oversight

Debt Collection: Improved Reporting Needed on Billions of Dollars in Delinquent Debt and Agency Collection Performance

Published by the Government Accountability Office on 1997-06-02.

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

                 United States General Accounting Office

GAO              Report to the Chairman, Committee on
                 the Budget, House of Representatives



June 1997
                 DEBT COLLECTION
                 Improved Reporting
                 Needed on Billions of
                 Dollars in Delinquent
                 Debt and Agency
                 Collection
                 Performance




GAO/AIMD-97-48
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Accounting and Information
                   Management Division

                   B-275282

                   June 2, 1997

                   The Honorable John R. Kasich
                   Chairman, Committee on the Budget
                   House of Representatives

                   Dear Mr. Chairman:

                   As agreed with your office, this report responds to your request that we
                   review debt collection issues for nontax debts. It deals with outstanding
                   lending program debt that is being directly managed by federal agencies
                   and discusses programs under which federal agencies disbursed the loans
                   as well as defaulted guaranteed loans for which agencies reimbursed
                   private lenders and are now attempting to collect themselves. Generally,
                   this debt is referred to as federal credit receivables. This report
                   specifically focuses on (1) reported governmentwide data on credit
                   receivables and delinquencies for federally managed loans, (2) the status
                   of efforts at four major credit agencies to resolve delinquencies, (3) the
                   dollars collected using various legislatively established collection tools,
                   and (4) ways debt collection reporting can be enhanced to evaluate
                   progress in collecting debt, and thereby assess agency efforts to meet the
                   mandates of the Debt Collection Improvement Act of 1996. We did not
                   verify the accuracy of the information provided to us by the Office of
                   Management and Budget (OMB), the Department of the Treasury’s
                   Financial Management Service (FMS), or by the four agencies included in
                   our review.


                   Governmentwide reporting to the Congress indicates that the amount of
Results in Brief   debt federal agencies are directly managing has remained about
                   $200 billion for the 5 years ended September 30, 1996. During that time,
                   reported delinquencies for these federal credit receivables varied between
                   $31 billion to $38 billion. Our report focuses on the four program activities
                   that had about two-thirds of this delinquent debt: the Department of
                   Education’s Federal Family Education Loan Program with $20 billion and
                   housing programs at the Departments of Housing and Urban Development
                   (HUD), Veterans Affairs (VA), and Agriculture, which cumulatively had
                   another $5 billion.

                   To gain a perspective on agency performance, we assessed the status of
                   agency efforts to collect on delinquent debts. At September 30, 1995, the
                   most recent data available on program-level collection performance at the




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             time of our field work, the housing agencies (1) were dealing with more
             than half of their delinquent debt through various involuntary collection
             tools, such as foreclosure and adjudication initiatives and (2) for almost a
             third of their delinquent debt, were attempting to contact borrowers to get
             them to resume payments on the original or revised terms. Education was
             experiencing similar challenges in collecting delinquent debt. Education
             and its agents, which include state or private non-profit guaranty agencies,
             were attempting to locate and confirm or revise repayment agreements
             associated with about 70 percent of Education’s delinquent debt.
             Contacting borrowers with delinquent student loans is an especially
             difficult task since they tend to be younger and thus more transient. Also,
             collection on such unsecured loans tends to be more difficult because
             there is no collateral to be seized if borrowers do not pay. Delinquent
             student loans accounted for 40 cents of every dollar of delinquent nontax
             debt directly managed by the government and over half of the delinquent
             federal credit receivable debt.

             We identified several enhancements that would facilitate valid
             assessments of agency collection efforts. Better data and key analyses are
             crucial aspects of federal efforts to measure success in accomplishing the
             charter for a more business-like credit management environment as set
             out by the Debt Collection Improvement Act of 1996. Progress in this area
             will be especially critical to the success of FMS as it assumes new debt
             collection management and reporting responsibilities under the 1996 act.
             But more importantly, such data is central to effective day-to-day
             management in terms of selecting collection strategies and deploying
             available staff and contract resources. Among the enhancements that we
             discuss are (1) developing a reporting framework to identify and assess
             the status of agency efforts to collect delinquent balances, (2) providing
             more information on how actively, successfully, and cost-effectively
             agencies are using individual collection tools, (3) reporting actual
             delinquent amounts that agencies are trying to collect and showing how
             those figures relate to amounts reported on agency financial statements,
             and (4) improving the reliability and consistency of reporting on
             delinquencies and credit receivables.


             With credit programs involving outstanding loan balances approaching a
Background   reported $1 trillion (including direct and guaranteed loans), the federal
             government is the nation’s largest credit manager. In carrying out this
             responsibility, federal agencies are faced with the challenge of ensuring
             that this debt, much of which is managed day-to-day by private sector



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    lenders and state or private non-profit guaranty agencies, is collected from
    millions of borrowers, and that billions of dollars in delinquent debt are
    effectively pursued and collected.

    Our review specifically focused on the $25 billion of delinquent credit
    program debt that four of the larger federal credit agencies were managing
    directly.

•   The Department of Housing and Urban Development’s Federal Housing
    Administration (FHA) Single Family and Multifamily Housing Loan
    Programs and Title I Program. The Single Family Housing program insures
    mortgages on one-family to four-family housing units. The Multifamily
    Housing program insures mortgages on projects such as rental properties
    of five or more units, housing for the elderly, hospitals, and nursing
    homes. The Title I Program insures loans for home improvements or the
    purchase of manufactured housing. These programs serve first-time home
    buyers with incomes that range from low to moderate, and the elderly and
    disabled who require special housing.
•   The Department of Education’s Federal Family Education Loan (FFEL)
    Program, which includes Federal Stafford Loans, subsidized and
    unsubsidized; Federal Parent Loans for Undergraduate Students (PLUS);
    and Federal Supplemental Loans to Students (SLS) (no new SLS loans were
    originated after July 1, 1994). The FFEL Program is the largest post
    secondary education guaranteed loan program of the federal government
    and its primary purpose is to increase post-secondary educational
    opportunities for eligible students.
•   The Department of Veterans Affairs’ (VA) Guaranty and Vendee Loan
    Programs. Under the Loan Guaranty Program, VA guarantees loans to
    veterans and current service personnel to purchase, construct, or improve
    homes. Through the Vendee Loan Program, direct loans are made to
    purchasers of VA-owned houses acquired as a result of defaults on
    guaranteed loans.
•   The Department of Agriculture’s Rural Housing Service (RHS) Single
    Family and Multifamily Housing Direct Loan Programs. Single Family
    Loans are made to low- and moderate-income families to purchase or
    repair homes in rural areas. Borrowers of single family loans are required
    to “graduate” from the direct loan program when their incomes are
    sufficient to afford private credit. Multifamily Housing Loans are made to
    provide moderate cost rental housing to persons of low and moderate
    incomes in rural areas.




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                      The above programs represent about half of the reported $50 billion in
                      reported delinquencies for credit programs and noncredit nontax
                      programs as of September 30, 1995. Of the reported $50 billion,
                      approximately $38 billion was attributable to credit programs. The
                      residual, categorized as “nontax, noncredit,” includes such things as fines,
                      penalties, and overpayments associated with a variety of government
                      functions.

                      At the end of fiscal year 1995,1 the credit programs included in our review
                      comprised 19 percent of reported outstanding direct loans2 and 75 percent
                      of reported defaulted guaranteed loans receivable.



How Credit Programs   Under direct loan programs, a federal agency generally makes a direct
Work                  disbursement to an approved borrower and then services and collects on
                      the loan. These loans may be secured, as in the case of the Department of
                      Agriculture rural housing loan programs, or unsecured, as are Department
                      of Education direct student loans. Under guaranteed loan programs,
                      federal agencies rely on private sector lenders to originate and service
                      loans within federal guidelines. All or a part of the interest and loan
                      principal are guaranteed by the government in the case of borrower
                      default. As with direct loans, guaranteed loans may be secured by property
                      or unsecured. (For more information on the growth of guaranteed loan
                      programs in recent years and on what happens when borrowers default on
                      guaranteed loans, see appendix II).

                      In general, federal direct loan and loan guarantee programs have
                      legislatively mandated provisions to accomplish certain social and
                      economic results. However, because many federal loan programs are
                      targeted at borrowers who, due to their financial situation, cannot
                      otherwise obtain private financing, the government’s risk is generally
                      greater than that of private lenders. By their nature, many of these
                      programs can be expected to result in a cost to the government—the cost
                      of achieving a program’s social or economic goals—and agencies are faced
                      with achieving these goals in conjunction with good credit management
                      practices. Costs are incurred on direct and guaranteed loans when


                      1
                       Our review focused on selected programs at FHA, VA, RHS, and Education and for those programs,
                      fiscal year 1995 amounts were the most recent data available when we performed our field work.
                      2
                       Most of the remaining outstanding direct loans relate to the Department of Agriculture’s farm loan
                      program, which we have reviewed extensively in other reports and testimony. See Consolidated Farm
                      Service Agency: Update on the Farm Loan Portfolio (GAO/RCED-95-223FS, July 14, 1995).



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                                        (1) interest rate or other subsidies are provided or (2) debts are not fully
                                        repaid and liquidation of any available collateral is insufficient to recover
                                        the unpaid balance. Whether or not a program is cost-effective depends
                                        largely on securing repayment and on the timeliness of those loans
                                        repayments. Therefore, within the objectives and provisions set out for
                                        each federal credit program, controlling and mitigating the risk of
                                        nonpayment are important, as are measuring and reporting on
                                        performance to hold agencies accountable for program results and costs.
                                        Figure 1 explains how failing to mitigate risks at any point during the
                                        credit management process—when first extending credit, when servicing
                                        accounts, or when recovering delinquent debt—can affect loan payment.


Figure 1: Credit Management Functions and Risks




   Credit         This includes a review of the loan applicant's credit worthiness and
   extension      compliance with program loan eligibility criteria. If a credit
                  extension process does not provide the ability to detect prior failure,
                  or current inability, on the part of the applicant to repay outstanding
                  federal or federally guaranteed loans, the risk of nonpayment on
                  new loans is increased.


   Account        This involves monitoring payment activity which enables an
   servicing      agency to "flag" overdue payments for special attention because if
                  they are left unattended, the risk of nonpayment increases.


   Recovering Debt collection should include a fair but aggressive program
   delinquent to recover delinquent debt. Restoration of the debt to a current
   debt       status is the primary goal or, if that is not achieved, maximum
              collection of available assets should be sought to offset the entire
              debt.




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Differences in Credit      It is important to note that differences among credit programs affect the
Programs                   validity of efforts to compare and contrast performance. In general,
                           secured loans offer better recovery options than unsecured loans chiefly
                           because delinquencies can be recovered by seizing or foreclosing on the
                           asset securing the loan rather than by pursuing the borrower. By program
                           design, some housing programs collect fees when the loan is originated to
                           help cover the default costs of the program and generally do not record
                           receivables or pursue shortfalls on loans after foreclosure. In contrast,
                           because of the legislatively mandated structure of the FFEL Program,
                           Education attempts to collect on all defaults, since there is no collateral to
                           seize, and loan origination fees collected are not designed to cover all
                           default costs. Other program differences and their effect on debt reporting
                           are noted throughout this report.


Prior GAO Work and         Federal loan programs have been a major focus of GAO’s High-Risk
Legislative Initiatives    Program.3 We have designated high risk areas involving loan programs at
Affecting Federal Credit   three of the four major credit agencies included in our review. Recent
                           reports on our High-Risk Program discuss: the Department of Agriculture’s
Programs                   farm loans, the Department of Education’s entire student financial aid
                           program, and the Department of Housing and Urban Development. Our
                           audits, those by the inspectors general, and others, have consistently
                           disclosed serious weaknesses in agency systems used to account for and
                           manage receivables. Audits have shown that some information for credit
                           and debt management is not accurate or complete.

