oversight

Direct Loan System Requirements

Published by the Government Accountability Office on 1999-06-01.

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

Federal
Financial
Management
System
Requirements




JFMIP-SR-f’;i 8
June          9
Whatis JFMIP? ’
The Joint Financial Management       Improvement     Program (JFMIP) is a joint and cooperative
undertaking   of the U.S. Department     of the Treasury, the General Accounting Oflice, the Oflice of
Management      and Budget, and the Office of Personnel Management,       working in cooperation with
each other and other agencies to improve financial management practices in government.           The
Program was given statutory authorization       in the Budget and Accounting Procedures Act of 1950
 (31 USC 65). Leadership and program guidance are provided by the four Principals of the JFMIF-.
Comptroller    General of the United States, Secretary of the Treasury, and the Directors of the Office
of Management      and Budget, and the Office of Personnel Management.        Each Principal designates a
representative to serve on the JFMIP Steering Committee,       which is responsible for the general
direction of the Program.     The JFMIP Executive Director, and a program agency representative
 (who serves for 2 years) are also on the Steering Committee.

The Program promotes strategies and guides financial management            improvement    across
government;    reviews and coordinates central agencies’ activities and policy promulgations;        and acts
as catalyst and clearinghouse for sharing and disseminating     information     about good financial
management     practices.   This information sharing is done through coderences and other j
educational events, newsletters, meetings with interagency groups and agency personnel, and
through FinanceNet, an electronic clearinghouse on the Internet.
                                                                                                                    ,
The JFMIP has worked on interagency projects that developed a financial systems framework and
financial systems re$.tirements.     For the future JFMIP plans to assist Federal agencies in improving
their financial systems through its Program Management           Office. The Office will work on revising       j
the Federal government’s requirements        definition, testing and acquisition processes, the first target
                                                                                                            /
of opportunity    is core
                       r financial systems. The objectives of the Office are to develop systems
requirements,    communicate     and explain Federal and agency needs, provide agencies and vendors
information    to improve financial systems, ensure that products meet relevant system requirements,
and simplify the procureme.nt process.

Information      on JFMIP      can be found at its website at
www.financenet.goti/financenet/fed/jfmip/jfmip.htmor       call (202) 512-9201.
Foreword
This Direct Loan System Requirements         document is one of a series of publications which started with the Core
Financial System Requirements       published by the Joint Financial Management       Improvement      Program (JFMIP).    Its   L
preparation addresses the goal of the President’s Council on Management         Improvement       (PCMI) and the JFMIP to        F
improve the effkiency and quality of financial management in the Federal Government.              Impetus has been provided
by the Chief Financial Officers Act of 1990 (CFO) and the Federal Credit Reform Act of 1990 (FCRA),
Government Management         Reform Act of 1994 (GMRA),       and Federal Financial Management          Improvement   Act of
 1996 (FFMIA), which strongly reaB%med the need for the Federal Government to provide financial systems that
facilitate the effective management of Government programs and services and the proper stewardship of public
resources.

These requirements encompass the full scope of requirements for an automated direct loan system. Each Agency
must evaluate whether it is practical to fully automate all of these functions or whether manual systems and
processes are justified. Agencies are to use these functional requirements in planning their financial system
improvement    projects. As with the other systems requirements documents, agencies will have to include their
unique requirements,     boh technical and functional, with the requirements itrthis document.      Furthermore,  each
agency must develop its own integration      strategy detailing how the direct loan system will either interface or
integrate with the core financial system and other applicable systems.

We want to thank the agency officials and others in the financial     management     community    who contributed    to the
document.  We value their assistance and support.




                                                                           Cleary Alderman
                                                                   Executive DGector
                                                                   June 1999
.‘.   ,,.
                 i




            “.
 Tableof Contents

Foreword
Acronyms
Illustrations
Introduction         , . . . . . , . . . . , . . . . . , . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,. . 1
Federal Financial Management                        Framework.                ......                 ; ...............................                                                  2

Background           .....................................................                                                                                                              7

SystemOverview.                ...............................................                                                                                                     : : . 9

Introduction        to Functional Requirements ........................................                                                                                                17    ’

Loan Extension ....................................................                                                                                                                    19

Account Servicing.              .................................................                                                                                                      27

Treasury Cross-Servicing                   ...............................................                                                                                             33

PortfolioManagement                    .................................................                                                                                               37

Delinquent       Debt Collection/Troubled                        Debt Servicing.                ...............................                                                        48

Other Reporting Requirements                          ............................................                                                                                     62

Appendix A: Policies Governing JFMIP Direct Loan System Requirements-Sequential                                                          .......          ; ....            ....       63

Appendix B: Policies Governing JFMIP Direct Loan System Requirements-Relational                                                          ..............                                67

Appendix C: Proposed Policies Governing JFMIP Direct Loan System Requirements                                                            ..............                                71

Appendix D: Glossary. ................................................                                                                                                                 72

Appendix E: Contributors.                      ......................................                                                                          ., .......              73
Acronyms
AAPC      Accounting and Auditing        Policy Committee
ACH       Automated Clearing-house
CATVRS    Credit Alert Interactive Voice Response System
CCLR      Claims Collection Litigation     Report
CFO Act   Chief Financial Officers Act of 1990
          ConfQuration      Management
DCA       Debt Collection Act
DCIA      Debt Collection Improvement         Act
DOJ       Department of Justice
EDA       Electronic Debit Account
E-mail    Electronic mail
FASAB     Financial Accounting Standards Advisory Board
FCRA      Federal Credit Reform Act
FFMIA     Federal Financial Management        Improvement     Act
FMFIA     Federal Managers’ Financial Integrity Act
FMS       Financial Management      Service
GAO       General Accounting Office
GMRA      Government Management          Reform Act
GPRA      Government Perfbrmance and Results Act
IRS       Internal Revenue Service
JFMIP     Joint Financial Management       Improvement      Program
OGC       Offlce of General Counsel                          I,
OMB       OfXce of Management       and Budget
PCMI      President’s Council on Management         Improvement
SAS 70    Statements of Auditing    Standards
SF        Standard Form
SFFAS     Statement of Federal Financial Accounting Standards
SGL       U.S. Government Standard General Ledger
TFM       Treasury Financial Manual
          Taxpayer Identification   Number
TOP       Treasury Offset Program
Illustrations
 1. Financial System Improvement                  Projects.          ................................                                                                   3
 2. Framework for the Integration                of Federal Agency Systems ......                                     ; ................                                5   br~

 3. Direct Loan System Overview. .....................................                                                                                                  9   E
                                                                                                                                                                            t’
 4. Direct Loan System: Internal and External Information                                     Stores ...................                                        15-i6
 5. Functional Requirements               .......................................                                                                                  17
 6. Explanation of Icons used in the Illustrations                           .............................                                                         18
 7. Overview of the Loan Extension Function of a Direct Loan System ...................                                                                            19
 8. Loan Extension: Application               Screening Process ............................                                                                       20
 9. Loan Extension: Loan Origination                     Process ...............................                                                                   23
10. Loan Extension: Internal Management                        Information            Requirements.             ...................                                26
11. Overview of the Account Servicing Function of a Direct Loan System . .’ ...............                                                                        27
12. Account Servicing: Billing and Collection Process ...........................                                                                                  ,28
13. Account Servicing: Account Status Maintenance Process ........................                                                                                 30
14. Account Servicing: Internal Management                         Information            Requirements             ............                      ., T ...      32
15. Treasury Cross-Servicing ........................................                                                                                              34
16. Overview of the Portfolio Management                        Function of a Direct Loan System. ..............                                                   37
17. Portfolio Management:            Portfolio Performance Process .........................                                                                       38
18. Portfolio Management:            Program Financing Process ..........................                                                                          41
19. Portfolio Management:            Portfolio      Sales Process. ............................                                                                    45
20. Portfolio Management:            Internal Management                   Information             Requirements            ...........                 ., ...      47       (

21. Overview of the Delinquent             Debt Collection Function of a Direct Loan System ............                                                           48
22. Delinquent      Debt Collection:        Collection Actions Process ........................                                                                    49
23. Agency Debt Program Management                        and Collection Process ......................                                                            50
24. Delinquent      Debt Collection: Write-offs and Close-outs Process ...............                                                               : ....        54
25. Overview of the Foreclosure and Liquidate Collateral Function of a Direct Loan System. .......                                                                 56
26. Foreclose and Liquidate Collateral: Foreclose on Collateral Process ..................                                                                         57
27. Foreclose and Liquidate Collateral: Manage/Dispose                                 Collateral Process ................                                         59
28. Delinquent      Debt Collection Function: Internal Management                                       Information        Requirements    .......                 61
29. Policies Governing JFMIP Direct Loan Requirements                                     (in sequential order) ..............                                     63
30. Policies Governing JFMIP Direct Loan Requirements                                      (in alphabetical order) .............                                   67
,
 Introduction
The CFO Act of 1990, GMRA, and FFMIA of 1996 mandate improved financial management, assign clearer
responsibility for leadership to senior officials, and require new financial organizations, enhanced financial systems,
and audited financial reporting. Improving Federal financial management systemsis critical to increasing the
accountability of financial and program managers, providing better information for ‘decision-making, and increasing
the efficiency and effectiveness of services provided by the Federal Government.

Proficient financial management and, accordingly, reliable financial systems,must provide for:

    l   Accountability. Inform taxpayers, agency personnel, and the Congress, in terms they can readily understand,
        about what the nation’s tax dollars are spent for, and how Federal assetsare protected.
    l   Efficiency and Effectiveness. Provide efficient and effective service to the various partners the Agency has in
        its direct loan program (i.e. individuals, contractors, partnerships, corporations, not-for-profits, grantees,
        state, and local Governments).
    l   Better Decision-Making. Provide to agency heads, program managers, and the Congress timely reports
        linking financial results and program data so that financial and program results of policy and program
        decisions can be identified, tracked, and forecasted more accurately.

Office of Management and Budget (OMB) Circular A-127, Financial Management Systems, setsforth general
policies for Federal financial management systems. Each agency is required to develop and maintain a single,
integrated financial management system. To support this objective, each agency is required to have an ongoing
financial systemsimprovement planning process and periodic reviews of financial system capabilities.

Agency financial systems must enable agencies to prepare financial reports in accordance with Federal accounting
and reporting standards. Financial systemsneed to be flexible to adapt to changes in accounting standards.

The Federal Accounting Standards Advisory Board (FASAB) was established in October 1990 to recommend
Federal accounting principles and standards to the Secretary of the Treasury, the Director of OMB, and the
Comptroller General, who are Principals of the JFMIP. The FFMIA of 1996 adopts the FASAB as the
standard-setting body and requires each Federal agency to implement and maintain financial management systems
that comply with uniform Federal accounting concepts and standards.

The Direct Loan System Requirements document has been prepared as a continuation of the Federal Financial
Management System Requirements series that began with the Core Financial System Requirements in January
1988. The document has been prepared in consultation with OMB, the General Accounting Office (GAO), the
Financial Management Service (FMS) of the Department of the Treasury, and Federal program agencies.




Direct Loan System Requirements                                                                                       1
     Federal
          Financial
                 Management
                        Framework
     This document is a part of a broad program to improve Federal fin&-&l management which involves the
     establishment of uniform requirements for financial information, financial systems, reporting, and financial
     organization.

     System requirements for common systemshave been prepared under the direction of JFMIP as a series of
     publications entitled Federal Financial Management System Requirements.’ Successivepublications in the series
     have included the Core Financial System Requirements (undergoing update), Human Resowces &Payroll Systems
     Reqhements    (undergoing update), Travel System Requirements (undergoing update), Seized/For&ted Assets System
     Requirements (undergoing update), and&fanag-etial    CostAccounting System Reqzhements (July 1995). This
     publication, Direct Loan System Requirements, and its companion, Guayaizteed Loan System Requirements, (December
     1993)” extend the establishment of functional requirements for ageixy systems.

     As shown in Illustration 1, Financial SystemImprovekent Projkts, establishing uniform requirements is only part of
     the process of improving financial managenient systemsand information. Improvements can be achieved through
     the selection, development, ,and/or purchase of applications that meet approved fUnctiona requirements and
     technical as well as data management specifications. Agencies must continue to improve their financial systemsand
     implement new requirements as they are issued so that continuing efforts to standardize and upgrade data and
     reporting requirtiments in accordance with OMB’s Governmentwide 5-year financial management plan will be successful.

     Well defined and effective Governmentwide functional requirements assistagencies in developing strong systems
     and information by eliminating duplicate work among agencies and providing a common framework so that
     outside vendors can more economically provide systemssoftware. Development of Governmentwide functional
     requirements for each application is a critical effort that will affect internally developed systemsand the evaluation
     and selection of commercially available systems. Agencies should consider including a vendor’s degree of
     compliance with JFMIP System Requirements as this may provide the agencies with an important evaluation
     criteria. However, agencies must augment these Governmentwide requirements with their own unique agency
     requirements, which must be carefully defined to ensure consistency with the Governmentwide requirements. Each
     agency must also integrate the Governmentwide requirements with existing systems,including the major program
     systemsthat are unique to the agency.

    The CFO Act requires agency CFOs to develop and m’dintain agency financial management systemsthat comply
    with applicable accounting principles, standards, and requirements; internal control standards; and policies and
    requirements prescribed by OMB and the Department of the Treasury.

    The FFMIA requires each agency to implement and maintain financial management systemsthat comply
    substantially with Federal financial management systemsrequirements, applicable Federal accounting standards and
    the U.S. Government Standard General Ledger (SGL) at the transaction level. This law recognizes that financial
    management systemsinclude the financial portions of mixed systems,such as direct loan systems,that are needed to
    support financial management. Each audit of an Agency’s financial statements will report on whether the Agency’s
    financial management systemssubstantially comply with Federal financial management system requirements. If,
    based on the auditor’s report and any other relevant information, the Head of the Agency determines the Agency’s
    financial systemsare not substantially compliant, then a remediation plan will be established that includes the
    resources, remedies, and intermediate target dates necessaryto bring the agency’s financial management systems
    into substantial compliance.

      Agency financial management systems must be able to provide complete, reliable, consistent, and timely
      information; prepare this information on a uniform basis; be responsive to the financial information needs of
      agency management; and support preparation of both agency budgets and financial statements. Of paramount
      importance is that direct loan systemsmaintain accurate borrower detail records and record transactions consistent
      with the loan contract and the U.S. Government SGL as these records form the subsidiary ledger to the receivable
--halance-inthegenetiger.
    2                                                                                      Direct   Loan System   Requirements
                                                                                   Federal Financial              Management        Framework



                                           Financial System 1mproveme.N Projects




             -7   Standards/
                 Requirements



                  . Standard Reporting
                     Requirements                        ,,
                                                                      Agency Implementation



                                                                                              1
                                                                                                  I       A
                                                                                                              I
                                                                                                                            I.
                                                                                                                                       I


                                                         . Additional’                                            . Adaptation
                  . U.S. Government       Standard         Agency
                    General Ledger                         Functtonal        :                                          ,

                            ,’                             Requirements

                  . Core Financial    System                                                                      . Procedures
                     Requirements


                  . Human Resources        &             . Additional
                     Payroll Systems                       Awncy
                     Requirements                                                                                 l   Training
                                                           Technical
                                                           Requirements
                  . Travel System
                    Requirements
                                                                                                                  . Documentation
                                                                                                      ,
                  . Seized/Forfeited Asset               . Integration
                    System Requirements                     Strategy                                                                   I
                 r-------
                 f . Direct Loan System                                                                           . Conversion         I
                        Requirements
                 I -----mm
                                                         . Software/
                  . Guaranteed   Loan System               Hardware
                    Requirements                           Evaluation                                             . Maintenance,


                  . Inventory System
                     Requirements


                  . System Requirements        for
                    Managerial Cost
                    Accounting


                  . Other Standards




       --
             f     Subject of
       I
                   this report
       1-I

                                                              Illustration   I




Direct Loan System Requirements                                                                                                                 3
Federal Financial   Management   Framework ’



Integrated     Financial Management            Systems                                  : :             ., : ,       _,,,
OMB Circular A-127 requires each agency to develop and maintain a single integrated financial management ,,
system. Development of an integrated financial management system is necessaryto support agency management,
the objectives of the CFO Act, and FFMIA Act of 1996 ‘.
                                                                                        .’ ’
Specifically, OMB Circular A-127 requires the implementation of a unified set of financialsystems and financial
portions of mixed systemsthat provide for effective and eficient interrelationships among softwarei hardware,
personnel, procedures, controls, and data contained within the systems. OMB Circular A-127 statesthat an
integrated financial management system has the following characteristics: common data elements, common
transaction processing, consistent internal controls, and’effrcient transaction entry.

