarily assign delinquent accounts to Education so that
these accounts can be referred to the Internal Revenue Service for fed-
eral income tax refund offset. The Department intends to use this man-
datory assignment option when it is in the government’s fiscal interest
to do so.

HUD, SBA, and FYIMAagreed with our recommendation to report closed out
accounts to IRS.IRSalso agreed with this recommendation and stated
that agencies are required to report any accounts written off as uncol-
lectible as income to the debtor.




Page 70                                 GAO/AF'MDBO42OMB’s Nine-Point Program
Chapter 6

Additional Legislation Would Help Improve
Credit Management

               While agencies have progressed in implementing OMB’S nine-point credit
               management program, there are additional opportunities for strengthen-
               ing credit management. We have seen growing losses in recent years,
               and even these do not depict the full extent of our losses to date or our
               future risk of tens of billions of dollars in losses from these programs. It
               is incumbent on agencies to use all the credit management tools at their
               disposal, and they must improve the quality of accounting information
               so that the government knows where it stands on these programs.

               Some of our solutions are not new. In our 1986 governmentwide report
               on federal agencies’ implementation of the Debt Collection Act of 1982,’
               we recommended that a statutory requirement be provided for many of
               the debt collection tools available to federal agencies. We believe this
               will result in increased compliance. Since that report, several legislative
               proposals, such as the. Federal Management Reorganization and Cost
               Control Act of 1986,’ the Omnibus Debt Collection and Credit Manage-
               ment Act of 1986,” and the Federal Credit Management and Debt Collec-
               tion Improvement Act of 1987; have called for many of these tools.
               However, these proposals were not enacted. Nevertheless, we believe
               that many of the requirements in these proposals make sense. We
               believe that the federal government’s overall credit management pro-
               gram would be strengthened by (1) amending the Debt Collection Act of
               1982 to require federal agencies to use certain credit management tools
               and (2) providing agencies additional authority to manage credit pro-
               grams and collect debts, such as allowing IRSto provide taxpayers’
               addresses to agencies under authority other than the Federal Claims
               Collection Act.




               ’ Debt Collection: Billions Are Owed While Collection and Accounting Problems Are Unresolved
               @AO/AFMD -86_39 , May 23,1986).
               “S. 2230 (99th Cong.), introduced March 26, 1986.

               “H.R. 4669 (99th Gong.), introduced April 22, 1986.
               4S. 1270 (100th Gong.), introduced May 21, 1987.



               Page 71                                               GAO/AFMD-SO-12 OMB’s Nine-Point Program
                       Chapter 6
                       Additional Legislation Would Help Improve
                       Credit Management




                       OMB’S nine-point credit management program, Circular A-l 29, and the
Credit Management      Treasury Financial Manual credit supplement provide a sound frame-
Wkld Be Improved by    work for managing federal credit programs. However, not every agency
Legislatively          is following this guidance, and in some cases, as discussed previously,
                       agencies are precluded from applying certain techniques and practices.
Rebuiring Certain
Crkdit Management      We support, where consistent with program legislation, legislating tech-
                       niques and credit management practices such as prescreening loan appli-
Tools                  cants to determine (1) credit worthiness, (2) ability to repay, and (3) if
                       they owe delinquent debts to the federal government. Further, the agen-
                       cies should deny credit to applicants who owe delinquent debts to the
                       federal government until satisfactory repayment arrangements are
                       made. These credit management tools were discussed in chapter 3. In
                       addition, credit management programs would be improved if agencies
                       were legislatively required, where consistent with program legislation,
                       to report delinquent accounts to credit bureaus, use private collection
                       firms, and report closed out debt to IRS as income to the debtor.

                       We also believe that credit management would be improved if agencies
                       required applicants, as a precondition to obtaining credit, to consent to
                       tax information being obtained from IRS and then used in the loan
                       approval process. However, we realize that this raises privacy and con-
                       fidentiality issues and work load concerns for IRS. Therefore, we believe
                       that this procedure should be performed on a test basis similar to that
                       used for the tax refund offset program and the use of private sector
                       attorneys to collect delinquent federal debt. This issue and IRS’ concerns
                       about it are discussed in the agency comments section of chapter 3.

  I
                       The use of IRS taxpayer information is another area where legislation is
Crkdit Management      needed. IRShas numerous taxpayer addresses which unfortunately agen-
Would Be Improved if   cies cannot always obtain to aid their collection efforts. In 1986, we rec-
IRS Provided           ommended that the Congress amend the Debt Collection Act to explicitly
                       authorize IRSto provide taxpayer address information to agencies pursu-
Ta$payer Addresses     ing debt collection activities under authorities other than the Federal
to ;AgenciesUnder      Claims Collection Act. (See footnote 1.) The Federal Claims Collection
                       Act, as amended by the Debt Collection Act, allows agencies to disclose
Authority Other Than   taxpayer addresses obtained from IRS to their employees and agents for
Federal Claims         the purpose of locating delinquent debtors. IRS refuses to disclose
Collection Act         addresses to agencies unless they cite the Federal Claims Collection Act
            I          as their collection authority.




                       Page 72                                     GAO/AFMD-90-12 OMB’s Nine-Point Program
                                                                                                             L




                        Chapter 6
                        Additional Legislation Would Help Improve
                        Credit Management




                        In the 1986 report, we identified several agencies to which II~Shad
                        denied such access. IRS has denied such access to FmIIA and the Federal
                        Deposit Insurance Corporation because they cite legislation other than
                        the Federal Claims Collection Act as their collection authority. For
                        example, F&A cites the Consolidated Farm and Rural Development Act,
                        as amended, and the Housing Act of 1949, as amended, as its collection
                        authority. An IRS official advised us that this situation has not changed
                        since our 1986 report.

                        Although agencies can assert the Federal Claims Collection Act as
                        authority to obtain IRS address information without abandoning their
                        other claim authorities, the information obtained can only be used for
                        purposes consistent with and authorized by that act. Use of taxpayer
                        address information to accomplish collection under debt collection
                        authorities, which may give the agency more authority to pursue collec-
                        tions, is prohibited.

                        Federal agencies’ collection activities would be strengthened if the Con-
                        gress amended the Federal Claims Collection Act to clarify the right of
                        federal agencies to obtain and disclose IRS address information while
                        pursuing debt collection activities under authorities other than this act.
                        This would allow FmMA and other agencies to obtain IRS address informa-
                        tion without having to narrow their claims collection process.


                        Chapter 2 discussed agencies’ reporting of receivable information and
Ne&l for Reliable       how the government’s credit situation has continued to deteriorate. That
Finbncial Information   chapter pointed out that the government’s credit picture is worse than
on @edit Programs       reported because of some agencies’ inaccurate or inconsistent reporting
                        of receivable information.

                        The Congress is provided information in OMB’S budget documents on
                        agencies’ efforts to implement the nine-point program. For example,
                        OMB’S Management of the United States Government addresses agencies’
                        activities related to the nine-point program. The Debt Collection Act
                        requires OMB to annually report to the Congress on the management of
                        agency debt collection activities.

                        As we recently reported,‘l growing losses indicate clearly the risks asso-
                        ciated with these programs. In the past 3 fiscal years, for example,

                        “Federal Credit and Insurance: Programs May Require Increased Federal Assistance in the Future
                        (GAWAFMD -4    90 - 11, November 16, 1989).



                        Page 73                                            GAO/AF%ID-90-12 OMB’s Nine-Point Program
              chapter 0
              Additional Leglrdation Would Help Improve
              Credit Management




              defaults on guaranteed loans and loan delinquencies have increased sub-
              stantially. However, the full magnitude of losses already incurred has
              not been reported because of long-standing deficiencies in financial man-
              agement systems and the inconsistent application of accounting princi-
              ples by some agencies responsible for administering federal credit
              assistance programs. It is apparent that federal financial assistance
              beyond that already provided by the government will be needed to pay
              for growing losses.

              In order for the Congress and the Office of Management and Budget to
              make budgetary decisions and adequately plan for future funding of
              federal credit assistance and insurance programs, it is important that
              they be fully aware of certain factors. These include program costs in
              terms of losses, the amount of those costs being recovered through fees
              and premiums, the source of any financing being provided, and the
              amounts of the shortfalls.

              In our 1986 report (see footnote l), we also concluded that to ensure the
              reliability of financial data, agencies should be required to have periodic
              audits of receivable information. In that report, we recommended that
              the Congress amend the Debt Collection Act to require this, a recommen-
              dation we still believe valid. We also believe that agencies should pro-
              vide audited receivable information to the Congress and notify their
              authorizing committees of their implementation of the credit manage-
              ment techniques addressed in this report so that the Congress can use
              this information, as well as information on agencies’ efforts to imple-
              ment the nine-point program, when making agency budgetary decisions.


              In 1986, we recommended that the Debt Collection Act be amended to
Coiwlusions   provide a statutory basis for many of the debt collection tools available
              to federal agencies. We believe that by using all applicable credit man-
              agement techniques, agencies would have effective comprehensive
              credit management programs. While some of these techniques are now
              included in OMB'S Circular A-129 and the Treasury Financial Manual
              credit supplement, we continue to believe that a statutory basis for
              many of them would further encourage agency use and help ensure that
              these concepts are used by future administrations.

              Also, reliable financial information on credit programs, as well as infor-
              mation on agencies’ success in implementing the nine-point program, is
              important if policymakers, such as the Congress and the Administration,



              Page 74                                     GAO/AFMD-!30.12 OMB’s Nine-Point Program
chapter 6
Additional Lq#datlon   Would Help Improve
Credit Management




are to make sound decisions on the future of the government’s credit
management programs.


Because of the magnitude of the government’s credit management prob-
lems, we recommend that the Congress amend the Debt Collection Act to
require agencies, where consistent with program legislation to

contract for debt collection services;
offset salaries of government employees who owe delinquent debts;
report information about an individual’s delinquent debts to credit
reporting agencies;
use administrative offset to recover delinquent debts;
prescreen loan applicants to determine credit worthiness, ability to
repay, and if they owe delinquent debts to the federal government,
including IRS;
deny credit to applicants who owe delinquent debt to the federal
government;
refer all appropriate debts to IRS for the purpose of offsetting delinquent
debtors’ tax refunds; and
report closed out debts to IRSas income to the debtor.

When enacting new credit programs or when reauthorizing existing pro-
grams, the Congress should specify the applicability of these techniques.

We also recommend that the Congress legislatively direct the Secretaries
of the Departments of Housing and Urban Development and Veterans
Affairs and the Administrators of the Farmers Home Administration
and the Small Business Administration, in coordination with IRS,to test
the use of consent forms for obtaining and using tax information in the
loan making process. The affected agencies could designate selected pro-
grams, including those with guaranteed loans, for participation in the
test.

We also recommend that the Congress require IRS to disclose address
information to agencies pursuing debt collection activities under author-
ities in addition to the Federal Claims Collection Act.

In addition, we recommend that the Congress require agencies to pro-
vide it with (1) audited financial information on their receivables and
delinquencies and (2) information on the implementation of the credit
management techniques addressed in this report. The Congress could



Page 76                                     GAO/AF’MD-90-12 OMB’e Nine-Point Program
                      chapter 6
                      Additional Lerpslation Would Help Improve
                      Credit Management




                      then use this, as well as information on agencies’ efforts to implement
                      the nine-point program, when making agency budgetary decisions.


                      Both OMB and Treasury agree there is a need for additional legislation to
A ency Comments and   improve the government’s credit management program. OMB agreed with
0 4r Evaluation       our legislative proposals and commented that it would also like to see
                      legislation implemented to (1) create a uniform system of enforcement
                      procedures for the collection of federal debt, (2) make the tax refund
                      offset program permanent, and (3) extend the Department of Justice’s
                      authority to use private sector attorneys to collect delinquent debts. OMB
                      commented that flexibility should be built into any legislative changes
                      so that agencies might implement a debt collection and credit manage-
                      ment program that makes the best use of the tools and techniques under
                      the nine-point program while not forcing an agency into the application
                      of an initiative that is not appropriate or cost-effective. Treasury agreed
                      that the Debt Collection Act needs to be strengthened, if only to clarify
                      that the tools and techniques authorized by the act are not optional. It
                      believes that any new legislation should require agencies to use all
                      appropriate collection tools and that any legislative changes should con-
                      sider the relationship between program legislation and credit manage-
                      ment and the differences between direct and guaranteed loan programs.
                      Treasury’s comments also included specific legislative changes which it
                      believes are needed.

                      Some of OMB'S and Treasury’s specific proposals parallel recommenda-
                      tions we have made. Others they present may have merit, but we did not
                      evaluate them as part of this review. We also believe that the legislative
                      proposals presented in this report are necessary if the government is to
                      obtain maximum benefits from its credit management efforts. The legis-
                      lative recommendations in this report do not call for a blanket legisla-
                      tive requirement for agencies to implement the nine-point program, but
                      rather propose legislatively requiring certain tools which we believe,
                      based on this report and our prior work in the area, are essential to good
                      credit management. Further, our report and recommendations address
                      the restrictions program legislation may place on credit management
                      activities. We also believe that any new legislation should consider the
                      differences between direct and guaranteed loan programs.

                      OMB agreed with the need for agencies to submit audited financial infor-
                      mation on their receivables and delinquencies. It commented that this
                      information would provide a useful indicator of the status of an



                      Page 76                                     GAO/AFMB9@12 OMB’s Nine-Point Program
Chapter 6
Additional Legislation Would Help Improve
Credit Management




agency’s credit management program and serve as a method for alerting
policy officers to emerging default trends and other credit problems.

OMB, IRS, and HUD agreed with our recommendation to broaden the
authority to release taxpayer addresses for debt collection purposes.




Page 77                                     GAO/AFMD-S&12 OMB’s Nine-Point Program
Apbndix     I

SWnmaryof Changesin ReceivableInfformation


                                       This appendix provides information on the governmentwide changes,
                                       between fiscal years 1986 and 1988, for loans receivable, loan delin-
                                       quencies, and loan write-offs.

labin 1.1:Change in Loan Receivablee
BehGeen Fiscal Yean 1985 and 1988      Dollars in millions
                                                                                                                                        Percent
                                       Agency                                                               1985              1988      change
                                       Agency for International
                                                     .~         Development                              $19,316          $19,530              1.1
                                       Department of Agriculture                                         126,789          117,510            -7.3
    I
                                       Department of Commerce                                                879              569          -35.3
                                       Department of Defense
                                       ~---                                                                1,581            6,681           322.6
                                       Department of Educationa                                           16,069           11,956          -25.6
                                       Export-Import Bank -                                               16,860            9,908          -41.2
                                       Department of Health and Human Services                               638              804             26.0
                                       Department of Housing and Urban Development                        27,290           13,377          -51 .o
                                       Department of the Interior                                            562              246          -56.2
                                       Small Business Administration                                       7,777            7,463            -4.0
                                       Departmentof Transportation
                                       --                                                                  2,170            1,674          -22.9
                                       Department of the Treasury                                          4,791            3,565          -25.6
                                       Department of Veterans Affairsb                                     3,506            4,207             20.0
                                       All other    --                                                    29,967           26,454          -117
                                       Total                                                          $258,195          $223,944          -13.3
                                       aOMB included guarantees of Student Loan Marketing Association obligations in the “all other” cate-
                                       gory in fiscal year 1985 and in the Education category in fiscal year 1988. For consistency, we adjusted
                                       the fiscal year 1985 “all other” and Education categories to include the amount in Education.
                                       bVA’s loans receivable amount was adjusted to include VA’s defaulted guaranteed loans, which VA
                                       reported as accounts receivable rather than loans receivable.
                                       Source: Fiscal years 1987 and 1990 Management of the United States Government.




