DCCUME-T FEYUM3 03'760 - [A2794033] Faitcers Hone duinisirationes Business and Industrial Loan Prograv can Be Iproeod. CDP-77-126; B-114873. September 30, 19'77. 65 pp. + 4 afrcdices (12 pp.). Report to the Congress; by Elmer B. Stdats, Comptroller General. Issue Area: Domestic Housing and Community Development (2190). Contact: Community and Economic Devealopent Dii. Budget Panction: Ccssunity and Regional Develosent: Area and Regional Develop ent (452). Organization Concerned: Farmers ose Administration. Congressional Relevance: ouse Committee on Agriculture; Senate committee on Agriculture, Nutrition, and Forestry; Congress. Authority: Rural Developsent Act of 1972 (P.L. 92-419). Consclidated 'arn and Rural Development ct, as amended (7 U.S.C. 1932 (Supp. II)). The business and industrial loan program of the armuers Hose Administration (FmHA) was established to help to save and create jobs i rural areas. The Congress appropriated and the agency obligated about $550 illion in loans during fiscal years 1974 and 1975, of which $117 million was designated for programs in Alabaaa, Arkansas, Georgia, Louisiana, Mississippi, and Tenncssee. Fineings/Conclusions IThe Congress needs accurate data to judge te prcgrau's effectiveness. Although the agency reported that 29,800 jobs were saved and created in fiscal year 1975, data supplied by the borrowers on approved loans showed that only about 11,100 jobs were saved and created. The higher number included figures for loans which had not been approved or which had been deobligated as of June 30, 1976. Further, the job data supplied by borrowers for 27 loans reviewed was overstated by sore than 100%. he agency is developing a management information system for all its programs, but the accuracy of the information put into the system needs to be veritied. Recommendations: The FPHA could take a number cf actions to ore accurately report accomplishments so that the Congress can better determine the program's effectiveness, improve loan application assessments, provide better loan servicing, and increase guidance to borrowers. In addition, action could be taken to attain enough qualified staff. (Author/SC) REPORT TO THE CONGRESS BY THE COMPTROLLER GENERAL OF THE UNITED STATES Farmers Home Administration's Business And Industrial Loan Program Can Be Improved Creation of job-producing businesses key to rural development. To this is the business and industrial loan programend, the Farmers Home Admin;stratt,;, Department of the of Agriculture, helps to save and create rural areas. jobs in The agency could take a number of actions to --more accurately report accomplish- ments so that the Congress can better determine the program's effectiveness, --improve loan application assessments, --provide better loan servicing, and --increase guidance to borrowers. Also, action could be taken to attain enough qualified starf. CED-77-126 SEPTEMBER 30, 1977 COMPTRT LLR GENERAL OP THE UNITED STATFS WASHINGTON. D.C. 24 B-114873 To the President of the Senate and the Speaker of the Hcuse of Representatives This report describes our review of the Farmers Home Administration's business and industrial loan program. Be- cause of the important role this relatively new program can play in developing rural areas, we sought to assess the agency's administration of the program and to determine what improvements are needed to make it more effective. This review was made pursuant to the Budget and Account- ing Act, 1921 (31 U.S.C. 53), ad the Accounting and Auditing Ace of 1950 (31 U.S.C. 67). We are sending copies of this report to the Director, Office of Management and Budget; the Secretary of Agriculture; and the Administrator, Small Business Administration. Comptroller General of the United States COMPTROLLER GENERAL'S FARMERS HOME ADMINISTRATION'S REPORT TO THE CONGRESS BUSINESS AND INDUSTRIAL LOAN PROGRAM CAN BE IMPROVED DIGEST The Farmers Home Administration can improve its business and industrial loan program to -- measure and report more accurately program accomplishments, --better assess proposed loans, -- provide better loan servicing and management assistance to borrowers, and -- attain enough qualified staff. The program, initially carried out during harsh economic conditions, has helped rural areas by saving existing jobs or creating new ones; however, several problems need the attention of management. The Congress appropriated and the agency obli- gated about $550 million in loans during fis- cal years 1974-75. Alabama, Arkansas, Georgia, Louisiana, Mississippi, and Tennessee accounted for loans of about $117 mill'on (21 percent) during this time. The report looks at the program in these States. MEASURING AND EVALUATING PROGRAM RESULTS The Congress needs accurate data to judge the program's effectiveness. Although the agency reported that 29,800 jobs were saved and created in fiscal year 1975, data supplied by the borrowers on approved loans showed that only about 11,100 obs were saved and created. The higher number included figuzes for loans which had not been approved or which had been deobligated as of June 30, 1976. Further, the job data supplied by borrowers for 27 loans reviewed was over- stated by more th 100 percent. (See pp. 6 to 11.) 5.L Upcn removal, the report beonotedhereon. e CED-77-126 Management needs more and better data to effectively evaluate the program. The agency is developing a management information system for all its programs, but the accuracy of the employment data and other information put into the system needs to be verified. Also, the quality of the jobs saved and created should be reported. (See pp. 11 and 12.) Criteria for determining what investment should be made to save or create a job and analysis and verification of data submitted by loan applicants are needed for the pro- gram to do the most sood. For loans reviewed, investment per job saved or created ranged from $1,600 to $90,000 using the job data submitted by borrowers, and from $1,300 to $200,000 using actual employment data. (See pp. 12 and 13.) Specific recommendations for more accurately reporting data and for saving and creating the most jobs are on page 14. EVALUATING PROPOSED LOANS Does the loan applicant have a good chance of succeeding? This question must be answered before making loans. Regulations governing loan evaluation procedures need to be clari- fied and procedures need to be followed. More experienced staff and clearer instruc- tions would reduce loan processing time (an average of 252 days for loans GAO reviewed) and, at the same time, increase the quality of the loans approved. (See pp. 17 to 21.) Better analysis of a loan applicant's finan- cial condition and the economic feasibility of a proposed project would better indicate that the businesses financed can succeed. Although the loans reviewed were outstanding for relatively short periods--from 8 to 26 months--several businesses either had gone out of business, filed for bankruptcy, fallen be- hind on their loan payments, or operated with- out profit. (Eee pp. 21 to 28.) ii To make sure the applicants collateral to repay loans in have enough cases of default, the agency should -- require that appraisals be made by independ- ent appraisers and reviewed by agency person- nel, --provide additional guidance on appraisal methods used, and -- obtain more accurate data on the net worth of borrowers and others personally teeing the repayment of loans. guaran- (See pp. 28 to 3.) Loans which merely transfer the risk of loss from banks and other creditors to the agency should not be approved. (See pp. 32 and 33.) Recommendations directed at (1) mproving loan evaluations, (2) better establishing loan security, and (3) eliminating loans which transfer loan risks the use of are on pages 38 and 39. to the agency LOAN SERVICING AND MANAGEMENT ASSISTANCE Borrowers' problems can be identified analyzed better. For example: and -- Lenders need to promptly notify the agency of borrowers' delinquencies. -- The agency and the lenders need to analyze borrowers' financial statements more quickly and effectively and make quent and better planned visits more fre- to bor- rowers. -- The agency needs to establish the use of loan proceeds to seeprocedures on are used as authorized. (See pp. that they 42 to 50.) Because agency and lender personnel lack the time and/or expertise to effectively borrowers, the agency should set assist aided by consultants, to provide up a staff, management iii assistance. (See pp. 50 to 54.) Specific recommendations are on pages 56 and 57. ACTIONS TO CORRECT STAFFING PROBLEMS When starting the program, the agency filled most positions with personnel with agricul- tural backgrounds. This is still being done even though --the former Administrator stated that experi- ence in the agency's lending programs was not the type being sought, --the need for staff with more diverse back- grounds had been brought to the agency's attention, and -- agriculturally oriented programs accounted for only about 30 percent of the agency's fiscal year 1976 expenditures. The agency has not followed fully the recom- mendation of the Senate Committee on Appro- priations that staffing levels keep pace with loan and grant activity. See pp. 61 to 64.) Recommended actions for attaining the staff needed are on page 64. AGENCY COMMENTS The agency agrees with GAO on the general im- provements needed in the program and cited actions taken and planned to achieve these improvements. The agency did disagree with some speif'c recommended actions and GAO's position on these matters is contained in the report. The agency's comments are incorporated in pertinent sections of te report and included as appendix III. iv tONTENTS Page DIGEST i CHAPTER 1 INTRODUCTION 1 Business and industrial loan program 1 Administering the program Program implementation, funding, and 3 loan status 4 Scope of reviw 4 Effect of the ec.omy on the program 5 2 PROGRAM RESULTS OVERSTATED--A BETTER SYSTEM IS NEEDED TO MEASURE AND EVALUATE PROGr<AM ACCOMPLISHMENTS uverstatement of program accomplish- 6 ments 6 Accomplishments should be categor- ized by loans closed and in process 7 Reported accomplishments based on overstated job data provided by borrowers 8 FmHA's management information system Criteria needed in judging reasonable- 11 ness of loan investment required to save and create jobs 12 Conclusions Recommendations 13 Agency comments and our evaluation 14 14 3 IMPROVEMENTS NEEDED IN POLICIES AND PROCEDURES TO EVALUATE PROPOSED LOANS Loan processing procedures 17 Businesses' potential for success not 17 adequately evaluated Need for improvements in obtain- 21 ing and analyzing financial data Economic and technical feasibility 23 studies 27 Page CHAPTER Need for improvements in determin- ing adequacy of loan security 28 Appraisal procedures 29 Personal guarantees 31 Loans used for refinancing purposes should not be used to reduce lenders' exposure to loss on prior loans 32 Conclusions 37 Recommendations 38 Agency comments and our evaluation 39 4 IMPROVEMENTS IN LOAN SERVICING AND MANAGEMENT ASSISTANCE EFFORTS COULD ENHANCE BORROWERS' CHANCES OF SUCCESS 42 Better and more timely information needed on borrowers' problems and progress 42 More timely notification of borrower delinquency needed 43 Borrowers' financial statements could be more effectively used as loan servicing tool 44 Visits to borrowers 47 FmHA monitoring of lender opera- tions 48 Better control needed over use of loan proceeds 49 Improvements needed in management assistance program 50 Conclusions 54 Recommendations 56 Agency comments and our evaluation 57 5 PROGRAM STAFFING--A PROBLEM NEEDING TC BE RESOLVED 61 Conclusions 64 Recommendation 64 Agency comments and our evaluation 64 Page APPENDIX I Schedule of loans reviewed by GAO 66 II Comparison of employment data reported to the Congress with actual at time of our visit 67 III Letter dated July 27, 1977, from the Farmers Home Administration 68 IV Principal Department of Agriculture officials responsible for administering activities discussed in this report 77 ABBREVIATIONS B&I business and idustrial DOL Department of Labor FmHA Farmers Home Administration GAO General Accounting Office SBA Small Business Administration USDA United States Department of Agriculture CHAPTER 1 INTRODUCTION Through recent legislation, the Nation to revitalizing and developing rural has been committed achieving a balanced national growth. areas as a means of mitment, the Congress enacted on Aug-st As part of that coin- Development Act of 1972 (Public Law 30, 1972, the Rural cipal trust is toward providing jobs9-419). The act's prin- an increased business income in rural America through ericouragelQnt rialization and increased business of rural indust- activity .- I income. Section 310B(a) of the Consolidated Development Act, as amended by section Farm and Rural opment Act of 1972 (7 U.S.C. 1932 118 of the Rural Devel- (Supp. II, 1972)), author- ized the Secretary of Agriculture to guarantee, insure, or make direct loans to public, private, izations or individuals for improving, or cooperative organ- developing, or financing business, industry, and employment the economic climate in rural areas. and improving the Consolidated Act, as amended (7 Section 306(a)(7) of U.S.C. 1926 (Supp. II, 1972)), defines a rural area, for purposes to private business enterprises, as of loans and grants in the outer boundary of any city any area that is not with- 50,000 or more and its immediately having a population of urbanizing areas with a population adjacent urbanized and density of more than 100 perqons per square mile. BUSINESS AND INDUSTRIAL LOAN PROGRAM The Secretary f Agriculture for carrying out the business and delegated responsibility industrial (B&I) loan program to the Administrator, Farmers (FmHA), under the supervision of the Home Administration for Rural Development. Assistant Secretary The primary purpose economic climate in rural of the program is to improve the areas by saving existing creating new jobs. In addition, FmHA and/or officials other program purposes include encouraging stated that rural industry and increasing the and stimulating of funds into, rural communities. tax base of, and the flow These purposes are to be achieved by assisting and encouraginq making loans to commercial business local lenders in and industrial enter- prises to expand or locate their operations areas. in rural Two types of loans have been made under the program-- guaranteed and insured. A guaranteed loan is made by an approved lending institution with FmHA guaranteeing to pay up to 90 percent of the principal and interest of the out- standing loan balance to the lender in case the borrower defaults. Lenders are responsible for servicing loans guaranteed by FmHA, including all actions necessary to collect the indebtedness and to protect the loan security. An insured loarn is made and serviced directly by FmHA. These loans are made available to applicants, including public enti- ties, which are unable to obtain loans elsewhere at reason- able interest rates and terms. Guaranteed and insured loans may be used for: -- Business and industrial construction, conversion, acquisition, repair, and modernization. -Purchase o." land, machinery, equipment, supplies, materials, furniture, and fixtures. -- Startup costs and working capital. -- Refinancing debt, when refinancing results in a sound loan and protects the Government's interest. Maximum loan terms are 30 years for loans made to pur- chase land and to construct, improve, or purchase buildings and permanent fixtures; 15 years for loans made to pr- chase machinery and equipment; and 7 years for loans made for working capital. Maximum loan terms for loans made to refinance debt vary with the estimated life of the collateral securing the loan. Interest rates charged for guaranteed loans are agreed upon by the lender and applicant while interest rates for insurec loans are based on rates paid by the U.S. Treasury on obligations of similar maturity. In determining which loan applications and prrjects be funded, FmHA has established, in the following order, will priorities for projects which will: -- Save existing jobs. -- Enlarge, extend, or otherwise improve existing businesses and industries. --Create the highest number of permanent employment opportunities. 2 -- Contribute to the overall economic sability of the rural areas but generate little or no permanent employment opportunities beyond the owner-entrepreneur. ADMINISTERING THE PROGRAM FmHA administers the program through a national quarters office in Washington, D.C.; a national head- in St. Louis, Missouri; and a field structure finance office county offices. of State and At the national level, an Assistant Administrator responsible for overseeing the program, and is also for pro- viding leadership and program direction, formulating coordinating policies, analyzing and projecting and and trends, and evaluating program effectiveness.program needs business and industrial oan division, headed The reporting to the Assistant Administrator, is by a director responsible for developing and recommending program operating procedures; coordinating and working with otherplans and agencies, public interest groups, and professional and business societies in promoting and managing the program; ing program ealuations at State and county and conduct- national finance office develops and executesoffices. The financial an program accounting and reporting FmHA's requirements. FmHA's 42 State offices, each headed are responsible for administering all FmHA by a director, programs and activities in one or more States and for supervising office operations. The day-to-day operations county of the at the State level are carried out by a supervisory program specialist who may be assisted by one or more loan loan specialists. The supervisory loan specialist for overseeing all facets of the program at is responsible the State level including loan processing and approval, monitoring lenders'loan servicing activities, and providing of assistance to borrowers. management Although not an administrative level, FmHA directors who are responsible for assisting has district from 6 to 10 county offices. FmHA has about 1,800 county offices, each headed supervisor, which serve as the focal point by a program as well as other FmHA programs. Thefor the B&I visor serves as the local contact person for county super- FmHA and 3 performs loan processing and servicing activities, provides technical assistance and guidance to loan applicants, promotes and publicizes FmHA programs locally. and PROGRAM IMPLEMENTATION, FUNDING, AND LOAN STATUS Proposed regulations to implement the program published in the Federal Register in June 1973 and were final regulations in October 1973. Funds were appropriated the Congress in October 1973 and the first loans were by obligated in December 1973. During fiscal yeirs 1974-75, the Congress appropriated, and FmHA obligated, $550 million in loan authorizations. The following schedule shows the status of the 'oans as of June 30, 1975. Number Amount (millions) Loans closed (note a) 299 $ 86.8 Loans in process 545 436.9 Loans deobligated 93 26.3 Total 937 $550.0 a/Loans which FmHA has contracted to make or guarantee. At June 30, 1975, FmHA had an unfunded backlog of about 1,000 requests for a total of aut $1 billion of financial assistance. An FmHA official tod us, however, that this figure could be misleading because it included requests for reasons such as ineligibility, would not be funded. which, For fiscal years 1976-77, the Congress appropriated additional $787.5 million in loan authority (this amount an included $87.5 million for the transitional quarter through September 30, 1976). For fiscal year 1978, July 1 the Congress increased the appropriation to $1 billion in authority. loan SCOPE OF REVIEW We reviewed the operation and administration of program at the national headquarters and the finance the office and in six State offices--Alabama, Arkansas, Georgia, Louisiana, Mississippi, and Tennessee. During fiscal 1974-75, the six State offices had obligated about $117years 4 million in loan authority, or about 21 percent of the national total. The following schedule shows the status of the loans as of June 30, 1975. Number Amount (millions) Loans closed 66 $ 22.5 Loans in process 89 88.0 Loans deobligated 30 6.2 Total 185 $116.7 We selected for detailed review 35 of the 66 closed loans, or about 53 percent of the loans made in the six States. These 35 loans were made 'o 34 borrowers. To obtain a more current reading on FmHA's loan processing procedures, we also reviewed 10 loans in process at June 30, 1975. (See app. I for a list of the loans reviewed.) In making our re- view we interviewed agency officials and represe) *atives of lending institutions, State and local government,, and other community groups and organizations; reviewed laws, regulations, policies, and FmHA procedures; and examined agency and lender records. We visited projects, interviewed borrowers, and examined borrower records. We also hired a consultant to assist us in determining the adequacy of FmHA's and the lenders' evaluations of the loans reviewed. EFFECT OF THE ECONOMY ON THE PROGRAM The implementation of the B&I program in fiscal year 1974 coincided with a downturn in the overall economy which adversely affected the business community. During the first 2 years in which the program was in operation, was experiencing a severe recession and, at the the Nation same time, unusually high inflation and interest rates. Although the effect that the state of the economy on the program cannot be precisely measured, we believe had that, in judging the overall effectiveness of the program, consideration should be given to the fact that the program was implemented during a time of high interest rates, soft consumer demand, low profit margins and curtailed capital expenditures. Had the overall economy been stronger, more businesses in better financial condition may have sought B&I loans and provided FmHA a larger universe from which loans could have been selected. Further, a stronger economy may have alleviatei some of the financial problems of the firms that obtained loans. 