Integrated. financial management systemsmay include electronic interfaces between component systemsor
applications if the interfaces are appropriately defined and controlled so that they meet the criteria above and follow
the timing of normal business cycles. Determination of whether to interface two particular applications or to, merge
them into one will depend upon the compatibility of the applications, the physical environment in which the
applications operate, and the commonality of data for making decisions, among other factors.

To provide information prepared on a un%orm basis’asrequired by the CFO Act, systemsneed to use consistently
defined data, processes,and controls. Standard reporting requirements, the U. S. Government SGL,
JFMIP-published financial system requirements, OMB circulars and bulletins, the Treasury Financial Manual
(TFM) including the credit supplement, Managing Government Credit (January 1989), and other such
publications provide a starting point for agencies defining specific data elements and processesfor their systems..

As shown in Figure 1 of Illustration 2, many layers of data can be defined. The three inner layers; standard
reporting data, U. S. Government SGL data, and performance measurement data must conform to data standards.
established through Governmentwide initiatives. The two outer layers represent data specific to an agency or to a
program which should be standardized throughout the agency or program. Standard data classifications
(definitions and formats) must be established and used for recording financial events as prescribed by OMB
Circular A- 127.
                                                                    ,’
Figure 2 of Illustration 2 shows how management processesinterrelate and provide common functionality.
Common processesthat are based on standards and used throughout the system enable transactions to be recorded
consistently, with predictable results.

Asshown in Illustration 2, data, processes,and application software need to be linked.to each other to form a
system; each is dependent on the other. Figure 3 of Illustration 2 shows that the financial system forms the
backbone for the agency’s integrated financial management system. It provides common processing routines,
supports common data for critical financial management functions affecting the entire agency, and maintains the
required general ledger control over financial transactions, resource balances, and other financial systems.

Federal agencies have systems that support (1) agency administrative functions such as personnel/payroll, travel,
procurement, and property management; (2) unique activities and operations of agency programs, such as loan
programs, grant programs, entitlement programs, and law enforcement programs; and (3) employee workstation
activities, such as word processing, electronic mail (e-mail),                                              a.I’
                                                          , and desk riiaiaagement.~           :
Functional requirements of the Federal government’s financial systemscan be segregated into two general
categories, mandatory and value added. Following are definitions for these two categories of requirements:


                                                                                -----             --.            -.-- --...--__
4                                                                                        Direct     LoanSystem F@qui’Aments
                                                                               Federal Financial ,Management Fram‘ew.ork



           Framework                  for the l,ntegration      of ‘Federal. Agency ,Systems                          ‘iI
                                                                                      ,. I,’




                         Standard <Data                         ,Tnyard                  Processes




                                                                tern / Jysle’n /Human Resources\     \\




                                                       Imr~qg   2                         ----~--~          ----...   ---   _

Direct   Loan System   Requirements                                                                                         5
Federal Financial Management Framework



    mandatory - Mandatory requirements describe what the system must’ do and c,onsistsof the minimum        ,
    acceptable functionality, necessaryto establish a system; or are based on Federal laws and regulations.
    Mandatory requirements are those against which agency heads evaluate their systems to determine substantial
    compliance with systemsrequirements under the FFMIA. These requirements apply to existing systemsin
    operation and new systemsplanned or under development.

    value-added - Value-added requirements describe features or characteristics and may consist of any
    combination of the following: (1) using state of the art technology, (2) employing the preferred or best
    business practices, or (3) meeting &specialmanagement needs of an individual agency.: Value-added,
    optional, and other similar terminology may be used to describe this category of requ+ements. Agencies shouid
    consider value-added features when judging systems.options. The need. for these value-added features in agency
    systemsis left to the discretion of each agency head..
                                             .   I       /
All requirements described in this documentare mandatory, this includes all statements described as‘“should”
or Gmust.n       .I

                                                                                    :
Direct Loan System
As shown in Figure 3 of Illustration 2, direct loan systemsare an integral part of the totalfinancial management
system for those Federal agencies authorized to make direct loans. The direct loan system interacts with the
financial system to record receivables, collections and disbursements in the general ledger consistent.with the U.S.
Government SGL.




                                                                                                         ‘,        ,




                                                                                  .---.                 .-_----_--...--...

6                                                                                         Ditwt   Loan System Require,ments
 Background
 This chapter presents a brief history of Federal credit programs, describes the policies that affect Federal credit
 programs, and’defmes the roles and responsibilities of the Federal organizations’involved in directing, overseeing,
 and implementing credit programs.
                                                                                    1

 History
 Federal credit programs provide benefits to certain borrowers or channel additional resources to certain sectors.of
 the economy. Examples of Federal credit programs include agricultural loans, small business loans, housing
 mortgage loans, and student loans. There’are tie types of Federal’loan programs: direct loans and guaranteed ’
 loans. In direct loan programs, the Federal Government makes a direct disbursement to an approved borrower and
 services the loan and collects the loan. Guaranteed loan programs utilize private sector lenders-to originate and’
 service loans, with all or a portion of the interest and loan repayment
                                                                   1.    guaranteed by the Government -in;caseof
 borrower default.               ’                                                                               .,
Federal credit programs generally are costly to the Government because they provide more favorable terms to
borrowers than are available from private lenders, often lending to individuals and businesseswho cannot obtain
private financing. Although the Government has chosen to administer these inherently high risk loan programs in
order to achieve social purposes? efficient and effective mariagement,can minimize losses.:‘Financial systemsare ,a
key element in achieving this goal. Financial systemsare especially critical to implementing the requirements ,of the
CFO Act of 1990, as amended, including measures of program performance and financial statements, and the
FCRA of 1990, which setsup new procedures to budget and account for credit subsidies and loan assets.


POliCy

The policies governing credit programs and financial systemsthat affect direct loan systemsare attached in
Appendices 1,2 (current policies), and Appendix 3 (proposed policies).


Roles and Responsibilities         of Departments       and Agencies
This section identifies the key organizations in the credit management community and the roles they play in
managing Federal credit programs.

Offke of Management and Budget. OMB is responsible for reviewing legislation to establish new credit
programs or to expand or modify existing credit programs, reviewing and clearing testimony pertaining to credit
programs and debt collection, reviewing agency budget submissions for credit programs and debt collection
activities, formulating and reviewing credit management and debt collection policy, and approving agency credit
management and debt collection plans.

Department of the Treasury. The Department of the Treasury, through its FMS, is responsible for monitoring
and facilitating implementation of credit management and debt collection policy. FMS develops and disseminates
as a supplement to the TFM operational guidelines for agency compliance with Governmentwide credit
management and debt collection policy. FMS assistsagencies in improving credit management activities and
evaluates innovative credit management practices.

Federal Accounting Standards Advisory Board. The FASAB was established in October 1990, by the
Comptroller General, the Director of OMB and Budget, and the Secretary of the Treasury. The Board exists
                                                                               ____-.-.-    .-.-   -    ----.-   - . . ._...
                                                                                                                               :-
Direct Loan System Requirements                                                                                           7    :.
 Background


 through a memorandum of understanding among these three principal. Federal executives. The FASAB
 recommends accounting standards to the ~JFMIPprincipals after considering :the financial and budgetary
 information needs of congressional oversight groups, executive agencies, and otherusersof finaricial:data.
                                                                                                           ./
 Accounting and Auditing Policy Committee. The Accounting and Auditing Policy Committee (AAPC) is a
 permanent FASAB committee established to improve Federal financial reporting ,by assisting in providing timely
 guidance to preparers and auditors of Federal financial statements. It recommends guidance on issuesreceived
 from numerous sources and references three topical areas: Statement of FederalFinancial Accounting,Standards
 (SFEAS), OMB’s Form and Content, and audit, issues. The AAPC has established a credit reform task force
 composed of members of Treasury, ‘GAO,, OMB and representatives from all the credit .agencies.to address all
 accounting, auditing, budgeting and reporting issuesencountered by agencies subject to .the FC&4 of ‘1990. ..._”
                                                                           ,’
 Federal Credit Policy Working Group. The Federal Credit.,Policy Working Group is ‘an interagency forum that
 provides advice ,and assistanceto O&tB and Treasury in the formulation and implementation: of credit policy. In
 addition to OMB and the Department of the Treasury, membership includes theDepartments! of Agriculture,
 Commerce, Education, Health and Human Services, Housing and Urban Development; Interiorj Justice, ‘Labor,
 State, Transportation, Veterans mairs, the Agencyfor International Development, the Export-Import B,ank, and
 the Small Business Administration.                j         :

 Agencies. Each agency is responsible for managing its own credit activities in accordance with its statutory
 authorities and the provisions of OMB circulars and other policy guidance. OMB Circular A-129, Appendix 3,
 outlines the specific functions of the agencies in relation to credit management.




                                                                                    ,:.;.             ,”
                                                                                .            ’   .,




‘8                                                                                          D.ire.ct Joan System Require.ments
SystemOverview
                                                  *
                                                      _.

                                                                                            ,.
This chapter provides an overview of direct loan system .requirements D.ata.from &loan extension,- account
servicing, portfolio management and delinquent debt functions will be used to calculate credit subsidy estimates and
satisfy credit reform accounting requirements. The overview has the following sections:
                                                       ..           ,‘,.s        ‘, I
    l . Summary of Functions presents ,ahigh-level descri@on of the functions that are supported by direct loan
        systems.                                                          .,
    l   Relationships with Other Systems describes how direct loan systems.interact with other systems.
    l   Data Requirements discussesthe types of data needed to perform the various. functions of a direct loan
        system.               ,
    l   Separation of Duties and Supervision discusseskey duties and responsibilities.
                                                                          ‘.
                                                            ,..,                            ;   .
                                                                                                                     I   (

                                          ‘.


SumrnaryofFunctions.~                ,         .‘:,                         I        ,, ,
                                                                                        ”                        .’
Illustration 3 shows the six functions of direct loan systemsand the key sources and destinations of information.
flowing into and out of the loan system.
                                                                                      ,’


                                         Direct Loan System Overview

                                                                     Guarante
                                                                     v       Loall
                                                                            System




                                                              Direct Loan
                                                                 System




                                                                                                     Property
                                                                                                    Ianagement
                                                                                                      System                 ,- j
                                                                                                    ?>           1




                                                           Illustration     3




Direct LoanSystem Requirements                                                                                                      9
System Overview                          !


The following is a brief description of the major functions of a direct loan system. The Functional Requirements
chapters’ provide a detailed description of each function, including the lower level processeswithin each function.
 ‘.
                                                                                 , :                        ,.. ‘1
Loan Extension

The Loan Extension function supports analysis of the applicant’s eligibility in accordance with statutory and
regulatory requirements. The Loan Extension function also supports the development of information to satisfy
credit reform accounting and budgeting requirements.. The processeswithin the Loan Extension function,, are:

                 l   Application Screening, and
                 l   Loan Origination.

Account Servicing                                                                               _. I
The Account Servicing function supports routine invoicing and collection of debts. The processeskthin the
Account Servicing function are:

             l       Billing and Collection, and
             l       Account Status Maintenance.

Treasury Cross-Servicing

Cross-servicing occurs when Treasury’s FMS or a Treasury-designated debt collection center provides debt
collection services for other,Federal agencies. The processeswithin cross-servicing are:-
                                                   .
        Identify Accounts Selected
             l



         l           Monitor Accounts Referred to the Debt Collection Center, and
         l           Support an Agency’s Request to Cross-Service.

Portfolio Management

The Portfolio Management function supports the management and performance evaluation of the direct loan
program and its porttolio. It also supports program financing and management of portfolio sales. The processes
within the Portfolio Management function are:

         l           Portfolio Performance,
         l           Program Financing, and
     l               Portfolio Sales.

Delinqu&t                Debt Collection ‘.                                                             .. .~

The Delinquent Debt Collection function includes the recovery of delinquent debt through the use of dunning
letters, offset programs, collection agencies, garnishment of non-Federal wages, litigation, and the termination of
collection action on uncollectible debt. The processeswithin the Delinquent Debt Collection function are:

     l               Collection Actions,
                                                                   -----            -.-.-----            _~      --    - ..-._- ._.._..-. _

10                                                                                                   Direct, Loan System Requirements
                                                                                                                      System Overview
                                                                                                                      -_____-_-.-                      :~



                    . Write-offs and Close-outs, and
                    l    Troubled Debt Servicing Under Agency Program Requirements.

 Other Reprthg                    Reqtiirements                                                                                                        i-.

This chapter provides requirements for two types of reporting:

                . Transaction History, and
                l External Reporting Requirements.


Relationships                       with Other Systems

The direct loan system must be capable of interfacing with other financial management systems. A brief description                                     i-
of some of the systemswhich interact with the direct loan system is provided below.                                                                    I7

            l            The direct loan system interacts with the core financial system to perform fund control checks, initiate or
                         record payments, record the results of other direct loan-related fmancial transactions, and acknowledge
                         receipt of financial information exchange. The direct loan system miist be able to perform automatic system
                         balancing. This system’balancing must ensure that direct loan partners involved in a financial information                    I
                        exchange agree on transaction number and dollar values passed, processed, and rejected. The automated
                        system balancing will include cumulative subsidiary account balancing to the general ledger. This automated
                        system balancing ensures that direct loan partners reflect the same picture of valid transactions over a
                        specified period of time, such as a month, quarter, or a year. The direct loan system must be capable of
                        supporting managerial cost accounting.
        l               Direct loan programs and guaranteed loan programs have common processesfor managing receivables.
                        Defaulted guaranteed loans acquired by the Government are serviced and collected in a manner similar to
                        direct loans. Therefore, an agency with both direct and guaranteed loan programs may have a direct loan                        I
                        system and a guaranteed loan system that share system capabilities related to collecting delinquent debt. If an
                        agency acquires property serving as collateral on a defaulted direct loan, the direct loan system will provide                 I
                        the property management system with the information needed to manage and liquidate the collateral,

System Inte$ace Function&..                       Verijkation

A team independent of the development organization will perform all verifications to ensure that the direct loan
system is capable of interfacing with other financial management systems.Verifications should include the
following:

    l                   Intersystem testing will take place to ensure that the direct loan system can process inbound and outbound
                        data to other interfaces for the direct loan program. This testing will ensure that the direct loan system can
                        accept data files, process them correctly, andtransmit the necessary.transactions, to -other, systems.     ;
    l                   All intersystem’vendors involved withthe testing will create and accept a’coml&ehensive test &U-L
    l                   A team independent of the development organization will review requirements, test plans and scenarios,
                        monitor test execution, and ensure that testing objectives are met. r
    . The team independent of the development organization will work as a partner in the development effort,
      gaining system-specific knowledge  while reviewing processes,outputs, and techniques to ensure compliance
         ..                    ..
      with procedures and quality results.                                                            ---. .- .._-.-                          ..,__.
Direct Loan System                  Requirements                                                                                         11
Sys,ttm Overvi.ew’


When issues arise, theywill be tracked through a CM tool, and the resolutions will be,included iq t&ng,s@-off     f,
documentation when resolved. Review other than test execution WY include at a minimum the following:
                                                       I 1, ; ::-       ,.
     Requirements Traceability Matrix. The syiiirn shall be able to demo&-a& that & deveiobment ’
     l

     requirements are incorporated into ‘I$$,fial system output through ,tl~e;.us~,   of requirements trace+i&y I
     matrices; .These matrices shall be submitted with the Preliminary Design Document and should be updated
     with each subsequent step in the enhancement effort (i.e., requiremefits,should, b,e C:,qFed+rough.@ie ,.
     preliminary design, detailed design, specifications, test plans, and test results).
     l   Functional Requirements Document. The syst&n shall kerform all Work*needed tos;ic&m&sh the specified
         outcomes, achieve or exceed the specified perforniance standare, record. and rcc&cile fimds, +nd tFa!k and
         report activity.
     ‘0 Detail Design, Document. The detail design shall fully consider requirements for hardware, sofnvark,
      , integration with other systems,security, te$ecomunicatio@, .data ‘management, mam$ ptoccdpres,                       ,. !,
        QA/QC;auditability, and capacity planning and my?gement. It.should cJocgment,the desigq ,in ,.                   ,
        system/subsystem specificatiqns, program sp,ecificatlonsj and database spe&acons. :, )I     ,. .. ,,,,..;       /
     l   System Specifications. System/Subsystem specifications, program specifications, and database specifications
         should all be included within the Detail Design Docunient.‘Specifications‘ shotid hi&de it a ininimiun
         flowcharts, input/output processing, and file layouts.                    8’     ,                 ..
     l Manual procedures. All system modificati&s or,,mai.ntenancech+ges,shaL,b.e inco?porated .&to gnqual
       procedures and functions as tiecessary~0 keep the procedures up to, date. System testing shall ensure that all
       related manual procedures p&form accdrditig t0 sjrsteti. fecjtiirements.            “;      ’           ’
                                           ”                              :. ., ‘/       : .,                 ’ :! ‘.
PostImplement*tt-on T,i,,,                          :...’ 4.        ?       h                 ,, :         I. .,      ,
                                                             ,.‘.   I,.,.                           ‘,’
After the system is implemented, transactions should be reviewed to make sure that transactions are processing
correctly and the data being produced is reliable. This testing will be conducted with actual production data, and
will be done with the team independent of t&e development organiiation verifying expected results. In addition,
whenever possible, daily, mdnthly, quarterly and fiscal/cdendar year-end reports should be reviewed     ., firior
                                                                                                               ., to
dissemination to ensure thit tlie datg,li& tipdated cdrrectly.
                                         ,                                                                  :
Conj&ratin     Manaacment (Wj                   j 1                                     ; ,,,..’         ,, ”