                                       Page 78                                                GAO/AFMD90-12 OMB’s NinePoint Program
                                          Appendix I
                                          Snmmary of Changer, in
                                          Receivable Information




Table I.21 Change in Loan Delinquencies
Between! Fiscal Years 1985 and 1988       Dollars     in millions
            I                                                                                                                         Percent
                                          Agency
                                          ------            -_                                               1985           1988      change
                                          Agency for International
                                          ._--
                                                                      Development                            $130            $334         156.9
                                          Department   of Agriculture                                        4,465          5,171          15.8
                                          Department        of Commerce                                        364            226        -37.9
                                          Department        of Defense                                          20            101        405.0
                                            ..----.            --
                                          Department        of Education                                     3,636          5,475          50.6
                                          Export-Import       Bank                                             621            856          37.8
                                          Department        of Health     and Human Services                    12             55        358.3
        I                                                   of Housing     and Urban Development               819          1,587          93.8
        I                                 Department
                                          Department        of the Interior                                     13             17          30.8
        /                                 Small Business         Administr%on                               2,327           I ,800       -222
                                          Department        of Transportation                                 552           1,295         134.6
        I
                                          Department        of the Treasury                                     98            100           2.0
                                          Department        of Veterans       Affairsa                       1,497          2,431          62.4
                                          All other                                                             88             15        -83.0
                                          Total                                                           $14,842       $19,483           32.9
       /                                  “VA’s loan delinquencies were adjusted to include VA’s defaulted guaranteed loans, which VA reported
                                          as accounts receivable rather than loans receivable.
                                          Source: 1985 data - OMB debt collection reports.
                                                   1988 data - Agencies’ Reports on Accounts and Loans Receivable Due From the Public as of
                                                   September 30, 1988.




                                          Page 79                                                  GAO/AFMLHO-12 OMB’s Nine-Point Program
    ,




                                      Appendix I
                                      Summary of Changes in
                                      Receivable Information




TabI& 1.3:Change In Loan Write-offs
Bettieen Fiscal Years 1985 and 1988   Dollars in millions
                                                                                                                                  Percent
                                      Agency                                                        1985             1988         change
                                      Agency for International Development                              $2             $46             ---
                                                                                                                                    2,200.0
                                      Deroartment of Aariculture                                       155           1.704            999.4
                                      Deoartment of Commerce                                            35             147            320.0
                                      Department of Defense                                              0               0                 .
                                                        ~-~
                                      Department of Education
                                      __--___..-_--___                                                  32             409          1,178.l
                                      Exoort-lmoort Bank                                                 4               0          -100.0
                                      Department of Health and Human Services                            1               1              0.0
                                      Department of Housing and Urban
                                      Develooment                                                     424          17.394          4.002.4
                                      Department of the Interior               --.                       1            381         38,000.0
                                      Small   Business
                                          --.___        Administration             _________~~-.--    462             493              6.7
                                      Department of Transportation                                       0            359                 .
                                                                       --.-.--              ~-
                                      Decartment of the Treasurv                                         0              0                 .
                                      Department of Veterans Affairsa                                   57            222            289.5
                                      All other
                                              -...     - _-.--.--.-.- --                                 7             11             57.1
                                      Total                                                        $1.180        $21.167           1.693.8
                                      “VA’s loan write-offs were adjusted to include VA’s defaulted guaranteed loans, which VA reported as
                                      accounts receivable rather than loans receivable.
                                      Source: 1985 data - OMB debt collection reports.
                                               1988 data - Agencies’ Reports on Accounts and Loans Receivable Due From the Public as of
                                               September 30, 1988.




                                      Page 80                                             GAO/APMD-90-12 OMB’s Nine-Point Program
Appendix II

Changesin GuaranteedLmms Outstanding and
Terminations for Default

                                       This appendix provides information on the governmentwide changes,
                                       between fiscal years 1985 and 1988, for guaranteed loans outstanding
                                       and guaranteed loan terminations for default.

       : Change in Guaranteed Loans
       kng Between Fiscal Years 1985   Dollars in millions
                                                                                                                                      Percent
                                       Anency/Proaram                                                              1985          1988 change
                                       Department of Agriculture
                                       _.-..-                                 .____            --
                                           Farmers
                                       ._....._.         Home Administration:
                                               -._--__---_--_-----                 --
                                               Agricultural Credit Insurance  -- Fund                            $1,385---_-.---$3,507     .- 153.2
                                          Commodity Credit Corporation:
                                                                                                                                 4,919
                                                                                                                   5,094 _-.----~---          -3.4
                                        _-...- Export      Credit         _I- Program
                                                              ----- Guarantee
                                                ..-.-.._-- _-_.                                                                                 .-

                                       Department of Commerce
                                                                                                                     235          123       -47.7
                                       _--Economic
                                          _______.  Development
                                                      -_--_-__-..--- Revolving Fund
                                               - __...__

                                       Department of Education
                                         Guaranteed (Stafford) Student Loans                                     35,807        47,610         33.0

                                       Department of Housing and Urban Development
                                                                         ___-                         -.-
                                         Federal Housing Administration Loans                        .~._____ 195,480 ---..-...~-..-.~
                                                                                                                             300,758          53.9
                                                                                                                                               ..~~

                                       Small Business Administration
                                         Business and Investment Loans                                            8,782         9,711         10.6

                                       Department of Transportation
                                         Maritime Administration:
                                           Federal Ship Financing                                                               3,864       -40.0
                                                                  ..-. Fund
                                                                        __-              --                       6,444

                                       Debartment of Veterans Affairs
                                                                                                                                                14.6
                                                    -.-.. Revolving
                                         Loan Guaranty               Fund
                                                            ~--_-.~-----..-.----__                  --          130,591
                                                                                                                  ------.    149,705
                                                                                                                              _.--~..~~-... - --~-

                                       All other                                                                 26,624        29,769        11.8
                                                       __-_-____.---.-                  ---...---
                                       Total                                                                 $410,442       $549.966         34.0
                                       Source. “Special Analysis F” of the Budget of the United States Government, Fiscal Year 1987 and
                                       “Specral Analysis F” of the Budget of the United States Government, Fiscal Year 1990.




                                       Page 81                                                GAO/AFMD90-12 OMB’s Nine-Point Program
                                        Appendix II
                                        Changes in Guaranteed Loam Outstanding
                                        and Tembationa for Default




Table 11.2:Change in Terminations for
Default Between Fiscal Years 1985 and   Dollars in millions                                                                        --
1988                                                                                                                               Percent
                                        Agency/Program                                                            1985        1988 change
                                        Department of Agriculture                                                                    -_____-
                                          Farmers Home Administration:
                                            Agricultural Credit Insurance Fund                                  -__- $26    -~ $94         261.5
                                        - Commodity     Credit Corporation:                                -.
                                            Export Credit Guarantee Program                                         185         272         47.0

                                        Department of Commerce
                                          Economic Development Revolving Fund                                       103           3     -97.1

                                        Department of Education
                                        --
                                        -- Guaranteed (Stafford) Student Loansa                                   1,018       1,438         41.3

                                        Department of Housing and Urban Development
                                        - Federal Housing Administration Loans                                    2,234      6,178         176.5

                                        Small Business Administration
                                          Business and Investment Loans                                             476        465         -2.3

                                        Department of Transportation
                                        -.. Maritime Administration:
                                        _- Federal Ship Financing Fund                                              321         181     -43.6

                                        Department of Veterans Affairs                              ---
                                        -Loan ~~
                                               Guaranty Revolving Fund                                            1,353      2,322         71.6

                                        All....--~.
                                              other                                                       --        361        242      -33.0

                                        Total                                                                   $8,077     $11,195         84.2
                                        aThis includes terminations that result in lender and guaranty agency liabilities
                                        Source: “Special Analysis F” of the Budget of the United States Government, Fiscal Year 1987 and
                                        “Special Analysis F” of the Budget of the United States Government, Fiscal Year 1990.




                                        Page 82                                              GAO/APMD-90-12 OMB’s Nine-Point Program
Appendix III

CojnmentsFrom the Office of Management
and Budget

Note: GP;O comments
supplem?nting those in the
report tekt appear at the         g-7:        5.
end of this appendix.                                           EXECUTIVE      OFFICE OF THE PRESIDENT
                                 ,,a*$j$;
                                                                   OFFICE    OF MANAGEMENT        AND BUDGET
                                 y-y                                          WASHINGTON.  II C. 20503
                             t         ,^   _..
                                        4. _i


                                                                            February      26, 1990



                                 Mr. Donald Ii. Chapin
                                 Assistant   Comptroller      General
                                 Accounting   and Financial      Management
                                    Division
                                 General Accounting      Office
                                 Washington,   D.C.     20548
                                 Dear Mr.             Chapin:
                                 Thank you for the opportunity                to review the draft    report     "Credit
                                 Management:      Deteriorating        Credit Picture     Emphasizes Importance         of
                                 OMB's Nine       Point     Program."           The facts     you cite     of rising
                                 delinquencies       and defaults         in Federal     loan receivables        in the
                                 principal     credit     programs       of the Departments        of Agriculture,
See COI lent 1                   Education,     Housing and Urban Development,               and Veterans     Affairs,
                                 are most worrisome.           Equally      of concern is the degree of minimal
                                 and noncompliance         (excepting        the Small Business     Administration)
                                 with OMB’s Nine Point Credit Management Program set out in Circular
                                 A-129.
                                 We agree with the main thrust        of the report    that much needs to be
                                 done.      While valuable   progress    has been made in some agencies'
                                 credit     management and debt collection      procedures    and accounting
See cotiment   2                 practices,      we need to do EE&~ better.           The Administration     is
                                 committed     to Federal  agencies   making significant     improvements    in
                                 their    management of credit.
                             Lpeto Or-.                      Although      past efforts        have focused primarily             on
                             delinquent         debt collection,           effective       loan origination         is critical
                             to preventing             future      losses.        We agree with GAO that                agencies
                             should       comply with           A-129 prescreening              requirements.           Agencies
                             should       require         applicants        to certify          they     are not currently
                             delinquent          on any Federal            debt (with         appropriate      penalties        for
                             false     certification)            and that they were informed                 of Federal       debt
See comment 3                collection           practices.           If    applicants         for    Federal      credit      are
                             delinquent         on other Federal debt, they generally                     should not receive
                             additional          Federal      assistance.           Legislative        impediments       to this
                             principle         (as with respect           to Guaranteed Student Loans) should be
                             removed so that               every Federal           agency-- and each private               sector
                             lender      for      guaranteed        loans-- is required             to ask about existing
                             delinquencies            and has the authority                 to deny credit          where they
                             exist.          We strongly          support      legislation          to this     effect.         The
                             general         rule      should       be that         credit      would      be denied        where
                             delinquencies           exist     that are not being satisfactorily                   resolved.




                                                   Page83
                           Appendix III
                           Comments From the Office of Management
                           and Budget




                  Use of credit     bureau reports          and the Department      of Housing and
                  Urban Development's       prescreening        system (l'CAIVRS")     would allow
                  agencies  to verify    certification.         All Privacy     Act considerations
                  on the question     of the use of CAIVRS by other agencies               have been
      3mment 4.   resolved  and ORB has issued an official              opinion    to this    effect.
                  The Department     of Veterans       Affairs    (VA) will   be implementing       the
                  use of CAIVRS later     this spring.
                  OMB believes       that cross-checking         against      IRS delinquent       tax files
                  is a tool which agencies             should begin     using.        We are working with
                  IRS on a prototype               match to identify              and resolve        specific
                  operational       problems and quantify          benefits,        including    the use of
                  the taxpayer       consent form as recommended by GAO. We are committed
      C
See omment 5.     to investigating
                  checking.         We will
                                            with     IRS faster
                                                 also explore
                                                                      automated
                                                                    the utility
                                                                                       methods of cross-
                                                                                         of using      (within
                  current     statutory     authority)       data on delinquent           tax status     after
                  loan origination        to verify      applicant     certification.
                  OMB continues     to support recovery        of servicing    and collection          costs
                  through origination        fees.  However, as noted in the report,                program
                  legislation     often prohibits       fees or sets them at levels                that do
                  not recover     full    costs.    The President's         1991 Budget proposes a
See @omment 6.    number of new and increased            fees, primarily        for guaranteed          loan
                  programs.      Programs covered        include    VA housing      loan guarantees,
                  most SBA loan          guarantee    programs,       and Rural       Electrification
                  Administration       loan guarantees.
                                Senricina        and Manaaement.              OMB strongly          supports       the
                  report's       conclusion         that more needs to be done to improve loan
                  servicing       through upgraded financial                systems.      We have been working
                  with     agencies       to test         and implement         improvements--such           as the
                  Farmers Home Administration                  (FmHA) servicing       pilots     and Education's
                  new debt collection             system.       We also support consolidated             servicing
Set   omment 7.   and collection            activities         at regional        centers      to improve        loan
                  servicing        and address serious             internal      control     problems,      such as
                  in   Farmers       Home county offices.                 As a general        principle,       staff
                  responsibilities             for     loan origination           and servicing          functions
                  should be separated.                 Financial      systems that can produce accurate
                  and timely        data are needed for account servicing,                      delinquent       debt
                  collection,        portfolio        valuation,       and risk analysis.          With the help
                  and support          of GAO, we will            continue       our emphasis on improved
                  financial        systems.
                  We believe    OMB, Treasury,     and GAO should give considerable           thought
                  to the form and content            of data produced         by credit       program
                  financial    reporting   systems.       One improvement      that we have been
See comment 8.    working    on concerns     the data on receivables            and delinquencies
                  reported    by the agencies     to the Department       of the Treasury.         The
                  data are difficult     to interpret      because    of the 18mixing'f of direct
                  loans and guaranteed      loan defaults       which, when default      claims are
                  paid, become classified       as direct     loan receivables.      Guaranteed

                                                                   2




                          Page 84                                              GAO/AFMD-90-12 OMB’s Nine-Point Program




                                                                         I
                             Appendix Ifl
                             Comments From the OfTIce of Manngement
                             and Budget




                    loan defaults     are masking improvements            by some agencies,        such as
                    the Department      of Veterans     Affairs,       in the management of direct
                    loans.     We have been working with Treasury's              Financial    Management
                    Service    to separate    receivable       and delinquency        data by type of
                    credit.      We hope to have this         effort     completed     in time for our
                    annual report     to Congress required           by the Debt Collection          Act of
                    1982, as amended. Separate presentation               and analysis     of direct    and
                    guaranteed     loan data will        become       even more important           as the
                    Government continues       the shift       from the use of direct            loans to
                    guaranteed    loans to achieve program objectives.
                    Loan.                  The Administration      plans to continue       its sale
                    of loan assets where this proves cost-effective            for the Government.
See comfhent 9.     Each proposed sale will     undergo a rigorous        economic analysis     that
                    compares--on     a net present     value    basis--holding       the loans     to
                    maturity    to a prepayment    program and to selling           with recourse,
                    partial   recourse,  or non-recourse      to the Government.
                    e                                   .      Even though our focus must shift    to
See com+ent   IO.   the front  end of the credit             cycle, we agree with GAO that agencies
                    cannot relax their   efforts            to recover delinquent  debt.
                    The tax refund offset            program has been one of our most successful
                    debt collection        techniques,      with over $1 billion        in recoveries    to
                    date.     The authority        for this program will        not expire until      1994,
                    but we should take advantage of any legislative                  opportunity    to pass
See com+ent   11,   permanent authorization             and ensure continued      use of this valuable
                    tool.     OMB will     continue      to work with the Internal        Revenue Service
                    and the Department of the Treasury to monitor                  agency use of income
                    tax refund       offsets     and ensure their       fullest      use.      We are also
                    considering      whether guarantee        agencies should assign to the IRS for
                    offset    defaulted      accounts on which a claim has been paid.
                    The use of         tax refund      offsets   for  delinquent      debts      owed by
                    corporations       is part of the President's       Management By Objectives
See cominent 12.    (MBO) system.          While the IRS is experiencing         some difficulty         in
                    meeting      the     target   date     for implementation       (January        1991),
                    Commissioner        Goldberg    and I are committed          to moving        forward
                    promptly.
                    Agency     use of Federal       salary    offset    was generally      found to be
                    satisfactory.          We strongly     support    the principle       that   Federal
See comment 13.     employees must maintain         an exemplary     level  of integrity,       and will
                    continue      to require    agencies    to use salary     offset      as a tool     to
                    resolve     delinquencies     on Federal debt.
                    All of the agencies     in the review,     except for F~BA, were reporting
                    delinquent     accounts to credit   bureaus.      FmRA began reporting  multi-
See comment 14.     family housing borrowers      to credit     bureaus in November 1989. FmBA
                    will   also be required    to report    single-family     housing accounts to
                    credit    bureaus.