5 CHAPTER 2 PROGRAM RESULTS OVERSTATED--A BETTER SYSTEM IS NEEDED TO MEASURE AND EVALUATE PROGRAM ACCOMPLISHMENTS FmHA provided the Congress with information the accomplishments achieved through its overstating business and industrial loan program. More accurate enable the Congress to better judge the data is needed to overall effective- ness of this relatively new program and to determine whether the accomplishments being achieved are commensurate investment being made and whether changes with the and/or funding levels should be made. To in program operation provide the Congres. with more accurate data, FmHA should -- include as program accomplishments the number of jobs reportedly saved and created for only loans actually made rather than including those for loans that are in process or that have job data been deobligated, -- verify and analyze the job data provided by can applicants to assure its accuracy and reasonableness, and --determine and report on the actual number of jobs saved and created by the businesses assisted. FmHA has established no formal criteria the reasonableness of the investment required to determine create jobs in approving loans. Such criteria to save and/or that the limited resources available are is needed so applied projects which will save and/or create the to those most jobs. OVERSTATEMENT OF PROGRAM ACCOMPLISHMENTS During joint hearings held in January 1976 by House and Senate subcommittees, 1/ and February FmHA reported that during fiscal years 1974-75 it obligated million in loan authorizations which resulted about $550 48,900 jobs saved and created. The program in about accomplishment l/Subcommittee on Conservation and Credit of Committee on Agriculture and Subcommittee the House on Rural Development of the Senate Committee on Ag:iculture Forestry. and 6 data reported ty FmHA was overstated because (1) data was included for loans not yet made and for loans that were deobligated, (2) there was duplicate counting of the loans obligated, ad (3) the number of jobs reported to be saved and created by the loans was based on data provided by borrowers which was overstated. FmHA reported that 29,800 jobs would be saved and created by the loans obligated during fiscal year 1975; however, only 37 percent of these loans were closed as of June 30, 1976. According to data provided by the borrowers, the closed loans saved and created about 11,100 jobs, about 37 percent of that reported. As discussed below, comparable job data for loans obligated during fiscal year 1974 could not be determined. Further, we found that the job data provided by the borrowers was overstated. Using the borrowers' data, FmHA reported that 1,881 jobs were saved and created by 27 of the 35 closed loans we reviewed. (Information on the number of jobs reported to the Congress to have been saved and created by the remaining eight loans was not available.) We determined, however, that the actual number of full-time jobs saved and created by the 27 loans was 920, about 49 percent of that reported. Accomplishments should be categorized by loans closed and in process In reporting program accomplishments to the Congress, we believe it would be more meaningful if FmHA categorized the data by loans closed and in process. Loans deobligated and those counted more than once should be deleted from accomplishment data. Although FmHA reported that funds were obligated for 937 loans during fiscal years 1974-75, some loans were counted two or more times. Eliminating such duplications, we determined that the actual number of loans for which FmHA obligated funds was 856, a difference of 81 loans from that reported. FmHA officials advised us that corrective action is being taken to eliminate the duplicative counting of loans, The status of the 856 loans as of June 30, 1976, is shown below. 7 Loan status Number Percent Amount Percent (millions) Closed 375 44 $129.2 23 In process 311 36 334.7 61 Deobligated 170 20 86.0 16 Total 856 100 $549.9 100 Although FmHA maintained information on the number of jobs saved and/or created for individu:l loans obligated during fiscal year 1974, the data was :ncomplete and, there- fore, we could not determine the number of jobs which should be deleted from the program accomplishment data for that year. For loans obligated during fiscal year 1975, FmHA reported to the Congress that 29,800 jobs were saved and created. However, most of the loans were either still in process or had been deobligated as of June 30, 1976. As shown below, the 183 closed loans, according to data provided by the borrowers, saved and created about 11,100 jobs, or about 37 percent of that reported. Number of jobs saved Loan status as of Number and created June 30,-1976 of oans Percent (note a) Percent Closed 183 37 11,100 37 In process 242 50 14,800 50 Deobligated 64 13 3,900 13 Total b/ 489 100 29,800 100 a/The number of jobs reported is based on data supplied by the borrowers. b/Represents unduplicated loans. In reporting on program accomplishments to the Congress, we believe that information on the number of jobs expected to be saved and created by the loans in process should be shown separately from the data for approved loans because no jobs are saved or created until the loan is closed. Job data for deobligated loans should not be shown at all. Reorted accomplishments based on overstated ob data provided by borrowers The reported number of jobs saved and created by the 8 program is obtained by FmHA from information supplied to it by loan applicants with little or no verification or analysis to determine whether it is accurate and reasonable. Such verification and analysis is needed not only to report accur- ately on program accomplishments but also to determine whether the loan investment per job saved or created is reasonable in reaching a decision on loan approvals. Further, FmHA should obtain information on the actual number of jobs saved and created, 1 year after the loans are closed, so that com- parisons between anticipated and actual program accomplish- ments can be made, evaluated, and reported on. Loan applicants provide employment data to FmHA on a number of different forms. The information provided by existing businesses shows the number of people employed at the time the form is completed--this number is used to report on the jobs to be saved. Poth existing and new businesses provide information on the anticipated number of new jobs the loan will create initially, 1-year after the loan is closed, and when operating at full capacity. We were able to determine the source of the job data reported to the Congress for only 27 of the 35 closed loans reviewed. These loans were reported to have saved and created 1,881 jobs. Through discussions with the borrowers and selected verification of payroll records, determined that the actual number of jobs savedhowever, we and created at the time of our visits to the borrowers in terms of full-time job equivalents was 920, or about 49 percent of the total reported. (See app. II.) We determined that the remaining eight closed loans actually saved and created 181 jobs, whereas the borrowers, when applying for the loans, said that they would save and create 306 jobs. No one form was consistently used as the source of the job data reported to the Congress. Also, no one employment figure was consistently used; i.e., for some loanb the estimated number of jobs to be created initially was used and for others it was the estimated number to be created 1 year after loan closing or when operating at full capacity. Other problems noted were that --the employment data provided to FmHA on 25 loans made to 24 existing businesses, i.e., the actual number of people employed at the time of application, were incorrect in 12 cases and --no distinction was made between full-time and sasonal or part-time employees for 15 of 16 loans made to 9 businesses employing seasonal or part-time employees. Also, 4 of the 24 borrowers who obtained loans for ex- isting businesses told us that the loans were for the trans- fer of ownership and, therefore, no jobs were actually saved. In determining the actual number of jobs saved and created, however, we included the employees of the four businesses. The following examples illustrate some of the problems in reporting program accomplishments. -- One borrower reported that his firm employed 200 people at the time of loan application and estimated it would employ 400 people ; year later. At the time of our visit, 22 months after the loan was closed, the firm was going out of business and employed only 15 people. --In another case the borrower reported that his firm employed 14 people. This figure was accepted by FmHA without verification. At the time of our visit, about 15 months after the loan was closed, the firm employed 13 seasonal employees and one full-time employee. The borrower told us that this was about the same situation as when the loan was approved. The full-time equivalent for the seasonal employees, who worked only 2 months of the year, would be two jobs. Therefore, in reporting jobs saved and in considering this loan for approval, it would have been more accurate to show that the loan saved 3 full-time job equivalents rather than 14 jobs. -- Although FmHA considered one loan made to an existing business as having saved and created 12 jobs (no breakout was available between jobs saved and created), the borrower told us that the loan did not save any jobs but rather merely enabled him to buy the firm--that is, the loan was made to transfer the ownership of a viable business. He said that one new job had been created. We do not believe loans made to transfer ownership should be routinely treated as having saved jobs. This procedure resu.ts in overstating program accomp- lishments and, because loans made to save jobs re to be given first priority, could result in giving priority to a loan of this type over another which would actually save and/or create jobs. 10 To provide the Congress with more accurate data, we believe FmHA should verify and analyze the job data submitted by loan applicants and obtain and report on the actual number of jobs saved and created by the borrowers 1 year after they have received the loans. FmHA's management information system We discussed the need for overall program accomplishment data with a U.S. Department of Agriculture (USDA) official in August 1975. Subsequent to this discussion, FmHA began requiring State offices to prepare monthly reports showing summary information on the number of jobs saved and created, the number and dollar amounts of loans categorized by size of population, 1/ and the number and amounts of loans deobligated and the reasons for the deobligations. No informa- tion is obtained, however, on the quality of jobs saved and created; i.e., whether the jobs are part-time or seasonal and the amount of wages and salaries paid. FmHA currently has underway a long-range effort to develop a unified management information system covering all of its programs. As part of this system, which is expected to be operational sometime after November 1978, FmHA intends to develop criteria for monitoring the impact and assessing the effectiveness of the B&I program. Some of the informa- tion the system is to provide includes -- number of jobs saved and created in relation to loan amounts invested; -- location and size of populations served by the pro- jects financed; -- industrywide statistics, including financial ratios, for use in comparing proposed projects against industry trends; --amount of losses incurred relative to other FmHA programs; and -- ages and amounts of loan repayment delinquencies. I/The act requires that priority be given to communities with a population of 25,000 or less. 11 The system should help provide management with the data necessary to evaluate overall program effectiveness. We believe, however, tat action should be taken so that the information put into the system, particularly on jobs saved and created, is accurate and that information is obtained showing the quality of the jobs saved and created. CRITERIA NEEDED IN JUDGING REASONABLENESS OF LOAN INVESTMENT REQUIRED TO SAVE AND CREATE JOBS FmHA has no formal loan approval criteria to use in determining what a reasonable investment should be to save or create one job. As a result, loan funds are not necessarily applied in a way to save and create the maximum number of jobs. Using the job data shown on the borrowers' applications, the investment per job ranged from about $1,600 to $90,000 for the 35 closed loaas reviewed. Using the actual job data for those borrowers whose businesses were viable at the time of our visits, the investment ranged from about $1,300 to $200,000 per job. Without (1) verifying the accuracy of the number of jobs reported as saved and (2) analyzing the reasonableness of estimates of jobs to be created by loan applicants and com- paring this to loan approval criteria, loans could be approved which require extremely high investments per job saved or created. Using the actual data at the time of our visits for the first two examples cited on page 10, the investment required for each job saved or created was about $66,700 and $200,000, respectively. No calculation was made for the last example which involved a $480,000 loan made to transfer the ownership of the business. In making our review at FmHA headquarters, we learned that FmHA's Utah State office obligated $30 million in fiscal year 1975 for a loan which the applicant estimated would create 100 jobs, an investment of $300,000 per job. Although a USDA official told us in August 1975 that FmHA would probably not guarantee the loan, it had not been deobligated as of August 1977. If deobligated, FmHA would lose the use of these loan authorizations because they can- not now be reobligated. The above examples demonstrate the need for FmHA to obtain accurate job data ana to develop and use loan investment approval criteria, particularly when compared to the criteria used by the Economic Development AdniLnistration, 12 Department of Commerce, in operating program--a maximum of $10,000 and its business loan Another loan investment figure a target of $6,000 per job. often cited by FmHA and other USDA officials is $20,000 per job. Although USDA's Economic Research information showing which types Service had developed of industries and businesses create the most jobs for the lowest used this data to develop loan investment, FmHA has not investment or to otherwise maximize the impact approval criteria and creating jobs by gi'ing priority of the program in saving which are the most lor intensive. to loans for businesses CONCLUSIONS FmHA needs to establish uniform so that program accomplishment policies and procedures data is systematically gathered, evaluated, and reported. More data is needed to make informedaccurate program accomplishment effectiveness of the program, judgments on (1) the overall (2) whether the program achievements are adequate in relation made, and (3) what, if any, changes to the investment being program and/or level of funding. should be made to the Instructions should De established officials at the State and county requiring FmHA lyze job data suomitted by loan levels to verify and ana- accuracy and reasonableness. To applicants to insure its effective in meeting its major make the program more creating jobs, better job data, objective of saving and criteria, is needed for reaching along with loan approval knowledgeable decisions at the State and national office levels should or should not be approved. as to whether The instructions ashould loan also require FmHA personnel to year after the loans are made tofollow up with borrowers 1 of jobs saved and created so that determine the actual number anticipated and actual program comparisons between accomplishments can be made, evaluated, and reported on. Action has been and is being management with the program data taken by FmHA to provide needed to evaluate the overall effectiveness of the program. however, increased efforts are As discussed above, accuracy of the data obtained. needed to help insure the obtained on the quality Also, information should be of the jobs saved and created help evaluate the effectiveness to of the program. 