The direct loq.system must use CM that will establish and maintain the security and integritj7 of the direct loan
system throughout its developpe\t, ,life cycle. A, comprehensive CM must provide all rjroj&t team members with a
consistent level of understanding of the systkm engineering process, maintain systemsstability, and reduce technical
risk associated with the development’effort;                                                          .,/




The direct loan system stores, accesses,and/or$dates severaLtypes of data., I$ d$s docume&‘a ~ro&p&$of
related types of data are referred to as ti information store. The term information store (rather than da’tabaseor
file) is used to avoid any reference to the t&hnical or physical characteristics of the data storage mediiim; ! Acniai
data storage (physical databases and files) must be ,$etermined by each agency during system development and
implementation based upon the lodn program’s &tutory r&$i-einenti ai well as ‘the ag&cy’s t&&&l                           r
environment, processing volumes, organi,zational structure, and degree of system centralization or decentralization.
This section defined the 4& informat& stores’&d pi-&idc$ <xamples‘ijf the data that iotiprise’each inform&oh ’ ”
                                                                  ,’.           ,:                I                    :.
store.
                                                                                             .-       --__----.---
I2                                                                                        Direcj Loaq ,Sys,temtl :Requirement,s
                                                   :.
                                                                                                                                  System .Overview
                                                                                                                                            -_-_                            C
                                                                                                .



  The following three information stores’are internal to the direct loan system:                                                                                            1
                                                                 : :, ,’ :’
 ‘Application    Inforniation.      This refersto data used to determine the eligibility and creditworthiness of the                                                        :b
  applicant; data about the loan being applied for; and the status of the review and approval of the application. It                                                        F
 includes the following specific types’of data:
                                                           ,_ .I       T’
        ’ Applicant Data (e.g., name, address, income, demographic data)
               l                                                                         ‘. ’ ’
          Application Data (e.g., amount, date, program)
               l



      l* Application Status (e.g., pending, approved, rejected)’
                                                            ,‘,       .’                                                                                                    g.
                                                                                                                                                                            $
 Lam. Information.          ,This refers to data associated with a loan once the loan has been approved. Data are captured
 from the.Aiplication Information ‘store .for approved,loans. Additional data are added throughout,the life of the
 loan to support servicing and analysis., It includes the following data:

               . Loan Data (e.g.> status, subsidy information, cohort)
           l     Collateral Data (e.g., appraised .vdue, status)                                    .,

           l        payment History (e.g., disbursement amount, collections includirig’principal                  and interest, accruals)
           l        Special Collection Activity Data (e.g., delinquent debt collection activity and status)

Program  Criteria.  This refers to decision-making criteria used in loan extension and servicingi portfolio
management, and delinquent debt collection based on statutes, program regulations,. and policies for the loan
program. This information store includes the following types of data:
                                                                   ”
                                ., ,. ‘) I                       :
       ; Eligibility      ”                                                              l    Credit Bureau Reporting
                                 * ‘.                                   ,.
       l Creditworthiness                                                            l       ,Treasury Offset,, Referral
       : Invoicing                                                                   l        Cross-Servicing- Re ferral
       . Receipt Application Rules                                                   l        Collection Agency Referral for debt greater than >
       . Loan Modification                                                                    180 days delinquent
       . Delinquent Debt Jdentification                                              l        Collection Agency Selection for debt greater than
                                                                                              180 days delinquent
       . Portfolio Evaluation .,
                                                                                     l        Litigation Referral
       . Loan Sale ,’
                                                                                 l            Write-off
       . Loan Purchase
                                                                                 l            Close-out
       . Prepayment
                                                                                 l           Collateral Foreclosure Selection and Holding
       . CAlVRS Referral             .’ . ;                                                                                              .’_,
              ,’      .                     ..‘i’I” ., 1!’ ;,,:,        ,.‘,.’               .,costs
                                                                                                ,:,~ ,..  .‘. ;.,r:) .y.,; -; --,- / .,I ; .‘- .,; r
                                       ‘,< ‘. ”
othw               Infimnation   Stores

Additional information stores are controlled and managed outside the ‘direct loan system:                                                              I
Credit Informahon.    This refers to information concerning the ,applicant’s financial background and
creditworthiness. This information store includes the following types ,of data:,
                                                                                                                    -                       --.1.---       . .._ -...   L _



Direct Loan System Requiremelits                                                                                                                       ,13              .
                                                                                                            :
System Overview,                                                                                                                                                         __I.-

                                                                                                            8’
     l   Delinquencies on Debt to the Federal Government,
     l   Credit +tory                        ., ,,                                    ., 1;’ I I                           ‘\        ,                    .       _.
                                                                                                                 :
     l   Employment and Income Data                             ,,’             ,..          ..i                                                      ^
     l   CollateralValue            ,’                         ,’                          .’ ‘, ,, .,                                             ...-
                                                                                                                                                                                     i
Core Financial System Information.     This refers to. information for performing funds control checks,initiating or
recording payments, and recording the results of other direct loan fmancial transactions This information store
includes the following types of summary data:             ,
                                                            .      ,..,         ‘.               . ,”    *.
     l Budget Execution Data’                               ‘_                ,’ ‘,           _.
     l   Net Receivables                                                                                             I’,                                      I    .,.
                                                   ,‘.          ‘. j.,
     l   Disbursements                                                                                  :                                     ,.
                                                                                                                                                                                .#
     l   Collections/Receipts                                                         ,,
     l   Administrative Costs                                                                                                   ..        :
     . Principal and Interest Data
     l   Working Capital Data                                         !
     l   Acquired Asset Data                             ,.o          ,,                                                                                                             ~

Organizatiorid’    Information.
                                                                                            /


     l   Treasury Interest Rates                                                                   .’
     l   Offset Requests
     l   Loan Payments                       .’
     l   Sales Proceeds I. .‘.                                            .‘.
     9 Approval for Sale                          -,
     l   Approval for Prepayment
     l   SF-1151 and SF-1081
     l   Write-off Approval
     l   Collection Activities and Results
     l   Foreclose Data

Relationships of Information       Stores

Illustration 4 depicts the relationships between theloan system information stores described above and the                                                                  ,
processes.within each function which accessor update those information stores.


Separation        of Duties and Supervision

Key duties and responsibilities in authorizing, processing, recording and reviewing official agency transactions
should be separated among individuals. Managers should exercise.appropriate oversight to ensure individuals do
nasmxd                                              _--.._.....
             or abusetheir =igned m!!orities aqzr_e_srribedby_QNW&ub-&J.23~                                                          .____
                                                                                                                                        _________.____._,__
                                                                                                                                                         ._.._
                                                                                                                                                             ..,_ .                  ;_
14                                                                                                                                       Di,rect Loan System, Requirements
                                                        Sysitem Ove‘rview’
                                                                      --.-




                                                                ,




                                       Ihstration   4




Direct Loan’ Sy’stein Re’Quire’denis
System Overview                                                                                                                                     7
                                                           Y.      !’ I,, ,.                                                           .
                                       ,, ’ .; ,” :              I \‘. I                            ,,               ,,,:’
                                                                                                                             I        .,,
                                                                                                                                                         .,
                                                                                                                                                         .,



       i   1      LI
                                                                                                                             ‘..
                       .External   Informntiiit   Stoics                     ‘.                                  .      ‘,                    ..’   ‘,
                                                                Delinquent        Debt Collection        ,.      Other Rcpting~Rcquiremcnts




                                                                                             Dir.ect 1oa.n System .Req.ui’rements

                                                                                                         ___--               -.--
                                                                                                             ., .I           : ‘,
 Introd.uction
            to Functional
                       Require,tients
                                                              i.

                                     .,




 This  introduction as shown in Illustration 5 describes the functional requirements for a direct loan system. The
 following functions should be supported
                                   .,.          :,, system:- ‘.... . ,..I’ .. j.
                                            by the                                          ,. ,         . ,) .,
                   ..                  I                       ,: :.,,                 .:   :
         L+r(Extension
            l                                ’                 ‘, .                 .
                                                          I,.
        .Accotint Servicing                        *     ,  1          -,; ,,.   -:
            l
                                                                                                          _’
  3 i Treasury Cross-Se~i&g        :     .,    J..         ., .% : ~ . ,.,‘,          ,. ‘,   II . ,,. ,,”       ._ :.            ,:
                                                                                                                         ~
        l       PO&i&   Management             ~       1.           ,.                      1            ,           s



                Delinquent                                     L.             .                          ‘
        l
                       ,.. Debt
                            .   Collection
                                      , .          ,        ,,..                  .   ..
        l       Other Reporting Requirements                                                                                 _’
                                                   0




                                                                                                                             .I




The functional requirements identified define the typical processing and data requirements for Federal direct loan
programs except some international programs, such as lending to sovereign nations. These requirements do not
include specific or unique requirements of individual direct loan programs.

Rather, the general requirements are a guide for agencies ‘to use in enhancing existing systemsor developing new
systems. These requirements assume the agency has a fully automated system that encompassesthe complete scope
of requirements described in this document. Some agencies may determine that it is not practical to fully automate
all functions based on factors such as loan volume, operating environment, statutory requirements, and cost. In
addition, some agencies may decide that one or more of the direct loan functions may be best performed by an
outside agency or contractor. Accordingly, it will be necessaryfor agencies to make adjustments to adapt the
requirements to meet their specific program and system requirements.

                                                                                                               -~.--..-._-             ____ --~
                                                                                                                                              _

Direct LoawSystem- Re,quirements                                                                                             17
Introduction to Functional Requirements                                                                                                                                                                                                                            ..--
                                                                                                                                                                                                                                              ;, .‘,   ,,’        ,.
                                                                                                                                   .;
The internal management information requirements identified throughout this document are those required to
establish credit management and financial reporting systemsthat are in compliance ‘with the standards provided in
OMB Circulars A-34, A-123, A-127, and A-129. Agencies”systems shall be capable of satisfying the reporting
requirements of OMB and Treasury, including those associatedwith the FCR4 of 1990 and the CFO Act of 1990.

For each function, the narrative is supported by diagrams showing the relationship betiveen processesand activities
and the flow of information. These diagrams are conceptual in nature; they do not imply any physical structure of
systems. The diagrams use conventions adopted to ensure consistency of presentation. The explanation of icons
used in the illustrations are explained in Illustration 6.  .




                                                                                                                                                                                                                                                             --




                                         Explanation                                  of ICoris used in the Illustrations


               0              Indicates      either      a process      (in the fun&n            level     diogmmr)      or an aclivily         (in the process     levei   diagrams),




               0             lndicater       an entity      external       to the agency.




              0              Indicates
                             diagnms.
                             Requirements
                                          a system
                                           the core
                                                            external
                                                            Gnancial
                                                                           lo the loan system.
                                                                             system is divided
                                                                                                            Many of!he  loan syrtem
                                                                                                         into pans which correspond
                                                                                                                                                 pmcnsa       have an Interface
                                                                                                                                                   to the funcdonal   requinmenls
                                                                                                                                                                                           with     the core financial
                                                                                                                                                                                                  in the Core Financial
                                                                                                                                                                                                                        system.
                                                                                                                                                                                                                             System
                                                                                                                                                                                                                                    On the




                           Indicates      an infomwdion       store.           At the function           level.    the name    ofthe      information     store   is displayed.          At the process      level.   the data within   the
                           information       store is displayed.




             El
                      b    Indicates      dataflaw       in oral.      eleclmnic.     or paper       form.        The dire&n           of Ihe arrowhead       indicates     the dire&n            of the flow.




                                                                                                                  filustration 6




18                                                                                                                                                                                                                       Direct Loan Sys+m Requirements
                                                                                                                  I   .’



 LoanExtension
 When extending credit through a loan program, agencies must ensure that applicants are considered in accordance
 with the statutory and regulatory requirements applicable to the specific program. In addition, agencies also must
 satisfy Governmentwide statutory and regulatory requirements for credit management, such as the Debt Collection
 Act of 1982 (DCA), as amended; the FCBA of 1990; and OMB Circular A-129, Agencies must be able to assess
 each applicant’s eligibility for the specific type of credit being sought and to document the result of their
 determination.                    %


 General Requirements
This section provides the Governmentwide functional requirements for the Loan Extension function of a direct loan
system. Illustration 7 provides an overview of the Loan Extension function. As shown, the Loan Extension
function consists of the following major processes:                                             .I     r
     l   Application Screening Process, and
     l   Loan Origination Process.


                                                                                                              -

                    Overview of the Loan Extension Function of a Direct Loan Systein
                                         :’
                     Applkltio.
                                4                                                 Loan   Disbursement




                k
                                       Notiflc~~io.   Letter




                                                               lllustratlon   7




Direct Loan System Requirements
Loan Extekion


Loan l&tension: Application Screining Process                                                                            ‘,         ,’

In order to determine the eligibility of loan applicants, agencies must screen applicants for program eligibility andj
where appropriate, creditworthiness, as well as check funds availability. During screening, the system captures
information~about both approved and,disapproved ‘applications,for..use in ,subsequent loanactivities.           :
                                                      .’
As shown in Illustration 8, the Ap&ation Screening Process consists of the”followhig ‘major activities: ’
                         ’                          : (      _.            ,, . .                           (’
     l Process Loan Application,
     l Evaluate Applicant Program Eligibility,          ‘            .,,I            ‘.   :,,    ‘. :. ~ .’ .j
                                                                                                         *
     l Conduct Credit Analysis,
   .e @ndu~@u&Cofi~ol,~d                :‘..,.     .(.,y ,, :       .- ‘, . ,, I:: 9’ ,: ‘j I, ,,,y :‘..:, ,,
                  :                         :      c’, , :‘.*> .’ ,, i,,           ,.                      ., .,
     : Approve/Reject Credit                                                                        ,
                           .., ,Request.
                                 j             i , ,       ,     ,.       I ( ~.                                       .’
                                                         : i. .,           &. .                       : .,         ,‘.

                                    Loan Extension: Application Screening Process




                                             Colkctkm of Aptdlntlon   Fees
                                                                               _,   ”                                                       ‘,.




                    ,,                                                                           .i:       ,,
                                                                                                                                        :
                                                                      .;                :

                                                                                                                                                   I’


                ,        ,,   1’/                                                                                               >
                                                                           I                ,’                                                    .”             /



                                                                                                       *
                                                                                                                    --        .----_-                   .   -.       ..-   ___..___




20                                                                                                              Direct~loan System ,.Requiremegts
                                                                                                   ‘,                   Loan; Extenjix.


 Process Loan Applicatiim:                      This activity captures data about the applicatxand the application.    .’         I 4 “’ 3

 An automated system should:                              :       ,, :                    .’   ‘,                  ,, ,’
              ~                            ‘,                                                                    ,,.
      Provide for a electronic application processusing v+ous media, such as a secure internet application (WEB Bite)..
                    l



                    l   Record critical credit,applic?tion data needed
                                                                     ,, td supple &pFcation :.Iscreening.
                                                                                                       .
                    l   Provide access  to application  information to $l agency s&participating   in the screening and credit-granting
                         _ ..
                        declslons.
                l       Process,and record coll&tions 6f fees,remitted with the application :in ,both the direct loan system and the
                        core financial system.                                     ‘: ., ; :
                                                  ,.!                                  ‘.