                           Over the past 15 years, numerous legislative and other initiatives—some of
                           which were in response to our recommendations—have strengthened
                           agency debt collection efforts or its oversight, including the Debt
                           Collection Act of 1982, the Debt Collection Improvement Act of 1996,
                           OMB’s nine-point credit management program, the Chief Financial Officers
                           (CFO) Act of 1990, as expanded by the Government Management Reform
                           Act (GMRA) of 1994, the Government Performance and Results Act (GPRA)
                           of 1993, the Federal Credit Reform Act of 1990, and the establishment of
                           the Federal Accounting Standards Advisory Board (FASAB). Among other
                           things, these initiatives clarified and strengthened agency authority for
                           collecting debt, provided the underpinning for improving financial and


                           3
                            Our High-Risk Program, which began in 1990, represents a special effort to review and report on the
                           federal program areas we considered high-risk because they were especially vulnerable to waste,
                           fraud, abuse, and mismanagement. The effort has brought much needed focus to problems that were
                           costing the government billions of dollars. In February 1997, we issued a series of reports on the status
                           of efforts to address problems in designated high-risk areas (High-Risk Series GAO/HR-97-20SET,
                           February 1997).



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                          program management and accountability in federal agencies, and revised
                          budget and accounting requirements for federal credit programs.

                          The Federal Credit Reform Act of 1990, in particular, changed the
                          budgetary treatment of loans and loan guarantees so that the government
                          could better measure and control its subsidy costs for loan programs.
                          Under the act, agencies are required to estimate and budget for the full net
                          present value cost of direct loans and loan guarantees, before credit is
                          extended. Recovery of delinquent debt is a factor not only in determining
                          the estimated cost of the loan program but also in controlling the cost of
                          the program. Higher recovery rates for delinquent debt translate into lower
                          program costs. The Federal Credit Reform Act of 1990 and the other
                          initiatives are discussed in further detail in appendix III.


The Debt Collection       The Congress also just last year took an important step in improving debt
Improvement Act of 1996   collection efforts by expanding collection tools and authorities available to
                          agencies. The Debt Collection Improvement Act of 1996, which we
                          supported, allows the public dissemination of information regarding the
                          identity of persons with delinquent nontax debt. In an effort to reduce
                          future delinquencies, it also requires agencies to screen potential
                          borrowers—except for disaster loan applicants—and requires denial of
                          credit to anyone who is delinquent in repaying federal debt (except for tax
                          debt). The 1996 act also calls for centralizing the servicing of debt that is
                          more than 180 days delinquent at Treasury’s FMS and designated collection
                          centers. In certain circumstances, the act provides authority for agencies
                          to retain and use a portion of collections, if appropriated. The act also
                          transferred the responsibility to prepare annual reports to the Congress
                          regarding agency debt collection efforts from OMB to FMS. A more extensive
                          description of this new legislation and the expanded responsibilities
                          accorded FMS are provided in appendix IV.


                          In carrying out our review, we analyzed debt collection information
Scope and                 available from OMB and the agencies included in our review for fiscal years
Methodology               1992 through 1996. Amounts for fiscal year 1995 were used to show the
                          status of delinquent debt for the selected FHA, VA, RHS, and Education
                          programs discussed in this report because it was the most recent
                          information at the program-level available at the time our fieldwork was
                          done. Because preliminary governmentwide debt collection information
                          for fiscal year 1996 just became available in February 1997, we included
                          this data in our report where possible. We also reviewed the Debt



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                  Collection Act of 1982, the Debt Collection Improvement Act of 1996, and
                  other significant applicable legislative and regulatory provisions affecting
                  the programs included in our review. We analyzed information in the
                  Analytical Perspectives section of the Budget of the United States
                  Government Fiscal Year 1997 and Fiscal Year 1998 and other selected
                  program data used by agencies to manage their credit programs.

                  To determine progress toward resolving outstanding delinquent debt in the
                  programs reviewed, we analyzed data provided by agency officials
                  describing actions taken to resolve delinquent debt. We did not verify the
                  accuracy of the information provided to us by OMB, FMS, or the four
                  agencies included in our review. We did, however, consider the results of
                  financial statement audits, and sought to determine whether agencies
                  reported debt collection information on a consistent basis, for the
                  agencies included in our review.

                  We conducted our work from October 1995 through March 1997 in
                  accordance with generally accepted government auditing standards.
                  Details on the scope and methodology of this review are included in
                  appendix I.

                  We requested comments on a draft of this report from the Department of
                  the Treasury; the Office of Management and Budget; and the Departments
                  of Agriculture, Housing and Urban Development, Veterans Affairs, and
                  Education. At a joint meeting on April 17, 1997, we received oral
                  comments from those agencies. Their comments are discussed in the
                  “Agency Comments and Our Evaluation” section of this report.


                  OMB’s data showed that as of September 30, 1996, federal agencies were
Reported Credit   responsible for directly managing about $204 billion of the approximately
Receivables and   $1 trillion attributable to government lending programs. The federally
Delinquencies     managed segment of the overall credit portfolio (credit receivables)
                  included (1) $164 billion of direct lending and (2) $40 billion of defaulted
                  guaranteed loans for which agencies had reimbursed private lenders and
                  were now trying to collect directly from borrowers.

                  Of the total reported $51 billion of governmentwide delinquencies, about
                  $36 billion (down from $38 billion in fiscal year 1995) was associated with
                  the federal credit programs. The remaining $15 billion of delinquencies
                  were nontax noncredit receivables resulting from such actions as grant
                  overpayments and civil monetary fines.



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                                       The numbers reported indicate that total credit receivables and
                                       delinquencies on agency books were steady from 1992 to 1996. As
                                       discussed later in this report, caution must be exercised in using this data
                                       for comparison or analytical purposes because agencies did not uniformly
                                       report data and reliability issues have surfaced during audits of agency
                                       financial statements.


Receivables                            Table 1 shows the reported credit receivables from fiscal year 1992
                                       through fiscal year 1996. For financial reporting purposes, credit agencies
                                       wrote off about $20 billion of credit-related debt during these years
                                       including: $3 billion in fiscal year 1992, $3 billion in fiscal year 1993,
                                       $8 billion in fiscal year 1994, $3 billion in fiscal year 1995, and $3 billion in
                                       fiscal year 1996. As discussed later in this report, although the write-offs
                                       allow financial statements to depict amounts the agency reasonably
                                       expects to collect, some agencies continue to pursue amounts that have
                                       been written off.

Table 1: Credit Receivables Reported
by OMB for Fiscal Years 1992 Through   Dollars in billions
1996                                                                                                        Fiscal year
                                       Credit receivables                                     1992      1993      1994      1995      1996
                                       Direct loans                                           $157      $157      $161      $160      $164
                                       Defaulted loan guarantees                                49        48         37        44      40
                                       Total                                                  $206      $205      $198      $204      $204
                                       Source: Debt collection reports and FMS.



                                       Table 2 shows these same reported credit receivables for fiscal years 1992
                                       through 1996 by lending agency. As the table indicates, most of these
                                       receivables belonged to the Department of Agriculture. We extensively
                                       reviewed most of Agriculture’s receivables in our reports, entitled
                                       Consolidated Farm Service Agency: Update on the Farm Loan Portfolio
                                       (GAO/RCED-95-223FS, July 14, 1995) and Farm Service Agency: Update on the
                                       Farm Loan Portfolio (GAO/RCED-97-35, January 3, 1997).

                                       Table 2 also shows an $18 billion increase in Education receivables
                                       between fiscal years 1994 and 1996. This was primarily the result of
                                       (1) $12 billion in loan growth from fiscal years 1994 to 1996 for the direct
                                       loan program, which was not part of our review,4 and, as explained later,

                                       4
                                        The direct loan program at Education was started in 1994 and was not included in our review
                                       because, as a new program, it did not have significant delinquencies.



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                                       (2) Education increasing the recorded net financial value of its receivables
                                       based on the audit of its fiscal year 1995 financial statements.

Table 2: Credit Receivables Reported
by Lending Agency                      Dollars in billions
                                                                                                             Fiscal year
                                       Agency                                                 1992      1993       1994      1995         1996
                                       Department of Agriculture                              $108      $108       $111      $109         $104
                                       Agency for International Development                      16        16        16         16         15
                                       Department of Housing and Urban
                                       Development                                               21        21        21         20         16
                                       Small Business Administration                              6          7         9        10         10
                                       Department of Education                                   15        13        14         24         32
                                       Department of Veterans Affairs                             3          3         3         3          3
                                       Export Import Bank                                         9          8         6         7          9
                                                             a
                                       All other agencies                                        28        29        18         15         15
                                       Total                                                  $206      $205       $198      $204         $204
                                       a
                                        Amounts for 1992 and 1993 include $10 billion and $8 billion, respectively, in accrued interest
                                       that were not distributed among agencies until 1994.

                                       Source: Debt collection reports and FMS.



                                       It should be noted that the credit programs at FHA, VA, RHS, and Education
                                       that we reviewed in more detail represent only a portion of the amounts in
                                       table 2. Table 3 identifies the credit receivables for the programs we
                                       reviewed as of the end of fiscal year 1995, which was the latest data
                                       available for the programs included in our review.

Table 3: Credit Receivables for
Programs Reviewed for Fiscal Year      Dollars in billions
1995                                                                                                                                Credit
                                       Program reviewed                                                                        receivables
                                       Education: FFEL Program                                                                             $20
                                       HUD—FHA: Single and Multifamily Housing and
                                       Title 1 Loan Programs                                                                               10
                                       Agriculture—RHS: Single and Multifamily Housing Loan Programs                                       30
                                       Veterans Affairs: Guaranty and Vendee Loan Programs                                                  3
                                       Total                                                                                               $63
                                       Source: Agencies’ Report on Receivables Due From the Public.




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Delinquencies                            Table 4 shows that from fiscal year 1992 to fiscal year 1996, reported
                                         delinquencies on credit receivables started and ended at $36 billion with
                                         interim fluctuations. At September 30, 1996, $26 billion, over 70 percent of
                                         the credit receivable delinquencies, was attributable to defaulted loan
                                         guarantees, primarily student loans. The remainder was attributable to
                                         direct loans. Reported delinquencies for the programs we reviewed
                                         accounted for about $26 billion (two-thirds) of the $38 billion in delinquent
                                         credit receivables managed by federal agencies at September 30, 1995.

Table 4: Delinquent Credit Receivables
Reported by OMB for Fiscal Years         Dollars in billions
1992 Through 1996                                                                              Fiscal year
                                         Loans                                      1992   1993    1994      1995   1996
                                         Direct loans                                $11    $10     $12      $10     $10
                                         Defaulted loan guarantees                    25     21      22       28      26
                                         Total                                       $36    $31     $34      $38     $36
                                         Source: Debt collection reports and FMS.



                                         On the surface, delinquencies from defaulted guaranteed loans appear to
                                         be a greater problem than those for direct loans. However, it is not
                                         possible to calculate the percentage of guaranteed loans that are
                                         delinquent because, according to OMB, no governmentwide data exists on
                                         the status of delinquencies for the $760 billion of guaranteed loans
                                         currently being serviced by private lending institutions. Without this
                                         information, reliable comparisons of delinquencies for direct and
                                         guaranteed loans are not possible. See appendix II for an analysis of
                                         guaranteed loans outstanding.

                                         While the amounts of reported delinquencies for the programs changed at
                                         each of the four agencies included in our review, the largest change
                                         related to Education’s Federal Family Education Loan Program, which
                                         grew from $14 billion to $20 billion from fiscal years 1992 to 1995. The
                                         major part of this increase was a result of Education increasing the net
                                         financial value of its receivables by $5.6 billion based on an independent
                                         audit of its fiscal year 1995 financial statements. Specifically, the audit
                                         revealed that Education should recognize a receivable for expected
                                         collections from loans previously considered uncollectible.

                                         The changes in the amounts reported as delinquent for fiscal years 1992
                                         through 1995 at the three housing agencies included in our review are
                                         highlighted below. More specific information on the status of collection



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    efforts of the housing programs and Education are discussed in the next
    section of this report.

•   FHA’s reported delinquencies declined from $2.6 billion to $2.3 billion due
    to loan sales, loan restructuring, foreclosures, and property dispositions.
    In March 1994, FHA began an aggressive program to sell defaulted
    FHA-insured single and multifamily mortgages. This initiative was
    undertaken as part of HUD’s overall reinvention efforts.5 As discussed later
    in this report, however, FHA officials acknowledged that reported
    delinquencies would have been significantly higher if they were consistent
    with FMS criteria.
•   VA’s reported delinquencies declined from $2.2 billion to $1.5 billion due to
    pre-foreclosure loan servicing activity, debt waivers and the Veterans
    Home Loan Indemnity and Restructuring Act of 1989. Under this act,
    borrowers pay a higher funding fee to cover defaults. VA does not pursue
    any remainder due on the loan after foreclosure.6 Thus, the delinquencies
    in VA’s portfolio primarily represent efforts to collect on defaults resulting
    from pre-1990 loans. A VA official said that the amount of delinquencies
    should continue to decline because few new housing delinquencies are
    being added, allowing VA to concentrate on resolving older delinquent
    debt.
•   RHS’ reported delinquencies stayed steady at about $1.2 billion during the
    4-year period. This amount is attributable solely to RHS’ direct lending
    program.