13 FmHA should obtain and disseminate to its State and county offices information as to which industries and businesses are labor intensive and encourage its staff to use this data to judge the reasonableness of job data sub- mitted by loan applicants. RECOMMENDATIONS We recommend that the Secretary of Agriculture the FmHA Administrator to take the following actions:direct -- Develop and issue instructions requiring that (1) job data submitted by loan applicants be verified and analyzed, (2) information o the actual number of obs saved and/or created by the loans and on the quality of such jobs be obtained and presented to the Congress, and (3) program accomplishment data presented to the Congress be categorized by loans made and in process rather than on the basis of loan obligation data. -- Establish criteria for loan approval which relate dollars invested to jobs saved and/or created. -- Obtain and disseminate information as to which industries and businesses are labor intensive for use in judging reasonableness of job data submitted by loan applicants. AGENCY COMMENTS AND OUR EVALUATION In commenting on a draft of our report (see FmHA agreed with the need to verify job data. Theapp. III), agency said that this will be emphasized in training sessions and that instructions will be issued to the State directors to evalu- ate applicants' job projections and, for the loans made, review borrowers' job data during field isits to their to and offices. FmHA said that it will implement a manual plants re- porting system to provide the needed job data suggested by our report and that when the unified management information system is implemented, it will be able to provide updated reports on employment figures for management and the Congress. FmHA said that there appears to be the implication in our report that FmHA deliberately overstated the accomplish- ments of the program, which is absolutely not true. The agency said that when a new program is started, it is almost impossible to accurately report the actual number of jobs 14 saved or created because many of the loans have not been closed. Therefore, the agency said it has always eported the number of dollars obligated and the number of jobs saved and created as reported by the applicant. Our report does not address the question of whether ?mHA deliberately overstated the accomplishments of the gram. As our repor? states, however, we believe that pro- in reporting on orogr,.I accomplishments to the mation on the number of jobs expected to be Congiess, saved and infor- created by the loans in process should be shown separately from the data for approved loans and that job data for de- obligated loans should not be shown at all. While the formation is not available to do this for the first yearin- the program, it is available for subsequent years. of On July 8, 1977, PmHA issued a memorandum to its State directors setting forth the actions to be taken as a of our report. result (A copy of FmHA's memorandum is attached to its comments on our report--see app. III.) In its memoran- dum, FmHA said that for an application having a high job- cost ratio, the loan file should be documented with the reasons for recommending its approval, the priority placed on the application, and the supplemental benefits that accrue to the community's eccnomy in which the project will be located. will rmHA said that although it has indicated to its per- sonnel during training sessions that a $20,000 loan invest- ment per job is aerirable it disagrees with our recommendation that criteria be stablished for loan approval relating dollars nvested to jobs saved and/or created. FmEA that: stated "* * * The creation of permanent stable jobs, effect on the tax base, flow of funds into the community, and other beneficial effects on the community will also be evaluated and used as criteria for loan consideration in determining which projects will be funded. A maximum job cost figure would pre- clude loans in many areas that have natural re- sources, the development of which would require substantial fixed asset costs." We appreciate the concerns raised by FmHA and believe the proposed instructions to its State directors may be beneficial. Nevertheless, in view of the fact that the program's major objective is to improve the economic 15 climate of rural areas by saving and/or creating jobs, we believe formnal criteria is warranted. This is not to say, however, that exceptions to such criteria could not be pro- vided for. Iln commenting on our recommendation to obtain and disseminate information to its field offices as to which industries and businesses are labor intensive for use in judging the reasonableness of job data submitted by loan applicants, FmHA said that distributing such information to field personnel would serve no useful purpose because t.le disadvantages would outweigh the benefits. It did not say what these disadvantages would be. 16 CHAPTER 3 IMPROVEMENTS NEEDED IN POLICIES AND PROCEDURES TO EVALUATE PROPOSED LOANS FmHA needs to improve its loan evaluation policies and procedures to attain its goal of approving only quality loans. Although FmHA has improved and refined its procedures and personnel have gained experience since the program was im- its plemented in October 1973, further refinements to its pro- cedures are needed along with greater assurance that FmHA personnel have the time and capability to adequately carry out the required procedures. We believe that clearer instructions and more experienced staff would reduce loan processing time--which averaged 252 days for the 35 loans we reviewed -and increase the quality of loans approved. Actions are needed so that -- FmHA and lender personnel responsible for evaluating loans obtain and analyze the financial and economic data necessary to determine the soundness and economic feasibility of the businesses financed, -- the methods followed in appraising property securing loans are adequate to determine the fair-market value of the property and that adequate analyses are made of the financial condition of loan guarantors, and --lenders' exposure to loss on prior loans are not reduced through loans guaranteed by FmHA. LOAN PROCESSING PROCEDURES Clearer instructions setting forth the responsibilities of the applicants, lenders, and FmHA personnel could assist in processing loans more effectively and efficiently. loan processing procedures, which can be involved and The complicated, are outlined below. Generally, lenders assist applicants in preparing and processing applications for guaranteed loans. Ordinarily, a preapplication letter is submitted prior to submitting a formal application to FmHA. Among other things, the pre- application letter includes a brief description of the proposed project, including information on the employment 17 opportunities to be generated. The applicant may also provide copies of any available feasibility studies, financial state- ments, or other pertinent information at this time. Since April 1975, FmHA has permitted applicants, at their option, to omit the preapplication step and submit a completed appli- cation form. In an effort to coordinate Federal, State, and local government efforts, applicants are ordinarily required to obtain clearance from State and local governments for loans of more than $100,000. Smaller loans for projects that have no significant impact outside the local community are exempt from this approval process. During fiscal yars 1974-75, all loans had to be pro- cessed through FmHA's national office. The preapplication and accompanying data were reviewed at the FmHA State office and, if the proposed project appeared feasible, information on the loan was submitted to the national office for its review. Generally, at this time the applicant was requested to provide FmHA with the necessary data for forwarding to the Department of Laoor (DOL) so that it could, as required by section 118 of the Rural Development Act of 1972 (7 U.S.C. 1932), certify that the loan would not result in a transfer of employment or business from one area to another and that it would not result in an overproduction of products or services in the area. Currently FmHA State offices can approve loans for which the guaranteed indebtedness does not exceed $500,000 without prior review and concurrence by the national office. The State office can also approve loans for which the guaranteed indebtedness does not exceed $750,000, provided the loan has been reviewed and concurred with by an official designated by the national office. The national office must review and concur with approving all loans for which the guaranteed indebtedness exceeds $750,000 and with all insured loans, regardless of the amount. The average and range of processing time required for each stage of the loan approval process is shown on the next page. 18 Loan processing time Number (days) of loans Loan processing stage reviewed Average Range Preapplication to State a/ 32 87 11 to 234 office approval State office approval to b/ 33 36 10 to 91 national office concurrence National office concur- c/ 34 61 2 to 176 rence to conditional commitment Conditional commitment d/ 35 61 1 to 251 to loan closing (ex- cluding construction time) Total (excluding 35 252 74 to 551 construction time) a/The preapplication stage was omitted for one loan and we were unable to determine the processing time required for this stage for two loans. b/We were unable to determine the processing time required for this stage for two loans. c/We were unable to determine the processing time required for this stage for one loan. d/FmHA officials stated that they have little or no control over the length of time required for this stage which primarily involves actions by applicants and lenders. Our review of the loan files and discussions with lenders, borrowers, and FmHA officials indicated that the following factors contributed to delays in processing lcan applications: -- FmHA regulations were unclear and frequently changed. -- FmHA personnel were inexperienced, inadequately trained, and unable to handle the work load. -- Applicants experienced difficulties in finding lenders willing to make loans. 19 -- National office review was lengthy. -- Borrowers and lenders did not supply needed informa- tion in a timely manner. We believe that more experienced staff and clearer instructions could have helped minimize loan processing time and, at the same time, increased the quality of the loans approved. recognize that some of these problems occurred because We the program was relatively new and that clearer regulations and more experienced staff should decrease the loan processing time in the future. The following examples and complications experiencedillustrate some of the difficulties in processing a loan. A $300,000 loan guaranteed by FmHA in June 1975 required 282 days to process. Some of the major factors contributing to the length of processing time are discussed below. -- The borrower submitted the application about 2 months after submitting the preapplication material. According to the borrower, an FmHA official was under the mistaken impression that FmHA had contacted him earlier and asked that the application be submitted. -- The State office required about 113 days to review and approve the application. The record showed that this process was delayed because of the need to obtain additional information from the borrower and the lender. -- The FmHA national office required about 19 days to review the loan. This process was delyed somewhat because the State office had submitted incomplete information to the national office. -- FmHA guaranteed the loan about 2 months after issuing the conditional commitment to guarantee the loan. A delay in this process occurred because FmHA did not ask the borrower to submit the pro- jected cash flow statements with the preapplication or application material but rather waited until after the loan was conditionally approved. 20 -- Part of the delay in processing the loan occurred because FmHA did not obtain and submit to DOL for its certification after the material receiving the preapplication but rather waited until about 6 months later. DOL certification required months. about 3 A $63,000 loan guaranteed 233 days to process, excluding by FmHA in April 1975 required project construction time. Some of the major factors contributing to delays in processing are discussed below. --A delay of about 1 month occurred because the county supervisor did not submit all mation with the preapplication and required infor- the State office had to request it. time was lost when -- A delay of about 2 months occurred because the county supervisor submitted incomplete information application and the State office had with the to return the application for completion. -- A delay of about 1 month occurred in final approval because of the need to wait for character on the borrowers and the DOL certification.clearances -- A delay of about ]-1/2 months occurred because the lender incorrectly prepared the loan closing documents. -- The county supervisor and the State B&I loan specialist said their inexperience and inadequate training contributed to delays in processing loan. this BUSINESSES' POTENTIAL FOR SUCCESS NOT ADEUATELY EVALUATED We noted a number of weaknesses in the loan evaluations made by FmHA and the lenders. Correction is needed if FmHA is to achieve its of these weaknesses goal of making only quality loans. FmNA and lender personnel approving the leans did not responsible for -- obtain required financial data--both projected, historical and 21 -- obtain updated financial data before approving loans, -- qustion sales and profit projections of applicants w. appeared overly optimistic and/or inadequately supported, -- adequately determine why existing businesses were operating at a loss or experiencing problems, -. require applicants to contribute sufficient equity to the businesses, -- adequately evaluate applicants' management capability or market analysis, -- obtain sufficient information to make a complete and adequate evaluation, and -- effectively use consultants in evaluating loans. Some of the problems because FmHA pers nnel and noted above apparently occurred lenders were not sufficiently familiar with FmHA's regulations and instructions on evalu- ating proposed loans. In interviews with the FmHA county supervisors and lenders involved in the lcans reviewed, we were told by 24 of the 32 lenders and 22 of the 33 vizors that they were not familiar enough with FmHA sups-- feasibility requirements to comment on their adequacy.project comments received from FmHA personnel as to why FmHA Other require- ments were not followed were that they did not believe data was needed and that they did not have the sufficient time to obtain and/or analyze the data. Other reasons for the problems noted appeared to be that the FmHA regulations and instructions were silent or vague on the types of data to be obtained and the to be used i.n evaluating proposed techniques lenders and 11 of the supervisors loans. In fact, 22 of the interviewed told us that they elieved there was a need for FmHA to develop handbook which, among other things, would describe a lenders lender's responsibilities for making and servicing the loans. The loans reviewed had been made for relatively short periods of tme at the time of our visits to the borrowers-- from 8 to 26 months. (See app. I.) Because of this, it is 22 difficult to accurately gage the effect the noted loan evaluation weaknesses will have on the success the loans in terms of poviding lasting benefits or failure of communities. Several of the borrowers, however, to the rural perienced financial difficulties at the time had ex- of our visits as follows. -- One borrower closed his business loan was paid in full) and another was in the process of going out of business after their businesses failed. -- One borrower had filed for bankruptcy. -- Four borrowers (including the borrower who had filed for bankruptcy) were delinquent on their loan ments from 47 to 161 days. pay- -- Because of unprofitable operations, one borrower changed his manufacturing operations from homes to cabinets and trunks, another had mobile part of his business premises, and another to lease sold his business. Need for improvements in obtaining and analyzing financial data Reviewing and analyzing a business' financial an important element in judging its potential data is for success. Recognizing this, FmHA requires existing businesses, applying for a loan, to submit audited financial when for the latest 3 fiscal years. statements Of the 25 loans we reviewed which were made businesses, however, the financial statements to existing tained for all 3 fiscal years in 16 cases were not ob- and statements ob- tained for 21 of the loans were not audited as required. Further, the financial data reviewed was generally not current. The elapsed time between the period latest financial statements obtained by FmHA covered by the for review and the dates the loans were closed averaged 193 from 61 to 455 days. days and ranged Loan applicants for both existing and new required to provide FmHA with 3 -year projected businesses are loss and cash flow statements along with a profit and upon which the projections are based. These list of assumptions projections, along with the financial statements submitted businesses, are to be reviewed by FmHA and by existing lenders for loan 23 approval purposes. Adequate analysis of this data is crucial in determining whether a business will generate sufficient cash flow and income to be viable. For 24 of the 35 closed loans reviewed, projected financial statements were not obtained in 4 cases and the statements did not cover the required 3-year period in 20 cases. Further, in 29 of the 31 cases where projected state- ments were received for all or part of the 3-year period, the assumptions upon which they were based were either inadequate or were not obtained. We do not believe projections can be fully and adequately analyzed without knowing the assumptions upon which they are based. Furthermore, even in those cases where the required financial statements were obtained, they were not always adequately reviewed dnd evaluated by FmHA and the lenders. In some cases we found that the projections were based on erroneous data and in some cases the projections appeared to be unrealistic when compared to the business' sales and pro- fits of prior years. For example, in the case of a $14,000 loan approved in August 1974, the applicant submitted financial projections for a -year period only, and the projected earnings were overstated because the income was not reduced by the cost of goods to be sold. In the case of a $560,000 loan approved in October 1974, FmHA personnel did not question the basis for the applicant's projections even though projected sales were about 590 percent above those actually achieved in the prior 10-month period. In the case of a $1.7 million loan in process as of June 30, 1975 (closed in November 1975), the State office, in replying to a national office inquiry, stated that "the applicant's projections and assumptions are of significant validity to be realistic and attainable." This statement is questionable when a comparison of the projections to prior achievements is made as shown on the next page. Further, no support or rationale was used to explain how the optimistic sales and profit projections shown on the next page would be achieved. 24 Amount of profit Fiscal year Amount of sales or loss (-) 1974 (actual) $ 6,963,469 1975 (actual) $ -785,053 7,167,030 -1,264,606 1976 (projected) 13,000,000 1977 (projected) 16,000,000 1,470,000 1978 (projected) 2,190,000 18,000,000 2,510,000 Another area which indicated that FmHA and lenders were not adequately reviewin and/or considering 3 was in regard to FmHA's requirement financial data sufficient tangible assets in the that applicants have business. In this regard, FmHA's regulations provide that applicants quired to have a minimum of 10 percent normally be re- business unless other credit factors equity 1/ in the centage. For 6 of the 35 loans we warrant a higher per- 10-percent equity requirement was reviewed, however, thr loans, the applicant actually had not met. For 2 of the 6 a negative equity, i.e., his liabilities exceeded his assets. One example in which a borrower did not have the minimum equity required involved a $175,000 July 1974. An unaudited balance loan P-Ir:? guaranteed in 1973, the latest data available tosheet dated December 31, approval, showed that the company FmHA at the time of loan $91,200 and liabilities of about had assets of about $89,000, or an equity of about $2,200 (2.4 percent). This undercapitalized condition in that showed a significantly creditors the borrower had only $1 for vety $40 owed inve ted in the business. In February 1975, FmHA made an insured The last audited financial statements loan of $900,000. showed an equity of 1.8 percent in prior to loan approval May 1973, unaudited statements showed an equity of 4.4 in April 1975, 2 months after loan percent in May 1974, and equity was nine-tenths of 1 percent.approval, the reported To be of maximum use to FmHA in evaluating loans, financial statements should be audited to and approving help in- sure the reliability of the data presented. Also, the most current statements available should in making informed judgments about be obtained to assist loan approvals. The l/Equity is defined as the difference liabilities, or the net wort', of between the assets and a business. 25 following schedule shows that FmHA did not, in many instances, use current and reliable data in reaching final decisions approving the 25 loans made to existing businesses. in Number of days between dates of current state- Number of statements ments and dates loans approved Audited Unaudited Total Under 100 1 4 5 101 to 200 2 6 8 201 to 300 - 8 8 301 to 400 1 1 2 401 to 500 1 1 19 a/ 24 a/We were unable to determine whether or not one statement was audited. The loan of $1.7 million discussed on pages 24 and 25 serves as an example of FmHA personnel not obtaining also dering the latest financial data available. The loan ana consi- was guaranteed by FmHA in November 1975. Although FmHA personnel were made aware that audited financial statements of the cant's operations for the fiscal year ending June 30, appli- 1975, were available and differed materially from the prior year statements, they were not obtained and reviewed before loan was approved. An FmHA official, when asked whetherthe recalled being made aware of this information, indicated he to us that he had but said that he did not obtain or review the statements because he was extremely busy about the time this loan was closed. The material changes in the applicant's financial condition are shown below. Period covered by financial statements 9-month period ending FY 1973 FY 1974 3/31/75 note a) FY 1975 Net worth $2,159,697 $1,387,369 $289,810 $ 122,763 (equity) Net loss 365,049 785,053 Not shown 1,264,606 a/Unaudited statements. FmHA regulations provide that lenders are accountable for making and servicing loans in a manner that will properly protect FmHA's interest. The regulations provide that lenders 26 are responsible for conducting certain investigations necessary to determine the soundness of the loan and that the contract of guarantee is unenforceable if it is determined that the lender did not comply with its loanmaking respon- sibilities. a-rte these requiremients, however, for all of the 32 guarinfted loans reviewed, the lenders either had not per- formed any detailed analysis or had not provided FmHA documentation on their analyses. Documentation of any analy- sis made by the lenders is necessary to enable FmHA to deter- mire whether a lender has adequately fulfilled its loan evalu- ation responsibilities and to assist FmHA in judging the sound- ness of the loan. Economic and technical feasibility studies FmHA regulations require lenders to submit to FmHA an acceptable economic and technical feasibility study covering (1) engineering matters, (2) adequacy and required training of management personnel and labor supply, (3) adequacy and sources of raw materials and supplies, (4) adequacy of buildings, land development, and transportation, (5) market analysis, and (6) adequacy of power, water, and waste dis- posal services. In reviewing the 35 loans, we found that there was a wide range in the degree of sophistication and quality f the feasibility studies performed. For example, in the case of a loan made to establish a restaurant, the market analysis was limited to FmHA personnel questioning several local leaders about the need for a restaurant, while in other cases, more comprehensive market analyses were made. We believe there is a need for additional guidance to obtain more uniformity in the quality of the studies, particularly market analyses and assessments of management capability. Market analyses include a review of such matters as marketing agreements and contracts, sales trends of the firm and the industry, and surveys to determine supply and demand. These matters were no,; always considered by FmHA and the lenders in approving the loans we reviewed. In six cases the applicants' prior sales did not support projections and in three cases publications on industry trends were not consulted. 