c .,I United States Genera1 Accounting, Office. Report to the Secretary of Agrkulture u Juuuary 1990 FINANCIAL AUDIT Farmers Home Administration’s Fhancial Statements . for 1988 and 1987 United States General Accounting Office Washington, D.C. 20648 Accounting and Financial Management Division B-226249 January 25,199O The Honorable Clayton K. Yeutter The Secretary of Agriculture Dear Mr. Secretary: This report presents the results of our examination of the Farmers Home Administration’s (FmHA) financial statements for the fiscal year ended September 30, 1988. Our opinion on ~HA’S consolidated financial statements is qualified because we were not able to satisfy ourselves that FMA'S acquired property accounts were presented fairly. FIIIHA lost $13.8 billion in fiscal year 1988. The 1988 loss was partially offset by appropriations of $7.5 billion. F~HA'S accumulated deficit is now $42.6 billion. The 1988 loss was primarily attributable to net inter- est expenses of $6.4 billion and provisions for losses on direct and guar- anteed loans of $5.7 billion. Delinquent farm loan balances were $12.5 billion or 49 percent of the farm loan portfolio. This report contains separate reports on MA'S system of internal accounting controls and on its compliance with laws and regulations. Our report on FmHA'S system of internal accounting controls discloses the following material internal control weaknesses related to acquired prop- erty: (1) FdA'S loan classification system used to estimate losses on individual farm loans is unreliable, (2) F~HA'S Acquired Property Track- ing System (AETS) contained inaccurate and incomplete information, (3) FmfIA has not completed APTS modifications which would allow it to properly record acquired property at fair market value or to record the associated gain or loss at the time of acquisition, and (4) FITIHA has not developed a methodology for determining property holding and disposi- tion cost factors for estimating loan losses and for computing the acquired property balance. Our report on compliance with laws and regulations discloses that FIWA complied with the provisions of laws and regulations for the transac- tions we tested. This report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Opera- tions not later than 60 days after the date of this letter and to the House Page 1 GAO/-St%37 Famwm Home Admhistration Page 3 GAO/AFMLbW-37Farmers HomeAdministration .- Pagr 5 GAO/AFMD-9037 Farmers Home Administration B226249 significant internal accounting control weaknesses in the system allow the reporting of inaccurate data. These inaccuracies remain undetected and uncorrected because reports produced by the system are not prop- erly reconciled with detailed acquired property files at FmHA’S field offices. Accordingly, in the absence of an accounting system which gen- erates reliable financial data on acquired property operations, we deter- mined it was not practical to perform, nor did we perform, sufficient alternative audit procedures to satisfy ourselves as to the net realizable value of FmHA’S acquired property and the associated provision for losses for 1988. In our opinion, except for the effects of such adjustments, if any, as GAO Opinion might have been determined to be necessary had we been able to per- form the necessary auditing procedures to satisfy ourselves as to the value of acquired property and the associated provision for losses, the statements of financial position as of September 30, 1988 and 1987, and the related statements of operations and cash flows for the year ended September 30, 1988, present fairly, in all material respects, the financial position of the Farmers Home Administration as of September 30, 1988 and 1987, and the results of its operations and its cash flows for the year ended September 30, 1988, in conformity with generally accepted accounting principles. As discussed in not.e 6, the fiscal year 1987 financial statements recog- nized cumulative ad,justments to correct the allowances for loan and interest losses. Because fiscal year 1987 was the first year that F~HA’S financial statements were audited, we were unable to determine the amounts of these ad,justments pertaining to prior years. Consequently, the full amounts of these adjustments were recognized in the statements of financial position and operations for fiscal year 1987. The following section provides supplementary comments relating to the impact of the agricultural economy on the financial condition of the Farmers Home Administration. Over the past 2 years, the 1J.S.agricultural economy has shown signs of Financial Condition of improvement. This is reflected in part by a number of factors, including FmHA increased farmland values. The improved financial strength of farmers has led to similar improvements for farm lenders, such as the Farm Credit System and commercial banks, between 1987 and 1988. Loan delinquencies for these lenders have declined, as have the number of Page 7 GAO/AF’MD-W-37Farmers Home Administration B-226249 in note 12, FmHA estimates it will request $17.3 billion in appropriations to fund realized losses for fiscal years 1986 through 1988. Donald H. Chapin Assistant Comptroller General August 30, 1989 Page 9 GAO/AFMIMO47 Fanners Home Addnhhntion Repwton Internal AccountingControls applicable to agency operations are properly recorded to permit the preparation of accounts and reliable financial and statistical reports and to maintain accountability over agency assets. Because of inherent limi- tations in any system of internal accounting controls, errors or irregular- ities may nevertheless occur and not be detected. Also, projection of any evaluation of the system to future periods is subject to the risk that pro- cedures may become inadequate because of changes in conditions or that the degree of compliance with the procedures may deteriorate. FmHA annually evaluates its system of internal accounting and adminis- trative controls and issues a report to the Secretary of Agriculture for inclusion in Agriculture’s annual FMFIA report to the Congress. In its November 1988 FMFIA report covering fiscal year 1988, FmHA reported that its internal control system, taken as a whole, complied with the requirement to provide reasonable assurance that internal control objec- tives were achieved. However, F~HA also reported that several material weaknesses existed in its system of internal controls. These weaknesses involved items such as inadequate internal controls over the manage- ment and leasing of acquired farm properties and an accounting system which did not completely serve the agency’s needs with respect to fun- damental accounting and financial control functions. The 1988 FMFIA report also contained FmHA'S annual assessment of its financial management system’s compliance with accounting principles, standards, and related requirements for federal agencies. FmHA has one overall accounting system comprised of 13 accounting subsystems. For those subsystems, the assessment identified seven areas which materi- ally failed to comply with the applicable accounting principles and stan- dards. Six of these areas were not corrected as of August 30, 1989. However, FmHA reported that, except for the seven areas noted, the accounting system taken as a whole generally complied with accounting principles and standards. We considered FmlIA'S FMFIA reports, the Department of Agriculture’s Office of Inspector General reports on financial matters and internal accounting controls, and other GAO reports in determining the nature, timing, and extent of our audit procedures. We also considered the Office of Management and Budget (OMR) staff summary of FmHA'S high- est risk areas, issued in December 1989. Our study and evaluation of the system of internal accounting controls, made for the limited purpose described in the second paragraph, would not necessarily disclose all material weaknesses in a system. Accordingly, we do not express an page11 Report on Internal Accounting Chtrols Specifically, FmHA has not completed system modifications which would allow it to properly record acquired property at fair market value or to record the associated gain or loss at the time of acquisition. Moreover, F~HA has not integrated the subsidiary APTS data with the related gen- eral ledger control accounts. System modifications to correct these weaknesses were scheduled for completion by September 1989, but have been delayed until October 1990. Additionally, our tests at 30 FmHA county offices disclosed that APTS con- tained inaccurate and incomplete information from 24 of these offices because . acquired properties were not always entered into AFTS, while others remained in APTS after they were sold; l new appraisals, reducing property values, were not recorded in APTS; and . data entry errors wcrc not always detected and corrected. Inaccuracies and data entry errors were not detected and corrected because the reports produced by APTS were not reconciled with detailed acquired property records at FmHA'S field offices as required by Title 2. Our review noted that county offices in 2 of the 10 states included in our sample did not receive copies of the APW reports needed to perform the reconciliations. Furthermore. l\~~ software did not include parameter checks to detect the recording of unreasonable property values. For example, although FI~IN regulations generally limit approval of single- family housing loans in excess of $60,000. some single-family houses were erroneously recorded in the system at values exceeding $1 million. In March 1989, we notified FmlIA about the serious nature of the internal control weaknesses in the acquired property accounting system. In an effort to reconcile the information in AM‘S with source documents main- tained at the county offices. FmflA required all county offices to review and correct their records and to certify that the inventory as recorded in .u-‘I’sas of July 21, 1989. was correct. However, as of August 30, 1989, the agency had not corrected the errors or made the software changes necessary for detecting unreasonable property values. Page 13 GAO/AFMD-90-3’7Farmers Home Administration Report on Internal Accounting Controls collateral with no loss reported in the loan classification system. How- ever, a September 21, 1988, appraisal lowered the value of the collat- eral, indicating a potential loss of about $2.7 million. Procedural errors by FmHA personnel resulted in inaccurate loss esti- mates in 64 cases. Although FIIIHAinstructions provide guidance to supervisors for preparing the loan classification system documents, we found that they did not apply this guidance consistently and accurately. For example, our audit procedures disclosed l a $12 million error was made in calculating collateral liquidation costs because the 20-percent cost factor for holding and disposition costs was incorrectly applied to the loan balance rather than to the collateral value, and l prior liens were not considered in establishing an estimated loss, result- ing in an $86,000 understatement of the estimated loss. Additionally, we found seven loans in our sample with loss estimates that were omitted from the total loan loss projection in the general ledger. These omissions could have been detected and corrected if a rec- onciliation between loss estimates in the field office files and automated files in the farm loan classification system at the finance office had been performed as required by Title 2. The remaining 37 cases contained a combination of the above mentioned errors. Although we found 212 inaccurate loss estimates in our sample of 500, the internal control weaknesses discussed above did not affect our opin- ion on the fiscal year 1988 financial