                                                                 3




                             Page86                                       GAO/AF’MD-99-12 OMB’s NinePoint Pro@em
                           Comment-a From the Office of Management
                           and Budget




                  We agree     that   private     collection         agencies    can be used more
                  extensively.      The Financial      Management Service          will    be reviewing
                  agency delinquent       debt to ensure full           and timely      referral.      The
                  issues raised in the report of delayed referral                 of debt six months
See comment 15.   delinquent    and high end-of-year         referrals     will  specifically       be
                  examined.     The Department of Education            reports   that new contracts
                  for its private     collection     agencies will        be completed this month.
                  As    noted in the report,           the Department of Justice          is experiencing
                   serious    backlogs      in litigating      delinquent       debt cases.     The report
                  also acknowledges           some of the efforts           that we have underway to
                  correct     this problem.          These efforts      are part of the President's
                  MBO system and are being carried               out by a litigation        task force of
See bomment 16.   the major          credit   agencies      (headed by the Departments               of the
                  Treasury        and Justice).            The task         force f 6 efforts       include
                  simplifying         and standardizing       the forms and procedures            to refer
                  collectible          cases to Justice          for   litigation,        and automating
                  Justice's      litigation     tracking    system (including        tying agencies into
                  the system to allow automated referral).
                  The Administration        strongly     supports     legislation       that would create
                  a uniform     system of enforcement           procedures        for the collection        of
                  Federal    debt,   to replace        the variety        of State procedures          under
                  which Federal debt must currently               be collected.          In addition,     the
                  authority    for the Department            of Justice      to pilot     test the use of
                  private    sector    attorneys      for debt collection             cases will      expire
See bomment 17    August 31 of this year.            Because of lengthy           procurement     delays in
                  activating      the program,        Justice      has not been able to gather
                  sufficient     data to evaluate         its effectiveness.           The authority      for
                  the pilot    program should be extended for another two years so this
                  evaluation     can be undertaken           and a determination          made on seeking
                  permanent authority.
                  Although    agencies  collected     $256 million     in late     payment charges
                  in 1989, we too are disappointed           in the uneven implementation             of
                  the authority    to charge interest      and other penalties       for delinquent
See Comment 18.   debt.    The problem is due to a confusing           array of interest          rates
                  and other provisions.         We are currently       considering      legislation
                  that would standardize       and simplify     the late payment structure.
                  WrN                The new write-off           policy   issued by Treasury             in 1909
                  has greatiy         improved       agency write-offs        of uncollectible             debt.
                  Treasury    will     continue      to review agency delinquent             debt to ensure
                  write-offs       are occurring         when appropriate.            Treasury      will    also
                  review the specific          write-off     deficiencies     identified       in the report
See comment 19.   and will     work with the agencies              to take the necessary           corrective
                  actions.      We agree that write-offs              must be reported        to the IRS as
                  income to the debtor.                The Department      of Education         has recently
                  made significant          progress      on write-offs,        and the Department             of
                  Agriculture       and the Small Business Administration                   this year will
                  be reporting       write-offs       to the IRS for the first           time.
                                                                 4




                          Page86                                            GA0/AFMD-90-120MB'sNh1e-PointPro@am
                               Appendix III
                               Comments From the Offlce of Mmement
                               and Budget




                                                                                                                        -

                                   dx,ov                       . one issue that cuts across the entire
                     credit      cycle     is the management of guaranteed                       loans.       As noted
                     above, the use of guaranteed                       loans is increasing,              and poses a
                     significant        potential     liability          to the Government.           Secretary     Kemp
                     has taken a number of aggressive                       and positive       actions      to correct
                     problems       in the Department                of Housing         and Urban Development's
                     guaranteed        loan programs.             We need strong management controls                   to
See corn1ii snt 20   prevent      losses      in other         agencies'         programs,     and early        warning
                     systems to identify            any problems that might be developing.                       As you
                     heard     at the January            31 meeting           of    the Federal        Credit    Policy
                     Working       Group,      a special           task     group      is currently         developing
                     recommendations            for   improved           management of guaranteed                loans.
                     Specific      recommendations            will     be available        later     this    month: we
                     will    share them with you.
                     In the meantime,      let me just     note that we agree that          front-end
                     controls   on credit   extension   and guidelines      for lender performance
                     and monitoring    are needed for guaranteed       loans.     We also agree that
See comr   ?nt 21.   formal written    agreements should be required         from lenders receiving
                     Federal guarantees      to protect   the Government's       interest,    and that
                     reviews   of lender compliance      should be conducted          (with penalties
                     imposed for non-compliance).
                                                           ation     The report's     major recommendation
                      is that legislation             be enacted      to make mandatory      the use of the
                     Nine Point         Credit        Management       Program.      We agree     that    such
                     legislation       would clarify            some issues      and help ensure       a more
                     consistent       application          of the Nine Point          Program.       However,
                     legislation      is never the complete answer: there must be leadership
                     and commitment           to improved         credit     management from agency        and
See com$ent    22.   Administration        officials.          Many of the credit     programs are heavily
                     decentralized,         and as a result              the implementation     of national
                     credit     management policies            and techniques     is not an easy task,      We
                     need better       policies;        but we also need much more vigor            in their
                     implementation        at all levele.            As Chairman of the Federal        Credit
                     Policy     Working Group, I am committed to these goals.
                     The recommendation            to require        statutorily        that    credit      agencies
                     submit audited        financial       information      on receivables         is a good one.
                     This information         would not only provide               a useful    indicator      of the
                     status of an agency's            credit     management program, but it could also
                     serve as a method for alerting                policy     officers      to emerging default
                     trends    and other credit           problems.        OMB is working with the Chief
See con    tnt 23.   Financial     Officers’       Council      and the Federal        Credit     Policy     Working
                     Group to define            requirements         for,     and the acope of,              audited
                     financial     statements        and to identify         which programs can most
                     benefit    from the preparation             and issuance of financial             statements.
                     We would be pleased               if you joined           us in our review             and the
                     implementation        process.


                                                                     5




                              Page87                                              GAO/APMD-QO-12OMB'sNine-Point Program
                              Appendix III
                              Comments From the Office of Management
                              and Budget




                      In drafting     any legislation,      flexibility       should be built     in so that
                      agencies     might implement       a debt collection          and credit   management
                      program that       makes the best use of the tools                    and techniques
                      available     under the Nine Point Program.                 Because credit       program
                      authorities,      types    of borrowers,           and portfolio     characteristics
See ‘IComment   24    vary, different      agencies may need to apply the Nine Point Program
                      differently.       Therefore,     any legislation         would need to ensure use
                      of the Nine Point Program while                  not forcing     an agency into the
                      application      of an initiative         that      is not appropriate        or cost-
                      effective.
                      Within   this     context,    we would support      the recommendation        that
                      Congress amend the Debt Collection        Act to w              agencies    to use
                      the Nine Point Program initiatives.         Our staff will      be working with
                      the agencies       and would be happy to work with             GAO on specific
See ICIomment   25.   language    suggestions.       We also support      the recommendation        that
                      Congress     require      the IRS to disclose        address    information      to
                      agencies   pursuing      debt collection activities       under authorities      in
                      addition   to the Federal Claims Collection          Act.
                      Improving     credit    management remains       a sizable      task,    and the
                      interest    and support of the General Accounting        Office,      Congressman
                      Kasich,   and others in the Congress is extremely          helpful.      We would
                      be interested       in exploring   opportunities   for cooperative        efforts
                      with the GAO in improving        credit   management.
                      Thank you for the opportunity    to comment on a very thorough    and
                      insightful report,  and for your presentation  of the report   at the
                      meeting of the Federal Credit   Policy Working Group.
                                                                     Sincerely,


                                                                     Frank Hods011
                                                                     Executive Associate        Director




                                                                 6




                             Page 88                                        GAO/AFMD-90-12 OMB’s Nine-Point Program
                Appendix III
                Comments From the Offke of Management
                and Budget




                The following are GAO comments on the Office of Management and
                Budget’s letter dated February 26, 1990.


                1. Addressed in Executive Summary.
GAC)Comrnents
   ,            2. Addressed in Executive Summary.

                3. Addressed in Executive Summary and agency comments section of
                chapter 3.

                4. Modified report to include OMR'S opinion on the use of CAIVRS.

                5. Addressed in agency comments section of chapter 3.

                6. Addressed in agency comments section of chapter 3.

                7. Addressed in Executive Summary and agency comments section of
                chapter 4.

                8. We agree that data on receivables and delinquencies reported by the
                agencies to Treasury are difficult to interpret because of the “mixing” of
                direct loans and guaranteed loan defaults. We believe OMB'S and Trea-
                sury’s efforts to separate this receivable data will provide useful credit
                management information.

                9. Report modified to explain that the administration plans to continue
                its sale of loan assets where this proves cost-effective for the
                government.

                10. Addressed in agency comments section of chapter 5.

                11. Addressed in agency comments section of chapter 6.

                12. Report modified to explain that it is unlikely that a business offset
                program would be operational for 1992.

                13. No change to report necessary.

                14. Report clarified to explain that FmHA began reporting Multifamily
                Housing accounts to credit borrowers.

                15. Addressed in agency comments section of chapter 5.


                Page 89                                 GAO/AFMD90-12 OMB’s Nine-Point Program
Appendix III
Comments From the Office of Management
and Budget




16. No change to report necessary.

17. Addressed in agency comments section of chapter 6.

18. No change to report necessary.

19. Report changed to include this information,

20. Addressed in agency comments section of chapter 4.

2 1. Addressed in agency comments section of chapter 4.

22. Addressed in Executive Summary and agency comments section of
chapter 6.

23. Addressed in Executive Summary and agency comments section of
chapter 6.

24. Addressed in agency comments section of chapter 6.

25. Addressed in agency comments section of chapter 6.




Page 90                                  GAO/APMD-90-12 OMB’s Nine-Point Program
AppendSx IV

&herds From the Department of the
Tre’asury’sFinancial ManagementService

Note: GA@ comments


                                                           DEPARTMENT        OF THE TREASURY
                                                      FINANCIAL         MANAGEMENT           SERVICE
                                                                  WASHINGTON.     D.C.   20227

                                                                   December 21, 1989

                         Dear Mr.       Chapin:
                         We have reviewed your draft               report     entitled       "Credit     Management:
                         Deteriorating        Credit     Picture     Emphasizes Importance             of OMB's Nine
                         Point ProgramV1, dated December 1989.                     As you noted, the credit
                         management program has made a very real contribution                             to improved
                         management of the Government's                credit      programs and continued
See cornSpent 1.         implementation        is essential        if we are to make long-term,
                         permanent changes in the Federal                 government's         financial     manage-
                         ment practices.           It is especially        critical        that agencies      improve
See com&ent 2.           their     financial     reporting      systems and move toward accrual                based
                         financial       statements      so that we can quantify              our risk exposure
                         and have "early         warning II of potential           financial      disaster.
                         We offer       the    following          general      comments:
See comrpent 3.          1.      on the       face of it, the numbers do indicate  a deterioration
                                 in the       agencies'  portfolios. However, they indicate      much
                                 more:
                                 0       Decreasing     receivables.     Between 1985 and 1988,
                                         receivables      decreased $34.3 billion.         This decrease    is
                                         attributable      to loan asset sales and prepayments           of
                                         almost $21 billion        and to the legislatively-mandated
                                         Department of Housing and Urban Development Low Rent
                                         Public Housing forgiveness         program of $21 billion.
                                         The sales and forgiveness        programs involved         non-
                                         delinquent     loans and thus did not affect          total
                                         delinquencies.
                                0        Better  accuracy     in agency reporting.         We are beginning
                                         to see the results        of the concerted     effort,   begun in
                                         1985 by OMB and FMS, to improve agency reporting.                In
                                         the short run, the improved reporting             will  make the
                                         Government's    financial      situation   look worse.
                                0       Increasing      defaulted    guarantees.        It is true that
                                        defaulted      guarantees    are increasing         and that these
                                         increases     are showing up in the agencies'                 delinquen-
                                        cies.      This situation     will     continue     until      the
                                        Government implements         improvements        in guaranteed          loan
                                        management.        The Guaranteed Loan Management Project,
                                        undertaken      jointly   by OMB and FMS, to address
                                        guaranteed      loan issues,      will   promulgate         standards      for
                                        the management of Federally             guaranteed        loan    programs.
See coniment 4.          2.     Most of the programs covered in the report      are guaranteed
                     Y          loan programs.   Agencies face different   problems with
                                guaranteed  loan programs than with direct    loan programs




                              Page 91                                                     GAO/AFMD-W-12 OMB’s NinePoint   Program
                              Commenta From the Department of the
                              Treasury’s Financial Management Service                                                 ,




                     Page 2 - Mr. Chapin
                              since the agency is not dealing            directly        with a borrower,
                              but with and through a lender.             Historically,         this has made
                              it more difficult          for an agency to impose or dictate
                              borrower/debtor        requirements.      We believe        that the perceived
                              enforcement     difficulties       as they relate        to guaranteed    loans
                              need to be acknowledged.
Se!@c:omment 5       3.   We agree that agencies need to fully           implement appropriate
                          credit     management tools and monitor      their    lenders.      There
                          is, however, a priority       and resource     issue not addressed in
                          the report.      Agencies have many priorities,          with credit
                          management often seen as competing with,            rather     than
                          complementing,     program operations     for scarce resources.
                          Resources are and continue       to be an issue with the agencies,
                          particularly     as requirements    for agencies      to monitor     and
   I
                          review lendere     increase.
Seeicomment     6,   4.   We found the report        misleading     in its discussion      of write-
                          offs     (page 89).     The findings     of the FMS Write-off      Task
No4 on p. 65.             Force regarding       the inadequacy      of Government write-off
                          policies      preceded the issuance       of the Treasury     Financial
                          Manual Credit       Supplement     (Supplement).      The Supplement
                          provided     the needed comprehensive         guidance on write-off        and
                          close out.
Seelcomment     7.   5.   We agree that the Debt Collection              Act of 1982, as amended,
                          needs to be strengthened,            if only to clarify    that the tools
                          and techniques       authorized      by the DCA are not optional.       Any
                          new legislation       should require        agencies to use all
                          appropriate     collection      tools,    for example, credit   bureaus
                          and collection       agencies,     but should not legislate
                          implementation       of the Nine Point Credit Management Plan
                          since that could prove to be very limiting.                In addition,
                          any legislative       change needs to address:
                          0         the relationship     between credit      management requirements
                                    and agencies'    authorizing   legislation,     in terms of
                                    which takes priority       and
                          0         the differences   between direct  and guaranteed   loan
                                    management, in terms of how the agencies      are expected
                                    to apply specific   tools for guaranteed   loans.
                          Specific       legislative     changes    which   we would    like   to see
                          include:
                          0        amending the DCA's definition     of person to include
                                   State and local governments,    thereby making such
                                   governments  subject to administrative     offset;




                              Page 92                                       GAO/AFMD-90-12 OMB’s Nine-Point Prorpam
           Appendix N
           Commenta From the Department of the
           Treasury’s   FinancSal Management   Service




Page 3 - Mr. Chapin
       0          allowing  agencies to retain     administrative   charges
                  assessed on delinquencies      to make credit   management
                  improvements   as an incentive    to assess such charges:
       0          simplifying      the interest,   penalty    and administrative
                  charges requirements        by merging the interest       and
                  penalty     charges into a single      late fee:
       0          expanding      the Department of the Treasury's    current
                  authority      to mandate the use of cash management tools
                  to include       credit management tools and techniques.
We believe      that we have a mechanism in place,          with the Economic
Policy     Council    Working Group on Federal Credit         Policy   (Working
Grow),      to obtain the visibility       and senior    level management
involvement       necessary   to ensure the continuation        and expansion      of
the credit     management program.        Secretary   Brady has indicated        his
willingness       to take any proposals     developed    by the working Group
to the Economic Policy          Council for consideration.          GAO's report
will    be helpful     in maintaining   the pressure     to improve
governmentwide       credit   management.
We appreciate   being given the opportunity         to comment.    If you
have any questions,     please contact     Victoria   I. McDowell,    Director
of the Credit   Administration   Division,       on 287-0665.
                                               Sincerely,



                                               Michael T. Smokovich
                                               Assistant  Commissioner
                                               Federal Finance


Mr. Donald Ii. Chapin
Assistant    Comptroller      General
Accounting    and Financial
  Management    Division
General Accounting       Office
Washington,    DC 20548




           Page 93                                          GAO/AFMD-99-12 OMB’s Nine-Point Program
               Appendix N
               Commenta From the Department of the
               Treasury’s Nnanchl Management Service




               The following are GAO'S comments on the Department of the Treasury’s
               Financial Management Service’s letter dated December 2 1, 1989.