    In addition, our January 1997 report7 on farm loans showed that
    reported delinquencies had dropped from 28 percent to 23 percent during
    fiscal year 1996, largely due to a write-off of $1.1 billion of interest and
    principal during the year. As noted in the overview report (GAO/HR-97-1,
    February 1997) for our series of reports on high-risk federal programs, the
    Congress passed the Federal Agriculture Improvement and Reform Act of
    1996, which made fundamental changes in loan-making, loan-servicing,
    and property management policies. Agriculture is still in the process of
    implementing the mandated reforms and their impact on the loan
    portfolio’s financial condition will not be known for some time.




    5
     For more information about HUD’s reinvention program, see High-Risk Series: Department of Housing
    and Urban Development (GAO/HR-97-12, February 1997).
    6
     Except when fraud or misrepresentation is proved.
    7
     Farm Service Agency: Update on the Farm Loan Portfolio (GAO/RCED-97-35, January 3, 1997).



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                                We obtained information on efforts to resolve delinquencies from the four
Status of Agency                agencies included in our review and grouped their efforts under four
Efforts to Resolve              general categories:
Delinquencies
                            •   attempting to contact delinquent borrowers to seek resumption of
                                voluntary payments by confirming or rescheduling loan terms,
                            •   receiving payments under those agreements,
                            •   applying involuntary collection tools if payment is not made voluntarily,
                                and,
                            •   deciding whether or not to terminate collection activity.

                                Agency debt collection officials agreed that categorizing collection action
                                in this manner would be useful for assessing progress in collecting
                                delinquent debt.


Description of Collection       For internal management purposes, agencies tracked delinquent debt
Phases                          using various formats and phases. A breakdown of delinquent debt on a
                                uniform basis according to where it is in the debt collection process is
                                useful to determine the status of efforts at agencies to resolve
                                delinquencies. Such a breakdown can serve as an initial framework by
                                those responsible for overseeing agency and governmentwide credit
                                management to identify where backlogs of work may be occurring or
                                factors that may be preventing timely debt resolution. Figure 2 illustrates,
                                on a very general level, the debt collection process. A more detailed
                                explanation of each activity follows.




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Figure 2: Major Debt Collection
Activities
                                                                                        Receive
                                                                                        payments
                                                                                        (voluntary)



                                     Attempting to contact
                                     borrower-to determine                              Apply involuntary
                                     reason for delinquency and                         collection tools
                                     establish new payment
                                     agreement if necessary



                                                                                        Terminate
                                                                                        collection




Attempting to Contact             Debt collection activity is to be initiated when a borrower does not make a
Borrowers                         scheduled payment. Since most loan payments are received from
                                  borrowers who have been routinely making payments, the ultimate goal is
                                  to restore delinquent loans to a current status. The first step involves
                                  contacting the borrower to determine the cause of the delinquency,
                                  whether the cause was a temporary or permanent condition, and whether
                                  the borrower is capable of resuming timely voluntary payments under the
                                  original or rescheduled loan terms. These contacts and the associated
                                  procedures are intended to give the borrower the opportunity to resume
                                  making timely payments. Sometimes the reason for the delinquency can
                                  not be readily determined because the agency has difficulty locating the
                                  borrowers due to missing or incorrect names, addresses, or social security
                                  numbers. Also, borrowers sometimes do not acknowledge attempts to
                                  contact them.

                                  Depending on the reason for the borrower not making payments, the
                                  agency has several options. If the cause of the delinquency is a temporary
                                  condition, the agency may negotiate a repayment agreement for the full
                                  liability or lesser amounts. The agency can turn to involuntary collection
                                  techniques if efforts to work out a repayment agreement with the
                                  borrower are unsuccessful. Depending on program policy, if the borrower



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                                   cannot currently pay or has no assets to offset, collection actions may be
                                   suspended or terminated.

Delinquent Debt Being Repaid       When borrowers resume payments on formerly delinquent debt, some
                                   agencies reclassify it as current; others leave it classified as delinquent for
                                   the life of the loan. Regardless of how it is classified, for installment loans
                                   such as the ones included in our review, the repayment period may extend
                                   over a long period of time (up to 30 years, depending on loan terms). This
                                   category also includes loans subject to moratoriums under which
                                   payments can be deferred for up to 2 years.

Involuntary Collection Tools       If the agency cannot collect either under the original payment terms or
                                   under modified terms as discussed above, more aggressive collection
                                   actions can be attempted, including the following.

                               •   Offsets: Tax refund offsets allow the agency, in coordination with IRS, to
                                   offset (withhold) delinquent amounts from a debtor’s income tax refund. If
                                   the debtor is a federal employee, an agency can arrange to withhold
                                   15 percent of his or her disposable income. Agencies can also use
                                   administrative offsets, which allow them to withhold other types of
                                   payments due the debtor from the federal government, such as retirement
                                   pay.
                               •   Foreclosure: If the loan is secured by property, the government, or its
                                   agent, may seize the mortgaged property. Foreclosure terminates all
                                   borrower rights in the mortgaged property.
                               •   Adjudication: This refers to delinquent debt that is in an administrative
                                   appeals process, being litigated by the agency or the Department of
                                   Justice, or being collected by the Department of Justice.
                               •   Bankruptcy: The agency may become involved as a creditor in bankruptcy
                                   proceedings.8

                                   FMS policy stipulates that if either litigation or bankruptcy is being
                                   pursued, the agency cannot pursue offsets.

Terminating Collections            When the cause of the delinquency is permanent, such as permanent
                                   disability of the borrower, debt collection efforts are sometimes
                                   terminated. If the debtor is deceased, the agency is to file a claim against
                                   the debtor’s estate for liquidation of the debt. Debt at this stage also
                                   includes amounts being considered for write-off.



                                   8
                                    Bankruptcy is initiated by the borrower and therefore is not an agency tool. We have included it in
                                   this section because OMB tracks debt in bankruptcy along with adjudication and foreclosure.



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Collection Efforts of                 For the housing agencies included in our review, figure 3 shows the status
Agencies Included in Our              of efforts to collect delinquent debt at the end of fiscal year 1995. We
Review                                present data for the three housing programs and student loan program
                                      separately because of the different nature and the status of the debt. A
                                      separate analysis for each agency follows.


Figure 3: Distribution of Housing
Delinquent Debt as of September 30,
1995 (Dollars in billions)                                                               7%
                                                                                         Collection action terminated $.420

                                                                                         1%
                                                                                         Status not readily determinable
                                                                                         $.049


                                                      •


                                                                  28% •                  Agency or private firm attempting
                                                                                         to contact borrower $1.58



                                             51%                   13% •                 In repayment $.727
                                               •




                                                                                         Adjudication, foreclosure, or
                                                                                         bankruptcy $2.874


                                      Source: Reports on Receivables Due from the Public and other agency schedules.


Federal Housing                       Table 5 shows the distribution of FHA’s reported delinquent debt for debt
Administration                        collection activities related to the Single Family, Multifamily, and Title 1
                                      housing programs as of the end of fiscal year 1995.




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Table 5: Distribution of FHA’s
Delinquent Debt as of September 30,   Dollars in millions
1995                                  Collection activity                                                            Amount
                                      Agency or private collection firm attempting to contact borrower                  $380
                                      In repayment                                                                       ___
                                      Adjudication, foreclosure, or bankruptcy                                         1,784
                                      Collection action terminated or suspended                                           87
                                      Status not readily determinable                                                     49
                                      Total                                                                           $2,300
                                      Source: FHA.



                                      According to FHA officials, the $380 million relates to Title I delinquent
                                      loans for mobile homes or for improvements to existing homes.
                                      Comparable data for single and multifamily debt were not readily
                                      available.

                                      FHA does not list any delinquent debt in the repayment status category.
                                      Debt being paid in accordance with original or rescheduled loan terms is
                                      reclassified as current.

                                      Over 70 percent of FHA’s delinquent single family and multifamily debt is in
                                      adjudication, foreclosure, or bankruptcy. Of the total $1.784 billion in
                                      these categories, according to FHA reports, $576 million relates to
                                      foreclosures on multifamily loans and $600 million relates to adjudication
                                      of single family debt.

                                      FHA  identified $87 million being considered for termination. FHA explained
                                      that this debt represented Title I cases that had cycled through all phases
                                      of its debt collection process with no resulting recoveries. FHA holds this
                                      kind of debt in a special inventory for up to 3 years and then liquidates it
                                      through sale or write-off.

Veterans Affairs                      Table 6 shows the distribution of delinquent debt for VA housing and
                                      nonhousing programs according to the debt collection activities. Although
                                      collection activity for the individual programs was not readily available, VA
                                      officials told us that $2.18 billion total delinquent debt represents
                                      $1.5 billion of delinquent housing loans (VA Guaranty and Vendee loan
                                      programs) and $.68 billion pertaining to non-housing programs such as the
                                      compensation and pension programs.




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Table 6: Distribution of VA’s
Delinquent Debt as of September 30,   Dollars in millions
1995                                  Collection activity                                                            Amount
                                      Agency or private collection firm attempting to contact borrower                $1,200
                                      In repayment                                                                       420
                                      Adjudication, foreclosure, or bankruptcy                                           230
                                      Collection action terminated or suspended                                          330
                                      Status not readily determinable                                                    ___
                                      Total                                                                           $2,180
                                      Source: VA Debt Management Center.



                                      VA officials informed us that most of VA’s delinquent debt is attributable to
                                      housing loans that were made before 1990. Prior to that time, VA billed
                                      borrowers who lost their homes through foreclosure for residual amounts
                                      not recovered through the sale of the property. The Veterans Home Loan
                                      Indemnity and Restructuring Act of 1989, as amended, restructured the
                                      program to require borrowers to pay up-front fees, ranging from 0.5 to
                                      3 percent of the loan, to help compensate for defaults. For loans closed
                                      after December 31, 1989, amounts not recovered through the foreclosure
                                      and/or sale of the property to a third party have not been recorded as a
                                      receivable or pursued, unless fraud or misrepresentation is proved.

                                      Most of the $1.2 billion in the first stage of collection represents debt
                                      referred to private collection firms. If VA cannot locate the borrower, it
                                      uses two major private collection firms to contact the debtor and work out
                                      repayment terms. If these firms cannot contact the borrower, VA will
                                      consider writing off the debt. One reason for debt in this category is that
                                      VA is legislatively prohibited from using tax refund offsets, administrative
                                      offsets, and salary offsets in pursuing collections on delinquent housing
                                      loans in certain circumstances.

                                      VA reported that the loan terms for $420 million in delinquent debt were
                                      rescheduled, for example, by reducing monthly payments and extending
                                      the repayment period. VA typically negotiates monthly payment plans over
                                      1 to 3 years, depending upon the borrowers’ financial condition. Longer
                                      terms are negotiated for very large debts.

                                      VA reported $230 million in adjudication or bankruptcy. Over half the debt
                                      in this category represents amounts for which adjudication actions were
                                      being pursued, after the failure of other collection actions. The remaining
                                      debt represents amounts for which the borrower had filed bankruptcy and



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                                      VA was waiting to secure a portion of the payment due, pending
                                      completion of bankruptcy proceedings.

                                      Two-thirds of the $330 million in the terminated or suspended phase
                                      represents amounts that have been returned to VA from private collection
                                      firms or the Department of Justice as uncollectible. The remaining
                                      amounts represent debts owed by borrowers who died and for which VA is
                                      awaiting receipt of death certificates and debt that was suspended because
                                      the borrower is unemployed, in prison, or currently unable to pay.

Rural Housing Service                 Table 7 shows the distribution of RHS’ delinquent debt according to the
                                      debt resolution activities for its direct lending for single family and
                                      multifamily housing programs as of the end of fiscal year 1995. Most of the
                                      debt relates to loans for single family homes.