27 For example, a Department of Commerce publication available prior to FmHA's approval of a $110,000 loan June 1975 to a foreign car dealer stated that sales in cars had decreased substantially and would decrease of foreign further. The State B&I loan specialist, however, did not consult or any similar publication. The borrower gave up this his car dealership franchise in April 1976, citing depressedforeign foreign car sales as a major reason for his failure. though the borrower continued selling used cars and Al- payments were current as of December 1976, he told his loan he plans to go out of business entirely. us that Management capability should evaluated more thoroughly by FmHA have been questioned or and/or the lender for nine of the loans reviewed. For example, although analyses applicants' financial statements revealed problems, of such as lack of profits, inadequate working capital, and under- capitalization--factors indicative of management weaknesses-- these matters were not always addressed so that corrective action could be taken. The two loa.ls discussed in detail on pages 33 through 37 illustrate some of these problems. Since July 1974, FmHA has required that feasibility studies be made by independent recognized consultaCts for all loans of $1 million or more. FmHA may grant exemptions to this requirement when the credit factors of the are such that a sound credit determination can be applicant reached without an independent study. The costs of feasibility studies are to be paid by the applicants and may be included in the loan amount requested. Five of the 35 closed loans and 5 of the 10 loans process that we reviewed were for $1 million or more. in 6 of these 10 loans FmHA waived the requirement for For independent feasibility study. There were factors, an which raise questions as to whether FmHA's exemption however, for credit worthiness were met. In the case of two criteria loans, for example, the applicants did not meet the of the six equity requirement. 10-percent NEED FOR IMPROVEMENTS IN DETERMINING ADEQUACY OF LOAN SECURITY FmHA regulations require that B&I loans be fully secured by collateral and that, usually, the personal and corporate 28 guarantee / of the borrower will also be obtained. The regulations, however, do not require that appraisals of collateral be made by independent appraisers, nor do they provide guidance on the types of appraisal methods to be used. Further, in at least 5 of the 45 cases reviewed, FmHA pers- onnel did not adequately review and analyze the value assigned to the collateral. Also, FmHA personnel did not always adequately review and verify the financial data submitted in conjunction with personal and corporate guarantees. Appraisai procedures FmHA regulations provide that property serving as collateral for loans will be appraised by a qualified ap- praiser to determine its "current value." FmHA personnel generally make the appraisals for insured loans. For guaranteed loans, lenders are responsible for determining that the appraisers used are adequately qualified and experienced. In evaluating loans for approval, FmHA pers- onnel are required to determine whether the collateral is sufficient to reasonably assure the repayment of the loan in case of default. For many of the loans reviewed, those closed and in pro- cess, FmHA did not adequately review the qualifications and/ or independence of the appraiser. For 9 of the 45 loans, the appraisal was made by an official of the lending institu- tion and in 3 cases by individuals employed by the borrower. In 2 of the 9 instances where the appraisal was made by the lender, the lenders' exposure to loss on prior loans made to the applicant was reduced. (See pp. 32 and 33 for a discussion of reductions in exposure to losses.) For the remaining 33 loans, all or part of the collater- al was appraised by independent appraisers in 25 cases and cost or book value was used in lieu of appraisals in 8 cases. FmHA regulations do not specify or provide guidance on the types of appraisal methods acceptable, nor do they provide guidance on the use of cost data in lieu of appraisals and the extent to which such cost data is to be verified. 1/A personal guarantee is, in effect, a pledge of one's personal assets to repay the loan in case of default. Where a parent corporation is involved, a corporate guarantee may be required. 29 The above problems, when coupled with lack of an adequate review and analysis of the values assigned collateral by FmHA personnel, can result in questionable values. The following example illustrates the need for additional guidance on the types oL acceptable appraisal methods and the need for FmHA personnel to be more deligent in reviewing and analyzing appraisals. In March 1975 FmHA guaranteed a $2.2 million loan to re- fir.ance the existing debt of a manufacturer. In February 1975 an independent appraiser reported that the collateral, made up of land, buildings, and equipment, had the same $5.5 million "in-use market value" as it had when he previously appraised it in February 1973. The appraiser, in making the 1973 appraisal, stated that his appraisal was based on the income appraisal method and a major assumption was that the firm would continue profitable operations. However, in January 1975, about 1 month before the updated appraisal was made, the firm's reported loss for the prior 9-month period was about $1.3 million. We believe that this and other significant factors affecting the ap- praisal could have been uncovered by FmHA personnel had they more carefully reviewed the appraisal. Furthermore, the lender obtained a third appraisal in May 1976 after the firm filed a petition for bankruptcy. This appraisal established the "current-market value" f the property at $1.3 million. On the basis of this value FmHA could lose up to about $900,000, i.e., 90 percent of the difference between the outstanding loan balance of about $2.3 million in April 1976 and the estimated market value of $1.3 million. 1/ This example illustrates the need for FmHA to provide guidance to its personnel on the different types of appraisal methods which are acceptable. We believe that for loan security purposes, appraisal methods designed to arrive at fair-market values would be most appropriate. In seven cases in which cost or book valte was used to establish the value of collateral, there was little or no 1/In our update of this matter in August 1977, an agency official told us that the property was sold during fore- closure for $700,000. 30 cost verification made. On the other hand, for one insured loan the county supervisor approved individual for loan funds covering expenditures made in requisitions conjunction with the project. Personal guarantees FmHA regulations provide that personal guarantees borrowers and others having a substantial of interest business will usually be required. Guarantees in the of parent, subsidiary, or affiliated companies may also be required. The regulations provide that the will be required in sufficient amounts personal to guarantees repayment of the loan and provide adequate reasonably assure security. The personal guarantee requirement may be waived certain instances where the proposed grantors by FmHA in the guarantee. Guarantors are required to cannot provide current financial statements showing their provide FmHA with personal net worth. For nearly all of the 45 loans reviewed, FmHA did not adequately review and verify the financial personnel mitted by the guarantors. For example, we data sub- where the reported figure for the guarantor'sfound 12 instances personal net worth included his interest in the firm receiving the loan which, according to FmHA's regulations, should cluded. We believe this information would not be in- have covered had FmHA personnel adequately reviewed been dis- guarantors' financial statements. The followingthe illustrates this point. example In June 1975, FmHA guaranteed a $110,000 loan. guarantor's financial statements showed The his personal net worth to be about $216,000; however, about amount represented his interest in the firm $176,000 of this receiving the loan. The guarantor's personal net worth for loan purposes, therefore, was only about $40,000. Also, financial statements submitted by were not current and were not updated before the guarantors the loan was approved. The average number of days between the statements submitted and the dates 33 of the dates of loans were approved was 211 days, and ranged the 35 closed 440 days. For the two remaining closed loans from 14 to obtain personal guarantees. FmHA did not 31 LOANS USED FOR REFINANCING PURPOSES SHOULD NOT BE USED TO REDUCE LENbERS' EXPOSURE TO LOSS ON PRIOR LOANS In September 1974 FmHA revised its regulations to provide that loans would not ordinarily be made to refinance debts, except that, with national office approval, loans could be so used when necessary for the success of a project nd arrangements for continuing the debt could not be maze. FmHA revised its regulations again in December 1975 to allow loans for refinancing debts of sound projects when determined necessary to stabilize the economic base of the rural area and increase or maintain employment. In evaluating loans for refinancing debt, FmHA personnel are to determine whether the loan is essential to restructure the applicant's debts, enabling the business to succeed rather than merely converting an unsound loan to a guaranteed basis or to bail out lenders having such loans. Despite the rather rigid FmHA requirements, loans were frequently made to refinance debts. Nineteen of the 35 guaranteed loans closed at the time of our review resulted in reducing exposure to losses by participating lenders and repayment of debts to other lenders and creditors. The following schedule shows for the 19 loans the lenders' and creditors' exposures before and after the loan guarantee. Exposure before Exposure after Reduction in loan guarantee loan uarantee exposure --------------------(millions)---------- Participatinq lenders $ 9.5 $1.6 $ 7.9 Other lenders and creditors 6.0 - 6.0 Total $15.5 $1.6 $13.9 An example of a lender's reduced exposure involved a loan of $500,000 guaranteed by FmHA in May 1975. About $345,000 of the loan proceeds were used t refinance existing debt owed the lender, thereby reducing the- lender's exposure to loss by about $295,000 as shown on the next page. 32 Exposure before loan $345,000 Less exposure after loan (10 percent of $500,000) 50,000 Reduction $295,000 As discussed on page 50, the use of the loan proceeds to reduce the lender's exposure appeared to be contrary to FmHA's understanding of how the funds were to be used. The following two examples are discussed in detail to present a more complete description of some of the problems involved in evaluating loans. Example 1--On March 24, 1975, FmHA guaranteed a $2.2 million loan to an existing business to refinance the follow- ing outstanding debts: $900,000 to the lead lender of the guaranteed loan, $800,000 to a participating lender in the guaranteed loan, and $500,000 to other creditors. FmHA's decision to guarantee the loan was based, in part, on its review of the business' independently audited financial statements for the 3-year period ending March 31, 1974; projected sales and profit and cash flow figures for the 3-year period ending August 31, 1977; an independent appraiser's report on the value of the collateral securing the loan; and unaudited personal financial statements of the guarantors. Financial statements FmHA obtained before guaranteeing the loan showed that the business, as of March 31, 1974, was undercapitalized in that the stockholders' equity was about 8 percent rather than te 10 percent required by FmHA regulations. Because of this, FmHA and the lender required the applicant to convert, by March 31, 1975, about $500,000 of debts owed to its stockholders to preferred stock. In reviewing the projected sales and income figures, FmHA did not question the projected sales for the 1-year period ending August 1975, which were 18-percent higher than the company's prior year sales, even though the applicant failed to provide FmHA with its assumptions supporting the projected figures. Information available at the time of FmHA's review indicated that there was an industrywide decline in sales of the company's major project. Despite 33 the lower than required equity and the absence to support projected sales, FmHA waived the of assumptions requirement for an independent feasibility study. Although updated financial data was available FmHA conditionally guaranteed and approved the before 1975, FmHA's decision to guarantee the loan was loan in March financial data which was almost 1 year old. based on The updated cial data showed that the firm's financial situation finan- riorated during the 1-year period. An unaudited had dete- nancial statement for the 9-month period ending interim fi- 1975, showed that the firm's net worth had plungedJanuary 4, $614,000 to a negative net worth of about $670,000, from had decreased from about $15.3 million to about sales $12.7 million (annualized basis), costs of goods sold were than actual sales, and the firm incurred about $50,000 less a net loss of about $1.3 million. Also, a major credit service classified in September 1974 the financial condition of the "unbalanced" and commented that debt exceeded firm as than 10 to 1. equity by more FmHA did not follow up on the agreement that convert $500,000 owed to its stockholders to the firm preferred We found that the agreement was not fully complied stock. with in that only about $270,000 was converted. We believe should have assured compliance before guaranteeing FmHA the loan. As discussed on page 30, FmHA the collateral made in February 1973accepted an appraisal of and updated in February 1975 which was based on in-use market market value. The appraiser used the value rather than fair- income appraisal method and stated in his appraisal report that this contingent condition. In fact, the February was an important 13, 1975, update was based on the assumption that the firm would continue pro- fitable operations. However, the 9-month interim statement through January 4, 1975, showed a $1.3 financial loss. After the firm filed for bankruptcy, million which was made in May 1976, established the a third appraisal value" of the collateral at $1.3 million, or "current-market $4.2 million less than the $5.5 million appraised value accepted less than 16 months earlier. by FmHA Two of the six banks participating in the guaranteed loan had reductions in exposure to loss--the which made a $800,000 loan and a second bank lead lender which made a $100,000 loan. 34 The loan guarantee reduced lenders' exposure by about $2.1 million as shown and other creditors' below. Participating lenders (note a) Other Lender Lender B creditors Total Exposure before loan $928,110 $806,806 Less exposure after $508,267 $2,243,183 loan 80,000 10,000 90,000 Reduction $848,110 $796,806 $508,267 $2,153,183 a/Lender A, the lead lender, loaned the applicant $800,000 and lender B loaned the applicant $100,000. $1.3 million of the loan was made by The remaining four participating lenders who had no reduction in exposure to loss. The firm filed for bankruptcy in February 1976 and liqul- dation losses to the Government appear likely. Example 2--On July 24, 1974, FmHA guaranteed loan to an existing business to be used a $175,000 for plant expansion, $67,000 for working as follows: $67,000 for debt retirement. capital, and $41,000 FmHA's decision to guarantee the loan was based on pre- application material; the favorable performance try, including the number of businesses of the indus- ations; the lender's determination expanding their oper- that the loan was sound; and on the value of the collateral pledged the loan. as security for The preapplication package includeu prepared by a Mississippi State agency, certain material cial statement covering a 4-month period,an unaudited finan- income and cash flow statements, and 2-year projected a projected balance sheet for the first year of operation. Although FmHA based its decision, in part, on the mate- rial prepared by the State agency and that the business operation was sound, the lender's opinion an official of the State agency that prepared the material neither evaluated the feasibility told us that the agency of the loan nor the firm's financial data, but rather merely assembled mation and helped the applicant in his application infcr- dealings with FmIIA. The lender told us that his opinion regarding the soundness 35 of the loan was based on the information pesented by the State agency. The lender also said that the loan was marginal but thought assistance was warranted because (1) the appli- cant w;as a good customer, (2) the loan would be used to create jobs, (3) there was a demand for the firm', roduct, and (4) the business would be an asset to the community. The 4-month financial statement submitted with the pre- application (only statement available because the business was organized in September 1973) was unaudited and unsigned and apparently was not evaluated by the lender or FmHA. Our review of the statement showed that the firm was undercapi- talized in that its net equity was less than 3 percent rather than the 10 percent required by FmHA. In addition, the state- ment showed a bank overdraft of more than $17,000. In reviewing the projected sales and income, neither the lender nor FmHA questioned the projected sales for the 1-year period ending December 31, 1974, of $2.2 million although actual sales for the 4-month period ending December 31, 1974, were only about $100,000. The applicant did not furnish FmHA the assumptions supporting the projected figures, but did state that the firm planned to establish new product lines and double its operating capacity. We believe the lender and FmHA should have questioned this statement based on the 4-month financial tatement which showed an undercapitalized position and profit of only about $1,200. Also, the lender and FmHA should have questioned the projected sales figures based on available information which showed that the industry was experiencing a slowdown and that several competitors in the surrounding vicinity had been found to be experiencing problems due to the depressed economy. FmHA did not update the financial data of the business between the time of preapplication and loan approval, about 7 months. Had FmHA updated the economic and financial condi- tion, it would have learned that (1) due to a truck strike the business could not ship its product and, as a result, lost ts largest customer, (2) a shortage of working capital was adversely affecting its manufacturing operations, (3) bank overdrafts were common, and (4) the business was losing money. In April 1975 the lender