               1. Discussed in agency comments section of chapter 3.
GAO Comments
               2. Discussed in agency comments section of chapter 2.

 I             3. Discussed in agency comments section of chapter 2.

               4. Discussed in agency comments section of chapter 2.

               6. Discussed in agency comments section of chapter 4.

               6. Report changed to include this information.

               7. Discussed in agency comments section of chapter 6.




               Page 94                                 GAO/AFWDW-12 OMB’s NinePoint Program
Appendix V

Co@mentsFrom the Department of the
Tr&wry’s Internall RevenueService

---,
Note: GAO comments
supplementing those in the
report texjt appear at the
end of thlb appendix                                       DEPARTMENT         OF THE TREASURY
                                                             INTERNAL      REVENUE      SERVICE
                                                                 WASHINGTON,       D.C. 20224

                                                                     JAN 241990
                             Mr. Donald Chapin
                             Assistant  Comptroller General
                             United States General Accounting        Office
                             Washington,   D.C.    20548

                             Dear Mr. Chapin:
                                   We have reviewed your recent draft report entitled,  ‘Credit
                             Management: Deteriorating  Credit Picture Pmphasizes Importance of CMB’s
                             Nine-Point Program”.
                                    Overall, we agree with the report’s findings that the Federal
                             government’s credit picture can be improved through full implementation of
                             the credit management initiatives   outlined in MEI’s credit program.
                             Included in this program is the disclosure of certain tax information by
                             IRS to Federal agencies, the referral     of delinquent loans to IRS for offset
                             of income tax refunds, and the reporting of closed out accounts as income
                             to the debtor to the IRS.
                                    We would take the opportunity to point out that the use of the refund
See com(nent 1.              offset program, while highly successful, carries some risk,   Recent IRS
                             studies indicate that taxpayers whose refunds are offset tend to be more
                             noncompliant.   While we continue our studies in this area, we believe that
                             expansion of the refund offset program should be approached cautiously.
                                     Also, we have long been concerned over the impact that disclosing tax
See combnent 2.              information for non-tax purposes can have on taxpayers’ confidence in the
                             tax system. Accordingly,     we believe that minimum criteria     should be met
                             before Congress agrees to expanding disclosure authority for non-tax
                             purposes. First, there must be a demonstrated need for the information.
                             Second, Federal agencies must have explored all possible means of obtaining
                             the information and found access to tax information to be the only feasible
                             means. Third, the benefits from using tax information should be
                             substantial   and should significantly     outweigh the costs of obtaining and
                             using the information.    Finally,     agencies receiving tax information must be
                             strongly committed to safeguarding information in their possession in order
                             to maintain taxpayers’ confidence that their tax information will remain
                             confidential.
                                     We have enclosed detailed ccamsents on the report recommendations as
                             well as additional    comments regarding certain statements made in the
                             report,    We hope these comments are useful.

                                   Best regards,




                             Enclosure




                                Page 95                                                  GAO/AFMD-90-12 OMB’s Nine-Point Program
   ,

                   Comments From the Department of the
                   Treasnry’s Internal Revenue Service




                      CREDIT MANAGEMENT: DETERIORATING CREDIT PICTURE EMPHASIZES
                                IMPORTANCE OF OMB’S NINE-POINT PROGRAM

                                RECOMMENDATION 1:
                               To improve loan origination                 procedures,     we recommend
                               that the Director            of the Office       of Management and
                               Budget and the Secretary                of the Treasury,       in
                               conjunction         with the Internal          Revenue Service       and
                               affected       agencies,       resolve     impediments    to
                               prescreening          applicants       against delinquent        tax
                               accounts.         We also recommend that the Secretaries                  of
                               the Departments           of Housing and Urban Development               and
                               Veterans       Affairs,      and the Administrators          of the
                               Farmers Home Administration                 and the Small Business
                               Administration          require      that program managers and
                               private      lenders      obtain loan applicants’           consent to
                               obtain     tax information           from IRS.      (Page 59 of the
                               draft    report.)
                Comment:
                         The IRS opposes the use of taxpayer                consents       to obtain   tax
See comment 3   information      that is otherwise         available      under a specific
                provision     of the Internal         Revenue Code. In 1982, Congress
                amended section         6103 of the Code, which governs the disclosure
                of tax information,           by adding subsection         6103(l)(3).         Under this
                subsection,      IRS can, upon written           request,    disclose        to the head
                of a Federal       agency administering          certain    Federal      loan programs
                whether or not a loan applicant              has a delinquent          tax account
                with the IRS.         In making this amendment, Congress determined
                that agencies       receiving     this information         should properly
                safeguard     tax information         in its possession.          In addition,
                unauthorized      disclosures       of this information         subject        the agency
                to civil     and criminal       penalties.
                         The suggested     use of waivers from taxpayers,          in an attempt
                to obtain    this information      lnore expeditiously,      undermines    the
                safeguard    and security      measures applicable      to information
                released    under subsection      6103(l)(5).      Agencies   receiving    tax
                information     pursuant     to a taxpayer    consent are not required         to
                safeguard    the information,       nor are they subject      to penalties       for
                unauthorized     disclosure.
                         In addition,      the use of taxpayer      consents   in this context
                raise    some of the same issues addressed in Tierney               v. Schweiker,
                718 F.2d 449 (D.C. Cir. 1985), where the court expressed                    concern
                about the USC of consents           as a “catch all”     mechanism to
                circumvent     the general      rule of confidentiality       established     by
                Congress.     The court also found that coerced waivers                could not
                be honored by the IRS.           We believe    that agencies’     use of
                required    waivers   will    face similar    legal challenges.




                   Page 98                                               GAO/AFMD-90-12 OMB’s Nine-Point Program
                                 Appendix V
                                 Comments F’rom the Department of the
                                 Treasury’s Internal Revenue Service




       -


                                                                  -2-


                               The use of large         volumes of taxpayer          consents  would create
                      a considerable       added burden on the IRS.              In addition,      it is
                      unlikely    that Federal         agencies      can obtain    this   data more quickly
                      using    a consent    from the taxpayer           than under current       procedures
                      for subsection       6103(l)(3).          The IRS would be happy to work with
                      agencies    to obtain      this     information      as quickly     as possible    using
                      our current     information        systems.
                             These comments are equally  applicable                 to the report’s
                      recommendations  to Congress  on amending     the             Debt Collection       Act
                      of 1982 (pages 102-103 of the report).

                                      RECOMMENDATION 2:
                                      To improve      debt collection        and appropriately       write
                                      off uncollectible         accounts,      we recommend that       the
                                      Secretary     of Education       require     the guaranty     agencies
                                      to temporarily       assign    delinquent       accounts  to
                                      Education     so that these accounts            can be referred      by
                                      Education     to the IRS for Federal            income tax refund
Now on p, 66.                         offset.   (Page 94 of the draft            report.)
                      Comment:
                               In order for a debt to be eligible               for refund     offset,   the
See conjment 4.       debt must be a legally           enforceable       debt owed to a Federal
                      ai3ew,        31 U.S.C.     3720A(a).      We are not certain        what is
                      contemplated        by a temporary       assignment     of a debt to the agency.
                      Although      the IRS in its ministerial            role with    regard   to refund
                      offset    would not question          the referral      of such debts for offset,
                      legal    challenges      appear likely       where offset     is used as a
                      mechanism       for paying    the debt actually         owed to the guaranty
                      agency rather        than to the Department           of Education.

                                      Recommendation       3:
                                      To improve      debt collection       and appropriately        write
                                      off uncollectible        accounts,     we recommend that         the
                                      Secretary      of Housing     and Urban Development         and the
                                      Administrators       of the Small Business         Administration
                                      and the Farmers Home Administration              (for   its Rural
                                      Housing     loans)   report    closed-out    accounts     to the IRS
                                      as income to the debtor.



                  *




                                 Page 97                                     GAO/AFMDBO-12 OMB’s Nine-Point Program
                             Appendix V
                             Commenta From the Department of the
                             Treasury’s Internal Revenue&I-V&




                                                                 -3-


                 Comment:

See homment 5             We agree       with this  recommendation.               Agencies  are required
                 to report       to   the IRS any accounts     written            off as uncollectible
                 as income       to   the debtor   on Form 1099G.
                                  RECOMMENDATION 4:
                                  We also   recommend that the Congress           require     IRS to
                                  disclose    address  information       to agencies      pursuing
                                  debt collection     activities      under authorities         in
                                  addition    to the Federal      Claims Collection        Act,    (Page
Now ion p. 75.                    103 of the draft     report.)
                 Comment:

See komment 6.            The IRS does not oppose a broadening               of the authority         in
                 subsection      6103(m)(2)     to release      taxpayer    address    information
                 for debt collection         purposes     under other     statutory      authorities
                 than the Federal        Claims Collection         Act.   Current     authority      under
                 subsection      6103(m)(2)     is restricted       to that Act.       IRS would
                 prefer     that the additional       authority       be specifically       spelled     out
                 in any amendment to subsection              6103(m)(2).
                            We would point          out that      the IRS is becoming m6re deeply
                 involved       in      Federal     government       debt collection         process.        Given
                 this     involvement,         Congress       may wish to consider           looking      at the
                 entire      loan screening           and debt collection           area and combine
                 existing       tax information           disclosure      authority       in the Internal
                 Revenue Code.             Currently,       there    are separate       disclosure
                 provisions         related      to debt collection           in subsections         6103(l)(3),
                 (l)(lO),       (m)(2),       (m)(4),     and (m)(5),       and to a lesser          extent
                 subsections          (l)(6)     and (l)(8).         Conceivably,       these could be
                 combined       into      a single     loan application/debt            collection
                 section.         This section         could provide        for better       coordination        and
                 internal       consistency         in the diSCl6SUre           of tax information.
                           Finally,       with regard        to legislative       changes,     we suggest
                 that there         should     be reciprocity        in the exchange         of address
                  information.          That is, agencies           should    also be required       to
                 provide       IRS with address          information        on taxpayers      who are in        the
                 loan origination             phase.     For th6Se loan applicants             with tax
                 delinquencies,           this    information      would be useful         to the IRS’
                 enforcement         functions.




                            Page 98                                           GAO/AFMD-99-12 OMB’s Nine-Point Program
                                  Appendix V
                                  Comments From the Department of the
                                  Ikeaeury’s Internal Revenue Service




                                                                           -4-

                      ADDITIONAL       COMMENTS
                                We have        the    following       comments      on other      statements   in   the
                      report.
                      Corporate       Offset         Program

           ent 7                 The report      states    that    IRS has not developed            the
                      capability       to offset       commercial        accounts     (page 78).       Actually,
           58.        the IRS is in the process               of developing         a test    to determine       the
                      feasibility        of a business        refund      offset    program.      This test
                      includes      a statistical        analysis        of corporate      accounts       to
                      determine      the short-term          cost-effectiveness           of collecting
                      delinquent       corporate       debt through         a business     refund     offset
                      program.
                               The report      also states       that   IRS will   not be able to offset
                      commercial      accounts     until     1992 at the earliest         (page 78).
                      However,     once the results          of the feasibility        study are complete,
                      implementation       of a business         offset   program would require
                      extensive     administrative          and systemic     modif ications     to the
                      current    Debtor Master        File.      It is unlikely      that a business
                      offset    program would be operational              for 1992.
                      Private      Collection          Firms      Could    Be Used More        Extensively
                                The report     states     that the Debt Collection              Act of 1982
See comhent      8.   allows     Federal     agencies     to use private         collection       firms    to
                      recover     debts owed to the government?                but that      agencies      have
                      referred      accounts     to private       collection      firms     sporadically        (pp.
Now on I$. 59.        79-80).       IRS recommends that debts should                   be referred       to private
                      collection       firms   before     these debts become eligible                 for referral
                      to the IRS’ refund           offset     program.       IRS’ studies        of the refund
                      offset     program have detected            an increase        in noncompliance         for
                      taxpayers      whose refunds        are offset.         Accordingly,         IRS believes
                      that every other         avenue of collection            should      be exhausted       before
                      these debts are referred              to the IRS.
                      Loan Servicing     Limitations                of    Farmers   Home Administration’s
                      nmHA’s)    Current    System
                               The report        states     that the Agriculture              Inspector       General
See comment 9         has issued       several      reports      detailing        problems     with FmHA’s
                      automated       system,      such as inaccurate             data on loan delinquencies
Now on p. 51.         (page 70).        Although       the report         indicates      that FmHA field
                      offices    verify      the account         status      of all accounts           for refund
                      offset,     the report        does not provide            an assessment          of the
                      accuracy      of these field          office      data.       This raises        a concern    for
                      IRS-- whether        FmHA is referring              accurate      debtor     information      to
                      the IRS’ refund          offset     program.




                                  Page 99                                             GAO/AFMD-90-12 OMB’s Nine-Point Program
          Appendix V
          Comments From the Department of the
          Treasury’s Internal Revenue Service




                                            -5-

          It is essential      that   IRS receive        accurate     information     from
the agencies        in order   to avoid either         offsetting       taxpayers
Without     delinquent     debts,   or offsetting          taxpayers      for amounts in
excess of their        loan delinquencies.           In each of these
situations,       a taxpayer     can file   a claim       for the appropriate
amount of an offset          to be refunded       to them.        This process     places
additional       burden on IRS operations           and generates         negative
publicity      for the IRS.




          Page 100                                      GAO/AF’MD-90-12 OMB’s Nine-Point Program
               Appendix   V
               comments Ftom the Department of the
               Trmmry’s Internal Revenue @vice




               The following are GAO’S comments on the Department of the Treasury’s
               Internal Revenue Service’s letter dated January 24, 1990.