Table 7: Distribution of RHS’
Delinquent Debt as of September 30,   Dollars in millions
1995                                  Collection activity                                                            Amount
                                      Agency or private collection firm attempting to contact borrower                  $—
                                      In repayment                                                                       307
                                      Adjudication, foreclosure, or bankruptcy                                           860
                                      Collection action terminated or suspended                                            3
                                      Total                                                                           $1,170
                                      Source: RHS.



                                      RHS has no debt identified in the first category because the agency did not
                                      track how many borrowers it was contacting to determine the reason for
                                      delinquent loan payments if payments were not made on time. In addition,
                                      RHS policy did not require the use of private collection firms. RHS officials
                                      stated that they were currently studying the option of using this tool.

                                      In addition, RHS officials informed us that since most of their debt is
                                      tracked by number of borrowers rather than by dollar amount, the
                                      amounts shown in repayment were estimates. Dollar amounts were,
                                      however, tracked for amounts in adjudication, foreclosure, bankruptcy,
                                      and collection action terminated categories.

                                      As table 7 shows, $307 million was in repayment. RHS loan servicing
                                      guidance encourages avoiding foreclosure whenever appropriate. RHS
                                      officials reported that the agency has many options for getting the
                                      borrowers into a repayment status. Borrowers are offered various types of



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            loan restructurings (e.g., loan extension) to give them an opportunity to
            make loan payments on time. Borrowers may qualify for a moratorium,
            also known as forbearance, if their financial hardship is temporary and
            likely to improve. Under the moratorium program, no payments are
            required for up to 2 years.

            Most of RHS’ delinquent debt—about 74 percent—was in bankruptcy,
            foreclosure, or adjudication. Roughly half of this amount represents
            amounts for which the borrowers have declared bankruptcy and debt
            recovery is delayed until bankruptcy proceedings are finalized. The
            majority of the remaining amounts in this category represent amounts in
            foreclosure.

Education   Education’s defaulted guaranteed loans represent over half of the reported
            credit program delinquencies and about 40 percent of the federal
            government’s total delinquent nontax debt. Figure 4 categorizes
            Education’s reported $20 billion in delinquent debt as of the end of fiscal
            year 1995. Table 8 offers an additional data breakout by identifying how
            much in the four categories is being administered by Education itself
            versus its agents—state and private non-profit guaranty agencies9—with
            which Education shares its collection process.




            9
             Guaranty agencies are responsible for verifying that lenders properly service and attempt to collect
            loans, making payment to the lending institutions for the guaranteed portion of loans that are
            terminated for default, and, subsequently, attempting to collect on those defaulted loans. If successful,
            the guaranty agencies retain a portion of amounts collected, in part to cover their collection costs.
            They are also reimbursed for certain administrative costs.



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Figure 4: Distribution of Education’s
Delinquent Debt as of September 30,                                                        In repayment $2.815
1995 (Dollars in billions)
                                                                                           9%
                                                                                           Adjudication, foreclosure, or
                                                                                           bankruptcy $1.767

                                                                                           4%
                                                                                           Collection action terminated $.842

                                                                                           1%
                                                                                           Other $.229




                                                         •
                                                   •



                                             • 14%



                                                                    72% •                  Educ./private firm attempting to
                                                                                           contact borrower $14.486




                                        Source: Reports on Receivables Due from the Public and other agency schedules.




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Table 8: Distribution of Education’s
Delinquent Debt as of September 30,    Dollars in millions
1995                                                                                      Guaranty           In-house
                                       Collection activity                                agencies        management Total amount
                                       Agency or private collection firm
                                       attempting to contact borrower                       $10,240               $4,246         $14,486
                                       In repayment                                            2,460                 355            2,815
                                       Adjudication or
                                       bankruptcy                                              1,680                  87            1,767
                                       Collection action terminated or suspended                 140                 702              842
                                       Othera                                                       0                229              229
                                                                                                                         b
                                       Total                                                $14,520               $5,619         $20,139
                                       a
                                        Other debt includes debt owed by borrowers with multiple student loans in various stages of the
                                       debt collection process.
                                       b
                                        Education’s Debt Collection Service center records showed an additional $3.6 billion, which
                                       includes accumulated interest and other amounts legally due from borrowers being pursued for a
                                       total of $9.2 billion.

                                       Source: Department of Education.



                                       Education and the state or private non-profit guaranty agencies were
                                       trying to contact and establish repayment agreements with borrowers
                                       owing 72 percent of outstanding delinquencies. Although success in
                                       getting borrowers into a repayment status was somewhat elusive,
                                       Education had collected from some of these borrowers by having Treasury
                                       intercept their tax refunds. Education officials told us that the $4.2 billion
                                       of the $5.6 billion that Education was managing in-house had cycled
                                       through the resolution process several times.

                                       About $2.8 billion, 14 percent, was in repayment status. Education
                                       considers borrowers to be repaying if at least two payments were made
                                       during the quarter being reported. Education had about $1.8 billion that
                                       was in the process of being resolved through bankruptcy or adjudication
                                       proceedings and was awaiting the completion of these activities. Debt for
                                       which collection action was terminated or suspended totaled $842 million.
                                       Reasons for termination include the death or permanent disability of the
                                       borrower.

                                       Delinquent student loans are harder to collect than the other types of
                                       loans discussed in this report for several reasons. First, unlike the housing
                                       loans, student loans are unsecured, leaving the government and private
                                       lenders with no collateral. Second, for the loans on which Education itself




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                       is trying to collect, delinquent cases are not received until both lenders
                       and the guaranty agencies have attempted collection, a process which
                       typically lasts at least 4 years after the debt became delinquent. Third, it is
                       more difficult to locate and contact borrowers who frequently relocate
                       after attending post secondary schools, experience name changes in the
                       event of marriage, and, in general, tend to have more frequent changes in
                       residences.

                       Other federal entities, such as the U.S. Postal Service and the Internal
                       Revenue Service, can assist in finding addresses, but those efforts still
                       leave some gaps. Education’s Debt Collection Service sent 3 million
                       delinquency notices to borrowers during 1995. About 662,000 (23 percent)
                       were returned by the U.S. Postal Service as undeliverable. Although the
                       Internal Revenue Service (IRS) was one source for providing more current
                       addresses for about 400,000 of these borrowers, its data could not provide
                       current addresses for about 240,000 borrowers.

                       Several other problems associated with student loans also make it difficult
                       to collect. Our February 1997 high-risk series report,10 for example, noted
                       that many student borrowers have little or no means to repay their loans
                       because they attended poor quality proprietary schools that failed to
                       provide them with marketable skills. In addition, we have also reported
                       that, in the past, many student loans were initiated absent important
                       controls critical to mitigating risks up front, including checks to identify
                       prior defaults on the part of applicants.

                       Notwithstanding the difficulty of finding a segment of the borrower
                       population, some may not respond to notices or may not honor repayment
                       agreements. In the latter cases, the contact process has been reinitiated
                       and involuntary collection measures have been used.


                       In examining each agency’s efforts to collect on delinquent debt above, we
Governmentwide         focused on some of the returns they were able to generate from five
Reporting on Dollars   mandatory collection tools: tax refund offsets, federal employee salary
Collected Through      offsets, administrative offsets, private collection firms, and litigation. At
                       OMB’s direction, agencies provided information on collections from these
Five Specific Tools    tools. Figure 5 shows that three of these tools—tax refund offsets,
                       litigation, and private collection firms—accounted for more than $2 billion
                       in collections across government—86 percent of the $2.4 billion collected
                       with the five techniques during fiscal year 1995. OMB’s report also revealed

                       10
                         High-Risk Series: Student Financial Aid (GAO/HR-97-11, February 1997).



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                                      that the use of these five tools generated twice as much in fiscal year 1995
                                      as in fiscal year 1992. Additional information about the tools and related
                                      collections is provided in appendix V.


Figure 5: Reported Collections on
Delinquent Debt Using Prescribed
Tools, Fiscal Year 1995 (Dollars in                                                     Administrative offset $330
billions)



                                                   14%
                                                                 22%                    Private collection firms $533


                                                                                        1%
                                           23%                                          Federal salary offset $21




                                                             40%




                                                                                        Tax refund offset $965
                                                                                        Litigation $553

                                      Source: Status Report on Credit Management and Debt Collection for fiscal year 1995.



                                      In recent years, the Congress has responded to the need to reform
Improving Debt                        government management through such initiatives as the Government
Collection Reporting                  Performance and Results Act (GPRA) of 1993 and the Chief Financial
                                      Officers (CFO) Act of 1990. GPRA aims to provide systematic information on
                                      the performance of government programs and to directly link such
                                      information with the annual budget process. The audited financial
                                      statements required by the CFO Act, as expanded in 1994, are intended to
                                      provide congressional and executive decisionmakers with the reliable
                                      financial and program information that they have not previously had. This
                                      information is to be provided to decisionmakers in results-oriented reports
                                      on the government’s program results and financial condition that, for the
                                      first time, integrate budget, financial, and program information. These




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                            reports are also to include cost information that add critical information
                            about what citizens and the nation are receiving for each dollar spent.

                            The 1982 and 1996 debt collection legislation are fully consistent with
                            these managerial concepts and established expectations that agencies will
                            make concerted efforts to collect debt. As mentioned earlier, Treasury’s
                            FMS has been charged with new debt management and reporting
                            responsibilities under the Debt Collection Improvement Act of 1996. FMS
                            officials told us that they intend to evolve annual collection reporting to a
                            more evaluative perspective. They envision presenting data on the status
                            of the delinquent debt being worked on, what types of collection
                            mechanisms are being used, the associated costs, and what can be done to
                            increase collection prospects.

                            Such reporting would offer the Congress better information, would also
                            address some of the underlying principles of GPRA and the CFO Act, and
                            would assist agencies in assessing the effectiveness of their current
                            strategies and identifying other potential strategies for managing or
                            increasing the collection of delinquent debt. Another valuable benefit is
                            that better data and analysis would assist agencies in their day-to-day
                            management of collection activities. Further, FMS could use such
                            performance information on the effectiveness of collection functions in
                            deciding which agencies should be named as debt collection centers.
                            Under the 1996 act, these centers are intended to play a key role in helping
                            FMS manage delinquent debt that other agencies cannot resolve within 180
                            days after the debt becomes delinquent.

                            We have identified a number of reporting enhancements that would be
                            valuable for assessing agency debt collection strategies and providing
                            better context for report users. Systematically building upon the available
                            analytical data would help ensure that relevant performance information
                            exists to allow FMS and agencies to continue progressing toward a more
                            business-like debt management environment. In particular, it would be
                            useful in looking at the status of delinquent debts, examining what
                            agencies are doing and how much they are actually trying to collect, and
                            determining if any lessons can be learned or experiences shared by
                            analyzing debt with similar characteristics. Further, addressing quality
                            issues, including whether agencies are reporting on a consistent basis and
                            whether their data are reliable, would be valuable initiatives.


Enhancing Debt Collection   We identified four potential enhancements to annual debt collection
Reports                     reporting to the Congress. The first—developing a framework to highlight


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                                   the status of collection efforts—would pinpoint where delinquent debt is
                                   in the debt collection process and thus highlight backlogs and help to
                                   identify existing collection barriers. The second—assessment of agency
                                   use of collection tools—would expand reporting beyond the five tools
                                   currently assessed to include information needed to develop performance
                                   measures for tracking agency progress. The third—including additional
                                   information on the amounts of delinquencies agencies are
                                   pursuing—would provide a better sense of the workload managed by
                                   agency debt collection functions. The fourth—aggregating information
                                   according to program characteristics (e.g., secured housing loans)—would
                                   better portray program differences and highlight collection challenges of
                                   similar programs. Collectively, such data would provide a reasonable basis
                                   for assessments of whether agencies are making concerted efforts to
                                   collect delinquent debt.

Status of Delinquent Debt in the   While various reporting frameworks could be used to report progress in
Collection Process                 collecting delinquent loan balances, and thus prospects for collections, a
                                   framework such as we discussed earlier would be one approach. Below,
                                   we highlight, for each phase of the debt collection process, why
                                   developing this information is important.

                                   Attempting to Contact Borrowers: For much of the delinquent debt, the
                                   primary challenge is to locate the borrower and/or borrower assets to
                                   encourage and arrange for voluntary payments. This challenging task is
                                   now standing in the way of efforts to pursue the collection of at least 40
                                   cents of every dollar of delinquent nontax debt that the federal
                                   government is reportedly trying to recover. A preponderance of debt in
                                   this category could mean that many borrowers are unable to pay or are
                                   simply not responding to agency attempts to contact them. By working
                                   cooperatively to determine how much debt in this category is attributable
                                   to each of these conditions, FMS and agencies could formulate strategies on
                                   such matters as whether and when to apply involuntary collection tools.