considered initiating foreclo- sure proceedings because the borrower was delinquent on his loan repayments. However, at the time of our visit in June 36 1976 the borrower had managed to bring current by leasing part of the premises his loan payments to other firms. The collateral securing the loan $230,000 which, if accurate, would was appraised at about be sufficient to prevent any, losses to the Government in case guarantee was also obtained from of default. A personal the applicant. About $75,000 of the loan proceeds existing debts to the lender, thereby was used to repay reducing potential exposure to loss from $75,000 the lender's of its $175,000 guaranteed loan). to $17,500 (10 percent CONCLUSIONS FmHA, in order to achieve its goal and to provide for more lasting economic of making quality loans. areas, should take action to (1) benefits to rural further revise, clarify, and strengthen its regulations and instructions approval procedures and (2) see that governing loan its procedures are followed. Definitive criteria for determining potential for success is needed. a loan applicant's Unless FmHA and lenders adequately analyze and verify many of the weaknesses observedinformation applicants submit, will Because each loan presents a number continue to occur. of different circumstances, however, FmHA must emphasize to its personnel and participa- ting lenders that each loan applicant's and projections must be adequately financial statements analyzed and all question- able items challenged and clarified. of each analysis should be documented. Furthermore, the results FmHA and lenders must obtain sufficient including updated and independently information, audited financial state- ments and projected sales, profit, supported by assumptions to permit and csh flow statements of a business' potential for success.an adequate evaluation to incorporate into its procedures Moreover, FmHA needs the variots techniques, such as financial ratio analyses, to be used in evaluating and approving loans. To attain greater uniformity in the ations of loan applicants' quality of evalu- financial data and overall economic feasibility, FHA should develop a handbook for lenders. The handbook should set forth FmHA's requirements for lean appro- val and clearly state the responsibilities this process. of the lenders in 37 Regarding economic feasibility studies, FmEA needs to provide additional guidance on what constitutes an adequate study, stressing particularly management capability and market analysis, and closely monitor all loan applications for $1 million and over to see that the regulations requiring feasi- bility studies by independent consultants are followed. Also, FmHA should require feasibility studies by independent con- sultants for loans of less than $1 million which could be considered marginal, i.e., one where the applicant is experi- encing losses, has inadequate security, does not have suffi- cient equity, etc. To see that collateral securing loans is adequate, appraisers should be independent and required to use appraisal methods designed to establish fair-market values. In those instances where cost data is used in lieu of an appraisal to determine the value of the collateral, such cost data should be adequately verified and reviewed for accuracy. Further, all appraisals should be analyzed by FmHA personnel experienced with appraisals to determine whether the proce- dures followed in arriving at the appraised value were ade- quate. In determining whether personal guarantees provide the loan security necessary, the most accurate and current data available on the guarantor's personal net worth must be obtained. To accomplish this, FmHA personnel should review and verify the data provided by the guarantors in their finan- cial statements. FmHA approved a number of loans involving the refinancing of debts of participating lenders and payments to other len- ders and creditors. Some of these approvals were questionable because they reduced the participating lenders' exposure to loss or bailed out lenders and creditors which were in a posi- tion to sustain a loss. Sich questions o£ lender bailouts could be eliminated by requiring participating lenders to maintain the same level of exposure they had on any prior loans being paid with the proceeds of loans guaranteed by FmHA. RECOMMENDATIONS We recommend that the Secretary of Agriculture direct the FmHA Administrator to: 38 -- Emphasize to FmHA personnel and lenders the need to follow prescribed loan evaluation applicants to submit all needed procedures, require current financial data, fully information--including provided, and document their analyze the information justification for recom- mending loan approval, including questionable items and the an explanation of any disposition made thereof. -- Clarify guidelines on how should analyze and verify Fmw"A personnel and lenders information borrowers submit and develop a lenders handbook ders' responsibilities in setting forth the len- loans. approving and servicing -- More closely monitor loans lion or more to see that being approved for $1 mil- FmHA's feasibility studies by independent regulations requiring more closely followed and consultants are by independent consultants require feasibility studies for $1 million which are of marginalloans of lass than quality. -- Revise the regulations governing that (1) appraisals of collateral appraisals to require guaranteed loans be made used to secure pendent of by appraisers that are inde- methods be both the used whichborrower and lender, (2) appraisal are designed to arrive at fair-market value of property the (3) adequate verification serving as collateral, of the serving as collateral be required cost of the property is to be used in lieu of an when such cost appraisals be analyzed by appraisal, and (4) all ence in appraisal methods FmHA personnel with experi- and techniques. -- Emphasize to FmHA personnel the need to review and verify current financial data providing personal guarantees. of borrowers and others -- Require that lenders participating by FmHA maintain the same in loans guaranteed level of exposure they had on prior loans. AGENCY COMMENTS AND OUR EVALUATION FmHA said that many of the by our report have been improved program deficiencies indicated training of personnel, revision considerably by further of its regulations in December 1975, and the use of a new project July 1976. It said that these summary frm developed in ther by the instructions issued actions will b enforced fur- on July 8, 1977, to State 39 directors. FmHA said also that the completion of the project summary by its personnel assures that the most important credit factors have been considered and documented for each loan. (The project summary calls for information on projected employment, market analysis, management capability, financial statements on past and projected operations, type and value of loan collateral, applicant repayment ability, lender servicing plan, and field personnel's comments and recommendations concerning loan approval.) FmHA said that it (1) will assess the need for a lenders handbook setting forth lenders' responsibilities in approving and servicing loans and (2) agreed with our recommendations concerning feasibility studies. In commenting on our recommendations concerning apprais- als, FmHA said that it has revised its regulations to require the use of qualified appraisers and that its forms provide for the use of fair-market values. FmHA said that for small loans, its regulations provide flexibility for estimating mar- ket value by lenders and FmHA personnel because costs for professional appraisals on such loans could be prohibitive. It said that it is also conducting training courses on how to evaluate appraisals. FmHA's revised regulations neither require the use of independent appraisers nor do they provide guidance on the circumstances under which independent appraisers should be used. In view of our findings that FmHA personnel accepted appraisals made by officials of lending institutions--inclu- ding those whose exposure to loss was rduced--and of bor- rowers' firms, we believe that further guidance is warranted concerning the need to use independent appraisers. Regarding FmHA's comments on possible exceptions for small loans, we would point out that Government agencies operating housing loan programs (including FmHA), which involve relatively small loans, require that appraisals be made by their own personnel, personnel of other Government agencies, or by independent apraisers. FmHA agreed that current financial statements are desir- able and should be secured at the time the application is accepted but indicated, however, that this was difficult in some cases because the processing time for its loans is sometimes lengthy. FmHA said that it requires lenders to certify prior to the issuance of the guarantee that there has been no adverse change in the borrower's financial condi- tion. FmHA also said that its field staff was advised of the 40 importance of reviewing and analyzing current financial statements of guarantors by the July 8 memorandum to its State directors. FmHA said that while it agrees with us that in refinan- cing debts it is desirable to keep the lender from reducing its exposure, as a practical matter, this is not always fea- sible. FmHA explained that many small communities have only one bank and that if it prohibited lenders from reducing their exposure, many businesses would cease to exist because of a lack of financing. Such a prohibition, FmHA said, may lead to forcing borrowers to change lenders to avoid regula- tion requirements and also could eliminate the ability of banks to'provide a line of credit for short term financing needs due to lending limits or bank liquidity. Nevertheless, in its July 8 memorandum, FmHA advised its State directors that in cases where the lender is reducing its exposure, the loan file should be carefully documented and that refinan- cing must make good economic sense and save existing employment. If FmHA is to continue the practice of guaranteeing loans which result in reductions in lenders' exposure to loss, we believe that, as a minimum, FmHA should require that such loans be approved at the national office level and that the reasons why it was not feasible to require the lender to main- tain the same level of exposure be documented. 41 CHAPTER 4 IMPROVEMENTS IN LOAN SERVICING AND MANAGEMENT ASSISTANCE EFFORTS COULD ENHANCE BORROWERS' CHANCES OF SUCCESS FmHA could increase its chances that business and indus- trial loans will provide lasting benefits to rural communities by improving its loan servicing and management assistance efforts. More effective measures are needed for (1) the timely identification of actual and potential problems of borrowers and the analysis of such problems to determine their causes and possible solutions, (2) assurance that loan proceeds are used only for approved and authorized purposes, and (3) the development of a management assistance program. BETTER AND MORE TIMELY INFORMATION NEEDED ON BORROWERS' PROBLEMS AND PROGRESS An effective loan servicing program designed to result in quality loans requires that early identification of actual and potential problems so that corrective actions can be taken. Improvements needed in this aspect of FmHA's B&I loan program include -- prompt notification of borrower delinquencies by lenders to FmHA, -- an effective followup system so that borrowers submit required financial statements, --a documented evaluation of borrowers' financial statements by lenders, -- more timely and effective analysis of borrowers' financial statements by FmHA, and -- more frequent and better planned visits to borrowers by both lenders and FmHA personnel. Lenders have the primary responsibility for servicing guaranteed loans, including obtaining and analyzing borrower financial statements and protecting and monitoring security. FmHA is responsible for supervising the loan servicing per- formed by the lenders and for servicing the insured loans it makes. 42 According to FmHA the primary purpose of loan servicing is to prevent problems. FmHA maintains that prompt followup on delinquent payments and early recognition and solution of problems are keys to resolving delinquencies. The lenders' servicing role appeared to be limited pri- marily to collecting and overseeing loan repayments. Little or no effort was made by lenders to document any analyses of borrowers' financial statements or of the results of any visits to borrowers' businesses. These problems occurred, in part at least, because some of the lenders were not adequately aware of their responsibilities--three of the lenders we visited did not even have copies of FmHA's regulations and others told us that they were not familiar enough with the regulations to comment on their adequacy. FmHA has no formalized method of supervising the lenders' loan servicing role. FmHA personnel sometimes visited len- ders, but FmHA regulations neither require nor discuss visits to lenders, nor do they prescribe any other procedures for providing adequate supervision. FmHA personnel are also required to obtain and analyze borrowers' financial st.tements. Although this duplicates the lenders' responsibilities, we believe it is highly desir- able considering that FmHA has no assurance that the lenders are performing this function adequately and that FmHA is responsible for up to 90 percent of any loss incurred. How- ever, 30 of the 33 supervisors interviewed told us that they lacked sufficient time to service loans adequately. The benefits of FmHA's analyses of financial statements were diminished, however, because the statements were not received or reviewed in a timely manner. Several of the FmHA supervisors told us that they lacked the time to follow up on overdue statements and several of the loan specialists told us that their workload preveited them from promptly reviewing the statements received. Fourteen of the super- visors we questioned said that they were not sufficiently trained or experienced to service B&I loans adequately. More timely notification of borrower delinquency needed A clear signal that borrowers may be experiencing prob- lems and need assistance is sounded when they fail to make loan repayments on time. Lenders and FmHA must react promptly and effectively to such warnings to have an effective loan servicing program which will help keep losses to a minimum. 43 We found four cases where lenders either did not notify FmHA of delinquencies or did not notify it in a timely manner, i.e., within 60 days after the due date. In fact, such noti- fication was not a requirement until December 10, 1975, when FmHA began requiring lenders to agree to notify the agency when a borrower is 30 days past due on a payment and is un- likely to bring his account current within 60 days, or if the borrower has not provided the required financial state- ments or is otherwise in default. The requirement is lacking, however, in that it does not establish a precise time within which a lender must notify FmHA of a borrower's delinquency nor does it prescribe any penalty for noncompliance. Rather, the requirement makes noti- fication contingent upon the lender's judgment as to whether the borrower is unlikely to bring his account current within 60 days. Establishing a preciae cutoff period for notifica- tion would eliminate any question about the lender's respon- sibility and his compliance ith the lender's agreement. Borrowers' financial statements could be more effectively used as loan servicing tool Our review showed that: -- lenders were not adequately analyzing borrowers' finan- cial statements; -- financial statements were not being rtieived timely or, in some cases, at all; -- nearly all State and county offices visited lacked an adequate system to determine when financial statements were overdue and when followup action could be taken to obtain them: -- FmHA personnel were not timely analyzing financial statements and preparing the resultant "spread sheets;" and -- many annual financial statements were not audited as required. Recognizing the need to obtain and review borrowers' financial statements, FmHA's initial regulations provided that lenders would require borrowers, with loans of $100,000 or more, to submit audited financial statements annually and, at a minimum, 6-month interim financial statements signed by 44 the borrower or his representative. According to an official of the national office, unaudited quired from borrowers with loans annual statements are re- of less than $100,000. FmHA regulations revised in September the submission of financial statements 1974 required that reports, other than the required and other management annual statements, be on a basis and frequency acceptable to FmHA. The regulations indicated the borrower, lender, and that in some cases monthly statements may be necessary, but submitted at least semiannually. required that statements be FmHA's current regulations provide statements be required for new business that monthly financial businesses needing close monitoring. enterprises and those schedule agreed on is made part of The statement submission the contractual agreement between mhA and the lender as well the lender and the borrower. as the agreement between To see that the borrowers' statements quately analyzed, the national office, were being ade- instructions requiring that certain in July 1974, issued key data included on the financial statements be analyzed This analysis is documented on a by State office personnel. mitted to the national office for spread sheet and sub- review. To be of maximum use in monitoring financial statements must be received borrowers' operations, manner. Also, any analysis of the and reviewed in financial statementsa timely should be documented and made a part of the borrowers' loan records for future reference and comparison, and the results of the analysis should be brought to the attention for any corrective actions required. of the borrowers The lenders e visited generally did not use the finan- cial statements effectively in monitoring rowers' operations. We found that and analyzing bor- -- generally little r no effort was receipt of financial statements somade to monitor the could be taken to obtain them in that followup action a timely manner, -- nine lenders said they did not analyze financial state- ments because they lacked the time and and/or the expertise, -- lenders provided FmHA with written comments on only 3 of 64 financial statements obtained from borrowers with guaranteed loans. 45 Lenders will have to establish monitoring systems if they are to comply with the contractual provision to notify FmHA when borrowers do not provide required financial statements. Cf 67 financial statements received by FmHA for the closed loans (3 financial statements were from 35 borrowers with insured loans), 24 were received within 60 days ending date of the period covered by the statements, of the received in over 60 days, and the date received could 32 were determined for 11. Further, 56 statements that were not be not been received, 42 of which were overdue for more due had 60 days. than Of the six FmHA State offices visited, only one had developed and implemented a systematic method of monitoring financial statement due dates so that followup action could be taken to receive those oerdue. The monitoring in the one State office called for sending a notice system supervisor for any audited statements not received to the 60 days of the ending date of the period covered andwithin unaudited statements not received within 30 days of for any date. the ending Twenty-one of the 33 county offices we visited systematically monitoring the receipt of financial were not statements. One county supervisor told us that he had established toring system but was too busy to implement it. a mcni- FmHA regulations prescribe a county office management system to assist in planning, organizing, and accomplishing county office activities. As part of this system, a card file with pertinent information is maintained for rower. This system, if used properly, could alert: each bor- visors to the need for followup action on overdue the super- financial statements. The problems observed involving the receipt of the cial statements were compounded by the delay or absence finan- statement analysis by FmHA. of The State offices visited had prepared and submitted the required spread sheet analyses to the national office on only 30 of the 67 financial statements they received. 