statements. Many of these errors offset one another, and our statistical projection of the errors and other audit procedures indicated that the fiscal year 1988 loan loss estimates for the farm loan portfolio were not materially misstated. However, as adequate control procedures were lacking, it is only happenstance that the fiscal year 1988 loss estimates were not materially in error. GAAP require that property holding and disposition cost factors which Holding and consider historical repair and maintenance costs, as well as current esti- Disposition Costs Are mates of taxes, insurance, and the cost of capital, be considered in esti- Not Based on Sound mating loan losses and in determining the net realizable value of acquired property. FITIHAhas not developed an appropriate methodology Methodology for determining such costs. Instead, FIIIHA applied a flat 20-percent fac- tor to collateral values to calculate its estimate of $3.5 billion in holding and disposition costs for use in establishing loan loss estimates. F~HA Page 16 GAO/AFMD-90.37Farmers Home Administration Report on Internal Accounting Controls l Ensure that field office supervisors use market values of collateral as close to the end of the fiscal year as practicable to estimate loan losses in the loan classification system. l Reconcile estimated loan losses between the field office files and the automated files at the finance office as of fiscal year-end. l Ensure that field office supervisors follow instructions when calculating the estimated loan losses, particularly the procedures regarding the con- sideration of prior liens in loss calculations, and the proper application of liquidation costs. One possible approach would be to provide periodic training on loan classification procedures. l Develop a sound methodology for determining holding and disposition cost factors applied to loan collateral and acquired property by consid- ering historical repair and maintenance costs, as well as current esti- mates of taxes, insurance, and cost of capital. We provided a draft of this report to responsible F~HA officials for com- Agency Comments ment. They concurred with our findings and have already initiated some corrective actions. For example, they said that R~HA has . initiated procedures to ensure proper reconciliations of APTS reports to field office files and has made changes within the system to correct the data entry problems we found and l established requirements to reconcile automated farm loan classification records to field office files on an annual basis. Further, they stated that MA is committed to implementing the remain- ing recommendations. Page 17 GAO/~90.37 Farmers Home Administration Flnancid Statements Consolidated Statements of Financial Position As of Septenber 30 1988 1987 1Dollarr in Thousands) ASSETS: Fund Balance with U.S. Treaswy I 3.343.405 I 6.987.940 Accounts Receivable (Note 3) Net of Allowance for Losses of $0.237 in 1988 and $6.593 in 1987 36.852 133.757 Interest Receivable (Notes 4 (I 6) Net of Allowance for Losses of 14.871.014 in 198B and 14,279,752 in 1907 139.546 1.001.750 Loans Receivable (Notes 5 & 6) Net of Allowance for Losses of 118.473.501 in 1988 and $14.664.348 in 1987 39.697.111 46.228.186 lnvestM"ts In Loan Sale Trust Assets (Note 7) 233,275 234,615 Acquired Property (Note 8) 867,941 1.232.758 Other Assets 33.089 31,270 ____..._____ _______-____ Total Assets I 44.951.219 I 55.850.276 iilsz*==llii il=s/xli==ii LIAGILITIES: Accpunts Payable I 90.539 I 78.047 Accrued Interest Payable (Note 9) 3.580.859 3.820.891 lntragoverrnental Debt (Note 9) 80.154.218 84.641.218 notes Payable - Investors (Note 9) 670,270 1.042.225 Accrual for Estimated Losses on Guaranteed Loans (Note 10) 1.278.587 764,431 Other Liabilities 109.855 159.517 _-_-_______- Total Liabilities 85,884.336 90.506.329 ____________ _________-_- EQIJITV: (Note 11) Unexpended Appropriations: Undelivered Orders 493.916 525.036 Unobligated Balances 11,617 11.839 Invested Capital 1.148,812 1.142.489 Cumulative Results Of Operations (Note 12) (42.587.462) (X335.417) __________-_ _________-__ Total Equity (40.933.117) (34.656.053) ___----___.- Total Liabilities L Equity The accmpanying notes are an integral part of these financial statements. - Page19 GAO/AFMLh9037 Farmers Home Administration Consolidated Statements of Cash Flows For Fiscal Years Ended September 30 1988 1987 (Dollars in Thousands) Cash Flows frcn Operating Activities: Interest Received I 2.432.661 I 2.914.345 Interest Paid (9.203.252) (9.291.284) Appropriations Received (Note 11) 574.098 556.806 Appropriations Disbursed (596.433) (596.239) wogran Expenses (383.658) (285,393) Other (Net) 224,433 137,801 Net Cash Used in Operating Activities (6.952.151) (6.563.964) Cash Flows frcw InvestIng Activities: Collections on Loans 3.380.200 4,536.550 Loans Yade (3.493.511) (3.874.236) Proceeds from LOa" Principal Asset Sales 1.053.975 2,825.121 Proceeds frm Sale of Acquired Property 155.344 154.837 Collections Received on Behalf of tnvestors 30,838 50.772 Payments Made to Investors (74.550) (51.884) Acquired Properly "isb"rsements (73.698) (91.195) Purchase of Loans (262.015) (59,123) Loss Settlement of Guaranteed Loans (Note 10) (113.486) (95.704) Return of ,nvestment LOan Asset Sale Trust 1.795 0 _.----_.._-- Net Cash Provided by Inuest~ng Activities 604.892 3.395.146 Cash Fhxs from Financing Activities: Borrowings ~PM U.S. Treasury (note 9) 17.705.000 12.530,OOO Payments on U.S. Treasury Borrowings (Note 9) (15.679.000) (7.100.000) Reimbursements for Losses (Notes 11 and 12) 7.554.171 4.413.671 Borrwings froa.Federal Financing Bank (Note 9) (6.513.00:) 170.000 Payments on Federal Financing Bank Borrowings (Note 9) (535.000) Payments on notes Payable (Note 9) (371.947) (35,179) Revolving Fund Appropristions 7.500 0 _.__._-._-._ _-__-__-_--_ Net Cash Provided by Financing Activities 2.702.724 9.443.492 _-._-__.____ _______-__-_ Net Increase (Oecrease) in Cash (3.644.535) 6.274.674 _-__._______ ____-__-_--_ Fund Balance with U.S. Treasury. Beginning of Year 6.987.940 713,266 ____________ ____-__-__-_ Fund Balance with U.S. Treasury. End of Year $ 3.343.405 f 5387.940 iE=ICiisilisl ==iiiil=I==i See Note 15 for Reconciliation of Net Loss to Net Cash Used in Operating Activities. The acccepanying notes are an integral part of these financial statements. Page 21 GAO/AFBlD9@37Farmers HomeAdministration Lending Prograns Insured Lending Activities Fsmers tine Administration budgeted lending programs include insured loans. The tern 'insured' is defined as loans made directly fm the revolving funds. These insured loans are available to be pledged as collateral for barrwings fra the Federal Financing Bank. Generally. an insured loan is made only if a borrower can not secure adequate credit from other sources at reasonable rates and twms. Federal law provides for multiple servicing actions to assist financially troubled borrwers. The Ylst significant of theSe actions include: Interest Credit Program: An Interest credit agreement is a contractual agreement between FnHA and single family or rural rental housing borrowers to reduce the borrowers' effective interest rate to as low as 1 percent. Eligibility requirements for single family housing borrowers receiving interest credit are reviewed annually. Rural rental housing borraers receive interest credit for the life of the loan: however. a#wxnts in excess of scheduled repayments may be due to f&HA based on tenants' income levels. Interest inccw on related insured loans is accrued at the contractual rate on the principal amount outstanding (Note 4). Debt Set-Aside Proqram: The debt set-aside program was implemented during fiscal year 1985. This program prxwides for setting aside up to 25 percent of 1 farmer program borrower's total indebtedness to a maximum of f200.000 for 5 years. During the set-aside period. no interest is accrued nor are principal payments required (Note 4). Rental Assistance Program: federal law provides FnHA the authority to provide rental assistance to eligible tenants occupying eligible rural rental housing. rural cooperative housing, and certain labor housing projects financed by FM. Rental assistance is the portion of the approved shelter cost (consists of basic OP market rent plus utility allowance) paid by FnHA to compensate for the difference between the approved shelter cost and the monthly ten&M contribution. Payments nade under this program are reported on the Consolidated Statement of Operations a5 grants and contributions. Loan Deferra! Program: The loan deferral program allns 1 delinquent borrower to postpone the payment of principal and interest for up to 5 yews. TO qualify. a borrower must be unable to pay essential living expenses or maintain the farm property and pay the debts, but wst demnstrate the potential to begin debt payments when the deferral period ends. The borrower is not required to pay interest on the deferred interest. Instead. the deferred interest will be repaid in equal installments over the remaining term of the loan. The interest rate at the end of the deferral will be the lesser of the current rate on a similar type new loan or the original rate on the loan. Page 23 GAO/AFMlMW7 FzumemHome Administration Financial Statements net Recovery BUyOut Program If the borrower IS unable to show repayment ability "sjng the available servicing options including Debt Wit?-Down, the borrower will be offered the option to Satisfy his loan at the net recovery value Of collateral. The recovery va1"e. since it reflects liquidation costs, wi11 be less than the market "ll"e of the collnterdl. Borrowers qualifying for the option will be required to sign an equity recapture agreement. The agreement provides that. if the borrower sells the property which secured the loan within 2 years of the agreement. FrnHA will receive the difference between the net recovery vnl"e and the current market value. FmHA cannot recapture mare than the debt written off. NOTE 2: SIGNIFICANT ACCOUNTING POLiCIES Loans and Allowance for Loan Losses Loans are carried at the principal amo"nt outstandIng less an allowsnce to reflect their ultimate collectibility. The allowance for loan losses is based on historical data (writeoffs. loan settlement data, and acquired property data). an aoalys~s of the agency's loan Classification of borrower accounts, and an analysis of current market factors and conditions (to include delinquent and rescheduled accounts). Accrual for Estimated LoSses on Guaranteed Loans Anticipated losses on guaranteed loans ape estimated based on historical dita, losses experienced in comparable insured programs. current market conditions, and field office expectations of lonn losses. This estimate is reported as an expense. and a corresponding .xcr"al for estimated losses on guaranteed loans is reported as a liability on the Consolidated Statement of Financial Position. Inccww Recognition and Reimbursanent for Losses All significant intra-agency balances and transactions have been eliminated in the consolidation. Sources of funds for the three major revolving funds of FnHA (Agricultural Credit Insurance Fund IACIFI. Rural Housing Insurance Fund IRHIFI. and Rural Developnent Insurance Fund (RDIFI) are provided by reimburwwnt for losses. borraings fran the Federnl Financing Bank (FFB). borrowings fran Treasury, borrow? loan repayments. and loan asset sales. Sources of funds for the Rural Developlent Loan Fund and Self-Help Housing Land Development Fund we provided Solely through Congressional appropriations and borrower loan repayments. Interest Income Interest income on loans is accrued at the contractual rate on the outstanding principal amount. The amo"nt of interest income accruing to nonperforming loans (in excess of 90 days delinquent) is reported as an offset to interest income on the Consolidated Statement of Operations. This offset is not included in the provision for losses on accrued interest on loans as reported on the Consolidated Statement of Operations; however. the Offset is included as an adjustment to the allowance for losses on interest receivable IS reported on the Consolidated Statement of Financial Position. Page 25 GAO/AFMD-SO-37Fanners HomeAdministration NOTE 4: INTLRfST The outstanding unpaid loan interest receivable and the related allowance for losses, by entity, as of September 30. 