                                   Delinquent Debt Being Repaid: Knowing how much delinquent debt is
                                   being voluntarily repaid is valuable information that could reflect
                                   improvement in timely cash receipts for specific programs. Three of the
                                   four agencies included in our review can track outstanding debt in
                                   repayment status. For example, at September 30, 1995, about 14 percent of
                                   Education’s delinquent portfolio was in repayment status. In general,
                                   fewer resources should be required to service debt in repayment status
                                   than to pursue delinquent accounts. Discussion among agency officials on
                                   successful strategies to get borrowers to voluntarily pay their debt could



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                          serve as impetus for change by other agencies attempting to collect similar
                          types of debt.

                          Involuntary Collection Tools: Reporting on secured or unsecured
                          delinquent amounts for which more aggressive collection strategies are
                          underway would also be revealing. The nature of housing programs would
                          suggest that housing delinquencies would normally be resolved through
                          foreclosures or borrower conveyance of the property. However, individual
                          program policies may slow or reduce the amount of debt in this category,
                          such as forbearance programs. Learning how much debt is in this stage
                          compared to other stages could help agencies decide whether any
                          strategic changes are needed in the use of their collection tools. A
                          preponderance of debt in bankruptcy, foreclosure, and litigation, for
                          example, could indicate that all reasonable attempts to persuade
                          borrowers to voluntarily pay have been exhausted. A relatively minor
                          amount in this phase of the collection process could indicate that an
                          agency had encountered restrictions imposed by statutes or agency
                          procedures in using some of these more aggressive initiatives.

                          Terminating collection: Including information on this phase in the annual
                          debt collection report would offer perspective on amounts no longer being
                          pursued due to death, disability, or expiration of the time limit for
                          collecting the debt. Significant amounts of debt in this category may
                          indicate that the agency has taken a close look at some of their older debt
                          and determined that factors, such as lack of borrower assets, preclude
                          collection or that future collection efforts would not be cost-effective.
                          Alternatively, significant amounts in this category compared to others may
                          mean that an agency may not be doing enough to collect debt.

Use of Collection Tools   As discussed earlier in this report, debt reporting to the Congress
                          currently provides some useful information on the collections from the
                          use of five tools on a governmentwide basis: tax refund offsets,
                          administrative offsets, federal employee salary offsets, private collection
                          firms, and litigation. Enhancing this information would provide agencies
                          with a stronger basis for deciding whether all appropriate actions to
                          collect a debt have been exhausted and thus whether agencies are making
                          concerted efforts to collect delinquent debt. Agency automated
                          information systems capture a variety of program-specific data and may
                          offer potential sources of information needed for assessing the
                          effectiveness of collection strategies. The agencies included in our review
                          presented relatively little information on how effectively they were using
                          those tools in the overviews to their fiscal year 1995 financial statements



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    under the CFO Act. Instead, the overviews focused primarily on high-level
    mission goals.

    FMS  could build upon current reporting on the use of collection tools in
    several ways in order to provide useful performance information: first, it
    could increase the number of tools reported on, and second, it could offer
    data regarding tool use, success, and cost. Some options would include the
    following.

•   Begin reporting on rescheduling of delinquent debt and garnishment of
    wages. For the period January 1, 1995, through September 30, 1995,
    Education queried its information system and found that $353 million, 69
    percent, of the $512 million recovered by collection firms was attributable
    to rescheduled loan terms. Although the $353 million recovered is
    significant, a more complete analysis is needed to identify how much was
    spent to reschedule the debt and identify the expected and actual
    collections received under the new terms. Assessing the extent to which
    borrowers continued to pay or actually completed payments without
    further delinquencies or defaults compared to the costs of establishing
    such agreements might be a factor in agency collection policies. Relatively
    high costs of achieving or sustaining repayment agreements could suggest
    employing more aggressive collection tools sooner. This kind of
    information could enhance debt management reporting and
    decision-making by showing the extent to which this tool had been used
    and how well it was working.

    Education was authorized to use administrative wage garnishments by the
    Emergency Unemployment Compensation Act of 1991. The Debt
    Collection Improvement Act of 1996 now allows all agencies to
    administratively garnish wages. Thus, FMS may want to include information
    on this important tool in debt collection reports to the Congress as
    agencies begin to pursue wage garnishments.

•   Require information needed to develop debt collection performance
    measures. FMS may want to consider requiring the following information
    from agencies in order to facilitate the development of performance
    measures for tracking the use of collection tools. Our work showed that
    some information of this nature, including the following, is available at
    some agencies, but only the amount collected through tools had been
    formally reported to the Congress:
    • number of cases the tool was applied to,
    • amount of delinquent debt dollars these cases represented,




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    •   number of cases for which the agency was successful in applying the
        tool (for example, how many “hits” were made on the cases submitted
        for offsets),
    •   amount collected through the tool, and
    •   cost of using the tool.

    This type of information would allow agency and governmentwide
    assessments of how actively, successfully, and cost-effectively delinquent
    debt was being pursued. These types of data elements could be used to
    develop performance measures such as the following.

•   How many cases and dollars of delinquent debt were submitted for each
    offset tool compared to the total delinquent debt an agency was
    attempting to collect? Tracking this measure year to year could highlight
    an agency’s progress in attempting to increase usage of the tool.
•   How often was the agency successful in applying each tool? Tracking this
    year-to- year could show upward and downward progress in applying a
    specific tool and therefore allow informed decisions on tool use.
•   How much did the agency collect versus the cost of using a tool? Tracking
    the return on investment year-to-year could highlight increasing or
    decreasing effectiveness in using a tool.

    Figure 6 illustrates how analyzing the performance of collection tools can
    assist collections of delinquent debt.




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Figure 6: Using Tax Refund Offsets at Education



   Of 2.2 million delinquent accounts that Education submitted for IRS tax
   refund offset, it was able to collect amounts for 25 percent of the accounts
   (554,000). The average offset was $936 against an average delinquent
   account balance of $3,000--almost a third of the amount owed. In the
   aggregate, it collected roughly $518 million and paid $7 per hit, about
   $3.9 million. According to an Education official, the agency's tax refund
   offset experience suggests that a significant percent of individuals who are
   delinquent in paying student loans are employed and could also be good
   candidates for wage garnishment procedures. Considering how wage
   garnishment procedures are applied, there is more assurance that amounts
   will be routinely collected until the debt is repaid. In many respects, a
   combination of wage garnishment plus tax refund offset is preferable to
   reliance solely on tax refund offset which relies on debtors being owed a
   tax refund in future years.




                                          This example suggests that offsets are highly cost effective. Analysis of
                                          cost-effectiveness, preferably couched in terms of unit cost per result,
                                          would be a highly relevant measure of agency efforts. Measures of the
                                          comparative costs and yields from the use of different collection
                                          techniques would be useful for managing collection activities at the
                                          agencies.

Providing Additional                      Agencies are required to report on their gross receivables in debt
Information on Amounts of                 collection reports, which is conceptually the same information that is
Delinquencies Being Pursued               currently reported in the footnotes to the financial statements (gross
                                          receivables, including the associated interest). Because some agencies
                                          continue to pursue other relevant amounts, we believe that reporting to
                                          the Congress on debt collection should be augmented to include
                                          (1) principle and interest that has been written off but that is still being
                                          pursued and (2) accrued interest on delinquent debt, presumed
                                          uncollectible, that is still being pursued. This additional information is
                                          necessary to provide a better picture of what debt is outstanding and
                                          amounts that agencies are attempting to collect.




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                               In terms of financial reporting, it is fundamental that agencies make
                               realistic assessments of what they expect to collect.11 However, agencies
                               also have a duty to have an effective debt management program.
                               Therefore, it is not unexpected that the amount an agency is estimating to
                               be collectible on its financial statements would be different than the
                               amount it is trying to collect on.12

                               This is particularly relevant for student loan debt since Education does not
                               have time limitations for collecting delinquent student loans and continues
                               efforts to collect for extended time frames. In concept, Education could
                               even offset a portion of the social security benefits of delinquent
                               borrowers. Consequently, the financial reporting number used to report to
                               the Congress reflects the agency’s gross receivables, not the amount that
                               Education is still pursuing. At the time of our review, Education was still
                               trying to collect $3.6 billion not included in the amounts reported to the
                               Congress.

                               We believe focusing upon amounts which remain in the collection process
                               would be beneficial primarily because it would offer the Congress a better
                               picture of both what borrowers owe and agencies’ debt collection efforts.
                               These data also provide a better basis for calculating recovery rates for
                               delinquent debt. For example, to calculate Education’s Debt Collection
                               Service recovery rate, one would compare the amount of collections to the
                               $9.2 billion on which Education was attempting to collect, not to the
                               $5.6 billion that is recorded as a receivable.

Aggregating Information        An additional enhancement that should be considered in the annual debt
According to Similar Program   collection report to the Congress is aggregating the credit data by program
Characteristics                characteristics to more appropriately portray program differences and to

                               11
                                 This is in accordance with Statement of Federal Financial Accounting Standards Number 1,
                               Accounting for Selected Assets and Liabilities, which states that in preparing financial statements, no
                               interest should be recognized on accounts receivable that are determined to be uncollectible unless
                               the interest is actually collected, and also states that until the interest payment requirement is officially
                               waived by the government entity or the related debt principle is written off, interest accrued on
                               uncollectible accounts receivables should be disclosed.
                               12
                                 Writing off a debt from financial records does not preclude an agency from taking advantage of offset
                               possibilities or other means of collection, should they become available. An agency can write off debts
                               from its receivables but at the same time maintain them in debt collection records when the potential
                               exists for offsets against wages or future benefits to the debtor, but the possibility of offset is so
                               uncertain that it does not warrant retaining the debt as a receivable or asset on the financial
                               statements.

                               An agency determines, as part of its program management, how long it intends to maintain information
                               on its borrowers and how frequently accounts will be reviewed for final disposition. Agencies are
                               required, in accordance with FMS guidance, to report the amount of debt that has been written off but
                               is still being pursued for debt collection.



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                                focus on collection challenges that are applicable to similar programs. The
                                annual debt collection report to the Congress includes governmentwide
                                data by combining data from over 24 agencies and also reports certain
                                data by agency. Grouping governmentwide data into categories similar to
                                those areas used in the annual budget (Analytical Perspectives), which
                                presents an analysis by education, housing agencies, business and rural
                                development, and insurance programs, would provide a better basis for
                                evaluating agency performance and finding alternative solutions for
                                decreasing delinquent debt. Programs providing credit for similar
                                purposes may be experiencing the same types of collection problems and
                                therefore may seek similar strategies or innovations for contacting
                                borrowers and collecting delinquent debt or other functions, such as
                                disposing of properties acquired through foreclosure. For example,
                                housing and other credit programs with secured debt have sought
                                economies of scale in disposing of real property. The interagency
                                Government Owned Real Estate Program conducts joint agency real estate
                                fairs and auctions to facilitate the management and disposal of real
                                property, which has helped reduce individual agency disposition costs.


Resolving Inconsistencies       Agencies classify previously delinquent debt on which borrowers are
in Classification of            currently making payments differently. Some reclassify such debt as
Delinquent Debt                 “current” but others keep it in a delinquent category regardless of the
                                current payment status. Such inconsistencies do not offer an accurate
                                view of loan portfolios. While such classification practices may be suitable
                                internally, they make it difficult to compare agency performance or
                                aggregate data for similar programs. Examples of inconsistent reporting of
                                these loans are listed below.

                            •   VA loans maintain their delinquent status until the delinquency is repaid or
                                written off. Once the delinquency has been repaid and payments are being
                                made according to the original terms of the loan, the loan is reclassified as
                                current.
                            •   FHA reclassified single family delinquent loans as in a current repayment
                                status when borrowers complied with forbearance terms, which typically
                                included making partial mortgage payments for up to 3 years. More
                                significantly, FHA officials told us that the agency had reported $2.3 billion
                                as delinquent at September 30, 1995, but these officials advised us that
                                their systems did not produce delinquency data consistent with the FMS
                                criteria. They stated that amounts reported as delinquent would have been
                                significantly higher under those guidelines.