 Evaluate Applicant Pr@mni Eli@bilit$. Th& activity &~po~%s’~ermi&tion of the ,applica+g~&x-ai broiram
‘e:ligibility. The system compares information from. @e loan application, recorded in ,&e system.in the jjrior activity,
 to system-stored agency program eligib$y critc@a, and provides t+e results of,this,compariso+ If full automation
.of this ‘process is not practical .’ the system mtist ddcument tie,’ results
                                                                        ,‘_’ ,. ofa ;,manub ,cbrnparison
                                                                                            .,‘~, ,’     by
                                                                                                          ,’ agericy
                                                                                                               _’ staff.
                                                          -,,..
 An automated system should:

            l           Compare loan application information to agency prograin eligibility criteria.
       Check the appropriate system data.filch to determine whether the applicant, has submitted a duplicate
            l

       Fpplication or h,+shad a recent 10~ application rejected. These situations may indicate attempts by
       applicants to subver‘t agency credit ptilicies.        ”
       Document,&% borrowers have certified that they have been unable to qb!ain, credit from private financial
            l

       sources, where such certification, is a program r&quirem&t.                 .’
                        ‘. .’                             ‘.
Conduct &edit Analysis. Where required by statute or regulatidn, this a&$           assessesthe applicant3
creditworthiness by comparing the applicant’s abjlity and history of repaying debt against the aiency’s,
creditworthiness criteria. The data used in this assessmentare provided in the’application fork And from several
external Sources,@lu&ng qredii bureaus and qe Credit Alert Interactive Voice Response System (CAIVR!3).
CNVRS proviges agency staff with telephone &xess to a,database,of individuals &in&fit/defaulted          on ;debt td
the Federal Government.                         ,.‘.                   .  <
                                                           :             :   :
An automated system should:

        l               Provide m. automated interface with credit bureaus that afitiws agencies to obtain applicant credit history
                        information (credit bureau report). For,,credit bureaus that do not have the capabiliq for an automated
                        interface, record credit history information entered by agencystaff.
    l                   Docunient &at applicant financial data, rizpayinent ability, and repayment history have been verified through
                        the use of suppletidntarydata so&c&s Such as employment and income data, financial statements, tax returns,
                        and collateral appraisals, where this is a,program requirement.
    l                   Compare the applicant’s creditworthiness information t?,‘system-stored program creditworthiness criteria
                        and, where a p&gram requirement, calculate a cr&lit: tiisk rating for the applicant.
    l                   Document whether CAIVRS identified the applicant as a borrower who is delinquent/defaulted on a
                        previous Federal debt. The system should allow override if the agency determines that the account was
                        referred to CAIVRS in error.

 Condtict Pun& Control. An agency must have sufficient subsidy tinds available and be within program lending
‘limits in order to approve a credit request and obligate funds.
                                                            --- This activiwpports the calculation of the subsidy
                                                                                                           - . ._
Direct loi~n Sys.tem ,Requilemeits                                                                                                     ,.a
Loan Extension                                           .’


cost of a direct loan and provides an interface svith the core financial system to check subsidy funds availability and
lending limits.                                ,:          ., i 2, ‘8.
                                       :                                           _‘.
An automated system should:
                                            ‘,                .’


                 l        Provide the infbrmation needed, to compute the credit,subsidy amount associated with a loan using projected
                          cash flows and the applicable Treasury interest rate in accordance with OMB Circular A-11, A-34, and
                          SFFASNo.2..                                   ,’        .I
                 l       Provide an automated interface with the core fmancial system to determine if sufficient funds are available in
                         the Program Account to cover -the subsidy cost and if available lending limits in the Financing Account are
                         sufficient to cover the face value of the proposed loan.
       Provide an automated, interface with the core’ fmar@, system to commit funds. for the loan if funds control is
             l

       not done vvithm the DL system.      ’ ‘.’       ‘.: ;” ’ “’                ,,_.
                ‘,                   ,,            -‘,..     ~                              ‘.
                                                                   .”
Aipro-be/Reject bedi; Rk@e& This activity ‘supports the final review and acceptance or rejection of each credit
application based on the applicant’s &&llment’of $ogram eligibihty and creditvvorthiness criteria and based on the
availability of funds.

An automated system should:                               .,
                                                        ,                  ,i            ,.
         l               Update’the ap$ication.information. store to reflect the status of the loan.
         l               Accept;; identify, track, and report supervisor ‘overrides of system,+enerated acceptance/rejection
                                                                                                  I                                                                       I
                         recommendations.
     Create and maintain aisystem record of accepted and rejected.loan asphcations.
         l

                                                                          /
     Generate a letter notifying the applicant of rejection or acceptance of the loan application.
         l


                                     I.                                 .’
Loan          Loan ~Orignation Process’,
                     Extensioti:




Loan origination includes booking the loan, establi&ing’a,fmancial obligation, creating.the loan documents, and                                                       I
disbursing funds in accordance &ith agency requirements, the ‘Credit Supplement to the TFM, ‘and OMB Circular
A-34. Loan origination is performed only if the Application Screening process concluded that the loan should be
extended. As shown in Illustration 9, the Loan Origination. process consists of the following major activities:
                                                                                                 .,
       BookLoan, and
         l

                                                                                             ;
     lDisburse and Account for Funds.            ‘,
                                    I               , ,!I,,
                                          “’                                1)                 :
                                                                                                    s
                                                          .. ,. 1 ‘_’                      ‘. , j.    I
                                                2 ‘;         , ,.:                      1
                     .L,..,.       ‘, ,,   I.       ,;,’ 1 -;,., ‘I, ‘. “‘S.“___,: .:“:               ‘,_ : .,/_I -)‘. : ::,; .. .,v : .:, . .;..
                                                  .’ ,:    ~” ‘. ,. ;   , 7.;.                              (‘. ;,                          I.:
                                                                           :           :.   :     ”                                   ,’
                                                                                   ;            ..,                                                                   /



                                                                               -                                                       -----.-....   - __......_.:_.. :-

22                                                                                                                 Direct Fo.ar System .Jequirements                  .
                                                                                                                                                                                                                                                                                                                                       Loan Extension


                                                      ,,,‘”                                                        ..‘;
                                                                                                                                                                                                          ,‘.


                                       Loan Ext ension: Loan Or igitiatign Process




                                                                                   I,.                                    I                                                                                                                                                    t
                                                    . . . . . . . . . . . . . .            . . . . . . .         . .              . . . . . . . . . . . . . . ..~..............................................,.,,
                                                  :.;.:.:.:.:.:.:.:.:.:.:.:.:.:      :.‘.‘.‘.‘.‘.‘.‘.‘.‘.’                    ‘.‘.‘.‘.:.‘.‘.‘.‘.‘.‘.‘.~.~.~.‘.’.’.’.’,’.’.~.’.‘.‘.‘.‘.‘.’.’.’.‘,~,‘,‘,‘,‘,‘,‘,‘,                                                                   .:,:,:,:.:,:,~‘:,:,:,~.~,~,~,~,~,~,~,;,:,~,~.~,~,
                                                                                              , .          . .                                                       .; ,...,                              ,.,.,.,.~.~.~.~.,.,.,.~.,.,.,.,.,.,.~.,       I
                                                                                                                                                                               . . . . . . . . . . . . . . . . . . . . . . . .                                                                                                                <’
                                                                                                                                                                         ~.‘.~.~.~.‘.‘.~.‘.~.‘.~.~.~.‘.‘.~.’.’.’.’,’,’,~.
                                                                                                                                                                         ‘.‘.‘.‘.‘.‘.‘.‘,‘.‘.‘.‘.‘.‘.‘.‘,~.~.’.~.,’.’.’.‘,
                                                                       L                                                                                                 ~.~.‘.~.~.~.‘.~.‘,‘.‘,‘.‘.‘.~.~.’.’.’.’.’.’,’,’,
                                                                                                                                                                         . . . . . . . . .(.,., I..,. . . ..( .; ..,., .,.;;;                      ;,.; 3,
                                                  .
                                                                                                                                                    ‘.‘.‘.‘.‘.‘.‘.‘.~,~.‘.‘.~.‘.~.‘.’.~.~.~.~.’,~     ‘,                                                                                Disburse                       and
                                              L                             BookLoam                                                               YIW.lUYYYCCC
                                                                                                                                                    ..‘.~.~.‘.‘,‘.‘.‘,~.‘.~.~.~.‘.~.‘.’.’,’.’,~,’,’,’
                                                                                                                                                       . . . .. .. .. . .. . .. . . .. . ..                                                                                             Accoiud                        for




                                                                                                                                                                                                                                                                                                            --.-..._.
                                                                                                                                                                                                                                                                                                            Diaburscncnt
                                                                                                                                                                                                                                                                                                            ht. ,tnr,“,,,,,g
                                                                                                                                                                                                                                                                                                            Subsidy Outlays)


                                                                                                           Credit Bureaus
                                                                                            -----------i----,                                                                                                                                                Treasury   Interest Rate

                                                                                                                          lkuury
                                           ‘Itnrrry           Ilterw       Ilate
                                                                                                                                                                                     /
  .I                                                                                                     >
                                                                                                                                                                                                                                                                                                                                                   --    _!
                                                                                             Illustrition 9



Book Loan. This activity concludes loannegotiations and generates the necessaryloan documents for the
borrower and the agency.

An automated system should:

       l   Record loan terms and calculate ,disbursement schedulesand repayment amounts and schedules as needed.
       l   Record the cohort and risk category, as defined in OMB Circular A-34, associated with the loan.
       l   Assign a unique account number to the loan that remains unchanged throughout the life of the loan.



       l   Record the applicable Treasury interest rate for the loan at the time of obligation in accordance with OMB
           Circular A-34 and agency specific guidelines. This rate is used in subsidy calculations.



                                                                                                                          --                                                                                                          -___I

Direct hn’     System ,Requirenients                                                                                                                                                                                                                                                                                                                    23    :-
loan Extension
                                                           :


             l   Provide an automated interface with the core financial system to record the direct loan obligation, including
                 the obligation for the subsidy, and liquidate commitments previously recorded.,
             l   Include in credit bureau reporting all commercial accounts in excessof a pre-determined amount.

Disburse and Account for Funds. This activity supports accounting ,procedures.required by OMB Circular A-34,
and the Credit Supplement to the TFM to record payments made.t.0 the debtor. The system requirements listed
below apply to loans with either single disbursements or multiple disbursements.
                                                       .‘.’      ;                                          :,                              /
An automated system should:          ,_:                      ,, ;
                                                                                                                                            /
                                                                                                                                            I
             l   Calculate and heduct the loan application and origination fee from disbursements if not previously remitted
                 by the applicant. ,                                                                                                        i:
                                                            ti - I         ,,. _          .. :       ,, :,.’ ,<                             1
             l   Provide the capability to cancel, thus deobligating, unclisbursed loark : _I   ” 1.I                 s      ‘,
                                                             ,                                                                              I
             l   Update debtor accounts to reflect management. override ,of offsets.       ’                                                1
             l   Record tiormation neede,d for each loan disbursement,‘including amounts and applicable Treasury interest,
                 rates, to support both the computation of accrued interest expense on borrowings from Treasury and subsidy
                 re-estimates.                             ,”
                                                                                       ‘*                                                   I
         l       Support the calculation of the borrowings. The actual organikation of the system processesbetween the
                 direct loan system and core financial system is at the discretion of the agency.
         l       Provide an automated interface with the.core finaricial system to initiate and record the disbursement by’
                 cohort, establish the receivable, and‘record the movement of the subsidy funds from the Program Account: to                ~
                 t$e Rinaking Account.            .’                                    1.
                                                                     ,.-
         9 The system must .be’able to annotate on the borrower recordthat a disbursement iyas offset by Treasury on
           behalf of another government agency;                    :
If the direct loan system itself handles the payment, processing, it must meet the requirements in the “Core.Financial
System Requirements” related to this activity and send summary data to the core financial system.                 ;
                                                                                                                                            ~
                                                                                                                                            I
                                                                      .,.-.
Cofiattd                Requirements                                                                ~
                                                          .’     .;
Some credit programs provide loans to finance the acquisition of ah asset that then serves as collateral for the loan.
OMB Circular A-129 requires that property serving as collateral be appraised by a state licensed or certified
appraiser when the loan amount exceedsa pi-e-determined amount. Circular A-129 also requires that the useful ,life
and value of pledged collateral must be recognized in the direct, loan system at the time of credit screening. The
estimated useful life of the collateral must be longer than the loan maturity and the loan-to-value ratio’must be
within applicable program requirements.                     ,’

An automated system should:
                                                  . : _.I i         .‘. _. (_-1 . ._.. ‘.‘. .‘.. _,. *. _,_, :,:,;        ,I,
     l           Capture the’estimated useful economic life of the pledged collateral, and,compare
                                                                                            :i         it to the,proposed  term of
                 theloan.           ”   ;       ‘.


     l           Document that transactions .over a pre-determined amount have, a collateral,‘a~praisal by a licensed or
                 certified appraiser.


                                                                                                    --~-         .-_..---__-    ...._.._.

24                                                                                                 Birec,t Lean. System .Requirements
                                                                                                          Loan .Extension: :



   : i Compute ,the loanto+lue ratio and flag those tloanswith a ratio exceeding 100% (or more stringent
       standards set by the agency). :                   .;I,.                                   :    ‘.
                                                                                                                               i’.
                                                                                                                               Lo
               : (,.      ‘,”   .,                     .,,.    ‘-,          ., ./                                              I.

Internal CManagement Information                Requirements,                   +I 1   1’      :                     a: ‘I=
      ‘,.. :,,. :                                     u                   ‘.,      ”
Listed below are internal management information requirements for the Loan Extension function. This information-
should be available to agency credit program managers and designated internal review officials on a periodic or an
as requested basis. This list is not an all mclusivc inventory of internal information requirements for the Loan
Extension function. Each atrencv must determine ‘the suecific management inGormation needs necessarv to manazze
its credit ‘programs~based,0; the agency mission, and aGplicable staGtory require,ments. In order to support thes;
needs, a system should provide a user-friendly query tool (preferably graphics-based) that facilitates reporting
rapidly on any required data elements.’ Agencies must,,maintain. financi$ accounting’information at appropriate
levels of summary for computational and reporting purposes: ‘The mam levels’ are: transaction, loan history, ‘risk
category, cohort, and account. Each agency ‘alsomust determine whether the. information should be provided on
hard copy reports or through system;queries. . ;, :          , :,     ?.‘I       .,’                         .,.I~
     ,. y.                           2 ‘_                     ,F.>
The direct loan system should provide at least the following types of management infor%&ion: .’ ”

 Approval ahd Rejection Monitorbig. This summary provides’ information about all credit applications that were
 ,approved or rejected for a given time period. The data.are broken down’into separate’statisticson credit a&rovals
 and rejectio,ns. The approval,section indicates the number af approved applications and the percentage, of total
 applications that they represent. The total requested amount and total a,pproved ,amount are,shown, for eachloan
 origination office. The rejected application section contains the number of rejected applicants and the percentage of
 total applications that they represent. The total of all loans requested is also shown. This data‘summary also lists the
 average time spent to process’s credit application, from the time’of application until‘the final ‘decision is made.
                                                                                 .,
 Override Exceptions. This summary identifies all credit application decisions that override actions of the
 automated system processes..Overrides, can occur ih two situations: an application is approved ,even ‘though the
 applicant’s program~eligibility or creditworthiness assessmentis not acceptable under agency program Umanagement’
lending criteria, or an application is rejected even though the applicant’s program eligibility and creditworthiness
are acceptable under agency program management lending criteria.
                                                                                                               ‘. ” / ” ,!
Potential Application Fraud. This summary identities all credit applications that matched one or more pending
or rcccntly rejected, applications. Comparison is based on four criteria: applicant name, applicant address,.applicant
phone number, and applicant Taxpayer Identification,Number,.(TIN).          If a pending application matches any of these
criteria, the data fields that matched a&the original application and pending application identification numbers           ,
appear on this. data summary with primary application i,dentification-information.                   ,_,
                           .”                                  ,’
Detailed Transaction History. This summary contains detailed loan origination and account data. The data I
summary is used for control and tracking, as an audit trail, and provides some of the data necessaryfor the credit
subsidy calculation. Detailed transaction history data summaries include, at a minimum, loan origination and.
disbursement data.
            ‘:.,;         ). , .‘.’       ,’                                                I’
Eiceptious. This summary highlights exceptions in’loan origination processing. Thd’summaty should‘be
generated periodically or on demand as needed. Examples of exception data include loan-to-value ratios exceeding
the allowable’amdunt for a given program and approved loans’ that have not been disbursed within a specified
period of time.                                                                                      ‘<




Oirect’Lo~an’3ystem   Re.i/uirenients                                                                                   25
Loa’n Extension


Disbursement Mtiagement Summary. This summary displays all loan origination activity on a periodic basis.
The summary is used to monitor the performance of each loan origination center, and to track the volume tid
amount of loan disbursements by program.