               1. While we fully support the tax refund offset program as a debt collec-
GAO1Comments   tion tool, we are currently evaluating the extent, if any, by which the
               refund offset program reduces taxpayer compliance.

   (           2. Addressed in agency comments section of chapter 3.

               3. Addressed in agency comments section of chapter 3.

               4. Because these are claims paid by the federal government, we believe
               they are legally enforceable.

               5. Addressed in agency comments section of chapter 5.

               6. Addressed in agency comments section of chapter 6.

               7. Report clarified.

               8. Although we support the use of private collection firms, we disagree
               that they should always be used before delinquent debtors’ tax refunds
               are offset. Agencies should develop appropriate debt collection strate-
               gies. In those situations where it is more effective to use tax refund off-
               set before private collection firms, this should be done. Further, OMB'S
               Circular A-129 states that an agency can initiate the income tax refund
               offset process at any point in the delinquent debt collection cycle.

               9. We agree that it is essential that IRSreceive accurate information from
               agencies when offsetting tax refunds, but the scope of our review did
               not include an assessment of the accuracy of F~HA'S field office data.




               Page 101                                GAO/AFMD-90-W OMB’s Nine-Point Program
Apfjendix VI

@xnmentsFrom the Department of Agriculture


sup@ementing those in the
report text appear at the
end cpfthis appendix.                                                  DEPARTMENT            OF AGRICULTURE
                                                                            OFFICE    OF     THE    SECRETARY
                                                                             WASHINGTON.           D. C.   20250                   EC   2 2   1989

                            SUBJECT:        GAO Draft    Report   (AFMD-90-12), Dated December 1989,
                                            Entitled,    "CREDIT MANAGEMENT: Deteriorating     Credit                         Picture
                                            Emphasizes    Importance   of OMB's Nine-Point Program'


                                     TO:    Donald H. Chapin
                                            Assistant  Comptroller    General
                                            Accounting  and Financial    Management                   Division


                            Attached       are   FmHA comments    to    subject      draft         report.

                            If we can be of further    assistance,     please                  contact          Leonard   Hardy,    Director,
                            Planning and Analysis   Staff    475-5300.


                             y/w--


                            RO AND R. VAUTOUR
                            Under Secretary
                            Small Community and Rural            Development

                            Attachment




                                            Page 102                                                   GAO/AFMD-90-12OMB’s NinePoint Program
                                    Appendix VI
                                    Cwnmente From the Department
                                    of’ Agriculture




                                    GAO DRAFT REPORT (AFMD-90-12, DATED DECEMBER1989, ENTITLED,
                                    "CREDIT MANAGEMENT: DETERIORATING CREDIT PICTURE EMPHASIZES
                                                  IMPORTANCE OF OMB'S NINE-POINT PROGRAM"


                          General     Comments

see   corl   ?nt 1.        In order to improve the clarity         of the report,        we suggest Chapters 1 and 2,
                          be combined.     Much of the data in these two Chapters                is duplicated      and
See con      xit2.        causes the report       to be redundant.       We also suggest the financial             condition
                          of the Rural Housing programs be included               in the report     since the
                          recommendations      relate   only to that program.          The report    cites    some large
                          delinquency   statistics      for FmHA, but does not break them down by program.
                          It recognizes    on page 18 that the majority             of these delinquencies         are in
                          our Farmer Program loans.          In fact,    about 95 percent of the delinouencies
                          are in Farmer Programs and the remaining               5 percent    in the Housing Programs.
                          As reported   on the September 30, 1989, Schedule 9 report,                  delinquencies        in
                          the Rural Housing Insurance Fund, using Treasury's                 delinquency      definition,
                          was $1.504 billion        out of a total    principal      and interest    balance of $28.236
                          billion.    Of this delinquent       amount, $487 million         was in litigation         at the
                          Office   of General Counsel or Department             of Justice.

Seecombent3.              On page 23, the report             states FmHA had "loan losses of about $22 billion           in
Nowon d,20.               fiscal    year 1989."         This is misleading       to someone unfamiliar    with FmHA's
                          financial     situation.          This amount is the allowance       for loss, not the
                          Agency's actual         1987 losses.         FmHA recognized  in 1987 that its loss
                          allowance     was inadequate          and made a substantial    adjustment    to the allowance
                          to more accurately           reflect     several years of deterioration      in the
                          agricultural       portfolio.         Actual    losses in FY 1987 were about $1.4 billion.

Seecorrjment4.            We also note the comment on page 63 that the Administration     plans to
Now on b. 47.             continue   asset sales.   FmHA has no new asset sale authority   in FY 1990 and
                          we understand    sales are very limited Governmentwide.   We suggest this
                          sentence be removed.

Seecorriment5.            GAO Recommendation        1

                          Automated      system   problems   hinder   FmHA servicing.

                          Departmental      Response

Seecomment6.              We do not believe    the comments on pages 70-72 accurately          and fairly   present
                          all facts pertinent     to FmHA's automated system.       As to the alleged
Nowon&        51 and52.   inability  of the system to generate accurate         and up-to-date    account
                          balances,  the system balances have served the Agency in two asset sales
                          amounting to millions      of dollars.  While the firm of Price Waterhouse did
                          not conduct a full     audit as part of these sales,      they reviewed FmHA's cash-
                          flow on the loans subject      to sale at the request of the underwriter.            In
                          addition,  GAO has audited FmHA's financial       statements     and has reported
                          problems only in the areas of acquired       property    and allowances      for losses.




                                    Page 103                                            GAO/AFMD-90-12 OMB’e Nine-Point Program
                            Appendix VI
                            Comment8       From the Department
                            ofAgriculture




                                                                                                                                     2

                 Moreover,     field       offices     are not requested   to verify      the account balances                  on
                 accounts sent          for IRS tax refund offset.         While the system could
                 automatically          select     borrowers  for offset,    field   offices   are given the
                 opportunity       to    exclude borrowers       as a safeguard    because of the legal
                 ramifications          of tax refund offset.

                 FmHA has made significant             progress    in the 80's to modernize          its automated
                 system.      Substantial       investments      and improvements       have been made to make
                 the system more responsive             to meeting the Agency's mission.               An example of
                 this progress,        FmHA is in the process of contracting                out the privatization
                 of single      family    housing billing,        escrowing,     and accounting      on a pilot
                 basis.      Also multifunction         work stations       have been installed        in field
                 offices     nationwide     to provide       high volume loan making and loan servicing
                 transaction       input capability        to local field       offices   giving   them control
                 over the accuracy of their             accounts.       Borrower account status          screens are
                 available      to field    offices     for determining        account balances on an as-needed
                 basis.      Also, history        is available     online    for all borrower accounts
                 reflecting       up to 15 months of transactions              posted to borrower accounts.

                 FmHA has also implemented        lockbox capabilities     with respect  to rural
                 housing loans allowing     up to 70 percent of borrower payments to be posted
                 to accounts on a 24- to 48- hour turnaround           basis.   As to the Federal
                 Managers' Financial    Integrity      Act, FmHA has corrected     30 of the 36 material
                 accounting  system weaknesses reported.

                 GAO Recommendation          2

                 The Administrator        of the Farmers Home Administration--for           FmHA's Rural
                 Housing programs--require          that program managers and private         lenders modify
                 loan applications        to include a signed borrower's      certification       that the
                 borrower has been advised of and understands           the government's         debt
                 collection    practices.

                 Departmental       Response

See cbmment 7.   The regulations         requiring        FmHA borrowers         to sign     a certification        statement
                 were published         on August        12, 1989.

                 GAO Recommendation          3

                 FmHA does not report            Multi     Family    Housing      accounts     to credit       bureaus.

                 Department      Response

See cbmment 8.   FmHA began to report            those     borrowers         in November 1989.

                 GAO Recommendation          4

See cbmment 9.   FmHA does not utilize            collection        firms.




                            Page 104                                                   GAO/APMD-90-12 OMB’s Nine-Point Program
                              Appendix VI
                              Comments From the Department
                              of Agclculture




                                                                                                                              3

        I          Departmental      Response

SeecomrLMlO        We are not aware of an OGC opinion  or other basis for the comment on page
                   82 that OGC agrees that referenced  appropriation   authority,     "neither
                   orohibits nor requires  FmHA to use GSA's debt collection      contractors."


                   GAO Recommendation          5

                   Agencies     are not assessing            delinquent    debtors    administrative     costs.

                   Departmental      Response
See com/nent 11.   In addition      to charging  an administrative     fee for income tax refund offset
Nowon@.63.         as discussed       on page 87, FmHA will    also charge a fee for processing    checks
                   returned    for nonsufficient    funds.     The regulations   were recently  amended to
                   authorize     this fee, but implementation       is dependent upon the completion    of
                   software    changes.

                   GAO Recommendation          6

Seecomment12.      FmHA's Single Family            Housing     program    needs to place      more emphasis       on write-
                   off procedures.

                   Departmental      Response

                   FmHA is working on a revision    of SFH servicing   regulations    to address the
                   need to seek deficiency   judgments,  after a foreclosure,      when the
                   foreclosure  sale purchase price is less than the unpaid balance on the
                   debt.

                   GAO Recommendation          7

                   Farmers Homes Administration                (for its Rural Housing loans),  report   closed-
                   out accounts to the Internal                Revenue Service as income to the debtor.

                   Departmental      Response

                   FmHA will  begin reporting discharged                  debts   to the Internal      Revenue Service
                   in January 1990 as recommended.




                              Page 105                                               GAO/AFMD-90-12 OMB’s Nine-Point Program
               Appendix VI
               Comments FYom the Department
               of Agriculture




               The following are GAO'S comments on the Department of Agriculture’s
               letter dated December 22, 1989.


               1. No change to report necessary.
GAO Comments
               2. No change to report necessary. As explained in chapter 1, this chapter
               is concerned with the reasons for changes in loan data at the govern-
               mentwide and agency level. We believe that we have adequately
               explained that Agriculture’s loan data indicators were influenced by the
               financial problems in the farm economy. In addition, FIIIHA'S Rural Hous-
               ing program experienced the same deteriorating loan condition as Agri-
               culture as a whole. Between fiscal years 1985 and 1988, the Rural
               Housing program’s loans receivables decreased by about 7.9 percent
               while delinquencies and write-offs increased by approximately 91 per-
               cent and 233 percent, respectively.

               3. Revised report to address allowance for loan and interest losses and
               to update the report using fiscal year 1988 data.

               4. No change to report necessary.

               6. GAO did not make a recommendation related to this issue.

               6. Although FmHA may have corrected some of its accounting system
               weaknesses reported under the Federal Managers’ Financial Integrity
               Act, the problems we cite in the report continue. Also, an internal F~HA
               report on its two loan asset sales stated that the sales “revealed areas of
               weaknesses in FIIIHA'S automated information systems, in the complete-
               ness of loan documentation, and in field office reporting.” As stated in
               our report on FmHA'S fiscal year 1987 financial statements, the study
               and evaluation of internal controls in the audit were made for limited
               purposes and would not necessarily disclose all material weaknesses;
               Consequently,   GAO did not express an opinion on FmHA'S SySteIn of inter-
               nal accounting controls. However, this report did cite specific weak-
               nesses in FIIIHA'S Automated Multiple Family Housing Accounting
               System. In a March 1989 letter to OMB on F-I~IHA'Suse of certain GSA-
               contracted collection services, the Acting Administrator stated that
               using such services would require an automated system “with a high
               degree of accuracy.” He further explained that FITIHA'S current system
               and procedures would result in too many errors to make its use an effec-
               tive collection tool. In response to this letter, on April 24, 1989, Treasury
               stated “F~HA continuously points to the lack of an automated system as


               Page 106                                GAO/AFMD-90-12 OMB’s Nine-Point Program
Appendix VI
Comments From the Department
of Agriculture




the reason for failing to meet credit management goals.” These issues
are further discussed in the agency comments section of chapter 4. Also,
we have modified the report to more fully explain these issues.

7. Report changed to reflect current status. Also, the regulations were
published July 12, 1989, not in August as cited.

8. Revised report.

9. GAO did not make a recommendation related to this issue.

10. The referenced opinion was signed by an Agriculture Associate Gen-
eral Counsel on November 19,1986.

11. Addressed in agency comments section of chapter 5.

12. GAO did not make a recommendation related to this issue.

13. Addressed in agency comments section of chapter 5 and report
revised to reflect the current status.




Page 107                              GAO/AFMD-SO-12 OMB’s NinePoint Program
Appkndix VII

Qmments From the Department of Education


Note: ‘GAO comments
supplgmenting those in the
report text appear at the
end of this appendix.
                                                            UNITED STATES DEPARTMENT OF EDUCATION
                                                   OFFICE    OF THE ASSISTANT     SECRETARY       FOR POSTSECONDARY    EDUCATION



                                                                                 JAN     121990


                             Ml-.   Donald     Ii. Chapin
                             Assistant       Comptroller          General
                             United     States      General       Accounting           Office
                             Washington,          DC 20548


                             Dear    Mr.   Chapin:

                             Thank you       for    the opportunity    to review      and comment on the draft
                             GAO report,         “Credit   Management:    Deteriorating         Credit Picture
                             Emphasizes        Importance     of OMB’s Nine-Point        Program”.
See cbmment 1.               The GAO report       adequately      reflects       the progress     the Department
                             has made over       a three     year   period     in implementing       OMB’s Nine-
                             Point   Program.      While     the Department          has not yet fully
                             implemented      the Nine-Point        Program,       efforts   are continually          being
                             made to develop       and implement          sound credit      management      policies.

                             The GAO report         assesses      Federal      agencies’       implementation       of OMB’s
                             nine-point      credit     management        program      and analyzes        changes    in the
                             Federal    government’s         loans     receivable        information       between    FY 1985
See cbmment 2.               and FY 1988.         The report,        however,       does not reflect          the continued
                             progress    which      has been made since             FY 1988 in implementing
                             various    points      in the Nine-Point            Program.        An example      of this
                             progress    can be seen in the area of write-offs.

                             The report      states         that    the Department,       as well   as guaranty
                             agencies,      wrote    off       only    a few loans     between    FY 1985 and FY 1988.
                             However,     since     FY      1988,     policies   have been developed         and
See cdmment 3.               implemented       which        have resulted      in the Department       writing-off
                             over    $700 million           in uncollectible        debts    in FY 1989 alone.

                             Also,     the Department’s           Write-off         Policy       Working      Group developed        a
See ctjmment 4.              draft     directive        on write-offs         which      describes         the Department’s
                             policies,         procedures,       and requirements              for   writing      off  debts.     It
                             contains        standards     for     officials        to apply       in determining         what
                             types     of debt       the Department          should      write-off         and close-out,      and
                             when.




                                                            *oo MARYLAND   AVE.. 9.w. WAr3HINOToN.   D.C. 20202. ---




                                    Page 108                                                          GAO/AFMD-90-12 OMB’s Nine-Point Program
                        Appendix VII
                        Commente From the Department
                        of Education




                   Page 2 - Donald          H.    Chapin




See cc   nent 5,   The directive        is currently         being   circulated       throughout        the
                   Department      for    comment and is expected               to be issued       in final
                   before    the end of January,             1990.     The Department         will    continue      to
                   fine   tune   its    write-off       procedures       to insure      that   uncollectible
                   debt   is identified           and systematically          written     off  and closed        out.

                   Specific     technical         comments    and our response       to        the
                   recommendations          are    enclosed    for your  information.