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                             •   Education did not reclassify most delinquent loans that were in repayment
                                 status as current loans. The majority of loans in repayment status
                                 maintained their delinquent status until the loan was repaid.13


Improving Data Reliability       None of the data submitted to OMB had been validated by financial
                                 statement audits because agencies were required to submit data to OMB
                                 before their annual financial statement audits were concluded. Three of
                                 the four agencies, including FHA, VA, and RHS, submitted unaudited data for
                                 fiscal year 1995.14 While the data from Education were audited,
                                 Education’s independent accountant disclaimed an opinion due to the
                                 unreliability of FFEL Program student loan data. Because there are limited
                                 or no assurances concerning the accuracy of the data under these
                                 circumstances, appropriate annotations that the data were not audited
                                 would alert users of the reports to the limitations. For example, FHA’s
                                 reported gross receivables after completion of its audit were $800 million
                                 more than the amount provided for governmentwide reporting on debt
                                 collection.

                                 Our audits, those by the inspectors general, and others have consistently
                                 disclosed serious weaknesses in agency systems used to account for and
                                 manage receivables. Audits have shown that the information for credit and
                                 debt management is not always accurate or complete. Our audits also
                                 found that long-standing weaknesses in agency financial management
                                 systems used to produce information on credit programs continue to
                                 diminish the reliability of amounts being reported to the Congress. The CFO
                                 Act is providing the impetus to begin resolving these reliability problems.
                                 Reliable data are not only fundamental for good credit management, it
                                 would also permit more accurate estimates of the costs of the credit
                                 programs in accordance with the Federal Credit Reform Act of 1990.


                                 Improvements in the availability and reporting of data and relevant
Conclusion                       performance measures are critical to answering the call for a greatly

                                 13
                                   Some loans that achieved repayment status were restructured and became direct loans. Other loans
                                 that achieved repayment status were consolidated and refinanced by a private sector lender with a
                                 new loan guarantee. As such, these new direct or refinanced loans were deleted from Education’s
                                 report to OMB on the status of defaulted guaranteed loans and included in Education’s report on direct
                                 loans or outstanding guaranteed loans.
                                 14
                                   FHA received an unqualified (clean) audit opinion after the data were submitted to OMB. RHS
                                 received a qualified opinion (as a component of the Rural Economic and Community Development
                                 consolidated financial statements) because of insufficient support for credit receivables and other
                                 accounts. VA received a qualified opinion due to the inadequacy of hospital system accounting records
                                 for net receivables and property plant and equipment.



                                 Page 33                                                          GAO/AIMD-97-48 Debt Collection
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                  enhanced debt collection environment. As FMS assumes its managerial and
                  governmentwide reporting responsibilities under the 1996 Debt Collection
                  Improvement Act, it has a good opportunity to make debt reporting more
                  useful to the Congress as well as to those with line management
                  responsibility who are attempting to collect the delinquent debt. Through
                  such improvements, FMS can also ensure that it has reliable and cogent
                  agency data to use for making its own decisions regarding how to proceed
                  with its enhanced management and governmentwide reporting role.


                  We recommend that the Secretary of the Treasury require the Assistant
Recommendations   Commissioner for FMS’ Debt Management Services, in conjunction with
                  major credit agencies and OMB, to revise the framework and data
                  requirements for agency reporting on debt collection to ensure that
                  reports to the Congress do the following.

                  (1)Provide complete reporting on the status of agency efforts to collect
                  delinquent debt. FMS should clearly specify the reporting framework, such
                  as the one discussed in this report, and ensure that it is uniformly followed
                  by reporting agencies. Effective status reporting will offer a clear picture
                  of agency progress in collecting delinquent debt and highlight any
                  significant backlogs in resolution phases meriting administrative action or
                  legislative consideration.

                  (2)Offer an evaluation of agency use of individual collection tools. This
                  evaluation should include agency and governmentwide assessments of
                  how actively, successfully, and cost effectively agencies are pursuing
                  delinquent debt. At a minimum, data should be available concerning the
                  collection tools predominantly used including (a) the number of cases and
                  the amount of delinquent dollars against which each tool was applied, (b)
                  the number of cases for which the agency was successful in applying the
                  tool, and (c) the cost of using the tool in relation to the dollars collected.

                  (3)Report amounts that agencies are actually trying to collect. This would
                  include the gross receivable and interest receivable amounts that are
                  currently included in the footnotes to their financial statements, plus (a)
                  principle that has been written off but that is still being pursued and (b)
                  accrued interest on delinquent debt that is still being pursued. The report
                  should also explain differences between these amounts.




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                         (4)Provide information that is reliable based on independent audits and
                         disclose information about the reliability of pertinent account balances
                         that are questioned through audits.

                         (5)Report delinquent debt consistently from agency to agency or disclose
                         inconsistencies.

                         (6)Aggregate the credit data by similar program characteristics and
                         provide explanatory information where necessary in order to more
                         appropriately portray program differences and focus on collection
                         challenges unique to similar programs.


                         In commenting on a draft of this report, officials from the Department of
Agency Comments          the Treasury, the Office of Management and Budget, and the agencies
and Our Evaluation       included in our review generally agreed with our factual material,
                         conclusions, and recommendations.

                         Treasury’s Deputy Assistant Commissioner for Debt Management Services
                         informed us that an action plan was being drafted and will include the
                         establishment of an interagency task force in June 1997. She stated that
                         one of the first projects the task force will work on is the development of
                         governmentwide reporting criteria so that delinquency rates can be more
                         fairly and accurately computed and analyzed.

                         Agencies also provided a number of other comments, including the
                         following.

                     •   Management of the entire credit process—extending credit, account
                         servicing, and recovering delinquent debt—is important and, as our report
                         states, each activity can affect credit program costs.
                     •   Agency data need to be improved in order to accurately assess agency
                         collection performance, evaluate current default rates, or draw
                         comparisons between similar loan programs.
                     •   Consistent application of governmentwide debt collection reporting
                         criteria is essential.
                     •   There are differences in how credit programs operate—for example,
                         secured debt has better recovery options than unsecured debt. Therefore,
                         as our report recommends, governmentwide reports should aggregate data
                         for programs with similar characteristics in order to more appropriately
                         compare agency collection performance.




                         Page 35                                         GAO/AIMD-97-48 Debt Collection
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We are sending copies of this report to relevant congressional committees
and subcommittees, the Director of the Office of Management and Budget,
the Secretary of the Treasury, the Secretary of Agriculture, the Secretary
of Housing and Urban Development, the Secretary of the Department of
Veterans Affairs, the Secretary of the Department of Education, and other
interested parties. We will send copies to others upon request.

If you have any questions or wish to discuss the issues in this report,
please contact me at (202) 512-9450. Major contributors to this report are
listed in appendix VII.

Sincerely yours,




Jeffrey C. Steinhoff
Director of Planning and Reporting




Page 36                                         GAO/AIMD-97-48 Debt Collection
Page 37   GAO/AIMD-97-48 Debt Collection
Contents



Letter                                                        1


Appendix I                                                   42

Scope and
Methodology
Appendix II                                                  45

Information on
Guaranteed Loans
Appendix III                                                 49

Summary of Efforts to
Improve Debt
Collection
Appendix IV                                                  52

The Debt Collection
Improvement Act of
1996
Appendix V                                                   56

Tools Tracked and
Reported
Appendix VI                                                  57

Amount of Reported
Delinquent Debt by
Agency at September
30, 1990 and
September 30, 1996




                        Page 38   GAO/AIMD-97-48 Debt Collection
                        Contents




Appendix VII                                                                                      58

Major Contributors to
This Report
Tables                  Table 1: Credit Receivables Reported by OMB for Fiscal Years               9
                          1992 Through 1996
                        Table 2: Credit Receivables Reported by Lending Agency                    10
                        Table 3: Credit Receivables for Programs Reviewed for Fiscal              10
                          Year 1995
                        Table 4: Delinquent Credit Receivables Reported by OMB for                11
                          Fiscal Years 1992 Through 1996
                        Table 5: Distribution of FHA’s Delinquent Debt as of                      17
                          September 30, 1995
                        Table 6: Distribution of VA’s Delinquent Debt as of September 30,         18
                          1995
                        Table 7: Distribution of RHS’ Delinquent Debt as of September 30,         19
                          1995
                        Table 8: Distribution of Education’s Delinquent Debt as of                22
                          September 30, 1995
                        Table IV.1: Key Provisions Affecting Federal Agencies                     54

Figures                 Figure 1: Credit Management Functions and Risks                            5
                        Figure 2: Major Debt Collection Activities                                14

                        Figure 3: Distribution of Housing Delinquent Debt as of                   16
                          September 30, 1995
                        Figure 4: Distribution of Education’s Delinquent Debt as of               21
                          September 30, 1995
                        Figure 5: Reported Collections on Delinquent Debt Using                   24
                          Prescribed Tools, Fiscal Year 1995
                        Figure 6: Using Tax Refund Offsets at Education                           30
                        Figure 2.1: Reported Governmentwide Trend in Guaranteed                   45
                          Loans
                        Figure 2.2: Cumulative Balances of Guaranteed Loan Programs               46
                          From 1992 to 1995 at FHA, RHS, VA, and Education




                        Page 39                                        GAO/AIMD-97-48 Debt Collection
Contents




Abbreviations

CFO        chief financial officer
FASAB      Federal Accounting Standards Advisory Board
FFEL       Federal Family Education Loan
FHA        Federal Housing Administration
FMS        Financial Management Service
GAO        U.S. General Accounting Office
GMRA       Government Management Reform Act
GPRA       Government Performance and Results Act
HUD        Department of Housing and Urban Development
IRS        Internal Revenue Service
JFMIP      Joint Financial Management Improvement Project
OMB        Office of Management and Budget
PLUS       Parent Loans for Undergraduate Students
RHS        Rural Housing Service
SLS        Supplemental Loans to Students
VA         Department of Veterans Affairs


Page 40                                     GAO/AIMD-97-48 Debt Collection
Page 41   GAO/AIMD-97-48 Debt Collection
Appendix I

Scope and Methodology


             As agreed with the House Committee on the Budget, our work
             concentrated on the debt collection phases and did not focus on the credit
             extension and account servicing phases of federal credit management or
             on credit reform requirements. We focused on lending program debt at
             four federal credit agencies, including HUD’s Federal Housing
             Administration Single, Multifamily, and Title I Programs, Education’s
             Federal Family Education Loan Program, the Department of Veterans
             Affairs’ Guaranty and Vendee Loan Programs, and the Department of
             Agriculture’s Rural Housing Service Direct Loan Programs.

             For each program, we identified significant applicable legislative and
             regulatory provisions. We also reviewed recommendations made under the
             National Performance Review, direct and guaranteed loan system
             requirements issued by the Joint Financial Management Improvement
             Program,1 and recently published federal government accounting
             standards for direct and guaranteed loans.2

             To determine the extent of changes in receivables, guaranteed loans,
             defaults on guaranteed loans, and delinquencies from fiscal years 1992 to
             1995—the most recent data available at the program-level at the time of
             our review—we analyzed data in (1) the annual status reports to the
             Congress on credit management and debt collection (referred to as annual
             debt collection reports), (2) OMB’s annual Federal Financial Management
             Status Report and Five-Year Plan, and (3) individual agency and FMS
             governmentwide summary Reports on Receivables Due from the Public
             (formerly the SF 220-9)3 and the Reports on Guaranteed Loans (formerly
             the SF 220-8).4 Preliminary information on fiscal year 1996 debt collection
             activity became available in February 1997, and we incorporated it in this


             1
              The Joint Financial Management Improvement Program (JFMIP) is a joint cooperative undertaking of
             the Office of Management and Budget, the General Accounting Office, the Department of the Treasury,
             and the Office of Personnel Management that aims to improve and coordinate financial management
             policies and practices throughout the government.
             2
              FASAB publishes recommended accounting standards after considering the financial and budgetary
             information needs of the Congress, executive agencies, other users of federal financial information,
             and comments from the public. OMB, Treasury, and GAO then decide whether to adopt the
             recommended standards; if they do, the standard is published by GAO and OMB and becomes
             effective.
             3
              The Report on Receivables Due from the Public covers the status of outstanding receivables including
             unpaid principal on direct loans and defaulted guaranteed loans acquired by the government, changes
             for the period, use of debt collection tools, adjudication activity, and other information.
             4
              The Report on Guaranteed Loans covers the status of guaranteed loans, defaulted loans and claims
             submitted by lenders, the age of and collection probability of outstanding guaranteed loans, and
             information activities to certify, review, and sanction lenders participating in loan guarantee programs.
             Also included are real property inventories held by the agencies resulting from loan defaults.