Illustration 10 provides an overview of the Internal Management Information Requirements of the Lo& Extension
Function.



                                                     Loan Extension: Internal Manggemkt Information Requirements



                                                                                                                                                                                                                         Override Exceptions
                                                         Rejection                      Monitoring




                                                                                   4                                                                                                                                                                                                                          +
      ..................................................................................................................................................................................
      .....................................................................................................................................                                                                                                                                               \. ............................................
      ..................................................................................................................                                                                                                                       .:.:.:.:              : . : : . : . : :.:.. : : : : :.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:
      .~,~.~.~.~,~,~,~,~,~.~.‘.‘.‘,‘.‘,’,’,’.’.’.~.~,~,~,~,‘,‘.’,’,’,’,‘,~,‘,‘,‘.‘,‘.~.‘.~,‘.‘,‘,’.’.’.‘.‘.‘,‘,‘,~.‘.‘,’                                                                                                                       ..........................................................                                    ............
      ..................................................................................................................
        ..............................................................................................................................                                                                                                                                                                                                  .‘.‘.‘.‘.‘.:.‘.‘.‘.‘.‘.‘.’
      :.:.:.:.:.:.:.:.:.:                                                                                                 .........                                                        :.:.:.:.:.:.:.:i:.:                                 ...................................
        .................                                                                                             ...................                                                                                                        .................
      ...............................................                                                                                                                                                                                          :.:.:.:.:.:.:.:.:.:
      .........................................................                                                                                                                            ...........................                                                                                                                                         ................
      ..................                                                                                                ................                                                                                                       . .................
               ............................                                                                             : :.:.:.:.:.:.:     ..                                                                                                                                                   ........
      .I..
                                   Transaction                &77+                                  History            M...........................
                                                                                                                           .......                  Risk Category                Loan                             Cohort                -.................               A,y,““t                 ::::::::::::::::
      :.:.:.:.:.:.:.:.:.:                                      ,~,~,‘,‘.‘,‘.‘.‘.’                                                                                                                                                        ...................................
      ...........................                             ..........                                                :.:.:.:.:.:.:.:.:.:
       ............................................            ..................                                                                                                                                                        :.:.:l:.:.:.:.:.:.:
      :.:.:,:.:.:,:.:.:.:                                      .‘.‘.‘.‘.‘.‘.~.~.~                                       :.:.:.:.:.:.:.:.:.:                                                                                              ...........................                             ........
                                                                .........
      ...................................................................................................                                                                                                                                  .................
      ...........................................................................................................................................                          ..‘...‘.‘.‘.‘.‘.‘...................~.~...~.............~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~.~                      .:
      ...................................................................................................................................................................................................
                                                                                                                                                                                                  ..............................................................................
      ............................................................................................................................                        >......................
      ..........................................................................................................................................................................................................................................................................................................................
      ..............................................................................................................................................................................................................................................................
                                                                                                                                                   A                                                                                                                 A




                                                                    Detailed
                                                                  Transaction                                                                                                                                             Exceptipns
                                                                    History




                                                                                                                                                                                                                            Illustration10




                                                                                                                                                                                                                                                                                                                                                                                             ,




                                                                                                                                                                                                                                                        .--.                                                                                       .--                            .-..-.-_

26                                                                                                                                                                                                                                                                      Direct Loan System Requirements
Account
     Servicing                                                                                                          _
                                                                          .’
OMB Circular A-129 requires the Government to service and collect its loans in a manner that best protects the
value of the Government’s assets.Efkient mechanisms must be in place :to collect and record payments and to
provide suffrcient‘accounting and management information for effective stewardship of the loan portfolio. These
servicing activities can be carried out by the agency, or obtained through a cross-servicing arrangement with
another agency. Under certain conditions, it may be advantageous for the Government to transfer.servicing and
collection responsibilities to the private sector.


General Requirements
                                                                                                       !,,
This section provides the Governmentwide functional requirements for the Account Servicing function of a direct
loan system. If applicable, agencies that utilize Servicer Organizations will be required to have a Statements of
Auditing Standard (SAS) 70 examination as part of their annual audit SAS 70 examines the internal control
environment of Service Organizations. Illustration 11 provides, an overview of the Account Servicing function. As
shown, the Account Servicing function consists of the follo&ig major processes: *’

      l   Billing and Collection Process;and
  :   l   Account Status Maintenance Process.




                     Overview of the Account Servicing Function of a Direct Loan System

                                                                                                                 c-J’
                                                                                                                                    PROGRAM

                                                                                                                                    CRITERIA




                                                                                                                                                                                                  :, :, :, :, :, :
                                    .:.:.:.:.:.:.::   :.:.:.:.:.:.:.:.:.:.:              .~,~.~.~,~,~,~.~,~,~.~,‘,‘,‘,~,~,~,~,~.~,~.~.~.~.~.~.~.‘.’.’,’,’.‘,‘,‘.~,‘,~.
                                                                              ,;,:,I   ,,:,:,:,:,:,:,:,:.:,:,~,~.;.~.~.~.~.~.~.~.~.~.~.~,~.~.~.:.:.:.:.~.~.~.~.~.~.~,,                           ,_:.:,:,:.:.
                                                                                                                                                                                                              ‘.‘.’
                                                                                                                                                                                                                ::
                                                                                                                                                                                                                ::
                                                                                                                                                                                                                ,‘.’
                                                                                                                                                                         Account        Slatus                  :::,       (To Portfolio
                                                                                                                                                                                                                :,I.       Management)
                                                                                                                                                                          Maintenance                                  +
                                                                                                                                                                                                                ‘.‘,
                                                                                                                                                                                                                I:;:
                                                                                                                                                                             Prow9




                                                                                                      Illustration                                11
                                                                                                                                                                                                                                           _______--.._--.-._        .___.._.

Direct loan System Requirements                                                                                                                                                                                                                                 27
Account Servicing



Account Semicing:                Billha~ and Collection Proctys
                                            ;’        .:,   .’                                         ‘.
This process involves routine billing and collection activities. ,Systemrequirements related to’ collecting delinquent
debt are ‘included in the Delinquent Debt Collection funct!ion Agencies must ensure that invoices are generated
promptly and that effkient mechanisms are in,tilace: to collect and record payments and to provide: support for loan
servicing. Borrowers should be encouraged to use pm-authorized debits, customer initiated payments, and other
electronic fund transfer methods that may be avatlabk yhen making loan payments. As shown in Illustration 12,
the Billing and Collection process consists of the followmg major activities:

     l  Invoice Debtor, and
     0, Apply Collections.-
                                                                                       ,’                    ,‘:
                                                                                                                   ,




                                                                                                                       Collection
                                                                          PROGRAM           CRITERIA                   Data                                     ,’




                                                                           !nvoicing    Criteria        ,.
                                                              -111111-1

                          Loan Data
                                                                           Receipt Application
           --------I



                       Payment    History




                                                                             Illustration12
                                                                                   ..                  .,
Invoice Debtor. This activity supports invoicing of debtors. Most loans are billed based on a schedule determined
at loan origination, but some may be based on renegotiated payment schedules.

An automated system should:
                                                                                                                                                                     ..,
                                                                                                                                                   ---...-.-.              .-.-...- _..__

28                                                                                                                                  Direct   LoanSystem Requireme,nts                   -p
                                                                                                            Account 3ervicing’
                                                                                                                            .---‘-


            l   Calculate outstanding balances for each loan account invoiced, including principal, interest, late charges, and
                other amounts due. .,
            l   Identify loan accounts to be invoiced based on agency program invoicing criteria, and loan account
   ,’           information, ,suchas amount outstanding, most recent payment; payment amount due, and date due.
            l   Provide the capability to analyze escrow balances to adjust’ required deposit amounts to prevent deficiencies
                in tax and.insurance deposits and payments for housing and other long-term real estate loans.
            l   Generate and transmit a bill, payment coupon, invoice or other document that shows the borrower ID,
                amount due, date due, the date after which the payment will be considered late, and the current balance.
        Provide a means for debtors to inquire into their account status such as electronic inquiry using a secure
            l

        internet site WEB site or automated telephone program such as a voice response unit.
                                                                .,
Reporting. The direct loan system must be able to prepare and ,mail to borrowers by January 31 of each year
Internal Revenue Service (IRS) Form 1098, Mortgage Interest Statements; IRS Form 1099-A, Acquisition or
Abandonments of Secured Property; IRS Form 1099-C, Cancellation of Debt; IRS Form 1099-G, Certain
Government Payments and other IRS Forms as required. In addition, the direct loan system must be able to
transmit to the IRS information on interest paid and other reportable data. The Debt Collection Improvement Act
(DCIA) now authorizes agencies to report non-delinquent consumer and commercial debt to credit bureaus,
providing the agency has processed the necessaryPrivacy Act notices for consumer debt.

Apply Collections. This activity records collections against debt from borrowers and applies the loan payment to
the debtor’s account in accordance with pre-determined receipt application rules to the appropriate liquidating or
financing account.

An automated system should:

        l       Apply collections according to agency program receipt application rules to the appropriate liquidating or
                financing account. Collection sources could include cash; pre-authorized debit, check, or credit card.
        l       Record a prepayment (the early payoff of the entire loan balance or paying more than the scheduled monthly
                payment), partial, full, or late payment indicator..
        l       Identity payments that cannot be applied and document why the payments cannot be applied.
        l       Apply components of payment (principal, interest, late fees) in accordance with established business rules.
        l       Be capable of automatically capitalizing interest in accordance with established policy.
        l       Provide an electronic means to receive payments such asAutomated Clearing-house (ACH) and Electronic
                Debit Account (EDA).
    l Provide the capability to compare borrower’s pre-authorized debits received from financial institutions and
      other external sources to expected collections.
    l Provide an automated interface with the core financial system to record the collection. If the direct loan
      system itself handles the collection processing, it must meet the requirements in the ‘Core Financial System
      Requirements” related to rhis activityand/ send summarydata to the core fmancial system.                   j .
     .,. .,      ..              ,,         :, I,. : ;,,,$:
                                                         1‘:f :.j ‘. : ;      .. ‘I ,‘f’ij-s
                                                                                     ^. j    :,. ‘.    : ,!       ,!.:
Account Servkkg: Account StatusikWatenance Process                                                                 ‘,

Agencies’ direct loan systemsmust contain adequate and current information reflecting loan payment history,.
including occurrences of delinquencies and defaults, and any subsequent loan actions that result in payment


Direct Loan System Requirements                                                                                               29


                                                                                                                              .---.--
Account Servicing                                                                                                                                                                                                            _-


deferrals, refinancing, or rescheduling. As shown in Illustration 13, the Account Status Maintenance process
consists of the following major activities:
                                                                                               .
     l Direct Loan Modifications, and                                                                  Y
     l Troubled Debt Servicing (Addressed in Chapter 9, Delinquent Debt Collection).
                                                                   .,


                                                                                                          ,’




                 Account Servicing : Account Status Maintenance                                                                                           Process




                 \               v A/        Request   \
                                                                                  , .
                                                                                   I            I
                                      r.
                                           Modii&io"       \                       I            II

                                                               1.1.:
                                                               ::.                              .,
                                                               :.:.:.:.:
                                                                .
                                                               :.:.:.:.:                             :.:..:i:::
                           Modified                            .‘.I...‘.
                                                               ‘.‘...‘.
                                                                                Direct               ‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.
                                                                                                            . . . . .                 . .  ‘.‘.‘.‘.‘.~.‘.‘.‘.~.’
                                                                                                                                           ‘.‘.‘_‘,‘,‘,‘,‘.‘,‘.’                PrograkM-anagement          1:;:;:;     ,,
                                                               ‘.‘.‘...’        Loan        :        ,‘,‘.‘,‘.‘,‘.‘.‘.‘,‘,‘.‘,‘,’              :.:.:.:.:.:.:.:.:.:.:
                                                               .:::.
                                                               :.:.:.:.:        Modifications        ‘.‘.‘.‘.~.‘.‘.‘.~.‘.‘.‘.‘.‘.
                                                                                                            .           .  .  .   . .            It......,.
                                                                                                     .‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.~.’.’.’.~.’.’.’.‘.
                                                                                                                                                              I                 and Collection Process    I ::::::: I
                                                               ::::.                                                                          . .           . .                   (see Illustration 22)     :::::::
                                                               ::::.                                 ,‘.~.‘.‘.‘,‘.‘.‘.‘,‘.‘,‘,‘,‘,‘,‘,’,’.’.’.’,’.’.‘.
                                                                                                      .                                   . .
                                                               ‘.‘.‘.‘.’




                      Funds Management

                                                                                                                                                                                   L0an
                                                                                                                                                                               Modification
                     Receipt Management                                                                                                                                          criteria
                                                                                                                                                                  -------‘m

                                                                                                                                                                              Delinquent Debt         -
                                                                                                                                                                               Identification
                                                                                                                                                                                    ClittSia




                                                                           Illustration13




Direct Loan Modifkations.       Modifications to direct loans are government actions that alter subsidy costs by
altering the terms of the loan. Modifications do not .include.subsidy cost reestimates, routine administrative
workouts of troubled loans, and other actions that are permitted within the existing contract terms. Government
actions leading to a modification include forgiveness, forbearance, reduction in interest rate, prepayment, and
extensions of maturity unless such actions are provided for in the original loan agreement. Subsidy funds must be
transferred from the program account to the financing.account to cover the cost of the modification. This is
required for all loans, although systems requirements for pre-1992 loans in liquidating accounts will be different
than the system requirements for post-1991 loans.
                                                                                         -
30                                                                                                                                                                        Direct Loan System Requirements                         ‘-
                                                                                                                                         i.
                                                                                                                 Account Servicing.--    ~


     An automated system should:

                 l   Support evaluation of accounts proposed for modification by the agency or borrower by comparing loan data
                     to agency program loan modification criteria.                  1
                                                                                      :
                 l   Calculate rescheduied loan terms, including repayment amounts and schedules, where appropriate. Calculate
                     any change in the subsidy amount as a result of the loan modifications.
             0 Perform a funds control check &verify the availability of subsidy through an automated interface with the
               core fmancial system.
             l       Produce selected loan account information listings for review by internal modification groups.
-            9 Establish a new loan account and collateral record for each new debt instrument and assign a unique loan
               account number to the new account record.
             l Maintain a link between the new loan account established for the new debt instrument and the old loan
               account records.
         l           Update the loan information store to reflect the modified,status of the loan, including changes in the value or
                     status of any collateral.
         l           Provide an automated interface with the core financial system to record pre-1992 and post-1991 direct loan
                     modifications.
                     Generate a new loan document which displays information concerning the original and modified direct loan,          I
         l



                                                                                                                                        ~

    Collateral             Requirements
    The system must document significant changes to the condition and value of any collateral.


    Internal             Management        Information     Requirements

    Listed below are internal management information requirements for the Account Servicing function. This
    information should be available to agency credit program managers and designated internal review officials on a
    periodic or on an as requested basis. This list is not an all inclusive inventory of internal information requirements
    for the Account Servicing function. Each agency must determine the specific management information needs
    necessary to manage its credit programs based on the agency mission and applicable statutory requirements.
    Agencies must maintain financial accounting information at appropriate levels of summary for computational and
    reporting purposes. The main levels are: transaction, loan history, risk category, cohort, and account. Each agency
    also ;must determine whether the information should be provided on hard copy reports or through system queries.

    The direct loan system should provide at least the following types of management information:

    Detailed   Transaction   History.  This summary provides detailed loan account data and payment, transaction
    activity on a loan by loan basis to provide a sufficient amount of the detailed transaction history and should be
    accessible online to permit routine account servicing. Additibnal detailed transaction history should be maintained
    on media such as microfiche or CD-ROM which can be readily accessibleby the user.