                                                                 Sincerely,

                                                                cc h-LLt+y---                    -
                                                                Leonard       L.    Haynes     III
                                                                Assistant          Secretaey

                   Enclosures




                       Page 109                                                    GAO/AFMD99-12 OMB’s NinePoint Prolpsm
                                       Appendix VII
                                       Comments Prom the Department
                                       of Education




                                                GAO Draft    Report  Titled,      “Credit   Management:
                                        Deteriorating      Credit   Picture      Emphasizes   Importance                           of
                                                  OMB’s Nine-Point     Program,”      GAO/AFMD 90-12,
                                                              Dated  December      7, 1989



                           Technical      Comments


                           GAO Comment:            . . . ..agency      financial            reports      sent     to Treasury     do not
                                                  separate        interest           associated         with    loans   from other
                                                  types       of accounts            receivables,           such as taxes.        We were,
                                                  therefore,          unable         to quantify         the amount       of loan
Now   Cl,n p.   22.                               interest        recorded           as accounts         receivable.        (Pg.  25)

See comment           6.   ED Response:           We believe            the      accounts       receivable           data   on    ED’s
       !                                          schedule        9’s         consists      entirely       of      interest       receivable.
       !,
                           GAO Comment:           . . . ..the     longer    a debt           is     outstanding,         the     more
                                                  difficult         the collection                of that      debt     will     be.
Now <n p. 23.                                     (Pg.      27)

See comment           7.   ED Response:           This    statement        is not necessarily             true    for    defaulted
                                                  student      loans.        Several     studies       indicate       that    defaulted
                                                  student      loans     become more collectible                as they       age.      We
                                                  believe      this    is true       because      many borrowers           default
                                                  when they        are young and have no income                  or low income.
                                                  As they      mature,       we believe        they    obtain     better      paying
                                                  jobs    and gain       the ability         to pay their        debts.
                                                  Concurrently         ED’s sanctions,            such as IRS offset,              salary
                                                  offset,      credit      bureau     reporting        and litigation           have
                                                  more meaning         to them and they             pay their       debts.

                           GAO Comment:           Table     2.2 Delinquencies  . , .Receivables                             for   the Five
                                                  Major     Credit   Agencies. Department     of                        Education     Fiscal
Now a p. 25.                                      Year     1985 22.6% and 1988 45.8%.      (Pg.                         32)
See cc lment 8.            ED Response:           Table     2.2 is extremely             misleading.              The dramatic          rise
                                                  in the percentage            delinquent           from fiscal           1985 to fiscal
                                                  1988 is primarily            due to decrease                in receivables            (see
                                                  appendix       I, table      1.1)      from     $16.1      billion        to $12
                                                  billion.         To more accurately               reflect        the portfolio
                                                  change,      the data      in table         II.1 (appendix              II) should         be
                                                  combined       with    the data        in table         1.1.       This     procedure       is
                                                  necessary        because     virtually          all     student       loans      in ED’s
                                                  loans     receivable       portfolio          are i n default.

                                                                                   FY 1985            FY    1988         Source
                                                  Guaranteed        Loans
                                                  Receivable                       $35.8  B           $47     6 0       Table      II.1
                                                  Loans     receivable              16.1B              12. 00           Table      I.1
                                                                                   $51.9  0           $59.6     B

                                                  Delinquencies                      $3.6 B            $5.5  0          Table      I.2
                                                  % Delinquent                        6.9%              9.2%




                                       Page 110                                                         GAO/APMD-90-12 OMB’s Nine-Point Program
                             Appendix M
                             Comments From the Department
                             of Education




                                       ThJs change In the percent dellnquent              Is a 33%
                                       increase.       It reflects    a very serious      problem which the
                                       Secretary     of Education     Is in the process of addressing
                                       with his credit        management plan and default          initiative.
                                       However, because of the structure             of the student         loan
                                       programs and the schedule Q and 42A reporting
                                       requirements,      table    2.2 substantially      overstates        the
                                       default   problem.
                   CA0 Comment:        Education's   deterloratlng credit  condition was
                                       primarily   due to default8 from the large number of
Now on    30.                          loans made In the late 1970s and early 1900s.     (Pg.                    40)
See car   ent 9.   ED Response:        The increase        in defaults       and the increase        in the ratio
                                       of delinquent         loans to loans outstanding            can be
                                       attributed       primarily      to increases      in loan volume,
                                       relatively       fewer federal        dollars    avallable      for grant
                                       programs,      increases      in higher education          costs which
                                       have outpaced the rate of inflation,                   and a policy     which
                                       has targeted        Stafford      loans to lower middle and lower
                                       income Individuals.             Defaults      may also be the result        of
                                       decreases      in the quality         of education      and the
                                       accountability          of program participants.
                   GAO Comment:        * . I . . lender activities       had decreased steadily  from over
                                       800 lender reviewe in fiscal            year 1981 to fewer than
Now on    49.                          200 such reviews          in fiscal   year 1987.   (Pg. 67)
See car nent 10.   ED Response:        The GAO report     should mention that in Fiscal  year 1989,
                                       ED completed 519 lender reviews.       Also, the guaranty
                                       agencies   conducted about 700 lender revlews during
                                       fiscal   years 1988 and 1989.
                   CA0 Comment:         . . . ..Many delinquent       Stafford     loan program loans were
                                       not referred       to IRS for offset.             This was because
                                       Education      did not'have      sufficient        automated resources
                                       or collection        contractor      capabilities       to handle
Now on p. 58.                          referral      of such a large number of accounts.                 (Pg. 78)
See comment 11     ED Response:     This Is an Incomplete           statement.      ED generally     relied
                                    on the guaranty         agencies     to select   accounts     to be
                                    assigned    to ED for IRS offset           purposes.      Prior to FY
                                    1990, ED did not mandate the assignment                  of guaranty
                                    agency account8 to ED for IRS offset                 purposes because
                                    It did not have the systematic              capability     and capacity
                                    to track these accounts and collect                them by other
                                    means.    Since ED did not have this capability                 and
                                    capacity    until     FY 1990, it could not meet the legal
                                    requirement       that mandatory assignment            must be in the
                                    Federal fiscal        interest.




                                                                   2




                            Page 111                                          GAO/AFMD-90-12 OMB’e Nine-Point Program
                            Appendix VII
                            CommentaFromtheDepartment
                            of Education




                                   ED has Increased        Its capacity     to collect   these
                                   accounts.       To the extent      that ED can more efficiently
                                   collect     than guarantors,       1t intends    to exercise   Its
                                   mandatory assignment         option when It is in the Federal
                                   fiscal    interest    to do so.
                 GAO Comment:      The agency's       decision       not to use the GSA contractors
                                   will    mean that no Education          accounts were referred        to
Now +I p, 60                       private    collection       firms    for 1 year.  (Pg. 81)
See c mment 12   ED Response:      This statement        Is true only with regard to accounts
     0                             newly-acquired       by ED during       1989, (not paying accounts
                                   or not Federal employee accounts)               many of which were
                                   not referred       to collection      agencies      for approximately
                                   one year.       Durlng FY 1989 defaulted            student     loan
                                   accounts valued at over one-half              billion      dollars
                                   remained at collection           agencies.      Sixty     ($60) million
                                   dollars     were collected       on these accounta.           In the
                                   previous     paragraph     GAO correctly      points     out that the
                                   original     (planned)     award date for the new collection
                                   contracts     was February       1989.     However, it incorrectly
                                   states    there was a 1 year gap In referrals                 "primarily
                                   because Education        decided to waJt until           its new
                                   automated debt collection           system    becomes      operational".
                                   It should be pointed      out that ED contracted     wlth
                                   National   Computer Systems      (NCS) to bring the new debt
                                   collection    system on-line    in April    1989. If NCS had
                                   lived up to its contractual        agreement and if ED had
                                   made collection     agency contract     awards as planned,
                                   accounte could have been referred         to the new collection
                                   agencies   In May 1989.
                                   Conversion  to the new debt collection              system   was
                                   delayed several   times during the year            because    of NCS
                                   failures.
                                  When it became evident           that the new contracts       would not
                                  be awarded until       January 1990, ED debt collection
                                  officials     appealed to Grants and Contract            Services   to
                                  allow additional       account placements       to the current      ED
                                  collectlon     contractors.         After a considerable      delay the
                                  current    contracts     were modified     on November 1989 to
                                  allow for additional          account transfers     - 139,771
                                  accounts valued at $228.6 million.              It Is estlmated
                                  that considerably        less than one-half       of these accounts
                                  were newly-acquired         in FY 1989.     The remainder were
                                  accounts    returned     to ED from collection       agencies during
                                  1989.




                                                              3




                           Page112                                        GAO/AFMD-90.l$OMB'sNine-PointProgram
                                  Appendix VU
                                  Comments From the Department
                                  of Education




                                         Finally,       in additicn                to   the     reasons   GAO cited                  for    not
                                         using      the   GSA collection                  contractors,         ED would                have     had
                                         to obtain        additional               resources         to monitor    the               GSA
                                         contractors.

                  GAL? Comment:          . * . . . In August      1988,      Education        published          regulations          to
                                        charge        a penalty      on delinquent            debt;     however,          according
                                        to an Education            official,         the   agency       will       not    implement
                                        the      charge    unti 1 after         the    new private           collection          f 1rm
Now on a. 63.                           contracts        are    awarded.          (Pg.    86)

See comjnent 13   ED Response:          This      paragraph            needs         clarification.                Under         ED’s      debt
                                        collection             regulations,                 as well        as under          other
                                        applicable             law,       ED may assess                penalties           only     where       the
                                        promissory            note       signed          by the        debtor      has a provision
                                        which       allows        the        loan      holder        to assess          penalties.               ( 34
                                        CFR 30.61(c),               31 USC 3717(e)(2),                       31 USC 3717(g)                and 4
                                        CFR 102.13(i)               (l)(iii),               CFR 102.13(i)            l(iii).            The vast
                                        majority          of student               loan       promissory         notes         do not
                                        contain         such      a provision,                    ED has charged               debtors
                                        actual        collection               costs        incurred         on these          loans,        and
                                        will      assess         an additional                  administrative               charge        of $3
                                        per     account          per month             to defaulters             on debts           being
                                        collected           by ED starting                    in FY 1990.           Perhaps           this      is
                                        the     additional            charge           which        GAO is referencing                  in this
                                        section         of the        report.

                  GAO Comment:          Education,           as well        as the        guaranty           agencies
                                        participating              in the       Stafford          loan       program,        have
                                        written        off     few    loans.          This      was primarily              because
                                        Education          has not       established              write-off          procedures          for
                                        guaranty         agencies         and the         Departments’             procedures          do
                                        net     comply       with     OMB Circular              A-129.          For example,           for
                                        the     accounts         assigned        from        guaranty         agencies,          Education
                                        procedures           do not      differentiate                between        written-off           and
                                        closed-out           accounts.           Education            recently         provided
                                        guaranty         agencies        with       write-off           procedures           and is
                                        currently          revising         it    internal          write-off          and close-out
Now on ip. 65.                          procedures.              (Pg. 90)
See comment 14.   EC Response:          ED and the       guarantors        have     been     reluctant         to write-off
                                        defaulted      student      loans     because        data      shows     that
                                        defaulted      student      loans,      unlike       other       consumer     loans,
                                        often     become    more collectible             with      age.

See comment 15.                         In May 1989,           ED issued           instructions                (89-G-159         Attached)
                                        to the      guarantors           covering           compromises             and write-offs.
                                        Guarantors         were     advised          that        ‘I.. ..The       Secretary          intends
                                        to require         the    assignment              of all        loans       on which
                                        guarantee        agencies         cease        collection              under      apprcved
                                        632.410(b)(4)           write-off            criteria..            .”     therefore,           ED
                                        will    have     the    responsibility                  to close-out              these      loans
                                        after     exhausting          all     collection              efforts.




                                 Page 113                                                         GAO/AFMD-90-12 OMB’s Nine-Point Program
                              Appendix VII
                              Comments From the Department
                              of Education




                -


See Fomment 16.                      As a matter       of policy,    ED has decided to write-off      all
                                     loans which       have reached the Federal statute         of
                                     llmltatlons       (SIX years) and close-out       all loans which
                                     have reached the period of limitations              for
                                     admlnlstratlve        offset  (ten years).     This policy    Is
                                     articulated       in a draft   directive   which we plan to
                                     finalize     within    the next month.     It should be noted
                                     that this policy         will be changed If either      the elx year
                                     or ten year perlod of llmltationa            changes.
                    GAO Comment:     The agenclee      In our review have generally               not assessed
                                     leglslatlvely       required     lnterest,      penaltles,     and
                                     administrative        costs on dellnquent         debts.      The use of
                                     these charges would serve as a deterrent                   to future
                                     delinquencies.         Also, these charges would generate
                                     revenue to the government which would offset                    at least
                                     some of the     coets     aseociated       with collecting       from
Now +n p. 67.                        delinquent     debtors.       (Pg. 93)
See clomment 17     ED Responee:     ED has been a leader in thle area.            ED currently
                                     charges defaulters      32.5% of the debt of loans belng
                                     collected   by collection     agencies    compensated on a
                                     contingency   fee basis.      This year It will        also begin
                                     aseessing   an administrative       charge of $3 per account
                                     per month to cover servlclng         costs (salarles,       space,
                                     computers etc.).       However, ED offlclale        believe    that
                                     the government must be concerned that these addltlonal
                                     charges do not become a disincentive            to repayment.       The
                                     government must determine        the polnt    (or range) where
                                     addltlonal   charges and penalties        become    excessive.
                                     There la a real financial        Issue -- at what polnt do
                                     debtors refuse to pay their         debts voluntarily,
                                     because the burden of the prlnclpal,           Intereat,     late
                                     charges and administrative         coats becomes too great?
                                     The Department’s     policy   on this subject       Is under
                                     review.




                                                                  5




                             Page 114                                       GAO/AFMD-90-12 OMB’s Nine-Point Program
                                    Appendix M
                                    Cbnmentn From the Department
                                    of Education




                     GAO Recommendation:         Require         program       managers           or    private         lenders    to
                                                 modify        loan    applications               to    include        an applicant’s
                                                 certification             that     they        are     or not        delinquent      on            a
Now on        42.                                federal         debt    (page      59).
         Ip
See corn In en! 18   ED Response:                We partially            agree.          We will        conduct       some analysis
                                                 of our       student         loan     recipient          population           to
                                                 determine          the    likely        effectiveness             of implementing
                                                 the    proposal.             In conducting             this     analysis,         we
                                                 will      look     at the        average        age of student              loan
                                                 recipients           and the        probability            of them        being
                                                 delinquent           on other         Federal        debts      versus        the
                                                 burden        implemenation             of this        proposal        would      impose
                                                 or the       total      student         loan      population.

                     GAO Recommendation:         Require         that     program          managers     and private          lenders
                                                 modify        loan     applications            to include          a signed
                                                 borrower’s           certification             that    the     borrower       has
                                                 been     advised         of and understands                the     government’s
Now cIn p. 42                                    debt     collection             practices        (page     60).

See cc3mment 19      ED Response:               We disagree.                Section          433 of the            Higher        Education
                                                Act of 1965,              as amended             already         requires         tl;at
                                                numerous          disclosures              be made to borrowers                       in
                                                either        the     application              or promissory              note.
                                                 Included         in those          disclosures              is a statement
                                                outlining           the     consequences               to the        borrower           if    the
                                                borrower          defaults,            including           a statement            that        the
                                                defaulter           will      be reported              to a credit            bureau          or
                                                credit        reporting           agency.            Draft       regulations               which
                                                are     at OMB for            clearance            further         expands        the
                                                disclosure            requirement              to include            statements             that
                                                the     borrower         will       be liable            for     substantial
                                                collection            costs       that       the     borrower’s           Federal           and
                                                State       income       tax      refund         may be withheld                to pay the
                                                debt,       that      in certain             cases       the     borrower’s             wages
                                                will      be garnished              or offset,             and that         the      borrower
                                                will      be ineligible               for      additional            Federal         student
                                                financial           aid,      as well          as for        assistance           under
                                                most      Federal        benefit           programs.