1988 and ,987. fo,lo,.: - September 30. 1988 Septmber 30, 1987 (0011~s I" Thousands) (Dollars in Thousands) Loa" AllO*a"Ce net LCl.3" n11ovance Net i"teWSt FOP Losses l"tWeSt interest For tosses rnterest Recelvlble (Note 6) Receivable Receivable (Note 6) Recel"able AClF 15,071.905 14.470.154 f 601,751 14.757.631 13.928.889 I 828.742 RHIF 235,524 181.328 54,196 217,662 139.316 78.346 RDlf 301.185 218.559 82,626 304.070 210,727 93,343 Other 1,946 973 973 2.139 820 1,319 _._...._-. __-_._-.-. Total $5.610,560 14.871.014 I 739.546 15.281.502 14.279.752 11.001,750 _____-_-_- interest inccm on loans ii accrued It the contractual rate on the outstanding principal amount. The interest incme recognized. consiSt?ng primrily of accrued loan interest. by entity, for the fiscal year* *9*a and 1987 foi10ws: 1988 1987 (Dollars in Thousands) Agn‘"it"ral Credit 1nS"ra"Ce Fund (AUF) 11.906.753 $2,101,107 Rural Housing Insurance Fund (RHIF) 1.305.785 1.561.015 R"Fll Development Insurance Fund (ROIF) 365.321 484.091 *II Other tntlties 720 2,113 _-_-_._... 1ntere5t on bms 3.578.579 $4.148.326 Less Interest on Nonperfonning Loans 997.267 1.093.355 Net Interest ,ncme $2.581.312 13.054.9/l I==i=i=izs _-_-.-_-_- _-___-_-__ AS Of Septetnber 30, 1988, approxmately 14.200 bormwers were participants in the debt set-aside program with almost $604.000.000 of principal being set aside. Interest rates on the majority of the related loans ranged frm 4.5 to 13.5 percent; however. interest lncme is not mxrued on the set-aside balances. InlereSt inc~le for RHIF does not include $1,427,314,280 of Interest credit provided to single family housing and rural rental housing barrowers: however. the mount is recognized IS other incme and the related interest credit progrm expense is reported in other expenres. The unpaid principal baldnce of loans receiving interest credit is approximately $19.2 b~ilion. The unpaid principal balance of nonperfoming lams (in excess of 90 days delinquent) is approximately $14.7 billion. /\lthough interest on these accounts continues to be .xcrued, this interest is not included in the net interest inccme reported on the Consolidated Statement of Operations. - Page 27 GAO/AFMD-90-37Farmers HomeAdministration Financial Statements The following schedule provides the loan principal repayments based on borrowers' repayment schedules. Loan Principal Repayments By Fiscal Year (Collars in Thousands) Principal fiscal Years Fxpagnents 1989 15.781.192 l 1990 1.921.883 1991 1,837.406 1992 1.748.630 1993 1.619.219 1994-1998 9.202.613 1999-2003 6.810.217 2004-2008 7.668.029 2009-2013 837.916 over 2013 12.837.127 Subtotal 157.654.232 Guaranteed loans purchased frcm holders 516.380 _________-_ Total loans receivable $58.170.612 liSIllllllli * NOTE: The FY 1989 principal repayments include approximately $3 billion of fully natured lams which are due and payable. Page 29 GAO/AFMD-90-37Farmers HomeAdministration Financial Statements In recognition of the diversity of the FlnHA portfolio. the following schedules provide the provision and other adjustments made to the allowance for losses by entity for fiscal year 1988: Allowance for Loan Losses (Oollars in Thousands) Provision Beginning Loans and Other Balance Uritten Adjustments Ending Balance October 1, Off. I" Allowance September 30, 1907 "et for Losses 1988 ACIF S12.176,199 $(1,473,728) 13.007.169 114.509.640 IWIF 2,208,366 (290,353) 1.285.035 3.203.048 RDIF 275,947 (14.826) 494,904 756,105 A,, Others 3.836 (171) 1,043 4,708 _....------___ Total 114.664.348 f(1.779.070) S5.588.231 118.473.501 EiiiiLiiiiiiZEi ilzEiii=iilillE Allowance for Interest Losses (Dollars in Thousands) Prov,sian Beginning Interest and Other 0alWCe Receivable Adjustments Ending Balance October 1. written Off. I" AlloXBnCe September 30, 1907 Net for Losses 1908 A‘IF I 3.920.889 S(477.631) 11.018.895 I 4.470.153 RHIF 139.316 (9.024) 51.036 181,328 ROIF 210.727 (4.580) 12.412 218.559 Ail, Others Total Yith consideration to the State of the agricultural econany and its effect on rural housing and farm property values. F&A management is of the opinion that the allowance for losses at September 30, 1988. is adequate to absorb future losses inherent in the portfolio at that date. However. considerable uncertainties continue to remain w?r the agricultural environment. The losses which will ultimately be realized on the loan portfolio are dependent upon the impact of future cornnodity prices. production costs, land and housing values. and Gavernnent agricultural and economic policy. - Page 31 GAO/AFMD-90.37Farmers HomeAdministration NOTE 9: LONG-TERM BORROUINGS The Secretary of Agriculture IS authorized by law to Wake and issue "OteS to the Secretary Of the Treasury for the purpose of obtaining funds necessary fop dIscbarging obligations and for making loans. advances. and authorized expenditures wt of the insurance Funds: ihis authority is exercised in the event that cash in the insurance funds is insufficient to covw Congressionally approved loan program authority or other liabilities incurred by the funds in maintaining related loan portfolios. Bornwings from the Federal Financing Bank and private investors are in the form of Certificates Of Beneficial Omership. Certificates of Beneficial OwnershIp outstanding with the Federal Financing Bank are sec"wd by unpaid loan principal balances and cash. Of the S3.343.405.005 and 16.987.940,236 fund Balance with U.S. Treasury as of September 30, 1988 and 1987, 12.703,822.547 and S6.281,076.419, respectively, were held in ~ererve which. with pledged "npa~d loan principal balances. Served as collateral fw borrowings frm the Federal Financing Bank. Certificates of Beneficial Ownership outstanding wth private investors are secured by unpaid loan principal balances. The long-tern borrowings of FmHA as of September 30, 1988 and 1987. follow: Long-Term 0orrovlngs (Oollars in Thousands) -.-I_ 1988 1967 Federal Financing Bank $58.496.000 I 65.00'3.000 U.S. Department of Treasury 21.658.218 19.632.216 Private investors 670,278 1.042.225 Total 0orrow1ngs I 80.824.496 $ 85.683.443 AS of September 30. 1988, about 54 percent of the FMA's long-ten" debt is payable o"er the next 5 years as indicated below: Fiscal Ueighted Years Of Outstanding Average naturit1es Pnmunt Due Borrowings- & (Dollars in Thousands) 1988 $ 00.824.496 11.61% 1909 $ 22.041.644 58.782.852 12.351 1990 8.375.644 50.407.208 12.66% 1991 3.390.461 47.008.747 12.53% 1992 5.793.051 41.215.696 12.34% 1993 4.421.708 36.793.900 12.49% 44.030.508 1994 2006 36.793,900 0 12.49% I 00.024,4’36 ii=ii/il=2iii=ii Page DB GAO/AFMD-90-37Farmers Home Administration Financial Statements NOTE IO: ACCRUAL FOR ESTIllATEO LOSSES ON GUARANTEEDLOANS F&A guaranteed loans we authorized through the Agricultural Credit Insurance Fund (ACIF), the Rural Housing Insurance Fund (RHIF). and the Rural Oevelopnent Insurance Fund (ROIF). The total outstanding guaranteed loan principal on Septenber 30, 1988. was $5.258.976.683 of which Fe-LA had guaranteed $4,600.845,451. The period of guarkntee provided by FnHA may extend 40 years depending on loan purpose. The guaranteed unpaid principal balance by entity as of September 30. 1988 and 1987. follows: 1988 1981 Guaranteed "npa,d Guaranteed Unpaid Principal Balance Principal Balance (Dollars in Thousands) ACIF I 3.618.477 $ 2.068.910 RHIF 17,306 21.457 ROIF 965,062 1.093.968 ----_-_____ ___________ Total t 4.600.845 I 3.184.335 . ..I..*.../ I.......... Conditional cannitments to make guaranteed loans have been established in the amount of $447,348.713. Anticipated losses on guaranteed loans are estimated based on historical d&S, losses experienced in Ccwarrble insured programs, current market conditions, and field office expectations of loan losses. This estimate is reported as an expenre. and I corresponding accru.~l for estimated lasses on guaranteed loans is reported as a liability on the Consolidated Statenent of Financial Position. The adjustments in the accru(11 for estimated losses (also see Nate 6) .SS of September 30, 1988 and 1987, in thousands of dollars. foll& Beginning Adjustments Ending B.?la"Ce to Accrual Balance October 1. LOSS for Estimated September 30. 1987 Settlement Losses 1988 ACIF I 644.338 I (82.057) I 606.163 $1.166.444 RHIF 271 (404) 366 233 ROiF 119.622 (31.025) 21.113 109.910 _____________. -----.-_.____ TOTAL $ 764,431 $ (113.486) $ 627,642 $1,278.587 . ..iii.....ii . . . ..E...iE..E i...i..*..... .E....ii....i Beginning Adjustments Ending Balance to Accrw.1 Salance octcber 1. LOSS for Estimated September 30. 1986 Settlement LOSSeS 1987 AClF $ 38,814 I (77.750) I 683.274 S 644,338 RHIF 369 (166) 68 271 ROlF 132.526 (17.788) 5.084 119.822 _______.__---- -......______ TOTAL I 171.709 I (95.704) $ 688.426 $ 764.431 ..iii........ . . . . ..iiii... Page 36 Financial Statements invested Capital Inverted Capital represents: amunts appropriated by Congress to ccanence operations of the revolving funds; amounts appropriated to increase the working capital of revolving funds which do not receive reimbursement fop losses (Note 2); donations or nonreciprocal transfer of assets frca other agencies; the results of operations fran the transferred assets: and the Government's net investment in FmHA's property and equipment. The following is a sunary of the activity in Invested Capital for the 1988 and 1987 fiscal years: invested Capital 1988 1987 (Dallars in Thousands) Beginning Balance I 1.142.489 I 1.140.844 Fiscal Yew Activity: Appropriated increase to Yorking Capital 7,500 0 Capital Expenditures 3,505 3.068 Depreciation (3.776) (1.666) 6001: Value of Disposed Equipment (1.082) (555) Nonreciprocal Transfer of Loan Assets fran Other Agencies 573 1.041 Loan Repayments Returned to U.S. Treasury (385) (452) Results of Operations frown the Transferred Loan Assets (12) 211 __.____.___ ___.__.__._ Ending Balance I 1.148.812 I 1.142.489 i....i.*.i. ../.....ii. Cumulative Results of Operations The Cumulative Results of Operations is the net result of operations from the WvOlving funds since their inception and the amounts reimbursed due to realized losses (Note 12). The following is a sure'nary of the 1988 and 1987 fiscal years' activity far the Cumulative Results of Operations: Cumulative Results of Operations 1988 1967 (Dollars in Thousands) Beginning Balance S(36.335.417) $(18.662.411) Fiscal Year Activity: Net Results fran Operations (13.806.216) (22.086.677) Reimburserrent for Losses 7.554.171 4.413.671 ______-_____- ___-_--_____- Ending Balance f(42.587.462) S(36.335.417) ii........... . . ..i.......i Page 37 GAO/AFMD4O37 Fanners Home Administration Financial Statements NOTE 13: LOAN ASSET SALES As In the previous fiscal year, FM+A was required to sell loan assets in fiscal year 1988. An overview of the 1988 and 1987 sales (required by the Agricultural Credit Act of 1987 and the Omnibus Budget Reconciliation Act of 1986.respectively) follows: 1988 1987 (Oollarr in Thousands) Receivables Sold: $1.663.735 $5,006.885 Proceeds: Cash 1.086.842 2.871.673 I""estnents in LO*”Sale Trust Assets (Note 7) 0 234.615 Protective Advance Fund 0 10.000 _____...