             Page 42                                                            GAO/AIMD-97-48 Debt Collection
Appendix I
Scope and Methodology




report to the extent practical. We also identified the amount of delinquent
debt by agency at September 30, 1990, and September 30, 1996, as
separately requested by your office. See appendix VI.

We also obtained information from program and/or agency financial
statement audit reports. We used information in the Analytical
Perspectives section of the Budget of the United States Government,
Fiscal Years 1997 and 1998, and other selected program data used by
agencies to manage their credit programs.

To determine progress toward resolving outstanding delinquent debt by
the programs reviewed, we reviewed data provided by agency officials
describing actions taken to resolve delinquent debt. We reviewed federal
debt collection policies, procedures, and guidance including FMS’ Managing
Federal Receivables and OMB Circular A-129, Policies for Federal Credit
Programs and Non-tax Receivables. We identified the debt collection
authorities and tools being used for each program we reviewed, and
discussed these procedures and actions being taken to resolve delinquent
debt with cognizant program officials.

During the course of our review, the Congress passed the Debt Collection
Improvement Act of 1996. (See appendix IV for more about this act). We
reviewed this act and assessed its governmentwide and agency-level
implications on debt collection efforts.

We conducted our work from October 1995 through March 1997 in
accordance with generally accepted government auditing standards. We
did not verify the accuracy of the information provided to us by OMB, FMS,
or the four agencies included in our review. We did however review the
results of financial statement audits, as well as seek to determine whether
the agencies included in our review reported debt collection information
on a consistent basis.

We requested comments on a draft of this report from the Department of
the Treasury, the Office of Management and Budget, and the agencies
included in our review. At a joint meeting on April 17, 1997, we received




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Appendix I
Scope and Methodology




oral comments from those agencies. The agency representatives who
provided comments on the draft are listed below.


Agency                       Official providing comments
Department of the Treasury   Deputy Chief Financial Officer

                             Deputy Assistant Commissioner for Debt Management
                             Services
Office of Management and     Senior Advisor for Debt Collection and Credit and Cash
Budget                       Management
Department of Education      Special Assistant to the Chief Financial Officer

                             Director of Debt Collection Service
Department of Housing and    Director of the Office of Financial Services
Urban Development, Federal
Housing Administration
Department of Agriculture,   Director of Fiscal Policy of the Office of the Chief Financial
Rural Housing Service        Officer

                             Senior Loan Specialist, Rural Housing Service
Veterans Administration      Director of Cost and Debt Management Service

                             Deputy Chief Financial Officer for the Veterans Benefits
                             Administration




Page 44                                                 GAO/AIMD-97-48 Debt Collection
Appendix II

Information on Guaranteed Loans


                                      Guaranteed loan programs grew about 13 percent—from $673 billion in
                                      fiscal year 1992 to $760 billion in fiscal year 1996. Increased demand for
                                      student, housing, and other loans contributed to this growth along with
                                      lower interest rates for some programs and funds appropriated by the
                                      Congress for marginal program expansion. The government is liable for
                                      the risk that it assumes on guaranteed loans. Most loans are guaranteed
                                      for a specified maximum based on the loan purpose and amount. Figure
                                      2.1 illustrates the growth of guaranteed loan programs. Figure 2.2
                                      discusses the extent of loan program growth at the agencies we reviewed.1



Figure 2.1: Reported Governmentwide
Trend in Guaranteed Loans             Billions of dollars
                                      800
                                                                                   760
                                                                           737
                                                                   694
                                      700     673       660


                                      600


                                      500


                                      400


                                      300


                                      200


                                      100


                                          0

                                               1992         1993    1994    1995    1996
                                               Fiscal years



                                      Source: Debt Collection Reports and FMS.




                                      1
                                       Our review focused on selected programs at FHA, VA, RHS, and Education, and for those programs,
                                      fiscal year 1995 amounts were the most recent available data. Therefore, reported fiscal year 1995
                                      amounts are used for the program-level data throughout this report.



                                      Page 45                                                         GAO/AIMD-97-48 Debt Collection
                                        Appendix II
                                        Information on Guaranteed Loans




Figure 2.2: Cumulative Balances of Guaranteed Loan Programs From 1992 to 1995 at FHA, RHS, VA, and Education



   FHA            Increased from $379 billion to $404 billion. This growth was primarily
                  due to an increase in single family housing loans caused by higher
                  demand resulting from lower interest rates.

   RHS            Increased from $100 million to $1.9 billion. The growth at RHS was
                  due to continued emphasis on guaranteed loans to encourage lending
                  by the private sector.

   VA             Increased from $160 billion to $179 billion. VA loan programs are
                  entitlement programs, which means that anyone who applied for the
                  programs and met eligibility requirements received a guaranteed loan.
                  The growth in entitlement programs is not limited by annual
                  appropriations. Instead, appropriations are made as needed to cover
                  demand.

   Education Federal Family Education Loan (FFEL) Program guaranteed loans
             grew from $63 billion to $93 billion. Under the FFEL Program,
             students meeting eligibility requirements can receive a guaranteed loan,
             provided they find a lender willing to initiate the loan. Like VA loans,
             the growth in this entitlement program is not limited by annual
             appropriations.




Collecting on Delinquent                When guaranteed loans become delinquent, the lending institution, not the
Guaranteed Loans                        government, is required to contact the borrower initially and carry out
                                        certain procedures to give the borrower the opportunity to resume making
                                        timely payments. If the lender still cannot collect, the loan is considered in
                                        default. Once a guaranteed loan defaults, several actions may take place,
                                        depending on the nature of the program. If the guaranteed loan is secured,




                                        Page 46                                            GAO/AIMD-97-48 Debt Collection
Appendix II
Information on Guaranteed Loans




the lender would normally initiate foreclosure action.2 The foreclosed
property would generally be either (1) sold by the lender, with the
government paying the lender for the guaranteed portion of any difference
between the amount recovered on the sale and the uncollected portion of
the loan principal and interest or (2) turned over to the government, with
the government paying the lender for the guaranteed portion of any
uncollected loan principal and interest.

Depending on the nature of the guaranteed loan program, funds for
covering some or all losses come from loan guarantee or insurance fees
charged to borrowers and/or appropriations. For example, the Mutual
Mortgage Insurance Fund, which represents almost 80 percent of FHA’s
basic single-family home ownership program, is required to be fully
self-supporting from fees charged to borrowers. In contrast, Education
and most other credit agencies receive annual appropriations to cover
estimated defaults and other costs.

Payments to lenders for default claims generally result in the
establishment of receivables for unsecured loans. When the government
makes a payment to a lending institution for a defaulted loan guarantee,
the government records a receivable for the amount of the payment and
then tries to collect from the borrower, generally using the same methods
used for direct loans. If borrowers do not voluntarily resume making
timely payments, agencies may use involuntary debt collection tools such
as federal salary offset, IRS tax refund offset, and litigation. The tools
tracked by OMB are described in appendix V.

If the government is unable to fully collect the amounts it guaranteed and
paid, actual program costs3 are incurred. Under legislation governing the
FHA and VA housing programs, which assess insurance fees to cover losses,
proceeds from disposition of assets are considered to fully satisfy the debt
and the government does not pursue residual amounts due from the
borrower. Receivables are recognized when a borrower fraudulently

2
 Not all defaulted guaranteed housing loans have gone into foreclosure. For example, historically, for
about 25 percent of the FHA-insured single family loans that have defaulted, borrowers were given an
opportunity to avoid foreclosure by qualifying for FHA’s Assignment Program. In these cases, FHA
paid the mortgage debt owed to the lender, acquired the mortgage from the lender, and developed a
new repayment plan for the borrower under which monthly mortgage payments were reduced or
suspended for up to 36 months. The loans were included in governmentwide receivables as defaulted
guaranteed loans. However, the Congress suspended this program in April 1996 because it was not
cost-effective. For more information, see Homeownership: Mixed Results and High Costs Raise
Concerns About HUD’s Mortgage Assignment Program (GAO/RCED-96-2, October 18, 1995).
3
 The Federal Credit Reform Act of 1990 requires agencies to estimate these costs each fiscal year and
budget for them before credit is extended. The agency is to reestimate subsidy costs, generally
annually, to incorporate the most recent data on actual and estimated losses and other cost factors.



Page 47                                                           GAO/AIMD-97-48 Debt Collection
Appendix II
Information on Guaranteed Loans




obtained a loan, or when an agency, such as FHA, sought to avoid certain
foreclosures by acquiring loans from the lender and managing the loans
itself.




Page 48                                         GAO/AIMD-97-48 Debt Collection
Appendix III

Summary of Efforts to Improve Debt
Collection

                      This appendix summarizes (1) legislative and other efforts taken in the
                      past 15 years to strengthen agencies’ debt collection capabilities and to
                      minimize losses, (2) other important initiatives undertaken over the past
                      decade which establish a framework for the credit agencies to strengthen
                      financial management and better measure the results of their operations,
                      and (3) our previous work on debt collection. The most recent legislative
                      effort—the Debt Collection Improvement Act of 1996—is discussed in
                      detail in appendix IV.


                      Debt Collection Act of 1982 and Amendments: This is one of the most
Debt Collection       significant pieces of legislation affecting credit management and debt
Initiatives           collection. Among other things, the act, which was passed largely in
                      response to our findings and recommendations on debt collection

                  •   clarified federal agencies’ authority to use debt collection tools available
                      in the private sector;
                  •   established many of the fundamental credit management practices still in
                      place today—for example, reporting delinquent debtors to consumer
                      reporting agencies and contracting for collection services; and
                  •   established a requirement for OMB to submit an annual report to the
                      Congress on the management of the federal government’s debt collection
                      activities.

                      OMB and Treasury efforts: Following the 1982 act, OMB and the Department
                      of the Treasury increased their focus on and level of involvement in
                      federal credit management programs. In 1986, OMB and Treasury agreed
                      that Treasury would be primarily responsible for overseeing agency credit
                      management activities, while OMB would continue to establish credit
                      management policy, including setting standards for extending credit,
                      managing lenders participating in guaranteed loan programs, servicing
                      credit and nontax receivables, and collecting delinquent debt. Treasury
                      develops and disseminates operational guidelines for agency compliance
                      with governmentwide credit management and debt collection policy.

                      OMB’s nine point credit management program: Also in 1986, OMB set out a
                      nine-point credit management program targeted at further improving
                      federal debt collection practices, reducing delinquencies, and improving
                      management of receivables. The nine-point program required agencies,
                      unless prohibited by legislation, to implement initiatives in each phase of
                      the credit management cycle—loan origination, account servicing,
                      collection, and write-offs. The nine initiatives required the use of



                      Page 49                                          GAO/AIMD-97-48 Debt Collection
                            Appendix III
                            Summary of Efforts to Improve Debt
                            Collection




                            (1) screening of loan applicants for credit-worthiness, (2) account
                            servicing to provide information on the results of credit program
                            operations, (3) credit bureau reporting, (4) private collection contractors,
                            (5) IRS tax refund offset, (6) federal salary offset, (7) loan asset sales,
                            (8) litigation, and (9) write-offs.


                            The Chief Financial Officers Act of 1990 and the Government
Other Legislative and       Management Reform Act of 1994: These acts provide the underpinning for
Financial                   identifying and correcting financial management weaknesses and reliable
Management                  reporting on the results of financial operations. Moreover, the CFO Act sets
                            up expectations for
Initiatives
                        •   the deployment of modern systems to replace existing antiquated, often
                            manual, processes;
                        •   the development of better performance and cost measures; and
                        •   the design of results-oriented reports on the government’s financial
                            condition and operating performance by integrating budget, accounting,
                            and program information.

                            The Government Performance and Results Act of 1993: The act places
                            emphasis on managing for results and pinpointing opportunities for
                            improved performance and increased accountability. As noted in this
                            report, in crafting the act, the Congress recognized that to be useful,
                            agency performance reports would not only need to document
                            performance levels, but also explain and describe the reasons for any
                            unmet goals and new plans for achieving those goals.