                     GAO Recommendation:        Require        program       managers       to         implement      the
                                                procedures          set    forth    in their              agencies’
                                                regulations,            such     as regularly               scheduled     site
Now on p, 53                                    visits       (page      731.




                                                                              6




                                    Page 116                                                   GAO/AFMD-90-12 OMB’s Nine-Point Program
                           Appendix VII
                           Comments From the Department
                           of Education




See Comment 20    ED Response:            We concur.     The Department          increased    its lender
                                          revlew staff     to 60 FTE in FY 1989.            In FY 1990,
                                          theae reviewers     will      conduct over 550 revlewa of
                                          lender and guaranty          agencies.       In addition,
                                          guaranty   agencies     will    conduct     another 600 lender
                                          revlews in FY 1990.
                  GAO Recommendation:     Require guaranty      agencies   to temporarily      assign
                                          delinquent    accounts    to Education  so that these
                                          accounts   can be referred     by Education       to the
                                          Internal   Revenue Service     for federal      income tax
Now on p. 68.                             refund offset     (page 94).
See ! omment 21   ED Reeponse:            We concur.        Prior     to FY 1990, ED did not mandate
                                          the assignment        of guaranty        agency accounts      for IRS
                                          offset    purposes because It dld not have the
                                          systematic       capability      and capacity       to track these
                                          accounts and collect           them by other means.           NOW
                                          that we do have the capacity                to collect    these
                                          accounts,      the Department         lntends   to exercise      Its
                                          mandatory assignment           option when it is in the
                                          Federal    fiscal     interest      to do so.
                  OAO Recommendation:     Assess interest,    penalties   and administrative
                                          costs on delinquent    debts, pursuant      to the Debt
                                          Collection   Act or other     applicable    statutes (page
Now on p. 68.                             95).
See domment 22    ED Response:            ED currently      charges defaulters        32.5% of the debt
                                          of loans being collected          by collection     agencies
                                          compensated on a contingency           fee basis.      This year
                                          it will    also begin assessing        an administrative
                                          charge of $3 per account per month to cover
                                          servicing     costu (salaries,       space, computers etc.).
                                          However, ED officials        believe     that the government
                                          must be concerned that these additional               charges do
                                          not become a disincentive          to repayment.       The
                                          government must determine          the point     (or range)
                                          where additional       charges and penalties        become
                                          excessive.      The Department’s       policy    on this
                                          subject    1s under review.




                                                               7




                           Page 116                                      GAO/AFMD-90-12 OMB’e Nine-Point Program
 .
               Appendix M
               Comment6 From the Department
               of Education




               The following are GAO’S comments on the Department of Education’s let-
               ter dated January 12, 1990.


               1. Addressed in Executive Summary.
GAO1Comments
               2. The report discusses, in chapter 6, Education’s efforts to develop
               write-off procedures.

               3. No change to report necessary. See comment 2.

               4. See comment 2.

               6. Revised report to include target date.

               6. No change to report necessary. The information on this refers to the
               entire federal government. Agency financial reports sent to Treasury do
               not separate interest associated with loans receivable from other types
               of accounts receivable.

               7. Revised report states that generally the longer a debt is outstanding
               the more difficult it is to collect.

               8. Added footnote to table 2.2 explaining the effect of defaulted guaran-
               tees on the percentages. Table 2.2 is to be considered in the context of
               the entire chapter. We disagree that the data in table 11.1should be com-
               bined with the data in table I. 1. Education’s calculations based on com-
               bining these two tables are misleading because they do not include the
               delinquent loans held by lenders.

               9. Clarified report.

               10. Added additional information to report.

               11. Clarified report.

               12. Clarified report to further explain why there was a l-year gap in
               referring newly acquired accounts to collection agencies and why Edu-
               cation did not use the GSA contractors. Also revised target date for
               awarding new contracts.

               13. Clarified report to explain that this is an administrative   charge.



               Page 117                                GAO/AFMD-!Wl% OMB’s Nine-Point Program
-
    Appendix VII
    Commenta From the Department
    of Education




-
    14. Revised report to include additional reason for not writing off
    defaulted student loans and to explain Education’s recent policy deci-
    sion regarding write-off and closeout.

    16. Education’s instructions to guarantors covering compromises and
    write-offs are not included here but were considered in finalizing this
    report. They are available from us upon request. Also see comment 2.

    16. See comment 14.

    17. No change to report necessary. The cited GAO comment is a general-
    ization about the agencies covered in our review. Also, as Education
    points out in its comments, the vast majority of student promissory
    notes do not contain a provision which would allow the loan holder to
    assess such penalties. Further, the report discusses the costs Education
    assesses delinquent debtors, costs associated with using private collec-
    tion firms, and the planned administrative charge to cover servicing
    costs.

    18. Discussed in agency comments section of chapter 3.

    19. Discussed in agency comments section of chapter 3.

    20. Discussed in agency comments section of chapter 4.

    2 1. Discussed in agency comments section of chapter 5.

    22. Discussed in agency comments section of chapter 5.




    Page 118                              GAO/AFMD-90-12 OMB’s Nine-Point Program
Append(ix VIII

Co$ments From the Department of Housing
an4 Urban Development

Note: GAO comments
supplementing those in the
report tekt appear at the
end of th/is appendix.
         /

        i

                                                           U.S. DEPARTMENT OF HOUSINQ AND URBAN DEVELOPMENT
                                                                          THE UNDER SECRETARY
                                                                           WA6HlNQTON.DC. 20410




                             January          5,    1990



                             Mr. Donald             8. Chapin
                             Assistant             Comptroller       General
                             Government             Accounting       Office
                             Washington,              DC 20548

                             Dear      Mr.     Chapin:

                                       Enclosed     please     find     the Department        of Housing    and Urban
                             Development's          official       response    to your      report    to Congress,
                             entitled:          "Credit      Management:      Deteriorating          Credit  Picture
                             Emphasizes         Importance       of OMB's Nine       Point     Program",    dated
                             December        1989 (GAO/AFMD-90-12).

                                       If     you need any         further     information     about  our response,
                             please          contact  Donna        Abbenante       of my staff    on 755-3532.




                                                                                    Alfred    A.   DelliBovi

                             Enclosures




                      Y




                                            Page 119                                         GAO/AFMD-90-12 OMB’s Nine-Point Program
                                Appendix VIII
                                Comments From the Department of Housing
                                and Urban Development




                                    Response    to GAO Report      On Credit     Management


                         The Department of Housing and Urban Development                        has reviewed
                    the captioned  report and has the following comments:
                           1.      Page 59:        *We . . . recommended that...        the
                                   Department        of Housing    and Urban Development
                                    . . . require      that program managers and private
                                   lenders      obtain     loan applicant's     consent    to
                                   obtain     tax information        from IRS".
                           We agree with        the desirability       of screening    loan
See cbmment I       applications       to deny benefits      to those who are delinquent         in
                    debts to the IRS. At present,              there is no process that provides
                    timely screening        of IRS indebtness.         Our guaranteed loans are
                    originated      in the private      sector which is denied access to IRS
                    data.     Until    a system such as I-IUD's CAIVRS system is loaded with
                    IRS delinquency        data, the time required         for screening    with the
                    IRS would delay loan processing              unacceptably.     If the IRS
                    expressed an intent         to develop a system for timely screening            or
                    agreed to provide debtor data into CAIVRS and if the screening                     ie
                    acceptable      under the Computer matching Act of 1988, then HUD will
                    adopt this recommendation.             In addition,     we would need assurance
                    that the IRS files         would exclude taxes that may be in dispute
                    from their      delinquency     records.
                          Also, given the importance of Credit Alert as a tool for
                    implementing   OMB Circular    A-129, it is difficult      to understand
                    why OMR itself   is delinquent     in responding   to HUD's April     1989
                    request for an opinion      on the applicability     of the Privacy Act to
                    the expansion of Credit Alert.
                            Section 312 loan applications          will    be modified    to include
                    the applicant's      consent for the department to obtain tax
                    information     from IRS. It should be noted that the Program Office
                    expressed a concern of revising           its loan applications         frequently
                    to satisfy     GAO's recommendations.          It is requested that all
                    necessary     changes be consolidated        into one recommendation.           This
                    would eliminate      confusion    that occurs in the Field Offices when
                    several requests to modify that application                 occur at different
                    intervals.      Departmental    claims would not be included            since these
                    debts arise as a result        of individuals        receiving    funds for which
                    they are not entitled.         No loan application          is involved    since the
                    debt is not a result        of extending     credit.




                w




                                Page 120                                   GAO/AFMD-SO-12 OMB’s Nine-Point Program
                                 Appendix VIII
                                 CommentslProm the DepartmentofHousing
                                 andUrbanDevelopment




Now on p, 40                2.      Page 56:   -- The second sentence of the first
                                    paragraph is incomplete  and out-of-date.    It
                                    should read:
See corndent 2.             "Charges      under the Title     I manufactured      home loan
                           program have not been sufficient             to offset     claim
                           losses,      and in October      1989, HUD revised      its method of
                           collecting        premiums on these loans in order to correct
                           this     problem.      Wore of the premium charge is now
                           collected       during   the early    years of the loan when the
                           risks     of default     and claim    losses   are greatest."
Now on p.i 42              3.       Page 60:          "The Secretaries         of the Department
                                     [including]        Housing    and Urban Development           ...
                                    require       that program managers and private
                                    lenders       modify    loan applications          to include    a
                                    signed       borrower's     certification        that     the
                                    borrower        has been advised          of and understands
                                    the Government's           debt collection         practices".
                            We agree to modify those applications     that do not already
See comment 3.       contain   such a certification.    Section 312 loans already has this
                     consent on its loan applications.       Departmental    Claims will  not
                     be included    for the reason mentioned above.       The debtors are
                     informed of the debt collection     practices   when the demand letters
                     are forwarded.
Now on p/, 68.             4.       Page 94:       I...   Eousing    and Urban Development               ...
                                    require    program mangers to refer                 delinquent
                                    accounts    to private       collection         firms     in the normal
                                    course   of their     collection        activities          and in
                                    accordance     with Office        of management and Budget
                                    Circular    A-129."
                             We agree with the recommendation and have referred               over $128
See comhent      4   million    in Title     I debts to private     collection     agencies since
                     1986. Also, as cited in the report,             a single    family deficiency
                     judgement pilot       is in process,     and these judgements will         be
                     referred     to the Title     I concentrated    collection     centers.     These
                     centers attempt to collect         and in turn refer problem cases to
                     private    collection     firms.   Multifamily      judgements will     be
                     referred     if appropriate.




                                 Page121                                       GAO/Al?MD-90-12OMB'sNine-PointProgram
                               Appendix VTII
                               CkmunentrPromtheDeparhnentofIiou&g
                               and Urban Development




                        On both Section 312 debts and Departmental                    claims,    the
                  Department is currently  using the debt collection                     tools   mentioned
                  in the report.
Now bn p. 68             5.       Page 95:       I)... Housing and Urban Developaaent       ...
                                  assess interest,        penalties  and administrative
                                  costs     on delinquent     debts, pursuant      to the Debt
                                  Collection      Act or applicable     statutes".

See cbmment 5.          We agree.   As cited in the Report, we already assess such
                  charges in the single     family and multifamily  programs and are in
                  the process of amending regulations      to charge such assessments in
                  the Title  I program.
See cbmment 6.           In fact, the second sentence at the top of page 87 in the
Now Qn p. 63.     text   of this chapter also should be revised to read:
                                  VDD officials        informed     us   that   the
                                  Department  is revising    its Title    I
                                  regulations   to permit   HUJJ'e administrative
                                  cost to be assessed     to debtors."
Now an p. 68.                     Page 95:    "The Secretary     of Housing    and Urban
                                  Development    . . . report closed-out    accounts   to
                                  the IRS as income to the debtor.
See comment 7.             We report closed-out      accounts to the IRS as required.           In
                  1989 (tax year 1988), we reported             949 closed-out     Title  I accounts
                  totalling      $2.7 million.     Also,   the deficiency      judgement
                  initiative      will result    in a significant      increase    in single  family
                  close-outs      that will    be reported    for tax year 1990 and future
                  years.
See ccjmment 8.          6.      Page 98 --      In conclusion       we support GAO's
Now op p. 72.
                                 recommendation      for legislative        authority      for
                                 taxpayer    addresses from IRS to be used by
                                 other Federal agencies in pursuing               the full
                                 range of debt collection          techniques       available
                                 to them.     We routinely     used the services           of
                                 the IRS to locate debtors in the past under
                                 IRS project     719 and are currently          revising
                                 our agreement with the IRS to comply with the
                                 requirements     of its Computer Matching Act of
                                 1988.     We submitted    a proposed agreement to
                                 the IRS in late November 1989 and are
                                 presently    engaged in drafting         the required
                                 benefit    cost analyses and Federal Register




                              Page 122                                     GAO/AFMD-BO-12OMB'sNine-PointProgram
.




    Commentu From the Department of Housing
    and Urban Development




      Notice.    Presumably,  the GAO's recommendation
      would exclude Project     719 from the
      requirements    of the Computer Matching act and
      thus reduce the administrative     burden to
      Agencies.




    Page 123                                  GAO/-90-12   OMB’s Nine-Point Program
               Appendix VIII
               Chnmenta From the Department of Housing
               and Urban Development




               The following are GAO'S comments on the Department of Housing and
               Urban Development’s letter dated January 6, 1990.


               1. Discussed in agency comments section of chapter 3. Further, the Sec-
GAO Comments   tion 3 12 loan program was not within the scope of our review.

               2. Clarified report.

               3. Addressed in agency comments section of chapter 3.

               4. Addressed in agency comments section of chapter 5.

               6. Addressed in agency comments section of chapter 5.

               6. Revised report.

               7. Addressed in agency comments section of chapter 5.

               8. Addressed in agency comments section of chapter 6.




               Page 124                                  GAO/M-MD-90.12 OMB’s Nine-Point Program
 Appendix IX

 Co&ments From the
 SmhJlBusinessAdministration

Note: GA@ comments
supplemqnting those in the
report te$ appear at the
end of thib appendix.
                                                       U.S.   SMALL    BUSINESS      ADMINWRATION
                                                                  WASHINGTON.     D.C.   20416




                             MK. Donald H. Chapin
                             Assistant    Comptroller      General
                             Accounting     and Financial     Management              Division
                             General    Accounting    Offfice
                             Washington,     D. C. 20548
                             Dear Mr.     Chapin:
                             We have reviewed      your draft  report   entitled,      "Credit   Management:
                             Deteriorating     Credit  Picture  Emphasizes      Importance     of OMB's
                             Nine-Point    Program,"    (GAO/AFMD-90-12).
See con    3nt 1.            Credit    management issues           have received      substantial       attention    at
                             SBA and we are pleased             that GAO notes that SBA has experienced
                             the most favorable            changes in credit       management in the past 3
                             years of the 5 major credit               agencies    reviewed.        Furthermore,
                             while we are concerned             by the statement        on page 4 that SBA
                             understated        loan delinquencies         in fiscal     year 1988 by about
                             $0.2 billion,         because we only report          past due portions          of loans
                             rather    than entire         loan balances,      we are pleased        that GAO has
                             acknowledged         corrective      measures implemented.           Notwithstanding,
                             we plan to analyze            this aspect of the report           further     and
                             provide     additional        comments when the report          is issued.
                             The following    are our specific  comments                     on the   five   recommen-
                             dations   made to SBA in the report:
See cornkent    2.                Recommendation          1, page 59 - Require         that program managers
                                  and private        lenders      obtain   loan applicant's       consent    to
                                  obtain     tax information           from IRS.     SBA can add language        to
                                  require      applicants       to consent      to IRS providing      tax
                                  information;         however,      the processes     for obtaining       such
                                  information        must be implemented          in a manner to allow loan
                                  applications         to be processed        in a reasonable      time frame.
                                  SBA normally         requests      that applicants      provide    copies    of tax
                                  returns      for the last        three years as a starting          point    in the
                                  credit     analysis      process.
See comment 3.                    Recommendation        2, page 73 - Require                 program managers to
                                  implement      the procedures           set forth        in their      agencies'
Now on p, 53.                     regulations,       such as regularly              scheduled       site    visits.       SBA
                                  has for years required              field     office       personnel      to visit
                                  lenders      at least     annually        and conduct portfolio                reviews.
                                  Our Computerized          Internal        Control      Review (CICR) function,
                                  which includes        visits      to field        offices,       contains       check list
                                  items to test compliance                with this        requirement,         or if
                                  waived,      to assure that waivers               are properly         justified.