~. ___---____ Tot.31 PrOceeds 11.086.842 13.116.288 LOSS on Sale Of Loans: I 576.893 l $1.890.597 * NOTE: The $576.893.000 loss shown above relates solely to those loan assets actually sold in fiscal year 1988. FnHA also provided for in f?scal year 1988 an estimated S498.000.000 loss attributable to the bnticipated loan asset sale of fiscal year 1989. Consequently, the total loss on sale of loans recognized in fiscal yew 1988 was 11.074.893.000. Information regarding the 1989 loan asset sale is furnished within this note under Future Asset Sales. An allowance for losses aIY)unt was not allocated to the 1988 or 1987 receivables sold due to immateriality. 1987 Loan Asset Sales The asset sales of fiscal yew 1987 were primarily conducted through the sale of a portion of FmHA's rural housing and cwmxunity programs loan portfolio to the Rural Housing Trust. 1987-l. and the Cmunity Program Loan Trust. 1987A. respectively. Additionally. prior to the sale of CMRnunity program loans to the Trust. eligible CMnunity program borrowers were given the Opportunity to PuPChase their loans at a c!iscaunt. The asset sale conducted with the Rural Housing Loan Trust. 1987.1. consisted of the sale of approximately 32.9 billion of rural housing loans. FMA received over $1.7 billion and investments in the Trust and a protective advance fund valued at $211 milllan (I201 million and $10million. respectively). A loss of approximately $1 billion was realized on the rural housing loan sale. The asset sale conducted with the Canunity Program Loan Trust. 1987A. consisted of the sale of $1.9 billion of ccwwnity program loans. The sole proceeds were approximately $1.1 billion and an investment in the Trust valued at $33.6 million. Frd!A realized a loss of approximately $842 million on the community program loans sold to the Trust. In addition to the cannunity program trust sale. 152.7 mIllion was received from the sale of $72.1 million of receivables directly to borrowers. Borrowers who purchased their loans received a discount of 119.5 million. Page 39 GAO/AFMD-SO-37Farmers Home Administration Financial Statements NOTE 14: CONSOLIDATED SCHEDULE OF BUOGETRECONCILIATION The following schedule provides a reconciliation of expenses to budgetary outlays as of September 30, 1988 and 1987: -__1988 1987 (Oollars in Thousands) Expenses As Reported on Consolidated statenent Of operations: Nonperforming Loans interest I 997,267 I 1.093.355 Total Interest Expense 8.987.288 9237.861 Total Provision for Losses 6.008.583 13.674.463 Total Other Expenses 3.494,316 4.279.405 Tot*, Expenses 19.487.454 28.385.084 __.__._____ Oeduct: Expenses Nat Requiring Outlays: Provision for Losses on: Loans (Note 6) 5.090.231 9.315.840 Accrued Interest on Loans (Note 6) 95,318 3.063.104 Guaranteed Loans (Note IO) 627,642 688,426 Acquired Property (Note 8) 205.397 607,093 Loss on Sale of Loan Assets (Note 13) 1.074.893 1.890.597 Interest Credit Program Expense (Note 4) 1.427.314 1.514.131 lnterert on Nonperforming Lams (Note 6) 997,267 1.093.355 Other 27.004 50,675 Total Expenses Not Requinng Outlays 9.535.061 18.223.221 ..~.._...._ __.___.__.. Expenses Requiring Outlays 9.952.393 10.161.863 _.._...---_ ___.._.._.. Add: Other outiays: Loans Nade 3.493.511 3.874.236 LOSS Settlement of Guaranteed Loans 113.486 95.704 Acquired Property Oisbursements 73.698 91.195 Purchase of Loans 262.015 59,123 Payments Made to Investors 74,550 51.884 Payments on Notes Payable 371.947 35,179 Other 6,854 1.394 _-__-___-__ Total Other Outlays 4.396.061 4.208.715 _____-___r_ Change in Accounts and Accrued Interest Payables 227.540 7,990 -__.__-____ Total Outlays 14.575.994 14.378.568 __.-___-_-. -__-__-____ Less Offsetting Collections 7,301.975 10.633.419 __.._.._.._ __-._______ Net Outlays I 7.274.119 I 3.745.149 E3iE==lis=i IIa.sii*izi= Page 41 GAO/AFMD-90.37Farmers Home Administration Financial Statements Within RHIF, the portfolio is canprised of single family housing (SFH) and multiple family housing (YFH) loans. Regarding the SFH loan programs. the stated rate on the majority of loans approximates the U.S. Treasury average interest rate. Although SFH borrowers may participate in the interest credit program (thereby receiving an effective rate below the market rate). the interest credit is subject to an annual review/adjustment. Additionally, FMA is authorized to recapture partial or full repayment of the interest credit when the property is sold, transferred. or vacated by the borrower and appreciation in the property has occurred. Because an unknown portion of the interest credit may be recovered and the fact that few SFH loans are held to the full tern Of the note. the extent of the interest rate cost Subsidy over the life of SFH loans cannot be reasonably estimated. The stated interest rate on I!!% loans also approximates the average Treasury rate; however. WFH loans are eligible for interest credit for the entire life of the loan and is not subject to recapture. FnllA estimates the unamortized discount on UFH loans would approximate 15.2 billion as of September 30, 1988. The expense of providing the interest credit program to SFH and MFH borrowers is currently recognized as an operating expense during the year and reported in the Consolidated Statement of OperationS. (See Note 4 for additional information regarding the RHIF interest credit program expense.) These estimates assme borrwer repamyments under the terms of the note. Also. if the $9.6 billion unamortized loan discount was reported on the Statement of financial Position. then the related allowance for losses rould be established based on the discounted lo&ns receivable. It is estimated that the allowance for losses would be reduced by approximately $6.8 billion and the net cumulative effect of reporting the unamortized discount would cause an approximate $2.8 billion reduction in net loans receivable. Since unamortized discount and allowance fo?' loss data IT? not maintained on a loan-by-loan basis. the reduction in the allowance for losses was based upon an analysis of each of the largest funds in aggregate. A loan-by-loan analysis would be rewired to determine the actual effect of the unamortized discount on the allowance for losses cnputation. Following are the estimated adjustments which would be necessary to recognize the interest rate cost subsidy on the below market rate loans receivable as of September 30. 1966. These estimated adjustments represent the cumulative effect on a11 prior years and the current year. Consolidated Statement of Financisl Position (Dollrrs in Thousands) ASSETS: Loans Receivable. as presently recorded. net of allownce for losses 139.697,111 Cumulative effect on current and prior years of recording interest rate cost subsidy (9.646335) Cumulative effect on current and prior yews of recording interest rate cost subsidy on allowance for losses 6.784.102 ______---___ Loans Receivable. net f36.834.370 .*.********* EfJUITV: Cumulative Results of Operations. as presently recorded S(42.587.462) Cumulative effect on current and prior years of recording interest rate cost subsidy (2.862.733) ________-_-_ Cumulative Results of Operations 1(45,450.195) **********ii Consolidated Statement of Operations Net Loss frca Operations, as presently recorded 1(13.806.228) Cumulative effect on current and prior years of recording interest rate cost subsidy (2.862.733) _____-______ Net Loss fm Operations S(16.668.961) ************ (917109) Page 43 GAO/AJ?MD-9037Farmers HomeAdministration -- ---- Financial Statements NOTE 15: RECONCILIATION OF NET LOSS TO NET CASH "SE0 IN OPERATING ACTIVITIES 1 The following schedule provides a reconciliation of net loss to the net cash used in operating activities as reported on the Consolidated Statement of Cash Flows for the fiscal years ended September 30. 1988 and 1987: 1988 1987 (Oollars in Thousands) Net Loss fra-a Operations $(13.806.228) f(22.087.659) Adjustments: Expenses Not Requiring Outlays (Note 14) 9.535.061 18.223.221 Incme Attributable to Interest Credit Progr&r (1.427.314) (1,514*131) Appropriations Received 574.098 556.806 Expended Appropriations (589.225) (601,588) Interest Receivable Reclassified (255,770) (449.043) Change in Interest Receivable (329.058) (439,070) Interest Receivable Written-Off, Net (491,323) (263,687) Change in Accounts Receivable 95.261 (27.870) Change in Accounts and Accrued Interest Payables (227.540) (7,990) other (30.113) 47.047 .-___...___ __._.-____. Total Adjustments 6.854.077 15.523.695 _..- _.__... Net Cash Used an Operating Activities 1(6,952.151) S(6.563.964) liiEE==liii NOTE 16: INTEREST RATE COST SUBSIDY FM.4 loan making activities provide for stated loan interest rates which are below Treasury market l-e?*. Because the revolving funds typically borrow ~ney to fund these lending programs at the U.S. Treasury rate. costs associated with making loans at a lower interest rate have historically been recognized through the difference between the interest expense on intragoverrwntal debt and accrued loan interest income on an annual basis. Federal accounting principles governing the recording of interest rate cost subsidy on below market rate receivables are undergoing reexamination by the Congress, the Executive Branch. and the General Accounting Office. The final interpretation of federal accounting principles. as they relate to interest rate cost Subsidy. cannot presently be determined. Accordingly, the FnHA accounting system Currently does not provide for loan discounting or provrde the automated capability for the related accounting entries over the life of the loan. Uithio ACIF. loans are available at limited resource rates significantly below the Treasury average interest rate. Based on an analysis of loans outstanding us of September 30. 198E. if a discount had been recognized at the time of loan closing. the unamortized discount would approximate $2.8 billion. Similarly. withrn ROIF. camwnity facility and water and waste loans are typically made at interest rates substantially below the U.S. Treasury average interest rate. In analyzing ROIF loans outstanding as Of September 30. 