    Standard    Management      Control/Ac&ty.       This summary tracks the status of all loan accounts by summarizing
    loan activity at various critical points of the loan cycle such as status, i.e. current, delinquent, in collection, etc. The        ~
    collection process summarizes payment activity to allow agency management to monitor the effectiveness of each
    activity in the collection process. Delinquency information is summarized- to highlight delinquent debt

    Direct Loan System Requirements                                                                                               31    ;--
     Account Servicing


     (collateralized and non-collateralized) and modified debt. This data summary is produced periodically and provides
     information for preparing the Standard Form (SF) 220-9.                                 (/ ,,:     ‘3 ,;,
                                                               .                                                 . .’                                                                                                                I
     Exceptions. This summary identifies deficiencies that have occurred in the routine processing and monitoring of
     account status. Examples of exceptions include unapplied payments and’delinquent accounts not eligible fordebt
                                                                                                   :
     collection. This summary is generally produced on a periodic basis.          .,
     Illustration 14 provides an overview of the Internal Management Information Requirements.




                   Account Servicing: Internal Management Jnformatioti. Requirements

                                                                                                                                                                                         .”




                                                                                  Detailed      Transaction
                                                                                             History

                                                                                Detailed Loan Account
                                                                -_-_____-__--_-----------------

                                                                           Payment Transaction           History




                                                                                                                   not elieible       for




                                                                                                                     :



                                                                                     Illustration         14                                                                                            :
                                                      1                                                                                                                 “.                            ; .., ,’
                                                                           I”..
                                                                            .‘.                      ‘:,, .,,                                         .A ‘.
              .           .           ‘,.        : i i .,                                                        .;‘.i--                            .,‘. :i. .‘. >/, _: ..’ ‘..      ‘:,:,-: i., . ..i.
                                                                                                                                                                                                    ,!,, :.Ti,‘.ii .L:; ;
                                    1 ,. .’
,.                .!.‘.                     :.      .! ::              ”                          ,’ ‘,.( :( :.,                                         a\“‘,, ,>‘, ;.                 ‘.         ,., : :\ ~:‘,J\..: ;



                                                                                                   ‘,,                                                                                                  .i.
                                                                                                                                                                                                                                 I
                                                                                                                                  :

                                                                                                                                            -                       __            __-..-.              --.. ..-..-..
                                                                                                                                                                                                                                 i _
     32                                                                                                                                                      Direct LoanSystem Requir,ements                                     !


          -                                       ____-____--                                                                               -.---               -------                                              ,--    -1
  Treasury
         Cross-Servicing
 General Reqeements
                       :
 Cross-servicing occurs when Treasury’s F&IS or ,a Treasury-designated debt collection center provides debt
 collection services for other Federal agencies as shown in Illustration 15. The DCIA of 1996 mandates agencies to
 refer their delinquent non-tax debt over 180 days delinquent to Treasury or a Debt Collection’Center for purposes
 of collection. Debt is considered delinquent ifit is 180 days past .due and is legally enforceable, i.e., there has been
 a final agency determination that the debt, in the amount stated, is due and there. are no legal bars to collection
 action. For example, debts in an appeals process required by statute or regulation should not be transferred to a
 Debt Collection ,Center if collection action during the appeals process is prohibited. There are five specific instances
 where debts are excluded,from transfer. They are:

            l debts that are in litigation or foreclosure,
                                                                          .’
            . debts that will be disposed of under an assetsalesprogram within one year after becoming eligible for sale, or                             ~
              later than one year if consistent with an asset,salesprogram and a schedule established by the agency and                                  b
              approved by the Director of OMB,
                                                                                                                                                      k
        l     debts that have been referred to a private collection contractor for collection for a period of time determined
              by Treasury,                                               , .’
        l       debts that have been referred to a Debt ,Collection Center with the consent of Treasury and for a period of
                time determined by Treasury, and
    l           debts that will be collected under internal offset if such offset is sufficient to collect the debt within three                      [
                years after.the debt is first delinquent.                                      ~
In addition, a specific classof debt may be excluded by the Secretary of the Treasury at the request of an executive;
legislative or judicial agency. Agencies are not required to transfer to FMS debts which are over 180’ days
delinquent until such time as a final agency determination regarding the debt is made or the legal bar to further
collection action is removed. An agency may refer non-tax debt less than I80 days delinquent to FMS, or with the
consent of FMS, to a Treasury-designated debt collection center for appropriate debt collection action.                                              1
Before referring debt to .a Debt Collection Center, the agency enters into a letter of agreement with Treasury FMS ,                                 1
authorizing FMS to provide debt collection services. This agreement details the limitations and parameters
required for the compromise, settlement or termination of collection action.
                                                                                                                                                     I
FMS and other debt collection centers may charge and retain fees (based on actual costs) for debt collection
services. Fees may be added on to the debt as an administrative ,cost if authorized by law.

Treasury can authorize an agency to cccross-service”,that is, collect debts on behalf of another agency, as a debt
collection center. The agency must submit a proposal to Treasury which contains the documentation supporting its
request to be designated as a debt collection center. The proposal must indicate what types of debts the agency
wishes to cross-service and its successat collecting its own delinquent accounts. Some agencies may be debt
collection centers satisfactorily “Working” their own debts. However, these agencies may not want to cross-service
for other agencies. Treasury will grant a one-year waiver to the transfer provision of the DCIA for debts which are
being collected in an agency’s own debt collection center, provided the agency submits doctimentatitin ‘which      ,‘. :
indicates the volume and type of debts being worked in the debt collection center, what percentage or proportion it
represents of the total agency volume, a description of the center’s use of the various debt collection tools, and
historical portfolio performance.

After debts are referred to a designated collection center, the agency retains responsibility for reporting the debts on
the Report of Receivables Due from the Public. The agency is also responsible for removing accounts         from its _..._
                                                                                                       ---____-.                           _
Direct Loan System Requirements                                                                                                    33                I-


                                                                                                        -- _ --.--___---~          __.__       ,_.
Treasury Cross-Servicing




                                                                                 Treasury Cross Servicing

                                                                     Routine program mapagement --
                                                                  servicing. demand letters. due process
                                                                   notices, debt collection up to referral




                                                                                                                                            Demand        Letter                  Debt repaidkesoesolved



                             Debt Collection    Center


                                               Admin. Functions
                                                                                                                                                                                                           “Death”   Match
                                                Other Services*
                                                                                                                                                                                                    -



                                                                                                                      I                               r

                                                                                                                                                                   Collection   Agencies

                                                                                              through   application       of criteria



             * Morigage servicing, unclaimed assets recovery,
                                                                                                                            ,
         bonsolidated  credit reporting, 1099 reporting for vendors
                                                                                                                                        ,             Gg!.




                                                                                                                                                                                                                             -
                                                                                                             Illustration15                          .,


receivables when the designated collection center directs it to write-off the debt. However, at the time the debt is
referred to Treasury for cross-servicing, the agency must discontinue all servicing activities. At that time, the
designated collection center has authority to act in the Government’s best interest to service, collect, compromise,
suspend or terminate collection action in accordance ‘with existing laws under which the debts arise and in
accordance with the letter of agreement with the Agency.

The cross-servicing process consists of the following:


     l   monitor accounts at the debt collection center, and
     l   use an agency authorized to “cross-service.”

         Identify Accounts Selected. This activity identifies and refers accounts for cross-servicing based on past
collection history and agency servicing requirements. An automated system should:

34                                                                                                                                                                        Direct       Loan System              Requirements
                                                                                                          Treasury Cross-Servicing
                                                                                                                                ----


                l   compare delinquent loan account information to statutory criteria to select delinquent loan accounts for
                    possible referral.
                l   generate notificatipn to the debtor: of the agenqs intent, to, refer the debt to a debt.collection center.
                l   update the loan tiormation store.
                l   identify accounts that can no ionger be serviced by agency personnel.

        Monitor Account; Keferred to the Debt Collection Ceriter’. This activity monitors and periodically
                                                                                   1.
reevaluates accounts referred for cross-servicing.
                                        .
            l       identify accounts wrth monetary adjustments that must be reported to the debt collection center.
            . provide ad hoc reporting capability needed to monitor the accounts referred to a debt collection center and
              the amounts recovered.
            l interface with the core financial system to record receipts remitted to the agency.
            l apply collections received from the debt collection center according to agency application rules.
        l           record collection fees in accordance,with agency program requirements.
        l           process agency or debt collection center refunds, notify debt collection center as appropriate, and update the
                    loan information store.
        l           notify debt collection center of adjustments, recalls of debt, or collections received by the agency on the
                    referred debt.
    l               remove from the accounting and financial records accounts that the debt collection center recommends
                    should be written off.

Use au Agency Authorized to Cross-Service. This activity determines the agency’s performance in collecting
debts.

An automated system should:

                    identify the volume and type of debts ‘serviced.
                    identify the tools used by the agency to collect its own debt.
                    provide one or more years of information on the average age of debt over 180 days.
                    calculate the amount of debt collected using various collection tools.
                    accrue late charges, as required by referring agency.
                    provide information to referring agency sufficient for the referring agency to satisfactorily complete the
                    Report on Receivables Due From the Public.
                    track, by portfolio, age of debt referred, dollar and number of referrals, collections on referred debts and
                    report to Treasury on a monthly basis.
                    provide information to referring agency as needed i.e., collections received.
                    provide ad hoc reporting capability needed to satisfy referring agencies unique information requests such as,
                    length of workout agreements, percent of debt that can be compromised, etc.



                                                                                                 --.-_-    .-.--   -   - ---.   - ._........_.. ._.,..

Direct Loan System Requirements                                                                                                              35
Treasury Cross-Servicing                                                                                                                                                                                                -
                                                                                                                                                                                                               ‘i-
                                                                                                                                                                                                                                             I
Internal          Management     Inform+Jon        Requirem&nis                                .                               ;                                                                 :, .                                        ,
Listed below are internal management information requirements for the Treasury Cross-Set-v&g function. This : ;                                                                                                                              ;
information should be available to agency credit .program managers a&designated internal review officials on a
periodic or on an as requested basis. This list is not an all inclusive’inventory of internal information requirements                                                                                                                    ’
for the Treasury CrossServicing function. Each agency must determine the specific management information needs.                                                                                                                          i!
necessaryto manage its credit programs based on the agency missiorrand applicable statutory requirements.                                                                                                                                 I
Agencies must maintain financial accounting information at appropriate levels of summary for computational and                                                                                                                           I
reporting purposes. The main ‘levels are:                                          _,                                                                                                                                                    I

         l   transaction,                                                                                                                                                                                                                /
                                                                    ‘_.
     l       loan history,                                                                                                                                                                                                               I-
                                                           ‘,                             /,, ‘:                ‘;,                     ! ..:                                                         .
     l       risk category,                                                                                                                                                                                                              b
     l       cohort, and                                                                                                                                                                          ‘>I ..                                 I:
     l       account.                                                                                                                                                                                                                    1
                                                  ,’
Each agency also must determine whether the tiormation                        should be provided on hard copy reports or through
system queries.                                                               .;    ”
                                                                                                                                                                                                                                         i:


                                                                                                                                                                                                                                         i
                                                     .‘I                       ‘:




                            ,.
                                              ,.     ,:         :         i   ,,    ‘,f            ,..,   ,,   .,     y   ,.        ;      ‘;   ::,   ,           :   ..   I       ,        ,-             I
                                                                                          ‘,


                                                           .’




                                                                                                                                                                                                                                     !
                                                                                                                                                                                                                                     I
                                                                                                                                                                                                                                 I



                                                                                                                           ------                         _____                ----_.-.-.                      . ..__       _.

                                                                                                                                                                                                                                 L.

36                                                                                                                                  Direct Lean System, ,Requiremen,ts
 PortfolioManagement
Port%olio management ensures that     an agency continuky e&&& progkm effectiveness-id minimizes its
programcosts,,       : :, .,,     7    ;:,  : : , , ,.:,,,., :,- ., -:,     !
           ‘, ,>.’ ”                             1  .,: :‘:.  b     .;  ‘“i ‘(, ,,                                                                 ‘&
                                      “,,
   ‘:, ..,        i   ; ..,,:;, , :   ‘:,          ‘.- ,          ..:       : ,.                                                                   t-
General: Rqukn,&                                                I’ :                          ‘.   r
                .’                 :_                                                  ,. ;
This’ sec& pi-ovides the Governmentwide tictional reqtiremefits for the Portfolio Management function of a
direct loan system. Illustration 16 provides an overview of the Por$olio Management function. As shown, the
Portfolio Management function consists of the following major processes:

    l   PortGolio Performance Process,
    l   Program F+ncing Process,
    l   Support Subsidy Estimate (see Illustration 18), and
    l   P.ortfolio SalesProcess.




               Overview of the Portfolio Management, Function of a Direct Loan System




                                                         .:.I    :.:.:.:.:.:.:.:.:.:

                                                         ;:j: :;:;:::;:;:;:;:;:;:
                                            Pmgmm        ~:~:~.~.~.~.~.~.‘_‘.‘.‘.
                                           Financing     .:.:.
                                                         :.:.:.:.:.;.:.:.:.:.:.:.
                                                                   . .
                                             AEtlS       :.:.:.:.:.:.:.:.:.:.:,:.
                                                         .‘.‘.‘.‘.‘.~.‘.‘.‘.‘.‘.’




                                                       Illustration16


                                                                                                       --.--._-_   ..-..-_        ‘.,,   _




Direct Lean System Requirements                                                                                              37              :--
Portfolio Management


Portfool Manaflement:      Portfololio Pe$kmance                 Process

Agencies must maintain adequate and up-to-date information on the status of their loan lxktkJio to evaluate         1
management and program effectiveness. Agencies need information about the status and quality of the. loan
por$olio to monitor its financial health. As shown in Illustration 17, the Portfolio Performance Processconsists of
the following major activities:

     . Identify Loans for Evaluation, and
     l Compute Portholio Performance Measures activities.
                                                                                                    ‘.



                            Portfolio Management:                                       Portfolio Performance Process

                                                                                                         RqmrtslEvuluotioos




              Portfolio
             EVPlUCdiOIl
              C&h3




                                                                 IoLrmation


                                                                  Loan Data
                                                                                                                        Administrative   Costs
                                           _-------------------------.

                                                             Collsteml        Data
                                           _---------------___-------.

                                                             Payment History
                                                                                                             Cwt Management
                                           _____-___-----------------.
                                                            Spwinl       Colkctian

                                                                                                           Core Financial     System




                                                                                     Illustration   17


Identify Loam for Evaluation. This activity selectsloans for revkw and generates data required for agency
management use in performing periodic loan reviews to evaluate&xui collateral adequacy, ensure debtor compliance
with agency loan program terms and conditions, and monitor the debtor’s financial .condition.

An automated system should:

     . Compare loan data to agency program portfolio evaluation criteria in order to identify loans that require
       review or evaluation.