30 spread sheets prepared, 7 were submitted in over Of the Of the 37 statements for which no spread sheets were 60 days. submitted, 20 had been on hand for over 60 days. 46 Recognizing the need for reliable information, regulations require that the annual statements FmHA with loans of $100,000 or more e audited by of borrowers public accountants. This requirement, however,independent plied with for 14 of the 25 annual statements was not com- from borrowers with loans of $100,000 or more. FmHA received FmHA generally took no corrective action when Furthermore, the borrowers submitted unaudited annual statements. Visits to borrowers /isits to borrowers are an important aspect servicing program. Although FmHA regulations of a loan visits to borrowers before December 1975, it encouraged was not until then that such visits were required. Some by FmHA and lender personnel in connection visits were made with the 35 loans reviewed. The visits, however, were infrequent, and lacked comprehensiveness. Further, visit sporadic, seldom documented. results were The value of obtaining and analyzing borrower statements by FmHA and the lenders is diminished financial priate followup action is not taken. Once when appro- potential problems are identified, visits could be useful or actual such problems with the borrowers and reach to discuss agreement on cor- rective actions to be taken. Also, visits necessary to inspect the physical condi orn to borrowers are of the plant and equipment and any property serving as collateral. In December 1975 FmHA revised its regulations its personnel, accoripanied by lenders if possible, to require borrowers in accordance with the following to visit schedule: -- Monthly for new businesses until the business ilized. is stab- -- At least quarterly for businesses less than 3 years old. --At least annually for businesses more than 3 years old. -- As often as needed for businesses requiring special attention. To increase should establish the effectiveness guidelines on the of visits, we believe FmHA matters to be considered by FmHA and lender personnel. One of these matters should be a discussion on the views of FmHA and lenders concrfn^inia 47 the results of their analyses of the borrowers' financial statements. Furthermore, FmHA should require that the results of such visits be documented, particularly any agreements reached to resolve actual or potential problems. The following examples illustrate some of the situations concerning visits to borrowers. -- In April 1974 FmHA guaranteed a $40,000 loan to an existing business. The county supervisor made three visits to the business during the 22-month period after the loan was made, one visit was made to discuss the business in general and two were made to inquire about overdue financial statements. -- In July 1974 FmHA guaranteed a $25,000 loan to an existing business. No visits were made by FmHA per- sonnel during the 21-month period after the loan was made. Although the lender told us he had visited the business four times, the borrower said the lender had never visited him. -- In March 1975 FmHA guaranteed a $505,800 loan to a new business. No visits were made by FmHA personnel during the 11-month period after the loan was made. Although the lender told us he had visited the busi- ness one time, the borrower told us he could not recall a visit by the lender. FmHA monitoring of lender operations Lenders have primary responsibility for evaluating and approving loans as well as servicing the loans once they are made. FmHA personnel are to supervise the lenders to see that they carry out their responsibilities adequately. FmHA needs to establish a formalized monitoring process to ade- quately accomplish its supervisory role and see that the lenders carry out their responsibilities effectively. In carrying out their supervisory roler FmHA personnel do, to some degree, review and evaluate lender operations, although this is not their primary objective. FmHA personnel generally had frequent contacts with lenders during the loan evaluation process, and in this regard some review and evalua- tion of lender operations is being made, if only in an informal manner. Once the loans were made, however, FmHA contacts with lenders were minimal and, hence, little information was ob- tained regarding the lenders' loan servicing role. Furthermore, 48 no provision is made to provide feedback on the effectiveness with which lender. to top management perform their re- sponsibilities on a formalized basis. BETTER CONTROL NEEDED OVER USE OF LOAN PROCEEDS FmHA did not verify whether loan proceeds accordance with approved and authorized were used in the 35 loans we reviewed. Further, purposes for 11 of provide any guidance on the manner FmHA regulations do not ceeds from guaranteed and insured in which the use of pro- loans will be controlled. Loans should be approved for specific to enhance a business' chances of success. purposes designed Once these pur- poses are agreed on, appropriate controls are needed so that borrowers use the loan proceeds accordingly. also needed so that the loan proceeds Controls are authorized by law and FmHA regulation. are used for purposes FmHA requires lenders to agree that be used in accordance with its regulationsloan proceeds will listed on the borrower's loan application. and the purposes however, require the lenders FmHA does not, ceeds are disbursed. Further,to regulations advise it on how loan pro- the manner in which FmHA will assure are silent on itself that the proceeds for guaranteed and insured loans are authorized. ed as approved and We were unable to determine whether used as approved and authorized by the proceeds were it was not clearly stated in writingFmHA in four cases because be used and/or there were inadequate exactly how they were to penditures made with loan proceeds. records supporting ex- This true for loans made to existing businesses was particularly ten document showing how the proceeds when the only writ- loan application which merely shows were to be used was the the amount funds to be used for each of the following of the loan acquisition, new buildings or plant categories: land ment, working capital, acquisition construction, debt pay- and equipment, and other. and/or repair of machinery On the other hand there were over the use of loan proceeds was four instances where control good. This was particularly true in two instances where documentation which tne loan funds would be used on the manner in loan closing. was obtained at time of 49 The following examples illustrate some of the problems we noted in regard to the loans where the use of loan proceeds were either questionable and/or not verified by FmHA. FmHA guaranteed a loan for $500,000 in May 1975. Accor- ding to the loan application, about $430,000 was to be used for working capital. In January 1975 the State office advised the national office that the working capital portion of the loan was needed to finance inventory, raw materials, and accounts receivable and that no part of the proceeds for working capital was to be used to pay off debts the borrower then owed the lender. This restriction on the use of the pro- ceeds was not, however, made a formal condition of the loan agreement. Although FmHA's loan file did not show how the proceeds were used, in reviewing the borrower's financial statements we noted that about $469,000 of current liabilities was paid, indicating that the borrower's prior debts to the lender were also paid. We brought this matter to the attention of an FmHA official who in turn asked the lender whether the loan proceeds had been used to repay the prior debts. The lender advised FmHA by letter dated April 1, 1976, that about $345,000 of the loan proceeds was used to repay the borrower's prior debts. FmHA guaranteed a $1.25 million loan on October 1, 1975. The borrower owned a manufacturing division which was located in a rural area and a sales and shipping facility located in an urban area. The loan application indicated that the loan was to be used for the rural facility. In notes to the borrower's financial statement covering the 2-year period ending August 31, 1975, the auditor stated that the borrower, in anticipation of the $1.25 million loan, obtained interim financing of $700,000 of which $577,000 was used to repay debts owed in connection with the urban sales and shipping facility. In view of the fact that the FmHA guarantee loan proceeds were then used to cover the interim financing, the loan proceeds were used for an ineli- gible purpose because they were used for a business operation located in an urban area. IMPROVEMENTS NEEDED IN MANAGEMENT ASSISTANCE PROGRAM FmHA has no management assistance program as such, but instead relies on its State office loan specialists and county 50 supervisors as well as lenders to assist borrowers with their problems. Neither FmHA personnel nor the lenders, however, appear to have the necessary time and/or expertise to provide effective management assistance. Among other responsibilities, the State office loan specialists are to see that borrowers receive adequate guid- ance in carrying out approved management practices, including the proper use of credit, income, and other resources. Accor- ding to an FmHA official, this can be done by the loan spe- cialists themselves or by supervisors and lenders. In implementing the program, FmHA established a position of supervisory loan specialist in each of its 42 State offices. By December 1973 the 42 positions were filled mostly by sonnel from within the agency. FmHA also established a per- loan specialist position and authorized each State office to fill this position in July 1975. The majority of these positions were also filled by personnel from within the agency. All but one of the supervisory and nonsupervisory loan specialists (referred to herein collectively as loan spe- cialists) in each of the six State offices we visited had received both the basic and advanced 1-week financial analysis courses provided by FmHA. According to FmHA, the objective of the basic course is to assist the individual to obtain a thorough knowledge of credit and financial analysis, including an understandir 9 of the structure, operations, management, unique problems and trends of a business operation. The and objec- tive of the advanced course is to provide the individual with a knowledge of advanced conceptual approaches to credit and financial analysis and to further develop his or her credit judgment. This training, although limited, may be adequate to enable loan specialists to analyze business' operations and financial data to detect major problems. Once detected, however, arrangements must be made to assist the borrower solving the problem. It is not clear in ither loan specialists have the time and/or training and experience needed to assist in the solution of the more complex problems which could arise. The loan specialists we interviewed often told us that they lacked the ti to adequately service the loans. This problem will be compounded as additional loans are approved. The loan specialists also face a logistics problem in assis- ting borrowers who are located throughout the State(s) served. 51 The supervisors also appeared to lack the and/or experience to provide borrowers with time, training, management assistance. Thirty-two of the any degree of 33 supervisors we questioned during the period of February had academic backgrounds in agriculture, through July 1976 while only about four had any background in business and economics. more, Further- -- only 10 supervisors had attended FmHA's basic credit and financial analysis course and none had the advanced course; attended -- 30 supervisors said that they did not have sufficient time to provide adequate loan servicing; and -- 14 said additional personnel, such as loan specialists, are needed to service the loans. In implementing the program, its appropriated loan authority to FmHA decided to use most of guarantee loans which are made and serviced by lenders rather than which are made and serviced by FmHA. The to make insured loans of most of the lenders we visited, however,loan servicing role was limited pri- marily to collecting and overseeing loan if they desired to provide management repayments. Even ful they could in view of the fact thatassistance, it is doubt- 17 of the 31 lenders interviewed indicated to us that they did and/or expertise to provide borrowers with not have the time assistance. This was particularly true for any degree of such lenders. the small rural We believe FmHA should develop some means management assistance to borrowers in need of providing This could be done by developing its own of such assistance. counseling program or by arranging for other organizations and groups to provide this service. For example, the Small Business Administration a management assistance program available (SBA) has borrowers alike. On June 30, 1976, SBA to SBA and non-SBA employed about 320 management assistance counselors. During fiscal year 1976, SBA's management assistance counselors had counseling sessions. SBA also has outside about 64,000 consultant groups providing management assistance to small businesses. These groups had about 143,000 counseling sessions during fiscal year 1976. Most of the counseling sessions conducted SBA and its consultants were with non-SBA by borrowers. 52 The SBA consultants providing management listed below. assistance are -- Service Corps of Retired Executives (SCORE). an organization of retired business executives This is who volunteer their services to help small solve their problems. business owners -- Active Corps of Executives (ACE). This is zation of volunteers drawn from-the ranks an organi- executives in industry, trade associations,of active institutions, and the professions. educational -- Small Business Institute (SBI). This is a program which provides faculty-supervised management to small businesses by university graduate counseling and under- graduate students. -- The Call Contract Program. This program employs sultants con- to provide management and technical assistance to small business owners who are eligible under EconomicOpportunity Act of 1964. the --The Professional Association Pro ram. Under this pro- gram members of professional associations, the National Association of Accountants, such as management and technical assistance to provide on a voluntary basis. small businesses The following examples illustrate some of the types of problems experienced by borrowers which, with some assistance, could possibly have been dealt with more effectively. FmHA guaranteed a $560,000 loan to a mobile facturer in October 1974. The borrower home manu- discontinued its mobile home operation less than 6 months loL because of decreased sales and began after getting the manufacturing cabinets and trunks. After getting the loan, the firm incurred severe losses and its assets continued to increase, resulting in a declined while its debts worth. The firm had experienced similarlarge negative net problems before receiving the FmHA guaranteed loan. Therefore, management assistance could have been detected the need for and dealt with at the time of loan approval as provided tions. for in FmHA regula- The loan specialist said that the firm's could not continue to maintain the operation. present business Despite this 53 opinion and he firm's history of problems, neither FmHA nor the lendfr made any effort to provide management assis- tance to the borrower. The lender and the FmHA county supervisor told us that they were not qualified to provide management assistance to the borrower. FmHA guaranteed a $45,000 loan in March 1974 to the owner of a farm supply store. In May 1976 the borrower was 3 months delinquent on his loan repayments. Because the business did not generate sufficient income, the borrower had taken a part- time job. His wife operated the business in his absence. The loan specialist attributed the business' financial troubles to poor management. He said that the borrower had more experience in sales than with management. Moreover, the lender told us that he required a guaranteed loan because the borrower lacked managerial capabilities. Despite the business' financial problems and the doubts about the bor- rower's management ability, neither FmHA nor the lender provided the borrower any management assistance. FmPA guaranteed a $500,000 loan in May 1975. The bor- rower became delinquent 4 months after receiving the loan. His difficulties arose due to decreased sales and increased inventory costs. In September 1975 the lender and the FmHA county super- visor considered asking SCORE to help the borrower, but did not. The lender notified FmHA in November 1975 that the loan would be in srious trouble unless "drastic measures" were taken. FmHA asked the lender to determine what should be to help the borrower overcome his problems. Although the done borrower was 5 months delinquent by January 1976, no deci- sion was reached on the action to be taken to assist the borrower. In March 1976 a meeting was held betweer FmHA, the len- der, and the borrower in which it was decided that the lender would consider deferring the monthly loan payments for prin- cipal if the borrower's problems continued. No specific actions were agreed to, however, concerning the manner in which the borrower's problems would be resolved. CONCLUSIONS Effective loan servicing and management assistance grams are needed so that the businesses financed and the pro- saved and created through FmHA's business and industrial jobs loan 54 program are permanent. To do this FmHA needs to obtain better and more timely information on borrowers' problems and progress and establish a management assistance program. Lenders must be fully aware of their servicing responsi- bilities particularly on such matters as obtaining ana analy- zing borrowers' financial statements, businesses, and assisting borrowers visiting borrowers' This guidance should be included with their problems. in the lenders handbook we are recommending FmHA develop. policies and procedures governing FmHA should establish its supervisory role to see that the lenders carry out their quate manner. responsibilities in an ade- To see that tion of borrowers'lenders provide FmHA delinquencies, FmHA with timely notifica- should revise the lender's agreement to prescribe lenders to provide notification, a definite cutoff period for impose a penalty upon lenders and to help attain compliance, fication. who fail t provide such noti- To make more effective use statements as a loan servicing of borrowers' financial tool, FmHA State and county offices should obtain and analyze borrower financial state- ments in a timely manner. Also, the pendently audited financial statementsrequirement for inde- so that the data obtained is reliable. should be enforced county offices that are unable Those State and responsibilities because of the to fully carry out their should advise the national officelack of an adequate staff of this so that corrective actions can be taken. FmHA and lender visits to borrowers sporadic, and lacked comprehensiveness. were infrequent, its regulations in December 1975 Although FmHA revised to borrowers, because so many to require periodic visits of the supervisors told us that they lacked the time to adequately of 33 supervisors interviewed--it service loans--30 whether this requirement can is questionable as to be fore, FmHA should closely monitorfully implemented. There- that the staffing is sufficient this requirement to see to make the requzrgd visits. So that comprehensive reviews are made duri, visits, FmHA should provide the supervisors list of what is to be accomplished and lenders with a check- visits should include an inspection during these visits. Such cussion of the results of the of collateral and a dis- analyses lender of the borrower's financial made by FmHA and the statements. 