1988. if a discount had been recognized at the time of loan closing. the unawtized discount would approximate $1.6 billion. Page 42 GAO/AFMD-9037 Farmers HomeAdministration Financial Statements During fiscal year 1988. FlnHA sold only mnmunity program low *ssets through a borrower buyback offer (lliscount Purchase Program) whereby eligible borrowers were provxded the opportunity ta purchase their- loans at a discount under the provisions of the Agricultural Credit Act of 1987. The Act extended to eligible corwnity program borrowers the right to buy back their loans at a price cornparable to that paid by the C-unity Program Loan Trust, 1987A (the carmunlty program trust asset sale of fiscal year 1987). but updated for current karlret conditions. During fiscal year 1988. approximately 2100 borrowers purchased nearly 3700 loans with an unpaid balance, including accrued interest. of 11.663.734.368. Proceeds frcn the Discount Purchase Program awunted to $1.086.841.795. The discount associated wth the program was $576.692.573. Future Asset Sales Farmers Hone Administration is required by the Omnibus Budget Reconciliation Act of 1986 and the Continuing Appropriations Act of 1987 to raise net proceeds of $584 million in fiscal year 1989 through the sale of camwnity program loans. The Rural Development. Agriculture. and Related Agencies Appropriations Act of 1989 includes a provision which requires that before any loans are sold bo~~owcr~ be lttorded the opportwlty O+ prepayment. Based (I" these stat"tory req",reme"ts. Fn*1A plans to offer another Discount Purchw? Program to eligible canwnity program borrowers. To the extent proceeds from this program do not meet the required $584 million, FMA will conduct a sale of loans (securitired sale. private placement. or sew? other type of third party sale) which will achieve the full amount. As of I(arch 1989 approximately 1800 borrowers with unpaid principal balances of $1.679 blll~on have indicated interest in the Discount Purchase Program. interested cornnunity program borrorerS have until May 9, 1989. to submit their final payment; hcwevw. it is anticipated that not a11 borrowers will comply. Consequently. F*IA has estimated that sufficient payments will be received to satisfy loan balances with an approximate fwx value in the range of $1.458 to $1.679 billion resulting in a lass of approximately 1498 to 1574 million. Accordingly. the fiscal year 1988 consolidated financial Statements provide for an estimated $496 million loss (included ?n the loss on sale of loan assets on the Consolidated Statement Of Operations) through an increase in the allcwnnce for loan Josses on the Consolidated Statement of Financial Position. Page 40 GAO/AFML-99-37 Farmers HomeAdministration FinancialStatements NOTE 12: CUMULATIVE RESULTS OF OPERATIONS Cumulative results of operations represent the cumulative deficit or surplus resulting from operations for 411 of the FrdiA revolving funds. The cumulative results of aperetions for the Agricultural Credit Insurance Fund (ACIF) which WIS established in 1946. the Rural Housing Insurance Fund (RHlF) which was estlblished in 1965. and the Rural Development Insurance Fund (ROIF) which YLS established in 1972 equll the net losses sust4ined fwn current 4.nd 411 prior yews less the Iccumul4ted reinburrwents for rellized losses received by those funds. The cumulative results of operations. by entity, IS of September 30. 1988. follow: Reimbursement Cumul*tiw Net Losses for LDSWS Results Of (Inception) (Inception) operations ACIF $(39,546,722.703) f10.980.735.000 S(28.565.987.703) RHIF (25.012.183.840) I5.I28,607.573 (9.883.496.267) RDIF (8.245.456.735) 4.110.666.000 (4.134,786.735) All Others (3.189.600) 0 (3.189.600) --_______________ _-...-._-______ _______--....---- Total $(72.807.552,878) $30.220.090.S73 $(42.587,462.305) ***************** *************** ***ii***********i The reimbursement for realized losses does not include current and prior fiscal year realized losses eligible for future reimbursement. Additionally, FrdA ~4s not fully reimbursed for the losses sust4ined in fiSC41 year 1986. which will be carried fanrrd and requested in the next fiscal year. The Potentill reimbursements (based an the fiscI1 year of loss realization) which FlnHA may receive pwsunt to Congressional action follow: 1986 1987 19BB Total ACIF I 35.000.000 13.442.596.000 f4.452.159.000 I 7.929.755.000 RHIF 0 3.660.061.000 2.677.897.000 6.337.958.000 ROIF 7.500.000 1.592.047.000 1.470.999.000 3.070.546.000 ------------.. ._...___-_____- _______-______ ____________.__ Total 5 42.500.000 $8.694.704.000 18.601.055.000 f17.338.259.000 __________**** __________ *************** ************** --..---.---**** ___________ Reported cumulative results of opentions in excess of the outstanding requests for reimbursement Primlrily represent allwance for future losses on receiv4bleS. lllwance for losses on acqu,red Property. and accrual for estimated losses on guaranteed loins. Page38 GAO/AFMLM@37Farmers HomeAdministration Financial Statements NOTE 11: EQUITV Unexpended Appropriations Unexpended Appropriations include the undelivered orders and unobligated balances of the FmW\ general funds which receive Congressional appropriations through the budgetary process. As appropriated funds incw obligations. the obligated aIraunt is recorded as an undelivered order and show- as an equity item on the Consolidated Statement of Financial Position. Undelivered orders are relieved by either an expenditure or an obligation cancellation. Appropriated funds which are not obligated are shorn as the unobligated awunt of the Unevwded Appropriations on the Consolidated Statement of Financial Position. At the end of the fiscal year. certain multi-year appropriations which have unobligated balances remain available to FnHA for obligation in future periods. Unobligated appropriations returned to the U.S. Treasury may be made available for restoration to FmHA subject to administrative determination. The following summarizes the activity for the appropriations and the Unexpended Appropriations balances of the appropriated funds for the 1986 and 1987 fiscal years in thousands of dollars: Undelivered Unobligated Appropriations Orders 0a1.Wlces Beginning Balances. October 1. 1987 1525.036 I 11.839 Fiscal Year Activity: Appropriations Received $574.098 574.098 0b;igkions Incurred 577,653 (577,653) Obligations Cancelled (14.570) 14.570 Accrued Expenditures (592,730) Reimbursements (1.473) 1.473 Balances Returned to U.S. Trelsury (12.710) Ending Balances, September 30. 1986 1574.098 iii=ilii**l2 Undelivered Unobligated Appropriations Orders Balances Beginning Balances. October 1, 1966 1563.473 S 8.684 Fiscal Year Activity: Appropriations Received 1556.806 556,806 Obligations Incurred 562,256 (562.256) Obligations Cancelled (16.037) 16,037 Accrued Expenditures (602.890) Relnbursmnts (1.766) 1.766 Balmier Returned to U.S. Treasury Ending Balances. September 30. 1987 $525.036 =iiiz=l=lIz= J Page 36 GAO/AFMD-90.37Fanners Home Administration Financial Statements Supplemental information associated with fiscal years 1966 and 1967 long-term borrowings follows: Accrued lnterert Payable (Oollars in Thousands) 1988 1987 lntragovernnental Debt: U.S. Treasury I 706.981 I 651.537 Federal Financing Bank 2.029.543 3.081.562 __________._ Subtotal 3.536.524 3.733.099 Private Investors 37.783 56,320 Other 6.552 31,472 ___-__..__.- TOTAL I 3,5E!n.859 I 3.620.891 ,nterest Expense (Oollars in Thousands) 1988 1987 Intragovernmental Debt: U.S. 1re*sury $ 1.211.362 I 1.155.462 Federal Financing Bank 7.678.991 8.046.262 Subtots 8.890.353 9.201.724 Private investors 66.851 64,762 Other 28.084 51.375 TOTAL I 8.987.288 During July 1974, FrMA began selling Certificates of Beneficial hrnerrhip (CEO) to the Federal financing Bank (FFB) as a primary means of program financing. The CBO interest rate Is based on Trea~ury~s cost of money plus l/8 of 1 percent to cover FFB's aaninistrative expenses. The interest Pates on FFB CEO's outstanding LS of September 30, 1988. range fra 7.324 percent to 16.516 percent. Owing flrcrl year 1966. FMA was required to pay a prepayment penalty on the early retirement of FFE CBO'r. In cwlying with the mandated loan asset sales. FnHA diminished the unpaid loan principal balances which Served as collateral for the CBO's. The agreement between FnHA and FFB provides that redmption of MO's nay occur at my tine: hwever. the payment made shall be of an anount 'which will result in 1 yield for the period from the date of repurchase to the maturity date of such CBO equal to the U.S. Treasury new issue rate for a security wth a maturity and pament schedule conparable to the remaining maturity and payment schedule of such CBO: The application of this provision of the agreement resulted in a penalty of $79.507.592. Page 34 GAO/AFMO-9037 Farmers HomeAdministration Financial Statements - r In fiscal year 1987, FlaHA conducted loan asset sales as tequired in the Omnibus Budget Reconciliation Act of 1986 (Public Law 99-509). As a result of these sales (Note 13), the Rural Development Insurance Fund (ROIF) maintains an investment in the Cwnnuoity Program Loan Trust. 19i37.4. This investment, reported at its appraised value of $33.614.488, represents a Class C residual security in the Trust and entitles the holder to residual cash flows resulting fran loan repayments not required to pay trust security holders or to fund required reserves. The Rural Housing Insurance Fund (RHIF) maintains an investment in the Rural Housing Trust. 1987-1. This investment represents Class 6 securities valued at $178.660.537 (1987 appraxsed value of $180.000.000 less return of investment received during fiscal year 1988 of $1.339.463) and Class C residual Securities valued at ~21.000.000. FnkP intends to retain the ROOF and RHIF Class C investments at least until a sufficient tract record has been establlshed to allow their true value to be determined. FMA intends to sell the RHTF Class 6 investment during fiscal year 1990. Based on estimates of the Class 8 investment's future value, It is anticipated that FnHA will receive sale proceeds not less tnan its recorded value. NOTE 8: ACQ"lRE0 PROPLRTY Acquired property is reported at net realizable value (estimated market value less cost of disposition). Property is acquired by the FlnHA revolving funds largely through foreclosure and voluntary conveyance. The properties consist primarily of 4.685 farm properties (total acreage of approximately 1.5 million) and 12.330 rural single family dwellings which are held by the revolving funds for resale. The revolving funds aw allowed to lease certain properties to eligible individuals for a period not to exceed 1 year. Fiscal yews 1988 and 1987 lease and rental incMne of $10.769.632 and S11.566.253. respectively, is reported IS other incane on the Consolidated Statement of Operntlons. The 1987 Agricultural Credit Act provides borrcwer rights regarding the sale of acquired farm properties. In order to protect these rights. restrictions were imposed on the sale of acquired farm properties. During GAO's FY 1987 financial audit. internal control weaknesses wwe cited concerning the valuation of acquired property and the reconciliation of the Property accounting records. Due to accounting system limitations in recording gains or losses realized at the tine property is acquired through voluntary conveyance. FmHA implemented procedures in fiscal yew 1988 to properly report these losses as loan losses. These procedures estimated the losses incurred fran property acquired through voluntary conveyance and included these losses in the loan receivable writeoffs. These weaknesses will continue to exist and related corrective procedures will remain in effect until revisions are fully implemented to the acquired property system. These revisions are included in a major systems alteration currently in proces*. Page 32 GAO/AFMD-9037 Farmers Home Administration Financial Statements NOTf 6: ALLOUANCE FOR LOSSES In fiscal year 1988 FM Substantially canpleted the implementation of a loan ClisSification syste'n: approximately 75 percent of the portfolio including farmer and single family housing program loans was classified. The loan classification system, required by OMB Circular A-129, provides the Agency additional data to .asSist in assessing the credit risk of the portfolio. OWECircular A-129 provides that Federal agencies annually perform a risk assessment of their portfolio and assign risk ratings. The Tisk ratings are based on the borrow?TIS fin(Lncial position, payment history. collateral or security value. as well IS other relevant information. An analysis of the canparability of the fiscal years 1988 and 1987 provision for losses must include recognition that the 1987 provision provided for both the current provision IS well &s adjustments to prior yew provisions. The significant incre.Sse in the fiscal year 1987 allowance for losses ~15 related to the declining trend in the agricultural economy over several years: that is. the increase was not attributable to I single adverse event during fiscal year 1987. The procedureS followed in estimating IoSSeS for fiscal year 1988 included: --The allowance for loan losses is based on historical data (consisting of writeoffs, loan settlement data. and acquired property losses). and an analysis of the loan classification of borrower .SccountS. and an analysis of current market factors and conditions (to include delinquent. rescheduled. and collection-only accounts). --The allowance for losses on accrued interest receivable is based on historical data (cumulative writeoffs of interest receivable). an analysis of the loan classification of borrower accounts. and an analysis of recent delinquency data. The latter analysis provides for a 100 percent allowance for 105s on the interest receivable on loans delinquent over 90 days. The other adjustments in allowance for lo.