                                 Page 125                                                    GAO/AFMDM-12       OMB’s Nine-Point Program
                     Appendix M
                     CanmentcdFrom the
                     Small Budness Administration




                      In addition,      SBA reviews    all requests              to purchase
                      guaranteed     portions    of loans,  and may              adjust     or deny
                      amounts claimed       for reasons of lender                noncompliance      with
                      written    agreements    or prudent   lending              practices.
See omment 4.         Recommendation            3, page 94 - Require            program managers to
   “I                 refer      delinquent        accounts     to private       collection        firms in
Now cpnp, 68.         the normal course of their                  collection       activities        and in
                      accordance         with OMB Circular           A-129.      SBA views the GSA Debt
                      Collection         Services      contract      as an additional           tool to
                      facilitate         collection      of delinquent          debt.       SBA maintains       an
                      extensive        and effective         network of field           offices      that
                      actively        pursue delinquent          debtors      for payment,         using
                      automated        systems with close management oversight.                           Field
                      offices       are encouraged         to refer       loans when they are not
                      able to perform            the function        adequately       themselves.
                     For example,      SBA management has identified    field  offices
                     with high delinquency       rates,   and during the month of
                     January   1990, will    make referrals    under the “Cure” portion
                     of the contract      of loans 6 months past due but not in
                     active  liquidation.

                     Finally,    when field    personnel     indicate they have pursued
                     all avenues available        to them and consider     the credit   no
                     longer   collectible,     all loans with no legal       bars to further
                     pursuit   are automatically       referred.
                     We believe   our four years of referral       experience,       during
                     which the ratio    of dollars  collected    to dollars       referred
                     has been less than one percent        (l%), enforces      the validity
                     of our philosophy    of maximum collection      efforts      prior    to
                     referral,

See cpmment 5.       Recommendation         4, page 95 - ASSeSS interest,                 penalties       and
                     administrative         costs on delinquent           debts,     pursuant       to the
Now qn p. 66.        Debt Collection          Act or other applicable             statutes.         SBA
                     assesses      interest      on all loans,        and in the guaranty
                     portfolio       (the largest      ), the rate assessed            is the market
                     rate charged by commercial               lenders.      Additionally,           SBA
                     earns interest         from the date of last payment,                  which,      in the
                     case of a delinquent            loan,    translates      into a stiff          late
                     payment penalty.           Last,    in the process         of liquidating
                     assets    of defunct       borrowers,       SBA adds all legally             allowable
                     expenses      incurred      in safeguarding         and disposing        of the
                     assets    to the balance          of the loans in order to recover
                     those costs wherever           possible.

See comment 6.       Recommendation     5, page 95 - Report closed-out      accounts    to
                     the Internal     Revenue Service     as income to the debtor.      AS
Now on p. 66.        noted in the draft      report,   automated   systems were developed
                     in fiscal    year 1989 that will      allow SBA to implement    this
                     recommendation     in January    1990, and subsequent   Years.

                                                         -2-



                 Y




                     Page 126                                                 GAO/AFMD-9042 OMB’s NinePoint Pro@am
       Appendix M
       Canmenta    From the
       Small Business Admhiatration




In summary,       we believe  that SBA is in substantial     compliance   with
your draft      Recommendations     1 through  4 and that for Recommendation       5,
SBA will      begin reporting    closed-out   accounts  to IRS in January    1990.
We appreciate     the opportunity      to comment on the draft          report   and
anticipate    providing   additional     comments     on the report       when it is
issued . If you need any additional            information,      please contact
Mr. Steven A. Switzer,       Assistant     Inspector     General    for Auditing
at 235-8203.




                                  -3-




      Page 127                                         GAO/AFMD-go-12 OMB’s Nine-Point Pro@am
               AppendixIX
               Comments From the
               Small Business Administration




               The following are GAO'S comments on the Small Business Administra-
               tion’s letter dated January 6, 1990.


               1. No change to the report necessary.
GL$OComments
               2. Discussed in agency comments section of chapter 3.

               3. Discussed in agency comments section of chapter 4.

               4. Discussed in agency comments section of chapter 5.

               5. Report changed to reflect administrative costs charged to debtors. SBA
               comments related to interest and penalty charges are discussed in the
               agency comments section of chapter 6.

               6. No change to the report necessary.




               Page 128                                GAO/AFMD-SO-12 OMB’s NinePoint Program
Apjmkiix        X

Co$unentsFrom the Department of
Veibrans Affairs

Note: G/40 comments
supplem$nting those in the
report tekt appear at the
                                                                   THE SECRETARY OF VETERANS AFFAIRS
end of this appendix.
                                                                                WASHINGTON




                             Mr. Donald H. Chapin
                             Assistant   Comptroller General
                             U.S. General Accounting   Office
                             Washington,   DC 20548
                             Dear      Mr.    Chapin:
                                       I     am pleased     to respond to your letter,                      dated December 7,
                             1989,           transmitting       your  draft      report                  --WT.                  .
                                                   0 Credit   Pioturo l&8~harrises moo                          of OEIB’s Wine-
                                                       (GAO/AFMD-90-12).

                                   Our review of the draft   showed three areas of concern that
                             are applicable  to the Department of Veterans Affairs  (VA).  These
                             are :
See cornbent    1.                              o   Loan origination            procedures         need strengthening:
See comjnent 2.                                 o   Account       servicing      needs continued              emphasis,   and
See comrjnent 3.                                0   Collecting         and writing         off   delinguent       debts   need more
                                                    emphasis.
                                       Enclosed  is a fact sheet containing                         our comments to        five   of
                             the     recommendations   in the draft report.
See comment 4.                        One additional         comment concerns           your    statement     that      VA
        I                    suspended reporting          closed-out      veterans     loan guaranty      accounts to
                             the Internal      Revenue Service          (IRS) as income to the debtor.                YOU
                             said this was done because several                 state law suits challenged            the
Now on i. 66.                validity     of establishing        such debts (draft        report,    page 92).       VA's
                             Centralized      Accounts       Receivable      System has never reported             these
                             accounts to the IRS as income.                There may have been isolated            cases
                             where regional          offices      manually       reported     a small      number of
                             accounts,     but the Department has not reported                them on an automated
                             basis since we started           this program.
                                       Thank you for           the     opportunity         to review     and comment on your
                             report.
                                                                                     pp*



                                                                                     Edward J.      Derwinski
                                                                                     Secretary
                             Enclosure




                                             Page129                                                GAO/AFIVLD-ZW)lBOMB'sNine-PointPro~~
                           Appendirx
                           Conunent8I+omtheDepartxnentof
                           VetaranoMfain3




                                                                                                        Enclosure




                 1.      B                     (page     59)      - That      the    Beareteries       of    the
                 Dopartmenta      of Xou8ing     and Urban Dov8lopment             and Veteruks     Affeir8,
                 and the Administrator8           of the Iranor           Home Adriniatretion         end the
                 em811 Busine88       AcImini8tration          require     thet    program      manager8 and
                 private     lenbet     obtain      loan     l ppliarntm*        aon8ent     to obtein       tax
                 information      from IRS.
See comment 5.        m              - The Veterans           Benefits     Administration        (VBA) has
                 changed      its      loan     guaranty     regulations      and forms        to collect
     ,           veterans'      social      security    numbers to screen against          IRS delinquent
     I           taxpayer     files.       However, because of the long IRS turnaround                 time,
                 it has not been feasible               to screen applicants         against    IRS files.
Now dn p. 36.    VBA will      explore       the option    cited     on page 48 of the draft          report
                 that    refers      to quicker       procedures       under 26 U.S.C.        6103(c)     for
                 obtaining       IRS information.

Now on p. 42     2.   m                       (page 60) - That the Bearetary           of the Department
                 of Vetwen8         Affairs       (for     VA’8 Lo8a     ouarenty     program)    end the
                 Admini8trstor         of   lPermer8     Borne Admini8trstion        (for PmHA@s Rural
                 Bou8ing     program81       require     program  manager8       to deny credit       to any
                 loan appliaant         found to be delinquent          on 8 federal      debt, until    the
                 debt i8 8etisfaatorily             te8olvea.

See cbmment 6.       Comments - We agree that    applicants      who have an outstanding
                 Federal  debt will   have their    applications        denied    unless    they
                 provide evidence that the debt has been paid-in-full          or a repayment
                 plan is established.   Existing instructions      will   be revised     to this
                 effect.
Now 4n p. 53.    3.   B                       mago        73)    - Thet the Boaratery        of the Department
                 of   Votbrur8      Affeira      roquiro          program     manager8    to develop      ana use
                 form81 lendor        sgreement8          rhiah     inaluclo  speaifia    lender   raguirements
                 end ponsltie8         for  not      l   ahieving       tho68 requirements.
See cbmment 7.        Comments - We do not consider                it necessary to incorporate               lender
                 agreements         into      the       loan    guaranty     program         because      of     the
                 certifications          lenders must make on the various                 forms VA requires.
                 When a lender's            certification         is breached,        VA has the right             to
                 adjust      or deny a claim in the event of foreclosure.                            A breach of
                 a lender certification               may also result     in suspension          of the lender.
                 Pending regulations               will     also allow    the assessment            of monetary
                 penalties       against        lenders       making false       certifications.               Other
                 regulations       that are now being drafted               will    clearly       state what is




                          Page130
                         Appendix   X
                         C0mmen~Pr0mtheDeP8rtI8ent0f
                         VetenrneAffek4




                 2.

                 expected     of lenders    making loans on the automatic     basis    (over 80
                 percent     of loans now being guaranteed      are automatic     loans)    with
                 specific     criteria   for withdrawal  of the automatic   authority.
                     Our system is well established           and familiar    to all participants.
                 Where there are breakdowns,            it is not due to a system weakness but
                 rather    a deliberate       incidence     of fraud    or a shortage           of agency
                 resources,     notably      personnel,      for oversight        activities.           Any
                 system, either     currently      in use or proposed,      is subject        to the same
                 weaknesses.      In summary, we see no inherent           advantage in requiring
                 a lender agreement vice the currently               used certification           program.
         /
         I
Now on p[ 68.    4. m                      (Pqv     94) - Th8t          the 6earot8rioe       of Houeiag     8ad
         ,       Urban     Developrent      8ad Voterure           Aff8ire      8ad the Adeiaietr8tor         of
                 ths 61811 Bueiaeee        Adeiaietr8tioa            require     progrur8mgere        to rofor
                 deliaqaoat       8aaouate      to priv8te           aolloatioa       firme   in the     normal
                 Qouree of their        oolleation        8ativiti.e          8ad in 8aaord8aoe       with   OMB
                 Ciroul8r     A-129.

See comment 8.       Comments - VA is referring         debts to private       collection     agencies
                 in our normal course of collection.             We discussed      with both OMB and
                 Treasury   the issue regarding         the 6-month timeframe           for referral,
                 and they allowed us to use a l-year           timeframe     rather than 6 months.
                 This allows us to use credit         reporting     agencies     and IRS income tax
                 refund offset       as collection    tools    before the debt is referred            to
                 a private    collection      agency.

NOW on pi 68.    5.                          (Page   95)   - The    Searet8rioe       of the Departmoats
                 Of Bduaatioa,          EOUeiag 8ad Urb,an Dsvelopment,             8nd Veter8m8 Aff8ir8
                 8nd the Adeiaietrator6            of    the em811 Bueiaeee          Adeinietr8tioa           8nd
                 the P8reore         Home Adeinietration        (for     it8    Rur81 HOU8iag           lo8aS),
                 aee*ee    iatereet,      penaltie       md adeini8tr8tive          aoete     of doliaqwat
                 dabte,     pureurnt     to the Debt COlleCtiOn              Act or othsr          8pplia8blo
                 8t8tUt88.

See comment 9.         w           - The VBA is already              addressing       this   issue  in
                 implementing       another     GAO audit    recommendation      included     in GAO's
                 final   report    Debt Collection.     . Biuons        Are Owed While Collection
                                   na Problems       Are Unresolved         (GAO/APMD-86-39).       We
                 supported     legislation       for a mortgage       indemnity     bill   that would
                 result   in a debt not being created if a loan went into foreclosure.
                 We are currently         developing    a different      approach to the topic      of
                 interest    charging      based on the effect      of the new legislation.        Our
                 expected completion         date is January 31, 1991.




                         Page131
               Appendix X
               Commenta Prom the Department of
               Veterans A&hi4




               The following are GAO’S comments on the Department of Veterans
               Affairs’ letter dated January 19, 1990.


               1. See comments 6 and 6.
G&O Comments
               2. See comment 7.

               3. See comment 8.

               4. Revised report to clarify that this was manual reporting for some
               accounts.

               6. Addressed in agency comments section of chapter 3.

               6. Addressed in agency comments section of chapter 3.

               7. Addressed in agency comments section of chapter 4.

               8. Addressed in agency comments section of chapter 6.

               9. Addressed in agency comments section of chapter 6.




               Page 132                             GAO/AFMD-W12   OMB’s Nine-Point Program
Apfnx&x   XI

Mq/jorContributors to This Report


                            Robert Pewanick, Senior Assistant Director, (202) 276-96 10
Accounting and              Cleggett Funkhouser, Evaluator-in-Charge
Finapcial Management        Linda J. Lambert, Evaluator
Divi ion, Washington, MaryWman,      Evaluator
    4
DC. I                 Charles Allen, Accountant
                      Coleman P. O’Toole, Evaluator
                            Norma J. Samuel, Evaluator

      1

                            Andrea J. Levine, Attorney
Offide of the General
Courkel




                            Page 133                             GAO/AFMl.MW12 OMB’s Nine-Point Program
Glossary


Loans Receivable          The unpaid principal of direct loans disbursed by a federal agency and
                          defaulted guaranteed loans.


Loan Delinquency          A loan receivable where the borrower has failed to pay the obligation by
                          the date specified in the initial written notification or applicable con-
                          tractual agreement and has not made other satisfactory payment
                          arrangements.


Lo+ Write-off             A reduction in loans receivable which occurs after an agency determines
                          an amount to be uncollectible.

    !


Gubranteed Loans          The unpaid total principal of the loan made by private lenders and guar-
                          anteed by the government, even though the guarantee may be less than
Outstanding               100 percent of the loan.


Termination for Default   Reduction in guaranteed loans outstanding which generally results in
                          agency direct loans or the acquisition of property.




(f@ww                     Page 134                              GAO/AFMlM&12   OMB’s Nine-Point Progmm
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