                            The Federal Credit Reform Act of 1990: Budgetary and accounting
                            requirements for federal credit programs were significantly revised under
                            the Federal Credit Reform Act of 1990. The Federal Credit Reform Act’s
                            goals are

                        •   measuring more accurately federal credit program costs,
                        •   placing the costs of credit programs on a budgetary basis equivalent to
                            each other and to other federal spending,
                        •   encouraging the delivery of benefits in the form most appropriate to the
                            needs of beneficiaries, and
                        •   improving the allocation of resources among credit programs and between
                            credit and other spending programs.




                            Page 50                                          GAO/AIMD-97-48 Debt Collection
                      Appendix III
                      Summary of Efforts to Improve Debt
                      Collection




                      Federal Accounting Standards Advisory Board: Accounting standards for
                      federal credit programs were revised in 1993 in accordance with
                      recommendations by the Federal Accounting Standards Advisory Board
                      (FASAB). The revised standards are consistent with provisions of the
                      Federal Credit Reform Act, and require that direct and guaranteed loans
                      be accounted for on a present value basis, fully recognizing actual and
                      expected credit program costs.

                      Statement of Federal Financial Accounting Standards Number 2,
                      Accounting for Direct Loans and Loan Guarantees, states that because
                      credit programs provide interest subsidies and sustain losses caused by
                      defaults, the costs of these programs are significant. Accounting
                      information called for in this standard provides the basis for evaluating
                      program performance by comparing actual accounting data with estimated
                      budget data for direct loans and loan guarantees.



                      GAO  has issued numerous reports in the past on federal debt collection
GAO Work on Federal   activities. In two of our reports on debt collection—Debt Collection:
Debt Collection       Billions Are Owed While Collection and Accounting Problems Are
                      Unresolved (GAO/AFMD-86-39, May 23, 1986) and Credit Management:
                      Deteriorating Credit Picture Emphasizes Importance of OMB’s Nine-Point
                      Program (GAO/AFMD-90-12, April 12, 1990)—we reported that despite
                      increased emphasis by the administration and individual agencies on debt
                      collection activities, the government’s overall credit picture had
                      deteriorated, with delinquencies and losses on federal loan and loan
                      guarantee programs continuing to increase. We also reported that agency
                      debt collection efforts were being hampered by accounting systems which
                      often did not provide management with current and accurate information
                      on the status of outstanding debt.

                      Despite progress in some areas and continued efforts on the part of OMB,
                      Treasury, and the Congress to strengthen overall debt collection
                      procedures, in our September 1995 testimony, Financial Management:
                      Legislation to Improve Governmentwide Debt Collection Practices
                      (GAO/T-AIMD-95-235, September 8, 1995), we again concluded that many
                      federal credit program agencies continued to face long-standing problems
                      in collecting debt.




                      Page 51                                       GAO/AIMD-97-48 Debt Collection
Appendix IV

The Debt Collection Improvement Act of
1996

                     The Debt Collection Improvement Act of 1996, passed by the Congress and
                     signed into law by the President in April 1996, provides significant
                     opportunities for improving agencies’ and FMS’ ability to collect delinquent
                     debt. Key provisions of this act affecting FMS and agencies are summarized
                     below.


                 •   FMS  has authority to coordinate debt collection efforts across the federal
Key Provisions       government.
Affecting FMS    •   FMS has the authority to service the debt of other agencies in-house,
                     designate debt collection centers or private collection contractors to
                     service the debt, or to refer the debt to the Department of Justice for
                     litigation. The centers it can designate to service debt are responsible for
                     centrally administering an array of activities, including debt servicing,
                     collection, compromise, or termination.

                     This represents a major change from the existing practice in which
                     agencies handle the debt from origination through resolution, regardless
                     of their success or the time involved. The act requires agencies to transfer
                     delinquent debts to FMS after 180 days. Several noncredit programs,
                     including the Nuclear Regulatory Commission and Federal Trade
                     Commission, have already transferred their delinquent debt to FMS for
                     collection. Some credit agencies expressed reluctance in turning their debt
                     over to FMS during our review. However, since the completion of our work,
                     all four credit agencies included in our review said that they were either in
                     the process of negotiating or were considering the transfer of debt to FMS.

                 •   Responsibilities for reporting on debt collection to the Congress are
                     transferred from the Director of OMB to the Secretary of the Treasury
                     (FMS). The act states that the agencies will now report annually to FMS. The
                     act states that within 3 years of the act, the Secretary of the Treasury is
                     required to report on collection services provided by FMS and other entities
                     collecting on behalf federal agencies. The act also gives the Secretary joint
                     responsibility—with the Attorney General—for program regulations (the
                     Federal Claims Collection Standards), which was previously a joint duty
                     between the Comptroller General and the Attorney General.
                 •   The act also provides resources to FMS and agencies to resolve delinquent
                     debt. FMS is authorized to charge fees for collecting delinquent debt. The
                     act allows for payment of collection fees for delinquent debt to be taken
                     out of amounts collected. In addition, the act provides authority for
                     agencies to retain a portion of collections to be used for improving debt
                     collection activities. The act calls for these amounts to be available to



                     Page 52                                           GAO/AIMD-97-48 Debt Collection
Appendix IV
The Debt Collection Improvement Act of
1996




reimburse agencies for certain debt collection and related expenses. But
under the act, the availability of the funds is subject to appropriation, and
it is too soon to tell whether this provision will achieve its intent of
providing incentives to agencies to increase the collection of delinquent
debt.




Page 53                                           GAO/AIMD-97-48 Debt Collection
                                                Appendix IV
                                                The Debt Collection Improvement Act of
                                                1996




Table IV.1: Key Provisions Affecting Federal Agencies
                             Requirements of the Debt Collection Act Requirements of the Debt Collection Improvement Act
Subject                      of 1982 and amendments                  of 1996
Contracting for debt             Agencies were generally authorized to       Treasury is required to maintain a schedule of private
collection services.             contract for debt collection services       sector contractors and agencies are required to use
                                 through the General Services                those contractors.
                                 Administration.
Offsetting salaries of federal   Authority provided but not required under   Requires agencies to participate in an annual matching of
employees who owe                the 1982 act.                               records to identify federal employees delinquent on
delinquent debt.                                                             federal debts.
Reporting information on an      This was authorized but not mandatory in    Agencies are required to report information about an
individual’s delinquent debt     the 1982 act and only covered delinquent    individual’s delinquent debts. Agencies have the option to
to credit bureaus.               debt.                                       report nondelinquent individual debt and all commercial
                                                                             debt to credit reporting agencies.
Using administrative offsets.    This was authorized but not mandatory       Provides authority for disbursing officials to conduct
                                 under the 1982 act.                         offsets and requires referral of debts over 180 days
                                                                             delinquent to Treasury for offset.
Using administrative wage        Not specifically authorized.                Specifically authorized and required, as appropriate.
garnishment.
Screening loan applicants.       Authority provided but not required.        Agencies are required to deny credit to those who owe
                                                                             delinquent debt to the federal government. With certain
                                                                             exceptions, such as a borrower with outstanding IRS
                                                                             debt, agencies must refuse credit to a delinquent credit
                                                                             applicant.
Referring delinquent debts       Agencies were required to refer delinquent Agencies are required to refer delinquent debts to FMS
for IRS tax refund offset.       debts to IRS at least annually.            for the purpose of offsetting any payments, including tax
                                                                            refunds.
Closing out debt to IRS as       Required of federal executive agencies.     All agencies may close out debts through FMS.
income to the debtor.
Requiring taxpayer               Required for those borrowing from credit    Required from all those doing business with the federal
identification numbers.          agencies.                                   government.
Publicly disseminating           Not specifically authorized.                Specifically authorized by statute.
information regarding the
identity of a person and the
delinquent nontax debt.
Allowing the Departments of Not specifically authorized.                     Specifically authorized by statute.
Labor and Health and Human
Services to release
information to agencies and
their agents on employer and
government data for the
purpose of collecting and
reporting delinquent debt.



                                                As was the case for the 1982 legislation, the 1996 act does not apply to IRS,
Applicability of the                            Customs Service, or Social Security Administration debt; however, these
Act

                                                Page 54                                                  GAO/AIMD-97-48 Debt Collection
Appendix IV
The Debt Collection Improvement Act of
1996




entities are participants in assisting agencies to collect debt. The 1982 act
covered the executive and legislative branch agencies, and the 1996 act
also includes the judicial branch.




Page 55                                           GAO/AIMD-97-48 Debt Collection
Appendix V

Tools Tracked and Reported


                        This appendix provides more information about the involuntary collection
                        tools tracked by agencies and included in the annual debt collection report
                        to the Congress.


                        Tax refund offsets resulted in $965 million in collections for fiscal year
Tax Refund Offset       1995—40 percent of the total collections of the five tools. This program
Program                 allows income tax refunds to be offset against delinquent amounts owed
                        to the federal government. Since the tax refund offset began in 1986, the
                        government has recovered more than $6 billion.


                        Litigation resulted in $553 million in collection for fiscal year 1995—
Litigation              23 percent of the total collections of the five tools. Delinquent debts which
                        cannot be collected through other means can be referred to the
                        Department of Justice for litigation. In addition to the $553 million in
                        collections, agencies reported $121 million in non-monetary settlements
                        recovered by Justice.


                        Private collection firms brought in $533 million in fiscal year 1995—
Private Collection      22 percent of the total of the five tools. Of the $533 million collected,
Firms                   $512 million pertained to collections on student loans.


                        Administrative offsets resulted in $330 million in collections in fiscal year
Administrative Offset   1995—14 percent of the total for the five tools. Agencies are authorized to
Program                 collect delinquent debt on behalf of other agencies by withholding or
                        offsetting payments due to, or monies held by, the federal government for
                        the debtor.


                        Federal employee salary offsets resulted in $21 million in collections in
Federal Employee        fiscal year 1995—just 1 percent of the total for the five tools. Under this
Salary Offset           program, delinquent accounts are matched against the federal personnel
                        rosters to identify employees delinquent on federal debts. Where matches
                        are made, 15 percent of a federal employee’s disposable income, less
                        amounts required by law to be withheld, may be offset against delinquent
                        amounts due.




                        Page 56                                            GAO/AIMD-97-48 Debt Collection
Appendix VI

Amount of Reported Delinquent Debt by
Agency at September 30, 1990 and
September 30, 1996

              Dollars in millions
                                                     Delinquencies          Delinquencies        Change from
              Department/Agency                             9/30/90                9/30/96       1990 to 1996
              U.S. Department of
              Agriculture                                    $16,695                 $8,758             $-7,937
              Department of Commerce                              294                     97               –197
              Department of Defense                             1,667                  3,369               1,702
              Educationa                                        9,882                19,156                9,274
              Department of Energy                              1,518                  2,377                   859
              Health and Human Services                         1,123                  3,783               2,660
                                                                      b
              Social Security Administration                                             331                   331
              Department of Housing and
              Urban Development                                 2,206                  2,282                    76
              Department of the Interior                          527                    438                   –89
              Department of Justice                               324                    101               –223
              Department of Labor                                 239                     95               –144
              Department of Transportation                        923                    160               –763
              Treasury (less IRS)                                 383                    508                   125
              Department of Veterans
              Affairs                                           3,851                  2,462             –1,389
              Agency for International
              Development                                         860                    794                   –66
              Small Business Administration                     1,870                  2,031                   161
              Export-Import Bank                                1,773                  2,451                   678
              All other                                         1,290                  2,077                   787
              Total                                          $45,425                $51,270              $5,845
              a
               Because of the nature of the Federal Family Education Loan Program, almost all of Education’s
              receivables are at least 270 days delinquent when acquired from guaranty agencies.
              b
               The Social Security Administration was part of Health and Human Services at September 30,
              1990.

              Source: OMB Debt Collection Reports and FMS. This information was not independently verified
              by GAO.




              Page 57                                                        GAO/AIMD-97-48 Debt Collection
Appendix VII

Major Contributors to This Report


                        Julie S. Tessauro, Assistant Director
Accounting and          Mary Ellen Chervenic, Assistant Director
Information             Linda J. Sellevaag, Communications Analyst
Management Division,    Cristina T. Chaplin, Communications Analyst

Washington, D.C.
                        Franklin D. Jackson, Senior Attorney
Office of the General
Council




(918896)                Page 58                                       GAO/AIMD-97-48 Debt Collection
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