% losses for 1988 include an estimated $498 million loss on the anticipated fiscal year 19E9 sale of camunity program loan assets. The $498 million estimated loss is not reported in the Provision for Losses on Loans but is included in the Loss on Sale of Loan Assets in the Consolidated Statement of Operations (Note 13). The other adjustments in allowance for interest losses represent IntereSt on Nonperforming Loans as reported in the Consolidated Statement of Operations. The provision and other adjustments in the allowance for IoSseS for the fiscal years 1988 and 1987 follml: Allowance for Allowx~nce for Loan Losses Interest Losses 1988 1907 1988 1987 (Dollars in Thousands) (Dollars in Thousands) Beginning Balance $ 14.664.348 I 6.102.903 I 4279.752 I 386.980 Receivables Yritten Off. Net (1.779,078) (754.395) (491.323) (263.687) Provision for LosSeS 5.090.231 9.315.840 85.318 3.063.104 Other Adjustments in Allowance for LoSSeS 498.000 0 997,267 1.093.355 __________-. ..~__._..___ _____--___-- ____--__-.__ Ending Balance I 18.473.501 $ 14.664.348 $ 4.871.014 I 4.279.752 IZillSlXliil E=ii**im=ssci lisSi=imLli. S5*Sii==IESi Page 30 GAO/AFMW9@37Farmers Home Administration Financial Statements NOTE 5: L@ANS The unpaid principal balances and the related allowance for losses by entity and Mjor loan progrm as of Septmber 30. 1966 and 1987. follw: September 30. 1988 septmber 30. 1987 (Dollars in Thousands) (Dollars in Thousands) Allcwance Allaance for for Losses on Net Losses on Net Unpaid Principal Unpaid Unpaid Principal Unpaid Principal _ (Nate 6L .fri~bcc~zL Principal (Note 6) Principal Agricultural Credit Insurance Fund Fam Dmership I 7.304.333 S 2.629.309 II 4.675.024 I 7.549.307 I 1.978.908 I 5.570.399 Operating 5,729,855 2.409.106 3320.749 6.280.074 2.085.088 4.194.906 Emergency 8.419.073 6.5R5.509 1.833.564 9.292.036 5.751.240 3.540.796 fconmic Emergency 3.419.262 2.842.750 576,512 3.798.945 2.331.236 1.467.709 Other 564.036 28.095 535.941 587.966 15.360 572.606 Guaranteed loans purchased fran holders 29,742 14.871 14.871 28,733 14,367 14.366 __ _ _ _. _ _. _._________ ___________ ._.______~_ 25.466.301 14.509.640 10,956.661 27,537,061 12.176.199 15.360.862 ___________ ___________ __________. __.________ ___________ ___-_______ Rural Housing Insurance Fund Aural Housing 18.560.191 3.1x3.259 15.441.932 18.368.197 2.126.932 16.241.265 Labor Housing 137.566 19.667 117,899 139,457 19.937 119.520 Rural Rental Housing 0.347.437 64,300 8.283.137 7.901.688 60.867 7.840.821 Rural Housing Site 566 1 565 704 1 703 Guaranteed loans purchased frm holders 1.641 821 820 1,258 629 629 _. _. __ _ _. . _. ___________ ___________ ______-__-. 27.047.401 3.203.048 23.044.353 26.411.304 2.206.366 24.202.938 -_ _-__-----.. __ __ _ _ _ _ __ _ _ _ ______.____ Rural Developlent insurance Fund uater I waste 4.072.137 465,434 3.606.703 5.192.352 28.320 5.164.032 Ccunity Facilities 1.025.371 47.310 978.061 1.183.506 683 1.182.623 Business I Industrial 36.914 862 36.052 37,689 880 36,809 Guaranteed loans purchased frm holders 484,997 242,499 242.498 492.127 246.064 246,063 _____-_____ ___________ _________-- ___________ ___________ ______..... 5.619.419 756.105 4.863.314 6.905.674 275.947 6.629.727 ___________ _._____-.__ ___________ ______-____ _______-_-- _.__._____. All Other Entities 37.491 4.708 32,783 38.495 3.836 34.659 _..________ _. _ _ __ __ _._________ ___..._.._. ____.______ Total Fti $58.170.612 $18.473.501 $39.697.111 160.892.534 114.664.348 146.226.186 **rl*l*i*.i i*sc**s*si* liEEiii=iS=i i====si==,ci ==**s.il====i /IS/iSliCii FWA had unliquidated loan and grant obligations of $4.645.631.423 and $4.962.626.952 as of Septmber 30. 1988 and 1987. respectively. Page 28 GAO/AF’MD-9037Farmers Home Administration Financial Statements Expended Appropriations Appropriations are provided by Congress on both an annual and mult,-year basis to fund certain general funds and other expenses such as personnel Compensation and fringe benefits, rents. ccawnications. utilities. other administrative expenses. and capital expenditures. The current budgetary process does not distinguish between capital and operating expenditures. For budgetary purposes. bath are recognized as a use of budgetary resources as paid. however foP financial reporting purposes under accrual accounting. operating expenses are recognized currently while expenditures fo? capital and other long-tern assets are capitalized and are not recognized as expenses until they are consumed in FUiA's operations. Appropriations for general fund activities we recorded as a financing source when expended. Unexpended appropriations we recorded as equity of the U.S. Government (Nate 11). Loss Reimbursement Reimbursement for losses is provided by Congressional appropriations and is used to reimburse the three major revolving funds of F&A for losses sustained in excess of reported income. The losses reimbursed include actual amounts written off and losses sustained on the sale of acquired property; hwever. adjustments in the allowance accounts to record estimated future losses are not included in the requests for reimbursement. Requests for reimbursement are submitted as part of the budgetary process. Appropriations to reimburse revolving fund losses are typically received 2 years after the year in which the loss was sustained (Notes 11 and 12) and are recorded as an offset to cuwlative results of operations. Intragovernmental Financial Activities The FmHA's consolidated financial statements are not Intended to report the Agency's proportionate share of the Federal deficit or of public borrowings. including interest thereon. Financing for budget appropriations reported on the FrklA's Consolidated Statement of Operations and Consolidated Statement Of Cash Flors could derive frcnx tax revenues or public borrowings or both; the ultimate source of this financing, whether from tax revenues or public borrowings, has not been Specifically allocated to the FMA. During fiscal years 1968 and 1987. the majority of the FDHA's employees participated in the contributory Civil Service Retirement System (CSRS) or Federal Employees Retirement System (FERS), to which FnHA made matching contributions. The F&A does not, howwr. report CSRS and FERS assets, accumulated plan benefits. or unfunded liabilities. if any. applicable to Its employees since this data is only reported in total by the Office of Personnel Managetnent. NOTE 3: ACCOUNTS RECEIVAGLE Accounts receivable is caprised primarily of receivables resulting from accrued rent on acquired property, accrued interest on judgments. and the recapture of interest credit. Of these. the most Significant is the S10.987.773 recapture of interest credit receivable. This amount represents the amount of interest credit to be repaid to the Government and is determined after giving consideration to the awwnt Of interest credit provided, the appreciation in property value, the method used to Satisfy the loan. the periW of time the loan was outstanding. and the amount of equity the borrower has in the property when the loan is satisfied. The substantial reduction in the amount of accounts receivable during fiscal year 1988 is primarily attributable to the collection of the Governnent National Mortgage Association (GNWI) receivable. This receivable ($104.835,716 LS of SepteWer 30. 1987) became due and payable to FnHA in fiscal year 1986 due to the maturity of the outstanding GNWl participation certificates. Page 26 GAO/AFMD-9037 Fanners Home Administration -- ~~ ___ Financial Statements Guaranteed Lending Activities In addition to the insured lending activities, FnHA has authority to guarantee loans. The term a9uarantee* means 'to guarantee the paynent of 8 loss on a loan originated. held, and serviced by a private financial agency or other lender approved by the Secretary of Agriculture.' FmHA provides financial assistance to borrowers by guaranteeing loans made by I federal Or' State chartered bank, savings and loan association. cooperative lending agency. or approved lending institution who perform all loan servicing activities. Guaranteed loans are accounted for as contingent liabilities (Note 10). The guaranteed loan program a11ows FlrHA to guarantee up to 90 percent of the rn~ney loaned by a financial institution (lender) to borrowers in rural areas or who employs people in rural areas. The lender is required to inform FrnWI on the loan status on Oecenber 31 and June 30 (depending on the type of loan). unless the loan is in default which requires more frequent reporting. Most guaranteed loans nay be sold in the secondary market by the lender to an institution known as a holder. Although a portion of the loan is So?d to a holder. all servicing responsibility remains with the lender. Payments by the borrower are forwarded on a pro rata basis to the holder. If the holder does not receive payments on the note within 60 days of an installment due date. the holder can demand that FM@ pwchase the holder's share of the loan. When the loan is purchased. FmHA assumes the rights of the holder and IS entitled to the pro rata share of any payments made by the borrower to the lender. All guaranteed loans purchased by Fn+lA are treated as an asset (loans receivable) ?n its portfolIo (Note 5). If the borrower defaults on the loan, the lender is responsible for liquidating the collateral. After the proceeds of the sale have been applied to the outztand?ng balances, FmHA is liable for losses under the te""s of the guarantee (Notes 5. 6. and 10). Interest Rate Guydown Program: The Fwd Security Act of 13i35 (Public Law 99-198) authorized FlnHA to enter into an agreement with participating guaranteed lenders to reduce the interest rate paid by guaranteed borrowers. In return, FmUA will make annual interest rate buydom payments to the lender in an amunt not to exceed 50 percent of the cost of reducing the interest rate on the loan up to a maximum of two percentage points. The Act authorized $490.000.000 for this program to be available through September 30. 1988. As of September 30. 1gGG. funds were obligated for this program in the amount of 148.930.066. Agricultural Credit Act of 1387 Yith the passage of the Agricultural Credit Act of 1987 (Public Law 100-233). the loan servicing options of delinquent farmer program borrowers were expanded. The regulation changes F&A has made to accnnodate the Act became effective October 14. 