38                                                                                                                                Direct Loan System Requirements
                                                                                                                                                           ~.
                                                                                                                        Portfoljo Managment-.-             I
                                                                                                                                                           ,~

        Compare loan data to agency program portfolio evaluationcriteria. to identify loans with potential for
                l                                                                                                                                          ’
        graduation to private sector financing.
                            :              >;.     ,’                                                                                                      B
Compute Portfolio Performance .$deasuies. This, activity s,upports port&o reviews that allow agency
management to evaluate overall agency firogram performance in relation to program goals and performance                                                    F
measures included in the age&& annual performance plan, strategic ,plan, and financial statements. Performance                                             i
                                                                                                                                                           I
measures inform management how well the @ogram reaches its intended constituents, how effectively the program
uses its allocated resources, and how successfully the program achieves its hitended public policy results. Effective.
performance measurement should highhghtprogram trends to prompt reexamination of agency $icies as
conditions warrant.                       .,
                                       :               ,.’      /
                                                                                                                                                           ,
The information necessary to compute some of the following measures may not be readily available for ‘all loan ”                                           i
programs, or may be avai$ble  only at substantial expense. Therefore,:the value of a given perfqrmance measure                                             t
                      .                                                                                                                                    $
should be exammed wrthrn the context of the total cost to ‘an agency -of using that measure.
                                                                                        :         ,. ‘., ; .’
                                                                                                        b      I                                           1
An automated system should:              ’            .’
        :                                > :
      Compute. and maintain program perfiirmance information. Some ex,arnplesof the’ types of perform&e
            l

      measures &.I agency may want its automated system to compute_’are:
                                                                                                                                                           i
          Number and dollar value of loans made
                                 l



                                 l   Average loan size
                             l       Loans made by geographical’region
                             l       Number and amount of delinquent loans by key indicators such as loan-to-value ratios
                             l       Number and amount of defaulted loans by key indicators such as loan-to-value ratios
                             l       Number and amount of rescheduled loans                         ‘.
                             l       Amount of loan write-offs                                                                                             i
        l           Compute and maintain financial measures.to help assess,  the credit soundness of a loan program. Some                                  I
                    examples of the types of performance measures an agency may.want ‘its automated system to compute are:                         :
                                                                                                                                                           I
                       Average loan-to-value ratio (for collateralized programs)
                             l



                         l           Current loans as a percentage of total loans
                         l           Delinquent loans as a percentage of total current loans
                         l           Write-offs as a percentage of seriously delinquent loans
                         l           Overall por$olio risk rate
                         l           Loan loss rates
                         l           Recovery rates on defaulted loans
    l               Compute and maintain efficiency ,measuresto help determine the effectiveness of use,of agency resources. ’
                    Some,examples:of the types .of performarice.measures anagency may wantits automated system,tocompute                               _
                    are:
                     l               Administrative cost per loan approved
                     l               Time required to process a loan application
                                                                                                                    ,
                     l               Administrative cost per loan serviced                                                                                 I
                     l               Administrative cost per delinquent dollar collec&ed-.                 ____-            ---    ._... -...- .-.. .__
                                                                                                                                                      _
Direct Loan System ,Requirements                                                                                                              39           I’
Porthilio Management                                                                                                       -.-



          l   Net proceeds on real property sold compared to appraised value
                                          c            1                     ‘,      ‘, .;         CT),
Port@l$.~
        iManagement: Proflvawa FinancingyProcess                           ,,
In accordance with the FCRA of 1990 and OMB guidance, agencies have several components to credit program
financing, including Treasury borrowing, subsidy’ re-estimates, and working capital funding. Agencies borrow
from the Treasury to finance’ the unsubsidized ,portion of loans -disbursed and to make mterest payments to
Treasury if insufIicient funds are available at the time: Agencies must re-estimate subsidy costs to reflect differences
in interest rates between the time of obligation and disbursement and changes in projected cash flows. Finally,
agencies may elect to set.aside funds as working capital to fmance costs associated.with foreclosing, managing, and
selling collateral.                                         --

                                                  :                :
Agencies should use .the Funds Management function of the core financial system to’ record the appropriations,
apportionments, and limitations associated with the Program Account and Financing ‘Account for ‘each credit
program, The direct loan system would accessthe. core fmancial., . system to perform funds control validation.,’
Accounting for and controlling administrative expensesrelated to credit programs can be accomplished in the core
fmancial system, so this activity would not normally be included in the direct loan system. As shown in Illustration
18, the Program Financing process consists of the following major activities:                 !

     l   Support Treasury Borrowing Calculations,
                                                                                     ’
     l   Support Subsidy Estimate                                                        ,.‘.
                                                                      ,.
     l   Support Subsidy Re-estimates, and              .        .,
     l   Analyze Working Capital Needs.

Support Treasury Borrowing Calculatio&. The FCRA of 1.990 provides financing accounts with permanent
indefinite authority to borrow from Treasury. The agency is required to track the amounts of borrowing, compute
interest expense related to these borrowings, and compute interest earned on uninvested funds in accordance with
guidance provided by OMB and Treasury. The transactions to-record borrowings and interest would usually be
processed by’ the core financial system with support for the calculations being, provided by the direct loan system.
The actual organization of system processes between the direct loan system and the core financial system is at the
discretion of the agency; however, together the systemsmust: ,’         .’                             I’,. :,       !
                                                                                                ,.           ‘/
     l Execute SF-1151’s and record amounts borrowed from Treasury to fmarice loans:’ $ke adjustments ‘to ‘:’
        borrowings during the year to reflect changes in original estimates.        .’              _/I.
     l Execute and record Treasury borrowings to finance interest, payments to Treasury if insufficient funds are
        available to -make the payment.                     : ‘..                                           ”
     l Track the amount of uninvested funds ‘in the Financing Account as needed to support ‘interest earnings ”                  1
       calculations,
     l Compute interest .expenseon borrowings and interest earnings on.uninvested funds.,             !’
     . ,Execute and’ reword repa~kiit of priinciIi~‘ ~s~g .SF-115.1,s~d’~~~~~9t ‘tb ;rreasu~ iisi~~ SF-1;08T’s.,

     l   Execute and record receipt of interest earnings from Treasury on uninvested, funds using SF;lOSI’s. .,>
     l   Provide an automated interface with the core fmancial system to record all calculations. ”     .
                                                          I                 !
                         .-                                 ,,’     r                            I
                                                                                           :, :’            .‘.           !
                                                                                          -.        __-       - . .-..-- ..-.
40                                                                                              Direct   LoanSystem: Requirements
                                                         ‘.                                                          Portfolio Maflageme.n.t
                                                                                                                                    .--__


                                                              ),    ‘,   ‘/            -




                        Portfolio Management: ‘Programkianci&                              Process


                                                                              ‘.
                         I                          Payment Histw                                  1




                                                                                   SFllSl’sandSF       1~81’s   ,I              I




                                                       luustration125



 This section outlines the types of data elements which might ‘be mcluded in a ioan system and builds upon the
 standards set forth in SFFAS No. 2,4ccountin~@Direct Loans and Loan Guarantees and OMB Bulletins A-l1 and
A-34. The key to implementing the requirements of these’documents is having adequate systemsand reliable data
 to reasonably calculate the credit subsidy estimate,
                                                  ,’  :,;-.    (’
 Given the diversity of Federal credit programs and, therefore, the wide range in data required to support subsidy
estimates,,a loan .systemshould be tailored to the data needs of each loan ,program. The data elements in a loan
system should be selected to allow for more in-depth ,analysisof the most significant subsidy estimate assumptions.
To accomplish this .generally the loan system should maintain three types .of data. First, information regarding loan
characteristics should be maintained., Second, relevant economic data should be gathered. Third, data.on the acts;?
timing and amount of 4 cash flays related to .each:loan     in &loan system should be collected.,           :     ,,
                                        :f,:,’ ,, I L- ,.. .;,      i ‘,’ .‘,. :     ;a.
Loan characteristics. The loan system should maintain data that is predictive of loan performance and subsidy
costs. Loan characteristics maintained in a loan system will vary greatly from program to program. For example,
the value of collateral pledged may be highly predictive of recovery rates for some programs. The’follotiing is a list
of some of the loan characteristics which agencies should collect. This information should be obtained from either
the loan system, the core financial system, or other data repository within or outside the agency.
                                                                                         -___                ----   ..-.-._ _....
Direct~loan System Requirements                                                                                                         ,41    -~-


                                                                                                                     --.___..       ~
           Portfolio Management                                                                                                          ---   ,’


                l       Loan number - Cash flows should be maintained at the individual loan level, even though analysis might
                        often be done at the cohort level. Cash flows, such as receipts from property disposition, must be.tracked
                        back to the original loan via the loan number or other data element used to identify the origmal loan.
                                         ,.
                l       Date of Obligation - This information is necessaryfor reviewing historical cohort data, since cohorts are
                        defined by year of obligation, and for relating loan behavior to other dated variables.

           Loan terms and conditions. A system should maintain the actual loan terms, including maturity, interest rate, and
           up-front and/or annual fees. These data are critical for comparing actual payments to scheduled payments and for
           measuring the relationship between default risk and loan terms and conditions. The system should be able to
           calculate and report, as necessary,the aggregate repayment schedule for a cohort.

           Changes in loan terms and conditi&.         Any change in terms and conditions needs to be recorded in addition to
           the original terms and conditions, not in place of them. This data is needed ‘both to re-estimate the subsidy cost
           and to establish a basis for estimating new subsidies.
                                                                              ._ /
           Borrower location. Agencies may choose to collect several location elements, such as zip code, congressional
           district code, approving o&e code, and servicing office ‘code for regional analysis.

           Borrower credimorthiness. Since creditworthiness may be a strong predictor of defaults, the loan system should
           include measures of the financial condition of the business or individual receiving the loan and past credit
           experience if applicable.

           Loan use. For certain loan programs, tracking the intended loan use may reveal a significant variance in cost
           depending on the use of loan proceeds.

           Program-specific data. Other loan characteristics may also be important in predicting default. The loan-to-value
           ratio is a critical data element for predicting housing loan defaults; for student loans, the type of educational
           institution may be important; the value of collateral’is important in a number of programs..

            Economic data. Nearly all loan programs are affected by trends and fluctuations in the economy. The system
            should maintain the primary economic factors which influence loan performance. The critical indicators will vary
         Y;+across programs. For housing loans, among other factors, property values and house appreciation rates should be
            monitored. For programs which determine borrower’s interest rates based on the borrower’s income, all economic
            data on incomes should be maintained in either the direct loan system, the core financial system, or other data
            repository w$hin or outside the agency.

           Historical cash flows. All cash transactions related to each loan should‘be maintained in the system for several
           years to allow for trend analysis. Since transactions may be identmed by a wide variety of transactional codes,
           agencies should consider grouping transactions by the type of cash flows that are projected in loan program subsidy
           estimates. These groupings will vary from program to program, depending on the way cash flows are projected for
           subsidy estimates. This information should be obtained from either.the direct loan system, the core financial
           system, or other data repository (such asmicrofichecor CD-ROM that permits easy retrieval of data) within or
           outside the agency.
                                   ‘.: ,.:i: : _ :.t i. i,; :I’ )‘,, ,,,.I ,_ ), 5,;,.,“..‘.
                                                                                         .,:: ;,y ..y,:..: .,;,. ; .., ;. ‘;: ‘(. ,-: ;‘I;; .‘I’
           Listed below are suggested groupings which may be modified to fit actual loan programs.

                    l   Approval amount.
                    l   Disbursement amount and disbursement rate for each year.
                    l   Up-front fee.
                                                                                                                         -.--..-.--_-_    ,___._
                                                                                                                                              -_.-.._.__
           42                                                                                                Direct Loan System Requirements


---.-_                                                                                      -- -----
                                                                                                            Portfolio Management



                l   Annual fees.
                l Interest subsidies.                            :
                l Prepayments-including both the timing and amount.
                . Defaulted loan amounts including both the timing and amount.
                l   Delinquencies.
       Recoveries (including both the timing and amount) on defaulted loans by recovery method such as sale of
                l

       collateral, or of&et programs.
     . Scheduled principal and interest payments:        ‘.
       Actual principal and interest.payments.
            l                                        -:’    ., .. ,                            ,          .I
                                                          :         ;
Support Subsidy Re-estimatks. .‘OMB Circul~‘A-34 ,and SFEAS No. 2 generally requires that the subsidy cost of
a cohort of direct loans be re-estimated at.the ‘beginning of each fiscal year following the year in which the initial
disbursement was made. A re-estimate of each cohort cash flow should include prepayments, d&auks,
delinquencies, recoveries, etc. This activity examines the results of operations, by risk category (if applicable) and
cohort, and adjusts loan subsidy costs between risk categories (if applicable) within a cohort and for the cohort as a
whole to account for changes in cohort subsidy costs resulting from interest rate changes and differences between
estimated cash flows, the actual performance of the cohort, and expected.performance changes in ‘mture cash flow.
System activities may be located in either the direct loan system or the core financial system, as appropriate.

An automated system should:

        l           Support the re-estimate of the subsidy cost for each cohort and risk category of loans at the beginning of each
                    fiscal year in accordance with OMB Circular A-34 and SFFAS No. 2.
        l           Maintain cash flow data that permits comparison of actual cash flows each year (and new estimates of future
                    cash flows), as well as historical data from prior years to the cash flows used in computing the latest loan
                    subsidy estimate.                                                                           .
    l               Compare the current year re-estimated subsidy cost to prior years re-estimated loan subsidy costs to
                    determine whether subsidy costs for a risk category increased or decreased.
    l               Transfer loan subsidy from those risk categories with an excessof loan subsidy to those risk categories in the
                    same cohort that are deficient in loan subsidy to provide adequate funding for each risk category.
    l               Group those cohorts that need indefinite appropriation loan subsidy funds separately from those cohorts that
                    have excess’funds. Request an apportionment and obligate funds to cover the subsidy increase for those
                    cohorts of loans that have insufficient subsidy. Transfer excesssubsidy of cohorts of loans to the Special
                    Fund Receipt Account.

The loan system should support the re-estimate calculation and provide the necessarydata to record the re-estimate
in the core financial system.
                                                                                                                 I(...
Analyze Working Capital Needs. Working capital is the excessof current assetsover current liabilities.which an
agency may elect to set aside in the Financing Account to finance the costs of foreclosing, managing, and selling
loan collareral for collateralized programs. This activity assessesworking capital data needs and provides for the
maintenance and accounting for these funds in accordance with OMB Circular A-34. System activities may be
located in either the direct loan system or the core financial system, as appropriate.

An automated system should:
                                                                         ---                --___---.--.-          -..-_ ___,__. _.,

Direct Loan System Requirements                                                                                                  43
Poit’folio Minagement                          ‘,



             l   Account for working capital cash balances in accordance with OMB guidance.
        Record costs incurred which are funded by,~ork#g capita&,
             l
                                                               ,.     ~ , ,/‘I. ; ,,i..~ ‘. “,,*I’
        Compute the amount of Treasury interest earned by working capital funds and provide this amount to the
             l

        core financial system.
                                                                                        .I
                                                                                                 .
Portfoliq tinagement: Port&i0 SalesProcess 1 :
                                             ,,’                  .,.
  OMB Circular A-129 states’that Federal loans, may be sold to a,non-Federal entity without recourse, with the
approval of OMB and Treasury. Federal ,loans.rniaybe sold with. recourse if there is statutory authority for such.
sales. When a loan is sold without recourse, the Federal Government neither warrants future payments of interest
and principal nor takes any service or collection responsibilities’after,‘the sale. :If aloan’is~~soldwith recourse,.the
Federal Government is required to reimburse or repurchase,the loan if the loan cannot b&collected. ;Under the
FCRA, the sale of direct loans is considered aloanmoditication subject to credit reform budgeting. and ‘accounting
requirements. Additional guidelines for loan assetIsalesand prepayment programs, are provided in the credit
SupplementtotheTFM.                       *i ,.          *        ::”       L    1
                              ..                              XI              ’  )                              ‘I
As shown in Illustration 19, the Portfolio Salesprocess consists’ofthe following major activities:            ’
                                            ,+ ,. ,, (:            :
        Prepare Portfolio for Sale or Prepayment,. ‘. :
         l
                                                         3 ,*.                                                   ,’
         l       Conduct Prepayment Program, and         ’:I        : 1:. :                                          :”
         l       Execute Porifolio Sales.                                                                       ,‘

Prepare.l?ortfolio           for Sale. This activity identifies loan assetsto be included in the pool of loans for sale or for
prepayment. If the need arises;’an agency has the option ofengaging a fmancial advisor to conduct portfolio
evaluations and make recommendations as to whether to.execute a’portfolio sale. Iniaddition, ,this activity supports
the preparation of statistical data for ‘finalizingthe terms’of the portfolio,sale and,recording OMB/Treasury
approval or disapproval of the sale. Subsidy costs of the sale would be estimated outside of this system and checked
against available funds before approval.
                                                              I !,I     ‘.
An automated system should:
                  ,I          ’ ‘,           ..;;      !        ,      ”                   :    ,‘.. (,.“’ j, )( ,, .
     lCompare loan information to’ agency program criteria to select,loans for ‘inclusion in a potential salespool!
     l  Provide the ad hoc query’capability needed to provide information ‘on selected loans:”       I 1.’ ‘, ’                  :, :     ~~.
     l  Record OMB/Treasury approval or disapproval of the sale/prepayment.
                                                                                                   ,:                             .,‘, ‘_
Conduct Prepayment         Program.      Prepayment’ programs are initiated only when statutorily mandated or upon
approval by O&iB and Treasury. This process supports <prepayment programs conducted in conjunction with: a t
portfolio sale or independent of a portfolio sale.                            \:           : ,,
                                                      .‘j    : ““’                     ._,    I :, ,?:,                   :!
An automated       system should:                                                   ,...        .-
             _,,,,
              ,..     ‘.’
                       ,,                     ,‘,_;,,  *, .,        .:    ,..
                            . . ’ .” ‘_!‘,, ! : , ..‘,,‘,. , :.,’ < . : _’ ,’ :.:,L s ~ ,. ; ;, I.;*;; t :.::.,., <,c. . 6,, :,.
                                                                                                                              7,,”I _ ^
     l  Generate ,a prepayment offer, to be-sent to eligible ,borroGers for participation
                                                                                 .I :         in theI_prepayment ,;/program.     .,
     l  Record receipt of c~qwitment. lepers frog, @?oveqs..  .,.  ,:,            : ,i          : i, ! :~, :              ,:,
     l  Provide an automated interface with ‘the-core financial systemto record the receipt. of a prepayment and the
        changes in subsidy costs.