55 To see that loan proceeds are used in accordance with approved and authorized purposes, borrowers should be required to specify in writing how the loan proceeds are to be used and be required to submit settlement sheets showing how the proceeds were disbursed. In this way FmHA can see to it that the proceeds are used as authorized. Although an effective loan servicing program will identi- fy borrower problems so that corrective actions can be taken, some borrowers do not possess the management capability needed to deal with the problems identified. FmHA should develop a formalized management assistance program to provide borrowers with assistance. The program should include a staff of manage- ment assistance counselors to provide assistance to borrowers to be augmented, when necessary, by outside consultant ogan- izations. RECOMMENDATIONS We recommend that the Secretary of Agriculture direct the FmHA Administrator to: -- Provide additional guidance to lenders on their loan servicing responsibilities. -- Require lenders to notify FmHA of a default by a bor- rower within a specified number of days and impose a penalty for noncompliance. -- Establish policies and procedures governing the super- vision and review of lenders' loan servicing opera- tior.s. -- Obtain better and more timely information on borrower operations by (1) requiring county offices to imple- ment a system of monitoring borrower financial state- ments so that followup action can be taken to obtain any statements not submitted on time and (2) estab- lishing time frames for State office personnel to follow in performing the required analyses of financial statements received. State and county offices unable to perform these or other required tasks because of inadequate staffing should be required to advise the Administrator of this fact so that corrective actions can be taken. 56 -- Require the enforcement of annual financial statements the requirement that of borrowers with of $100,000 or more be adited loans lic accountants and emphasize by independent pub- to borrowers that borrowers failing the lenders and ment are in default of their loan to meet this require- areements. ---Monitor personnel efforts to comply with requirements concerning visits to borrowers' mine whether staffing levels businesses to deter- need to be adjusted in order to make the required visits. -- Provide additional guidance accomplished through visits on the objectives to be to borrowers made by supervisors and lenders. -- Require (1) borrowers to specify written loan agreement how loan as part of their (2) lenders to provide FmHA with proceeds will be used, detailed data showing how the loan proceeds were disbursed, personnel to verify that proceeds and (3) FmHA dance with the loan agreement. are used in accor- -- Develop a formalized management including the establishment of assistance program a assistance counselors. Agreementsstaff of management sultant firms should be entered with outside con- the service to borrowers in into to help provide need. AGENCY COMMENTS AND OUR EVALUATION In commenting out the duties and on our report, FmHA said that it responsibilities of the has set der's agreement. As discussed lender in the en- earlier it is also considering the development of a lenders handbook. In commenting on our recommendation lenders notify it when borrowers to require that loan repayments for a specified are delinquent on their number of days, FmHA said that its regulations requiring loan repayments are 30 days pastlenders to notify FmHA when be brought current within due and are not likely to 60 days, provides the lender latl- tude in working out problem loans unnecessary correspondence and and eliminates a lot of FmHA said that (1) it is stated servicing problems. Further, in the lender's agreement that improper servicing of the paying the request for loss loan could lead to FmHA's settlement and (2) its regula-not tions provide for debarment of loans properly. lenders who do not service 57 As stated in the report, FmHA's requirement makes notification of delinquencies contingent upon the lender's judgment as to whether the borrower is unlikely to bring his account current within 60 days. We believe that the present regulation would, in effect, encourage lenders to wait the full 60 days prior to notifying FHA of delinquencies and that FmHA would find it difficult to impose a penalty on a lender that did not notify it of a delinquency in less than 60 days. In contrast, under SBA's regulations a lender must agree to notify SBA of delinquencies within 45 days of the due date. If the lender fails to do so, SBA will not reimburse the len- der for the interest earned from the date of default (delin- quency) to the date the notice of default was received by SBA when a lender places a demand on SBA to purchase the guaranteed portion of the loan. Also, SBA regulations provide that it " * * * shall not purchase the guaranteed percentage unless SBA shall first determine that said delay in notification of default did not cause any substantial harm to the Government. * * *" SBA's regulations are more in line with what we believe is needed to adequately protect the Government's interest. That is, a precise period of time within which the lender must notify FmHA of delinquencies should be specified in the agreement between FmHA and the lender, including a provision setting forth those penalties that will be im- posed for failing to provide the required notification with- in the specified period. FmHA did not specifically state whether or not it agreed with us that policies and procedures governing the super- vision and review of lenders' loan servicing operations should be established. It did say, however, that it had implemented a system whereby national office personnel review field for compliance with FmHA regulations and loan conditions offices and also make periodic reviews of lenders. In commenting on our recommendations to obtain better and more timely information and on enForcing the require- ments for audited financial statements, FmHA said the regu- lations now set forth appropriate loan servicing monitoring and provide for the monitoring of the receipt of audited statements. FmHA said also that a field visit guide was being developed to strengthen the review of borrowers' records (FmHA attached a draft of the guide to its comments--see app. III) and that it will continue to emphasize the need to obtain 58 and analyze borrowers' financial statements in a timely manner in its training programs and monitoring efforts. Further, in its July 8 memorandum, FmHA advised its State directors of the need to implement appropriate follow- up systems at State and county office levels to assure receipt of the required financial statements. Concerning field visits to borrowers' businesses, FmHA said it believes that at present funding levels it has ade- quate staff to properly monitor the loans and that the uniform monitoring procedures being developed will help assure that its objectives for the visits are met. On the basis of our review, we believe it is at least questionable as to whether FmHA has adequate staff to imple- ment its procedures concerning visits to borrowers. Parti- cularly in view of the fact that nearly all of the county supervisors we interviewed said that they lacked the time to adequately service loans. Concerning the verification of loan proceeds FmHA stated: "Our regulations provide that the district director will make an audit of the borrower immediately prior to the issuance of the guarantee. As a part of this audit, he is required to verify that funds will be used for authorized purposes by checking the issuance of checks with the loan purposes specified in the application. Also, the lender certifies in the len- der's agreement that funds will be used for authorized purposes. Subsequent field visits would disclose any irregularities in use of funds." .n addition, in its July 8 memorandum FmHA directors to instruct the district directorsadvised the tate of the impor- tance of the preguarantee audit to assure that the loan funds are used for the authorized purposes approved when the appli- cation was reviewed and that the loan will produce the desired results. FmHA's actions should help improve the problems found during our audit regarding the use of loan proceeds. However, we believe our recommendations are still valid in that they provide for a more complete solution. For example, we had difficulty in verifying that loan proceeds were used as in- tended for some loans because of a lack of any documentation specifying what was intended. Unless borrowers are required 59 to specify in writing how the loan proceeds will be used, the district directors may face the same problem in their audits. FmHA agreed with our recommendation oncerning the establishment of a formal management assistance program and said that it believes that many of the SBA programs would be useful in providing management assistance to borrowers. 60 CHAPTER 5 PROGRAM STAFFING-A PROBLEM NEEDING TO BE RESOLVED The program more effectively could have been implemented had insure that it had a FmH. taken the necessary and operated actions to trained employees; sufficient staff of experienced with FmHA personnel however, most staff positions or having agricultural backgrounds. were filled FmHA has instituted training and many have taken one programs for its personnel, credit analysis courses. or both of two -week financial program and the fact Because of the complexity and that the needs of the program of the mediate, we believe the were im- staff should have been to a greater degree with personnel supplemented in making business having prior experience loans. The need for adequate cal skills had been brought staffing with more diverse techni- others in the past on to FmHA's attention by several us and made several recommendations occasions. For example, we the business and industrial regarding the implementation of report 1/ to the Congress, loan program in a May 1973 such action as is necessary one of which was that FmHA take cient staff of experienced to insure that it have a suffi- implement the program. or trained employees to properly of a report 2/ we issued FmHA personnel needs were the subject ded that, until FmHA in September 1975 wherein hires we conclu- skilled employees, it and trains enough technically will the newer rural development not be able to effectively implement basis. programs on more than a limited In implementing the program, and industrial loan division FmHA established 1973 which was staffed t the national level a business with three professional in August of June 30, 1976, this employees. As 7 of whom were hired division had 12 professional from other Federal agencies employees, organizations because and private of their business loan experience. l/"Ways to Improve Effectiveness Programs" (B-114873, of Rural Business Loan May 2, 1973). 2 /"Personnel Management to Help Farmers Home Improvements Initiated or Needed Administration Meet Its Missions" (RED-76-16, Expanded Sept. 10, 1975). 61 Staffing at the State level also began in May 1973 and by December 1973 business loan specialists had been appointed in each of the 42 State offices. Nearly all these positions were filled by promoting or reassigning FmHA employees, most of whom lacked experience in making business and industrial type loans. In fact, an FmHA official indicated that all loans had to be processed through the national office during the first 2 years of the program's life primarily because of the lack of experience and training of State office personnel. To help correct this situation, the former Administrator of FmHA authorized each State director to iire an additional loan specialist effective July 7, 1975. In advising the State directors of this action, the former Administrator said that persons assigned to these positions should have strong com- mercial lending backgrounds, such as that possessed by key bank officials. Further, he said that credit experience in FmHA lending programs was not what was being sought because the new B&I loan program is quite different from FmHA's other programs. Nevertheless, of the 27 people hired to fill these posi- tions as of October 31, 1976, only 3 were hired from outside the agency. FmHA officials cited employee opposition and resistance to hiring non-FmHA personnel to fill these posi- tions as the major factor for FmHA's limited success in this regard. Historically, FmHA's practice has been to hire persons with agriculture-related education and/or experience for county offices and to train them in administering FmHA pro- grams. This practice has resulted in most FmHA employees having agricultural backgrounds although agriculturally orien- ted programs accounted for only about 30 percent of FmHA loan and grant expenditures in fiscal year 1976. As the former Administrator indicated, credit experience in FmHA programs would not necessarily be sufficient to qualify for a loan specialist position in the B&I program. Not only are the loan purposes quite different but the size of the loans made are much larger. There are no maximum amounts prescribed for B&I loans and many loans are made for over $1 million, whereas farm ownership and operating loans, for example, are limited by law to $100,000 and $50,000 respectively. FmHA staffing levels have not kept pace with its overall loan and grant activity. Between June 30, 1973, and June 30, 62 1976, FmHA's full-time permanent staff decreased from 7,161 to 6,860 employees, or about 3 percent, while the amount of loans and grants made increased from about $3.8 billion to $5.4 billion, or about 42 percent, and outstanding loan balances increased from $9°6 billion to $18.5 billion, or about 93 percent. A comparison of FmHA full-time permanent staff, by organizational le-,el, as of June 30, 1973, and June 30, 1976, follows: Number of full-time permanent employees Organization Increase level June 30, 1973 June 30, 1976 decrease (-) Hieadquarters 268 317 49 Finance office 462 376 -86 State 894 976 82 District 295 280 -15 County 5,242 i911 -331 Total 7,161 6,860 -301 The decrease in full-time employees was offset to some degree by an increase of about 700 part-time permanent employees. We could not categorize the part-time employees by organi- zational level because FmHA records do not show this informa- tion. The Congress recognized the need for FmHA to increase its full-time permanent staff by appropriating $12 million more than the amount requested by the administration in the fiscal year 1976 budget. The report of the Senate Committee on Appropriations specifically stated the Committee's recom- mendation that the additional funds were needed to provide more adequate staffing. Subsequently, a Member of Congress stated his understanding that it was intended hat the additional funds be used to hire between 750 and 1,000 addi- tional full-time permanent employees. However, contrary to the Committee's recommendation as well as the Member's under- standing as to the intended purpose of te additional funds, only about $4 million of this amount was expended in hiring 63 400 full-time, 200 part-time, and 100 temporary employees. The remaining funds were used for pay increases, travel ex- penses, postage expenses, and training. For the fiscal year 1977 budget, the administration proposed no changes in FmHA's full-time staffing level. Nevertheless, the Congress appro- priated about $7.8 million more than that requested by the administration for salaries and expenses. CONCLUSIONS FmHA has assisted many businesses to save and create jobs in rural areas. As this report p',ints out, however, problems exist which are in need of management attention. To solve these problems and increase the overall effectiveness of the program, FmHA must have a sufficient number of qualified staff. The Congress has appropriated additional moneys to help provide the staff needed. FmHA must take the necessary action to see that its future hiring efforts are directed to acquiring employees with the technical backgrounds needed to fully implement its newer programs, such as the B&I pro- gram. RECOMMENDATION We recommend that the Secretary of Agriculture direct the FmHA AdministratoL to take such actions as are necessary so that employees hired in the future have the educational and technical backgrounds needed to more adequately imple- ment its programs. AGENCY COMMENTS AND OUR EVALUATION In commenting on our report, FmHA stated: "This program was implemented at a time when FmHA was instructed to make a reduction in personnel of 10 per- cent. It was very difficult to justify to FmHA employees the hiring of outside talent under these con- ditions. The agency has continually been updating its requirements for loan officers. When the program was first implemented, the use of FmHA personnel was an expeditious means of staffing for the program. "We would like to take issue with the audit's conclu- sion. The fact that we met all allocation allotments each year with a reasdnable delinquency rate, we believe, points to an outstanding job performed by those loan specialists with primarily agricultural 64 backgrounds. It must be noted that all these loan officers had prior lending experience in housing, community programs, and farmer programs. Present and future training courses and FmHA personnel development programs were designed to provide for further evelopment of B&I loan officers. "We agree that under ideal conditions personnel with a commercial loan background would be desir- able. FmHA has implemented a 2-year graduate program in financial management leading to an advanced degree. This program is designed to pro- vide future mnagement for the agency and properly trained personnel to implement the various FmHA programs and respective objectives.' While we can sympathize with FmHA's statement that it would find it difficult to justify to FmlHA employees the hiring of outside talent at a time when it was instructed to make a 10-percent reduction in personnel, we believe that in implementing any new program, an agency's first consider- ation must be to insure that the program will be operated as efficiently and effectively as possible. The most im- portant ingredient to accomplishing this objective is staff-- toth in number and quality. Our report points out a number of problems experienced in operating the B&I program. We believe that similar prob- lems may be avoided or minimized in the future if FmHA takes the action necessary to attain a sufficient number of qualified staff. 65 APPENDIX I APPENDIX I SCHEDULE OF LOANS REVIEWED BY GAO At time of AO visit (note a) Date closed Months in or New or operation Loan obligation existing since Payment number Amount approved business loan closed status Loans closed as of June 30., 1975 1 $ 1,371,456 2/75 New 12 Current 2 40,000 4/74 Existing 22 3 505,800 3/75 New 11 4 60,000 11/74 11 5 900,000. 2/75 12 6 359,000 2/75 Existing 13 7 300,000 2/74 25 8 63,000 4/75 New 11 9 560,000 10/74 Existing 18 b/ Current 1C 817,053 3/75 14 Delinquent 11 110,000 6/75 10 c/ Current 12 500,000 6/75 10 Current 13 351,000 2/75 New 12 14 250,000 4/75 Existing 11 15 2,200,000 3/75 15 d/ Delinquent 16 500,000 5/75 9 Delinquent 17 400,000 12/74 14 Current 18 600,000 11/74 15 19 1,400,000 12/74 " 14 20 300,000 6/75 8 21 45,000 3/74 New 26 Delinquent 22 2,697r266 *7/74 Existing 21 Current 23 25,000 7/74 21 24 170,000 8/74 21 25 30,000 7/74 21 26 100,000 10/74 New 19 Paid in full 27 14,000 8/74 Existing 20 Current 28 19,000 4/75 New 10 e/ Paid in full 29 480,000 6/75 Existing 12 Current 30 1,000,000 9/74 22 e/ Paid in full 31 10,000 1/75 17 Current 32 175,000 7/74 23 33 200,000 2/75 New 17 34 (note f) 300.000 2/75 Existing 16 35 (note f) 600,000 5/75 13 Total $17 452 575 Loans in process as of June 30, 1975 36 $ 1,800,000 6/75 Existing 10 Current 37 6,400,000 6/74 38 1,250,000 5/75 Not visited 39 1,700,000 4/75 40 85,700 6/75 41 86,350 4/75 New 42 85,000 3/75 43 3,000,000 4/75 Existing 44 650,000 4/75 New 45 _ 4000o00 4/75 Total S15,457,050 Total $32 909 625 a/GAO visits were made during the period February-July 1976. b/Although the loan was current, the company had experienced financial difficulties and was no longer in the business for which the loan was made. c/Although the loan was current, the company had experienced financial difficulties and was in the process of going out of business. d/The company had filed a bankruptcy petition. e/The loan was repaid after the business failed. f/Loan numbers 34 and 35 were made to the same borrower. 