19GG. In addition to the servicing options that were availsble prior to the Act. FnHA anticipates the following two new options will have 1 significant impact on the farmer program loans receivable. As of Septenber 30, 1389. FM notified 75.352 delinquent borraers of all the servicing options available. Debt Yrlte-Dmm Program The Act permits FnW\ to wite-down farmer program loans to the recovery value of the collateral if the barvower has a feasible plan to continue the farming operation. Loans can be witten-dam only if the restructured loan would result in ~ecove~y to the Goverment that would be equal to or greater than the anount recovered if the collateral was involuntarily liquidated. Borrowers who participate in the Debt Write-Oom Program must sign a shared appreciation agrewnt entitling FM4 to share in the appreciation of the real estate securing the loan. thereby recapturing a Portion of the debt write-dnm want. The agreement allws FllHll to receive fm 50 to 75 percent Of the apPreCiati0n during the life of the IO-year agreement if. during the 10 years, the borrower sells or conveys the property, ceases farming operations. or pays the debt in full. At the end of the tenth year. the borrower must pay 50 percent of the appreciation on the property. The -nt Page 24 GAO/AFMD-SO-37Farmers Home Administration Financial Statements Notes to Financial Statements FOR FISCAL YEARS E"CIFO SEPTEMBER30. ,988 AND 1987 NOTE 1: ORGANIUTION AND PROGW6 Entity and Basis of Consolidation Farmers Hare Mninistration (FnHA) is the credit sgency for agriculture and rural developlent in the U.S. Department of Agriculture (USOA). In 1988. the Agency marked 53 years of financial and technical assistance to rural America. This service has been performed under the successive names of Resettlement Administration, Fan Security Administration. and Farmers nW Administration. Yhen it began in 1935. the Agency's original function was to make loans and grants to Oepression- stricken families and help them regain self-sufficiency in making their living on family farms. For 53 years. Fti has been concerned primarily with credit and counseling services that have supplemented resources of the private sector for building strong family farms. In 1gEG. farm credit still accounted fov almost one-half of al1 ~esowces administered by FMA. This fact was particularly apparent in 1988 when America's fanners were hit by the nrst drought since the Oepression era. FWA responded with 1 full package of fan credit assistance including low interest emergency farm loan*. The Agency designated 1.489 counties eligible for emergency loans. In its farm programs. FnHA made or guaranteed over 37,700 loans totalling $2.3 billion to fa~mel‘s who could not otherwise obtain credit from cw-aercial lenders. During the last 2 decades. Congress created additlonal nonfarm programs to benefit families and camwnities in rural areas. These programs have helped to provide safe, modest housing: modern, sanitary water and sewer systems: essential canunity facilities: and job- and economy-boosting business and industry in rural areas. These are reflected in the current mission statement which directs FlnHA to 'serve as a temporary source of supervised credit and technical support for rural &v?ricans for improving their farming enterpnses, housing conditions. c-unity facilities. and other business endeavors until they are able to qualify for private sector rescwrces: Over the years. Fti has developed a credit system that reaches the county level. The Agency has approximately 11.400 permanent full-time employees who serve rural America frDR 46 State Offices. 266 District Offices. and 1.907 County Offices. plus the National Office in Washington. O.C.. and the Finance Office in St. Louis. Missouri. Service is provided in every rural county or parish in the 50 states. plus the Pacific Trust Territory. Pllerican Samoa. Guam, Puerto Rico, and the Virgin Is,*"&. In fulfilling its mission as a 'lender of last resort' in providing housing. credit. and agricultural assistance to people in rural areas. the Farmers Hone Ministration (FMA) maintains 11 general funds. 5 revolving funds. and 2 other funds. The majority of FnHA loans are made from three revolving loan funds. The oldest is the Agricultural Credit Insurance Fund (ACIF), established rhen F*LA began to make insured loans in the 1940’s. and na the fund from which all fanner progrsn loans are made. The Rural Pausing Insurance Fund (AHIF) was established with inauguration of insured rural housing loans in 1965. The Rural Development Insurance Fund (RDIF). established under the Rural Developent Act of 1972. took over fm AClF the Agency's lending for water. sewer, and other cwnity facilities. and for business and industrial development. The consolidated financial statewnts account fov all funds for tiich FMA is responsible and are presented on the accrual basis of accwnting as required by the GAO Policy and Procedures Manual for Guidance of Federal &encies (Title 2). Page 22 GAO/AFMD9037 Farmers Home Administration Financial Statements Consolidated Statements of Operations r FOP Fiscal Years Ended September 30 1988 1987 (DollaA in Thousands) INTEREST INCOME: Interest on Loans (Note 4) I 3.578.579 $ 4.148.326 Less Interest on Nonperfoming Loan5 (Note 6) 991.267 1.093.355 _.........~_ Interest Incane 2.581.312 3.054.971 _____.__.... INTEREST EXPENSE: Interest on Intragoverrw,tal Debt (Nate 9) 8.890.353 9,201,724 Other interest Expense (Note 9) 96,935 136,137 ___-_--.---- Interest Expense 8.987.288 9.337,861 ________.... NET lNTEREST EXPENSE (6.405.976) (6.282.890) __....____._ PROVISION FOR LOSSES ON: Loans (Note 6) 5.090.231 9.315.840 ACCPWd ,nterest 0" Loans (Note 6) 85,318 3.063.104 Acquired Property (Note 8) 205.392 607,093 Guaranteed Loans (Note 10) 627.642 688.426 ___._-__...- Total Provision for Losses 6.008.583 13.674.463 ___________. ____________ NET INTEREST EXPENSE AND PROVISION FOR LOSSES (12.414.559) (19.957.353) ____________ OTHER INCOME: Inc~ne Attributable to interest Credit Program (Note 4) 1.427.314 1.514.131 Expended Appropriations 589.225 601,5&3 Other Income 86.108 33.380 ___.______.. Total Other Income 2.102.647 2.149.099 _______--___ OTHER EXPENSES: Loss on Sale of Loan Assets (Note 13) 1.074.693 1.890.597 Interest Credit Prqlran Expense 1.427.314 1.514.131 Grants and Contributions 351.532 348.647 Personnel Canpensatio" and Fringe Benefits 303.905 298,647 Rents. Connunications, and Utilities 42.451 45,205 Other A&ai"istrative Expenses 51,650 49.942 Other Program Expenses 163.063 132.236 Preprynent Penalty on Intragovernental Debt (Note 9) 79.508 0 _----------. Total Other Expenses 3.494.316 4.279.405 ______------ NET LOSS FRO,, OPERATlONS $(13.806.228) $(22.087.659) . .._._._.. The accmpany~ng notes are an integral part of these fl"a"cidl Statements Page 20 Report on Compliance With Laws and Regulations We have audited the consolidated financial statements of the Farmers Home Administration ( F~HA) for the fiscal years ended September 30> 1988 and 1987, and have issued our opinion thereon. This report per- tains only to our consideration of compliance with laws and regulations for the year ended September 30, 1988. Our report on compliance with laws and regulations for the year ended September 30, 1987, is pre- sented in GAOIAFMD-89.~0, dated December 20, 1988. We conducted our audit in accordance with generally accepted govern- ment auditing standards. Those standards require that we plan and per- form the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Compliance with laws and regulations applicable to FmIlA is the respon- sibility of FmHA'S management. As part of obtaining reasonable assur- ance as to whether the consolidated financial statements were free of material misstatement, we performed tests of FmHA'S compliance with the following provisions of laws and regulations: - Anti-Deficiency Act (:I1 I1.S.C. 1341-1519); - Debt Collection Act of 1982 (31 LJ.S.C.3711-3719) and related regulations; - Prompt Payment Act (31 U.S.C. 3901-3906); . Omnibus Budget Reconciliation Act of 1986 (PI,. 99-509); and - other legislation and regulations concerning F~IIA'S farm, housing, and community and businclss loans and grants. The results of our tests indicate that, with respect to the items tested, the FmlIA complied, in all material respects, with the provisions referred to in the third paragraph. With respect to items not tested, nothing came to our attention that c,auscd us to believe t,hat the FmIlA had not com- plied. in all material resptbcts. with those provisions. Page 1x GAO/AFMD-90-37 Farmers Home Administration applied the same factor to the current value of acquired farm property and a ‘i-percent factor to housing property to estimate $154.9 million in holding and disposition costs when computing the net realizable value of acquired property. Without a sound methodology for determining holding and disposition costs and other refinements, loan loss estimates and the acquired prop- erty balance may be inaccurate. F-IIIHA'S newly implemented Acquired Property Tracking System has Conclusions improved its ability to track and account for property acquired through foreclosure and voluntary conveyance. However, FITIHA has not recon- ciled APTS data to detailed records and has not implemented software enhancements that would detect unreasonable property values. Although F~HA'S loan classification system, implemented in fiscal year 1988, is a major step toward meeting Title 2 and OMB requirements, field office instructions that provide guidance for estimating realistic collat- eral values and computing estimated losses are applied inconsistently. In addition, FITIHA has not performed reconciliations between the loan clas- sification system data and detailed files to detect errors and omissions from the system. Accordingly, without reconciliations of system data to source docu- ments, consistent application of instructions, and necessary software enhancements, significant errors in the acquired property and loan loss allowance accounts occur and are not promptly detected and corrected. In addition, the development of a sound methodology for determining holding and disposition costs is necessary to ensure that the loan loss estimate and the acquired property balance are reasonable. We recommend that the Secretary of Agriculture direct the Administra- Recommendations tor of the Farmers Home Administration to: . Ensure that all county offices receive APTS reports, require periodic rec- onciliations of API% report information with the detailed acquired prop- erty files as of fiscal year-end, and develop appropriate internal controls to detect the recording of unreasonable dollar values for inventory properties. Page16 Report on Internal Accounting Controls In response to our fiscal year 1987 report on internal accounting con- Weaknessesin the trols, FmHA implemented a loan cIassification system for its Agricultural New Farm Loan Credit Insurance Fund (farm loan portfolio) to comply with Title 2 and Classification System OMB requirements. This system is designed to classify loans according to the degree of risk and to estimate losses based on collateral shortfalls. All farm loans were classified by September 30, 1988, and the informa- tion was used by F~HA as the primary basis for determining the fiscal year 1988 allowance for loan losses for its $25 billion farm loan portfolio. However, our audit tests revealed significant internal control weak- nesses in the farm loan classification system, which caused it to be unre- liable. We reviewed a statistical sample of 500 F~HA farm loan classifications and supporting documentation and found that loss esti- mates were inaccurate in 212 of the 500 cases. Specifically, in the 212 cases, we identified the following types of problems: l current market values of collateral were not always used to determine estimated loan losses, . numerous procedural errors were made in computing estimated losses, and . detailed files at the field offices were not reconciled with the automated farm loan classification system detailed records, resulting in the omis- sion of loans from the system. Although generally accepted accounting principles (GAAP) require that allowances for loan losses be based on present market conditions and other factors, we found that in numerous cases F~HA supervisors were not establishing market values for collateral in order to project loan losses. Market value is defined as the monetary value that F~HA could reasonably expect to receive for the property in a current sale to a will- ing buyer other than a forced or liquidation sale. In 104 cases, supervi- sors used outdated appraisals or borrower financial statements to establish the value of the collateral, as illustrated in the following examples. - In 1988, FmHA estimated a loan loss of $12.1 million based on a 1981 appraisal of loan collateral. However, an updated September 30, 1988, appraisal of the collateral value indicated the loss would likely be about $6.7 million. . Using estimated collateral values as stated on a borrower’s financial statement as of January 1987, a loan was considered fully supported by Page 14 GAO/AFMD-9097 Farmers Home Administration opinion on FmHA'S system of internal accounting controls taken as a whole. In our fiscal year 1987 report on internal accounting controls. wc dis- closed four conditions which we believed adversely affected t.‘nln\‘s abil- ity to record, process. and report financial data. Specifically. WCfound that l controls over the tlntr) of guaranteed loans into the accounting system were inadequate; l FIIIIIA'S Automated Multiple Family IIousing Accounting System ( ;\YIW) was implemented wit,h numerous control weaknesses; . acquired property was improperly valued, and det,ailed property files were not reconciled with general ledger control accounts, and l FmIIA’S analysis of thcl nh imatc collectibility of its loan portfolio fot establishing an adcqriatc allowance for loss was not in acXcordanc8cwith OMH Circular A-l 29 The results of our t’is(‘al year 1988 examination indicate t,hat hllA improved its internal control procedures for ensuring that all guaran- teed loans are recorded in the Guaranteed Loan Accounting System. Accordingly, we no lorigt>r consider this to be a material internal cant 1-01 weakness. Furthermore, although Fmfli\ recognized AMASinternal control weaknesses in its fiscal yclar 1989 FMFIA report,, we arc not reporting on those weaknesses bc~usc~ corrective actions have been substantially completed. However, our study and evaluation disclosed three conditions that WV believe result in the, risk that errors and irregularities in amounts that would be material in relation to PrnkiA'S financial statements may occur and not be promptly tlctc~cted. These weaknesses conctrn VIUI~A’S valua- tion of acquired proptrty. implementation of its new farm loan classifi- cation system, and it 5 melthodology for compuung holding and disposition costs. In response to the dcficicncies reported in our fiscal year 1987 report on Control Weaknessesin internal accounting c~mt~rols,F~IIA implemented the Acquired Property the New Acquired Tracking System ( WIX), an automated subsidiary ac~counting system for Property Accounting farm and housing properties acquired through foreclosure and voirn- tary conveyance. While ~1’s has improved FmtlA'~ ability to track and System account for acquired l)roperty, the system does not conform with UO’S Policv L and Proccdl IIP Manual for Guidance__-.-- of Federal --.Agcncics. Title 2. Report on Internail Aeeourking Controls We have examined the consolidated financial statements of the Farmers Home Administration (EYIIHA) for the fiscal years ended September 30, 1988 and 1987, and have issued our opinion thereon. As part of our examination, we made a study and evaluation of the system of internal accounting controls to the extent we considered necessary to evaluate the system as required by generally accepted government auditing stan- dards This report pertains only to our study and evaluation of the sys- tem of internal accounting controls for the fiscal year ended September 30, 1988. Our report on the study and evaluation of internal accounting controls for the year ended September 30, 1987, is presented in GAOIAFMD-89-20, dated December 20, 1988. The purpose of our study and evaluation was to determine the nature, timing, and extent of the auditing procedures necessary for expressing an opinion on FmHA'S financial statements. Our study and evaluation was more limited than would be necessary to express an opinion on the sys- tem of internal accounting controls taken as a whole. For the purpose of this report, we have classified the significant internal accounting con- trols into the following categories: l loans and grants, s guaranteed loans, . acquired property, . treasury, and . financial reporting. Our study and evaluation included all of the control categories listed above, except for the treasury and financial reporting categories. For those categories, we found it more efficient to expand the scope of our substantive audit tests. Substantive audit tests can also serve to identify weaknesses in internal control policies and procedures. The management of RIIHA is responsible for establishing and maintaining a system of internal controls, including accounting controls, in accord- ance with the Accounting and Auditing i\ct of 1950 and the Federal Managers’ Financial Integrity Act of 1982 (FMFIA). In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of a system of internal accounting controls are to provide management with reasonable assurance that (1) obligations and costs are in compliance with applicable laws, (2) funds, property, and other assets are safeguarded against waste, loss, and unauthorized use or mis- appropriation, and (3) assets: liabilities, revenues, and expenditures Page10 GAO/AFMD-9037FarmersHomeAdministration B226249 agricultural bank failures. In addition, bankruptcy filings by family farmers declined between the end of 1987 and the end of 1988. However, the improved farm economy has not had the same positive impact on F~HA. F~HA, as the lender of last resort, has served as a “shock absorber” for the farm industry, providing financing to those farmers unable to qualify for loans with commercial lenders. As farm- ers’ financial condition deteriorated significantly from the mid-1970s to the mid-1980s, increasing numbers of farmers who had been refused financing by private lenders, turned to F~HA for credit assistance. F~HA'S farm loan portfolio increased from $5.1 billion in 1976 to $25.5 billion in 1988. As farmers’ financial condition further deteriorated during this period, many ceased repaying their debts to F~HA. This severely affected FmHA'S financial condition by increasing its loan losses and interest costs. MA'S farm loan portfolio remained stressed in 1988. R~HA increased its allowance for loan losses by $5.1 billion in fiscal year 1988. In addition, F~HA recognized a $628 million provision for losses related to its guaran- tee programs, increasing the accrual for estimated losses on guaranteed loans to $1.3 billion. As of September 30, 1988, the outstanding principal balance on delin- quent loans to farm program borrowers was about $12.5 billion or 49 percent of the total outstanding principal. As discussed in note 1 to the financial statements, the options of delinquent farm program borrowers were expanded with the passage of the Agricultural Credit Act of 1987. As of September 30, 1989, FmHA notified 75,352 delinquent borrowers of all servicing options available. With the use of these options, delinquent balances are expected to decrease. The agricultural economy is driven by elements such as weather condi- tions, interest rate fluctuations, government agricultural and economic policies, and foreign economic conditions. These factors influence farm income and available cash, as well as the value of farm assets. Farmers’ ability to repay debt and the value of the underlying collateral deter- mine the ultimate realized losses on FmHA'S loan portfolio. As discussed Page8 United States GAO General Accounting Office Washington, D.C. 20548 Accounting and Financial Management Division B-226249 To the Acting Administrator Farmers Home Administration We have audited the accompanying consolidated statements of financial position of the Farmers Home Administration (FmHA), an agency of the Department of Agriculture, as of September 30, 1988 and 1987, and the related statements of operations and cash flows for the fiscal years then ended. These financial statements are the responsibility of FmHA’S man- agement. Our responsibility is to express an opinion on these financial statements based on our audits. In addition to this report on our audits of FmllA’S fiscal year 1988 and 1987 financial statements, we are also reporting on our consideration of FmHA’S system of internal accounting controls and on its compliance with laws and regulations. We conducted our audit in accordance with generally accepted govern- ment auditing standards, except for scope limitations as discussed in the following paragraphs. Those standards require that we plan and per- form the audit to obtain reasonable assurance about whether the finan- cial statements are frc,e of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclo- sures in the financial statements. An audit also includes assessing the accounting principks used and significant estimates made by manage- ment, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion, Prior to fiscal year 1987. F~HA did not prepare its financial reports or maintain its accounting records in accordance with generally accepted accounting principles. Although F~HA adopted such principles during fiscal year 1987, thr scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the results of operations and cash flows for the: fiscal year ended September 30, 1987. Our opinion on FmIiA's fiscal year 1987 statement of financial position (GAOIAFMD-~20) was qualified because FmHA’S accounting system did not capture current property market values at the time of acquisition for voluntarily conveyed property, and it was not feasible for us to deter- mine the amount of adjustments, if any, to the allowance for losses and the related provision that would have been required to record these assets at their fair values at the time of acquisition. Our audit of the fiscal year 1988 financial statements disclosed that although FmHA implt~rnented a new acquired property system (referred to as the Acquired I’ropc,rty Tracking System) during fiscal year 1988, Page 6 GAO/AFMD-90-37Farmers Home Administration Contents -c Letter 1 Opinion Letter 6 Report on Internal 10 Accounting Controls Control Weaknesses in the New Acquired Property 12 Accounting System Weaknesses in the New Farm Loan Classification System 14 Ilolding and Disposit,ion Costs Are Not Based on Sound 16 Methodology Conclusions 16 Recommendations 16 Agency Comments 17 Report on Compliance 18 With Laws and Regulations ______- -~-~ -- Financial Statements 19 Consolidated Statements of Financial Position 19 Consolidated Statements of Operations 20 Consolidated Statements of Cash Flows 21 Notes to Financial Statements 22 Abbreviations AMAS Automated Multiple Family Housing Accounting System AI'TS Acquired Property Tracking System FiMFIA Federal Managers’ Financial Integrity Act FmHA Farmers Home Administration GAAI generally accepted accounting principles OM11 Office of Management and Budget Paye 4 GAO/AFMD-SO-37Farmers Home Administration B-226249 and Senate Committees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of this letter. We are sending copies of this report to the Director of the Office of Man- agement and Budget, the Secretary of the Treasury, the Acting Adminis- trator of the Farmers Home Administration, and interested congressional committees. Sincerely yours, Donald H. Chapin Assistant Comptroller General Page 2 GAO/AFMD-9&37 Farmers Home Administration
Financial Audit: Farmers Home Administration's Financial Statements for 1988 and 1987
Published by the Government Accountability Office on 1990-01-25.
Below is a raw (and likely hideous) rendition of the original report. (PDF)