66 APPENDIX II APPENDIX II COMPARISON COMPARISON OF EMPLOYMENT DATA REPORTED TO OG RESS THE CNGRESS WITH ACTUAL AT TIME OF OUR VISIT Number Number over employed or under(-) Employment at time Number of employment months since reported of our Loan reported loan closed to the visit number Congress to the at time of (note a) Conres our visit 1 100 2 31 -69 5 3 12 4 -2 22 5 7 5 75 2 11 7 42 -33 42 16 12 8 -26 25 5 4 9 44 -1 11 10 13 -31 43 83 18 11 7 40 14 12 (note b) 1 -6 30 24 10 13 -6 10 7 15 14 38 8 12 15 92 54 900 20 11 16 -880 15 70 15 -55 17 47 9 18 40 -7 14 3 14 19 (note c) 97 -11 15 20 (note c) 80 -17 32 42 14 221 10 8 3 3 22 220 - 26 23 (note c) 298 78 11 4 21 24 20 -7 21 25 19 -1 7 6 21 26 16 -1 21 27 12 -4 25 11 19 28 -14 20 29 (note c) 6 - -6 12 36 10 24 12 Total 1,881 920 -961 a/GAO visits were made Part-time and seasonalduring the period February-July 1976. equivalents. employees are shown as full-time b/Employment reported to ployed applies only to the Congress and the number em- new jobs created by this borrower had 59 employees when the loan was made.loan. The c/Although we show the number of employees at visit, the borrower told to transfer ownership us that the purpose the time of our of the loan was were actually saved. of the business and therefore no jobs 67 APPENDIX III APPENDIX III UNITED STATES DEPARTMENT OF AGRICULTURE FARMERS HOME ADMINISTRATION WAuINGTON. D.C. 02RO Mr. Henry Eschwege Director, Community and Economic Development Division U.S. General Accounting Office Washington, DC 20548 JUL 27 1977 Dear Mr. Eschwege: This is in response to your letter forwarding draft copies of the audit conducted on the business and industrial loan program. The Farmers Home Administration agrees with GAO in the improvements needed in this program as set forth in the digest of the report. FHA appreciates that the audit recognizes that this program was implemented at a time when we were i one of the worst recessions in this country's history. However, there is one other important factor that influenced the beginning of this program that was omitted. When this program was implemented, FmHA was ordered to make a 10 percent reduction in VmHA personnel. Our comments will be made in the same order ac the various sections in the draft audit report were presented: Chapter II The verification of job data is a part of the loan evaluation and should be done in every case. We will emphasize this fact in our upcoming training meetings, will issue instructions to our state directors to verify job projections and later provide for review of job data on subsequent field visits with appropriate documentation made in the loan file. FmHA will implement a manual reporting system to provide the needed job data suggested by this report. When the agancy UMIS system is implemented, we will be able to provide updated reports on employment figures for management and Congress. There appears to be the implication in the audit that PmHA deliberately overstated the accomplishments of the program. ThSl is absolutely not true. When a new program is started, it is almost impossible to accurately report the actual number of jobs created or saved because many of the loans have not been closed and the construction completed. herefore, FHA has always reported the number of dollars obligated and the umber of jobs saved and created as reported by the applicant. Farmers Home Admnistration is an Equal Opportunity Lender. Complaints of racial or ethnic discrimination should be sent to: Secretary of Agriculture Wshington, D.C. 20250 68 APPENDIX III APPENDIX III ,his agency has indicated to all B&I personnel in its training meetings that a $20,000 per job investment is desirable. We disagree with the report recommendation that a dollar job cost figure should be established. The creation of permanent stable jobs, effect on the tax base, flow of funds into the community, and other beneficial effects on the community will also be evaluated and used as criteria for loan consideration in determining which projects will be funded. A maximum job cost figure would preclude loans in many areas that have natural resources, the development of which would require substantial fixed asset costs. We do not believe information on labor intensive industries distributed to field personnel would serve any useful purpose as the disadvantages are greater than the benefits. Chapter III 1. Many of the areas pointed out by this audit report indicating deficiencies have been improved considerably by further training of personnel and by a total revision of the regulations in December 1975 and use of the new project summary form developed in July 1976 (see attached project summary). This will be enforced further by instructions to the field (see attached letter). The completion of th' project summary by FmHA personnel assures that the most important credit factors have been considered and documented for each loan. ISee GAO note, p. 76.] On August 4, 1976, FmHA revised its application form (see attached). Part B of the form requires the lender to analyze the application and set forth its recommendations. Also, a lender's agreement (see attac:ed) sets forth detailed certifications by the lender and loan servicing requirements. We will assess the teed for a lender's handbook.[See GAO note, p. 76 ] 2. We agree with the recommendation of this report. We will monitor this closer. 3. We have revised our regulations to require qualified appraisals and our forms do provide for fair market values. On small loans, regulations provide flexibilit for estimating market value by lenders and FA because costs for professional appraisals on small loans could be prohibitive. We are also conducting courses to teach our persounel how to evaluate appraisals. We agree that current financial statements are desirable and they are secured at the time the application is accepted. However, the processing time for our loans issometimes lengthy. To help in this regard, we require the lender to certify prior to the issuance of the guarantee that there has been no adverse change in the borrower's financial condition. We have instructed our field staff of the importance of reviewing and analyzing current financial statements of guarantors (see attached letter). 69 APPENDIX III APPENDIX III Analysis of cost of property is considered by the loan reviewer. has accountants, engineers and FmHA architects who assist the loan determining the value of property. reviewer in 4. We agree with the report that in refinancing debts it to keep th lender from reducing is desirable its exposure. However, as a matter, this is not always feasible. practical only one bak and a prohibition In many small communities against the lender reducing its there is would cause many businesses to exposure This might lso lead to forcing cease to exist through lack of financing. orrowers to change lenders to regulation equirements. avoid could also eliminate the ability to prcvide a line of credi for of the bank short-term financing needs due limits or bank liquidity. to lending Chapter V 1. FmHA has set out in the lender's r- -nsibilities of the lender. agreement the duties and The regulations provide that A. MInHA when the loan is 30 days past the lender to be .:rought current within 60 dle and the loan is not likely days. We feel that this gives latitule in working out problem the lender loans and eliminates a lot of correspondence and servicing unnecessary problems. It is clearly tated agreement that improper servicing in the lender's paying the request f of the loan could lead to FeHA's loss settlement. FbHA does have not debarment of lenders who do not regulations for service loans properly. 2. FRHA has implemented a system National Office loan officers. for review of field offices by The review includes but is not checkirg loan dockets for compliance limited to established prior to loan approval. with FmHA regulations and conditions are made of the lender. In addition, periodic field reviews 3. The regulations now set forth appropriate Joan servicing monitoring. The lender has the primary responsibility in process of development a field to service the loans. FmHA has visit guide which will strengthen agency's review of borrowers' he records. We are in agreement with the audit tnat borrowers' financial should be obtained in a timely manner and analyzed promptly stateagerts an early warning system. This to provide requirement has been in our regulations from the beginning of the program. our training programs and monitoring We will continue to emphasize this in of state office operations. 4. FmHA regulations do require This is address3ed in the lender's annual audited financial tatements. agreement and the loan agreement the borrower and lender. FhnHA regulations d provide for between of the receipt of these statements the monitoring and the len.dr's comments after have been analyzed. they 70 APPENDIX III APPENDIX III 5. At present funding levels, FmHA properly monitor its loans. As mentionedfeels it has adequate staff to above, we are establishing uniform monitoring procedures to assure that FmHA objectives will be accomplished. 6. Our regulations provide that the district audit of the borrower immediately prior to director will make an the issuance of the guarantee. As a part of this audit, i is required to verify for authorized purposes by checking the issuance that funds will be used of checks with the loan purposes specified in the application. Also, the lender certifies in the lender's agreement that funds will be used Subsequent field visits would disclose any for authorized purposes. irregularities in use of funds. 7. We gree with the report that a more formalized menagement assistanceFmHA should have as one of its goals progran for borrowers. Many of the Small Business Administration assistance pograms, we feel, would be useful. At the present time, FHA has used us with problem loans in a number of specific outside consultants to help cases. We had funds in our budget to hire qualified consultants on a retainer basis who would be available when needed; however, we were unable to do this due to procurement regulations prohibiting the hiring of onsultants on this basis. Chapter V This program was implemented at a time when FHA was instructed to make a reduction in personnel of 10 percent. It was very difficult to justify to FmHA employees the hiring of outside talent agency has continually been updating its under these conditions. The requirements for loan officers. When th-! program was first implemented, the use of FmHA personnel w an expeditious means of staffing for the program. We would like to take issue with the audit's conclusion. Thefact that we met all allocation allotments each year with we believe, points to an a reasonable delinquency rate, outstanding job performed by those loan with primarily agricultural backgrounds. specialists It must be noted that all these loan officers had prior ending experience in housing, community programs, and farmer programs. Present and future training courses and development programs were designed to pro.-ide FmHA personnel for further development of B&I loan officers. We agree that Lnder ideal conditions personnel ground would be esirable. with a commercial loan back- FmHA has implemented a 2 -year graduate program in financial mua ___.; leading to an advanced designed to provide future management for degree. This program is the agency and properly trained personnel to imp:cment the varivus FHA programs and respective objectives. Sincerely, GORDON CAVANAUGH Administrator Attachments 71 APPENDIX III APPENDIX III UNITED STATES DEPARTMENT OF AGRICULTURE FARMERS HOME ADMINIqTRATION WAS.NGTONn. D.C. 20250 July 8, 1977 SUBJECT: Business and Industry Loan Making and Servicing (General Accounting Office Audit) TO: All State Directors As you probably know, the General Accounting Office (GAO) has recently completed an indepth audit of our business and industrial (B&I) loan program. The audit covered the years 1974-75 and included the review of the National Office, Finance Office, and six State Offices, which repre- sented about 21 percent of our total B&I program. It was noted that many areas of our program need to be improved In order for us to continue toward our goal of improving service tc our applicants, borrowers, and lenders, and providing for a more efficient organization, the following major areas need to be reevaluated and streamlined: 1. Document the file completely with the analysis of the lo'a. This includes, among other things, completely filling out the Form FmHA 449-29, "Project Summary," including the recommendations of the County Supervisor and District Director. This procedure is to be -ollowed whether a State or National Office review of the project is required. It is essential that our applications are properly analyad. In the future, any ircomplete project summaries forwarded to the National Office will be returned with the file without rtview. 2. If personal or corporate guarantees are obtained for the project, make sure you review their current financial statements, including close examination of the garantor's net worth. Copies of these financial statements should be in the file together with the loan officer's comments and evaluations. 3. Carefully document the file on those cases where the lender is requesting refinancing, and particularly where the lender is reducLing his exposure on existing loans. Keep in mind that refinancing must make good economic sense and will, in fact, save existing employmeat. 4. In servicing loans, be sure that the lender and borrower fully realize the importance of our requirements to monitor periodic borrower's financial statements. Timely review of the financial statements and their analysis with proper documentation in the file is imperative as a means of early detection of potential problem loans. Appropriate followup systems need to be implemented at State and county levels to assure FmHA's receipt of the borrcer's periodic and annual audit financial statements. farme'rs Horn,me Adnmtlitratlion is anrEqual Opportunity Lender. Complaints o r ial or clthnrf dise rirnnation shoul be rent to: .',,r tarlv ,[ .4'i, tI/ltt,,' I' ,;illthm,,,. I).(. '025.) 72 APPENDIX III APPENDIX III 5. Instruct the District Director of the importance of the preguarantee audit. Loan funds must be used for the authorized approved when the application was reviewed. This audit is FmHA'spurposes ance that the funds obligated and the purposes stated will produceassur- desired results. The audit must incluie the review requirements the set forth in Section 1980.454 of FmHA Inrtruction 1980-E. 6. Verify the job projections. This is part of the loan analysis. Job projections should tie in ith the rpplicart's projected salaries and wages as reflected on the financial statements. Also, keep the Job cost ratio. We had indicated earlier in our training in mind that a rule o 'h.umb of $20,000 per job investment is desirable,meetings do not want to establish a definite dollar figure. but we hould an application have a high job cost ratio, document the file with the reabsons recommending the application, the priority you placed on the for and the application, supplemental benefits that will accrue to the economy in the local community. 7. We eed to reCuce our loan processing time to a more reasorable level. The GCO report indicated that the average processing time of loans reviewed was 252 days, of which an average of 61 days covered period of time from which National Office concurrence was given the State issuing the cnditional commitment. Also, between issuance to the conditional commitment and loan closing (excluding construction of the was an average of 61 days. The following schedule reflects some time) average processing times: of the rrom preapplication to State Office approval 87 days State Office approval to National Office concurrence 36 days National Office concurrence to Issuance of conditional commitment 61 days Conditional commitment to loan closing (excludes construction) 61 days 8. On periodic field visits, make sure that requirements of the loan agreement are being met. Document the files on crrent employment versus company projections at loan closing, phy!.cal appearance business, business payroll, taxes, inventories, and special of the problems, etc. We w .1 be working on a guide to assist you in this area. I expect you to follow through with implementing the necessary procedures and training to meet the deficiencies noted. GORDON CAVANAUGH Administrator 73 APPENDIX III APPENDIX III FmHA Instruction 1980-E Guide Page 1 Business and Industrial Loan Program Field Visit Reportc I GENERAL. The following may be used by te County Supervisor, District Director B&I Chief or other designated FmHA empluyee as a guide for the preparation of the field visit reports as required in 1980.469 Administrative. This guide does not replace Form FmHA 424-12 "Inspection Report," which is used in accordance with FmHA Instruction 424.1. II INITIAL FIELD VISIT. At the initial field visit the reviewer should discuss with the Lender the following items: A Any special requirements of the Lender's Loan Agreement which need monitoring by the lender. B Lender's servicing responsibilities as outlined in Form FmHA 449-35 with attention to Lender'c analysis and follow-up of borrower's financial statements; annual audit report, arranging schedule for future fiield visits and responsibilty to notify FmHA promptly of delinquency or problem loans. III SUBSEQUENT FIELD VISITS. Reviewer should be particularly aware f any significant changes i the borrowers operat ons and financial position. IV PRIOR REVIEW OF FILE. before going on field visit briefly review the loan file and the latest field visit report. V PROBLZH AND DELINQUENT LOANS. The reviewer is responsible to promptly notify the tate Director of problem or delinquent loans. VI ADDITIONAL INFORMATION. Financial Statements, newspapers or magazine artiles,. charts, etc. may be attached t the report. VII CONCLUSIONS AND RECOMMENDATIONS. hake constructive commentq and suggestions to assist others in making decsion on servicing actions. Comments should include the reviewers opinion on how the Lender is perforlung his servicing responsibilities. 74 APPENDIX III APPENDIX III PmHA Instruction 1980-E Guide 1 Page 2 Business and Industrial ,Toan Program Field Visit Report Report Number Date of Visit (Use consecutive order beginning with No. ) Borrower's ID No. Name of Borrower: Address: Street County State Fiscal Year End: Persons present or contacted on visit: Original Amount of Loan $ Present Princpal Balance $ Is loan(s) current? If no e.plain Number of jobs projected at time of application Current (See Form FImHA 449-22) number of jobs _ (Verify by reviewing Borrower's quarterly FICA reports, payroll records or personal count.) Comments: Latest Annual Local, State and Federal Taxes borrower is paying $- Latest Annual Payroll $ Are the premises and facilties maintained in an c erly, clean and safe manner? If no explain. Is the inventory (raw materials and finished) properly stored and protected? If no, explain. 75 APPENDIX III APPENDIX III FmHA Instruction 19V1O-E Gui e 1 Page 3 Is the business experiencing any problems in obtaining the necessary rw materials or marketing f its products or services? Does the overall operation appear to be functioning smoothly , or does it appear disorganized? Are there any labor union problems, civil suits, tax or creaitor's actions taken against he borrower? Has there been any change in methods of production, products or terms of sales? Is the borrower providing adequate financial statements to the lender for his analysis? Is the bookkeeping system adequate? Review and attach latest financial statements. Comment on sales, inventory and profit trends, accounts receivables and payables,debt payments, etc. General Comments: (May include information on recent fires, damages, flooos, new competition, new construction or development significant changes in area which effects the business, any new loans made to borrower, changes in management, other problems, etc.) Conditions and recommendations: County Supervisor District Director GAO note: The attached project summary, application form, and lender's agreement referred to have been deleted bcause of their volume. 76 APPENDIX IV APPENDIX IV PRINCIPAL DEPARTMENT OF AGRICULTURE OFFICIALS RESPONSIBLE FOR ADMINISTERING ACTIVITIES DISCUSSED IN THIS REPORT Tenure of office From To SECRETARY OF AGRICULTURE: Bob S. Bergland Jan. 1977 Present John A. Knebel Nov. 1976 Jan. 1977 John A. Knebel (acting) Oct. 1976 Nov. 1976 Earl L. Butz Dec. 1971 Oct. 1976 ASSISTANT SECRETARY FOR RURAL DEVELOPMENT (note a): Alex P. Mercure Apr. 1977 Present Vacant Feb. 1977 Apr. 1977 William H. Walker II Dec. 1975 Feb. 1977 James E. Bostic, Jr. (acting) July 1975 Dec. 1975 William W. Erwin Jan. 1973 July 1975 Thomas K. Cowden May 1969 Jan. 1973 ADMINISTRATOR, FARMERS HOME ADMINISTRATION: Gordon Cavanaugh June 1977 Present Denton E. Sprague (acting) Apr. 1977 June 1977 Frank W. Naylor (acting) Jan. 1977 Apr. 1977 Frank B. Elliott Aug. 1973 Jan. 1977 Frank B. Elliott (acting) Mar. 1973 Aug. 1973 Vacant Feb. 1973 Mar. 1973 James V. Smith Mar. 1969 Feb. 1973 a/Until January 1973 the title of this position was Assistant Secretary of Agriculture for Rural Development and Conser- vation. (02875) 77
Farmers Home Administration's Business and Industrial Loan Program Can Be Improved
Published by the Government Accountability Office on 1977-09-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)