44                                                                                                   Direct:Loa;n System ,iRe,q,uiiements
                                                   Portfolio Managementi Pcktfdl~o S&s Process




                         Request A~roval     for
                           Salemnpaymmt




                                                                                                          ,:,   ‘.           2

                                                                                                                                 :


                                                                       Illustration19
                                                                                               .I.,
Execute Portfolio Sale. .Portfolio salesare initiated only when statutorily mandated or upon approval by OMB
and Treasury. This process supports the preparation of statis.tical.datafor finalizing the terms,of the sale, the sale
closing, and transfer of sale proceeds. to Treakuy. ’ ,At the time, of the sale, legal title is transferred from, the agency
to the third party purchaser.

An automated system should:
                    /      . ..        /.       ,:       1                                          ,       :
     Identify loans with incomplete Cdocumentation in the loan&formation
             l                                                                           store and generate a request for
     information to ensure loan files are cori+lete. ’
                 Update the loan information store with
                                                     /’ any provided information.                             ,..
             l



             l   Generate documents and other.information necessaryto finalize ., ,the.’ salesagreement with the purchaser.
         l       Update’ the loan information store to’ identify loans sold using information received from the underwriter.
         l       Provide an automated interface with the core fmancial system to record the sale of the receivables, the
                 proceeds, changes insubsidy costs, and calculate the related gain,or loss in accordance with SFFAS No. 2.
                                                                                                                    ’

                                                                                                      -              ---._           .,._.---..        .   .   ..




Direct           loan.    Sydem            Reqdfements                                                                                            45                --
Collateral    Requirements
There are no collateral requirements applicable to the l?ortfolio.Management function., :


Internal     Management      Information      Requirements
Listed below are internal management ir&rmation requirements for the Portfolio:Management .fimction. This
information should be available to agency credit programmanagers and designated.iriternal review officials on a
periodic or as‘requested basis. This list is not an all inclusive inventory of internal information requirements, for the
Portfolio Management function. Each agency must determine the specific management information needs’necessary
to manage its credit. programs based on the agency mission and applicable statutoryrequirements. Agencies must
maintain financial accounting information at.appropriate, summary levels for computational +urd,,repor+ig:-’    purposes.
The main levels are: transaction; lo,an history, risk category; cohort, and account., Each agency also-must determine
whether the information should be provided on hard copy reports or throughsystem queries. .The direct loan
system should provide at least the followmg,types of management         information: ” ~ “’
                                                            .:,.
Detailed Transaction History; Thissummary identifies, for each program by cohort and compiled on a loan by
loan basis, the number and amount of loans -in each phase of the direct loan life cycle. The information provided
includes the number of loans, current and delinquent, and the total number and value of loans in the portfolio.

Standard Management ~oprol/&ti~~.            This summary .provides portfolio activity, with comparisons to one or
more prior year loan activity, for agency management use in evaluating portfolio and credit management ’
performance.

Portfolio Sale Historical Payments. This summary provides a detailed payment history for each loan included in
the portfolio selected for,sale. Historical payment data are critical in order to assessthe investment value of the
portfolio to be offered for sale, determining the structure and, terms of the sale, and calculating the gain or loss on
the sale.

Portfolio Sale Performance. This summary provides the rating agencies and financial advisors with statistics to
more effectively evaluate portfolio characteristics performance. Statistics include loan-to-value ratios, effective
yields, and loss estimates.

Program Credit Reform Status. .This summary provides ,the status of the fiscal year’s credit reform
appropriations and subsidy levels.

Illustration 20 provides an overview of the Internal Management Information Requirements of the Portfolio
Management Function.




46                                                                                      Direct Loan System Requiremenh
                                                                                                                                                I



                                                                                                Porlfilio         Management
                                                                                                                         --                     )



                             ’   :              ‘,
                                                                                                   /’



         Portfolio Management:       Internal        Management         Information   Requirements




                                                                                                        LSysrmQuerier       1          !
                                                                                                                            I          I



                                                       Iltustr~ti0~24          ;                                                           I

                                                                          ,.               ‘I




                        ..




                                                                                      --_--__                .-     _--. .,._.-.._...-._
                                                                                                                                 4,        ;-
Direct loan System Requirements
                        ‘..      ‘.I,          ,I                                                  1




Delinquent
        Debt~oll~~tiotflkoh~dDebtServicing
OMB Circular A-129 requires agencies to have a fair but aggressive program to recover delinquent debt. ‘Ek&$le ’                                                                                                                                                                                                    i
is shown in the Overview,of the Delinquent Debt Collecq.on Fun$on,of a.Direct Loan System, Illustration 21,                                                                                                                                                                                                        i,
Each agency must establish a’cofiec&on strategy consjstent with its stattitor$ program’ authority that seeksto return                                                                                                                                                                                              1
the debtor to a current payment status or failing that, ma&&e the col@c&ns,,that can be realized. ;              ,,: :                                                                                                                                                                                             1
                                                                                                                                                                                                                                                                                                                   i
The Delinquent Debt Collection/Troubled                                                                                Debt Servicing function consists of the following major processes:
                                                                                                                                             :
      l    Collection Actions Process, and
      l    Write-offs and Close-outs~Process.




                      Overview of the Delinqkent Debt Collection Function of a Direct Loan System’




                                                                                             Llqtddnte         Cotlateral                                                                                                                                flcqwt     and
                                                                                                     +                                                                                                                                                   Approval
                                                            ,..,....,.._,............~~
                                                              . . . . . ,~,~,~......,~,~..,~.~,                                                                                                                                                                                             pOJ/Agcncy
                                                           ,.,.......                                  ,~.~,~.~.~.~,~.~,~,~.‘.‘.‘.‘.‘.‘,’,~,~,~,~.~,~,‘,‘,‘,‘,‘,’,’,’.’.‘.‘. .
                                                               .                  ,~,~,~.~,~.~,~,~.‘,‘.‘.
                                                                                   .    . . . . . . . .‘.‘,‘.‘,‘.‘.‘,‘,‘,‘.~.~.~.‘.‘.‘.’.’.’,’.~.’.’.~.‘,‘.‘.‘.’.’.’.’.‘.‘.‘.‘.‘.‘.‘.‘.‘.~.
                                                                                                        .                .,.,.~.,.~.,.,.~.,.,.,.,.,.,.,.,.,. I.,...                                                     ,:.:.:.:.:.:.:.:.:.:.:.:.:.:
                                                           ‘...’ .::::::.                                                                                                                                                                       :.:.:.                                            COtUtSd
                                                           ::::.                                                         ‘.‘,‘.‘.‘.‘.‘.‘.~.‘.‘,‘.‘.‘.‘.‘.’.’.’.’.’                                                                                                        b
                                                                                                                                                                                                                                                :;:
      (From Account                                                                                                      ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~                                                                                       .‘.‘.’                        ___-___----------------
                                                           :I::.                     Couectlon                              ,,............t.....                                                           Wlittsaffs and                       .‘.‘.’
                                                           :I::.                                                         ::::::::4uir;~~:.:::::::::::::::::                                                                                     .‘.‘.’
      Sctvklng)                                                                                                               .       .                           ::.
                                                           :I::.                       ACtlOIU                           ,..................                                                                 clme-outr
                                                                                                                            . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .
                                                                                                                         .,‘.‘.‘.‘,‘,‘,‘,‘,‘.~,~,‘.‘,‘.‘.‘.’.’.’.’.
                                                                                                                            ...                                 . .                             .
                                                                                                                          ~,~.‘.‘,‘,‘,‘,‘,‘,‘.‘.‘.~.‘.‘.‘.’.’.’.’.’
                                                                                                                          ~,~.‘.‘,‘,‘,‘,‘,‘,‘.‘,‘,‘,‘.‘.‘.’.’.’.’.’




                  v
 /
           Credit Informatton
                 sourcea
  ______________-_---_---

          CoUefUoo      A@ncim                      Collection’Activities                  ,I                I’
  ___________________                   ----        and Results
                                                                                                                                          +                                            4
           Federal Atycles
                                                                                                                                                                Loall
                                                                                                                                                                                                                                                                                                            ._/
                                                                                                                                                          lnformatlon




                                                                                                                                               Illustration21



                                                                                                                                                                                                                                                    -_                                                            :-
                                                                                                                                                                                                                                                           Direct         lean.Syste,mRequi.rements               1
                                                                                                          Delinquent Debt Collection/Troubled Debt Servicing-
                                                                  .’,I ,‘“.          ‘I ‘                    ‘.               .’       .I,   .:.
                                                                         ‘.                     .,, ,.I ,... ..’ / I               ‘,”               , 11

 Gene+          .Reqeepents                                                                                                                                                         .,I. .’
                                                                                                                                                ,                ,’
 This section provides the Governmentwide functional requirements for legislative and/or program servicing actions
 that must be accomplished before the debt can be referred for cross-servicing as,shown in Illustration 22,,Agency
                                                                                                               ,,
 Debt Program Management and Collection Process;


                                                                                                                                                                                          --
                                                                                                                                                                               ,,
                                                                                                                                           ‘,




                             Agency Debt Program Management and Collection .Process

                Agency Program Staff
                                                                                                                                        Troubled        Debt’Sewieing



                        ,,       .,.                     j:,.         .,      ,       ‘-. ,’                 ,‘I   I   I, _’   ,,
                           )       ,                                                                                                          ,Demand Letters ,’
                        Debt established                                                                                                 Credit Bureau reporting
                                                                                                                                        Treasure Offset Program
                                                                                                                                                Internal offset
                                                                                                                                      Private Collection        Agencies
                                                                                                                                                 Compromise
                                                                                                                                         Repayment Agieements
                                                                              debt identified   as overdue                                Lit~gation/Foraclosure
                              Current debt                                                                                                          Write-off
                      servicing and collection                                                                                      Reporting      as discharged to IRS
                                                                                                                                              Schedule for sale
         1111111111
                                                     I

                             Billings
                       Paymentposting/           ’
                            crediting  ,
                           Reporting
                            Tracking
                       Schedule for Sale

                                                                                                                                                8
                                             Payment missed
                                      debt has been accelerated   -
                                          all agency servicing
                                            requirements   met




                                                                                            Illustration 22


Delinquent     Debt Collection:                  Collection factions Process
                                                  I
The agency has considerable flexibi+y in.determining how to collect its delinquent debt. The size, age, and type of
debt are essential factors in determmmg the resources to be expended in recovering debt. OMB Circular A-129 and
the Credit Supplement to the TFJM provide guidelines to determine the appropriate tools to use to collect
delinquent debt. If collateral is attached to the direct loan, foreclosure and liquidation of the collateral should occur
after providing the debtor reasonable opportunity to cure the loan. Any deficiency balance may be pursued using
collection tools such as referral of the balance for cross servicing. As shown in Illustration 23, Delinquent Debt
Collection: Collection Actions Process,Troubled Debt Servicing under agency program requirements includes:

                                                                                                                                                    -                      ------      .-....
                                                                                                                                                                                           .-_. cm
Direct LeanQstem              ReqCirements                                                                                                                                            49        -
Delinquent Debt Collection/Troubled D.ebt Servicing



     l   Report Delinquent Debt
     l   Contact with the Debtor
     l   Refer for Treasury Offset
     l   Refer to Collection Agencies
     l   Refer for Litigation Activities
     l   Garnishment of non-Federal Wages
                                                                          ,.



Report Delinquent Debt. This activity reports selected delinquent account information to credit- bureaus and to
CAIVRS to indicate the delinquency status of the debt. Agencies must report all non-tax commercial and
delinquent consumer accounts in excessof a pre-determined amount credit bureaus provided that the agency has
processed the necessaryPrivacy Act notices for consumer debt.                                 ‘.,



                           Delinquent Debt Collection:                                                          Collection Actions Process



           Notification
                                                                                               Collection     Agencies
                                                                                             ___________-----




                                                                                                                                                                  CollectIon       Data




                                                                                                         CAIVRS Referral Criteria
                                                                                                         _________-----------
                                                                                                               Credit Bureau Reporting
                                                                                                         _------------------- Criteria
                                                                                                              Offset Referral Criteria            -   *
                                                                                                         ______-------------.                                                 Loan Date
                                                                                                                                                           _________---------------
                                           Loan Data                                                       Collection      Agency Referral        _
                          _____________-----------                                                                        Criteria
                                                                                                         ___________---------                         -b          Special      Collection   Activity
                                     Special   Collection                                                  Collection        Agency   Selection   -
                                                                                    I                I   I--“-‘
                                                            :,.       ”   ,,
                                                                  2            ;I              ,h.         \>

                                                                               L        AdHocReports            1




                                                                                                                                                                                                       -
                                                                                             -.~            .           --
                                                                                             Illustration           23




50                                                                                                                                                                Direct, LoanSystem Requirements

                                                                                                                                                                                                           - ----
                                                                                   Delinquent Debt CoIIe,ction/Troubled~~.-.--
                                                                                                                         Debt Servicing


      An automated system should:
                                     1                                                                          ._




                      l   Identify delinquent commercial and consumer accounts for reporting to credit bureaus (preferably by
                          electronic ‘interface) and CAIVRS by comparing reporting criteria to delinquent loan data.
                                                                                                                                                    ;.
                      l   Calculate outstanding balances, including interest, penalties, and administrative charges, and include this
                          information in credit bureau reports,                                                                                     I
                      l   Generate (or include. in demand letters) a notice to inform consumer borrowers of the referral of a delinquent
                          debt to a credit bureau and CAIVRS in accordance with regulations.             I      ,.
                      l   Maintain a record of each account reported to credit bureaus to allow tracking of referred accounts.                      )
                      l   Prepare data on appropriate medium, on a monthly basis, of delinquent, debtors to be included in the
                          CAIVRS database.

      Contact with Debtor. It is critical for an agency to address a delinquency immediately to prevent it from
      becoming more serious. If the delinquency is not resolved after the initial contact, the agency should pursue.
      additional contacts. If the volume .and amount of loans is large enough, agencies may establish workout groups to
      decide on appropriate actions to maxim& debt recovery.

      An automated system should:

                  l       Generate and transmit dunning letters to debtors with past-due loan accounts.
                  l       Identify debtors who do not respond to dunning letters within a specified time period.
              l           Track demand letters and borrower responses to document borrotier due process notification (and borrower
                          willingness and ability to repay debt).
                  l       Track and document debtor appeals received in response to demands for payment.
              l           Provide automated support to the collection process. Support could be provided for activities such as
                          contacting a delinquent borrower by phone; documenting contacts with a debtor and the results;
                          documenting installment payments, rescheduling agreements, and debt compromise; generating management
                          reports; and tracking the performance of individual agency collectors.

      Refer for Treasury Offset. The DCIA of 1996 mandates the referral of all Federal debts over 180 days delinquent
      to Treasury FMS for the purposes of administrative offset. A delinquent debt for administrative offset is a debt that
      is not being paid voluntarily by the debtor. Xf the delinquent debtor is in a voluntary repayment plan acceptable to
      the creditor agency and is making the payments as required under the plan, the debt should not be referred for
      administrative offset. In addition, debts that are ‘over 10 years old, in foreclosure, moratorium, or bankruptcy
      cannot be referred to Treasury for administrative offset. The administrative offset program administered by the
      Department of the Treasury is named the Treasury Offset Program (TOP). The DCIA requires FMS, the U.S.
      Postal Service, or any other government corporation, or any other disbursing officials of the U.S. designated by the
      Secretary of the Treasury, to offset Federal Payments to pay the delinquent debts. When fully implemented, TOP
      will offset Federal salaries, IRS refunds, and Federal administrative payments such as payments to vendors. DCIA
      authorizes Treasury to charge a fee sticient to cover the full cost of implementing administrative offset; the agency
      can either pass this fee on to the debtor or absorb it.                                     ,..,, ! _,, . ;..: ,. ,., , * j 1;I7i’..y,.

      An automated system should:

          l               identify accounts eligible for referral to the TOP.
          l               generate written notification to the borrower that includes the following: the nature and the amount of the
                          debt; the intention of the agency to collect the debt through administrative offset; an explanation of the
                                                                                                                                    --..-.--_..-_   :__

      Direct loan System Requirements                                                                                                        51     .
---                                      .“.
Delinquent Ddbf Collectidn/Trtiubled Debt Servhing ,’


         rights of the debtor; an offer to provide the debtor an ,opportkity to inspect and copy the records of the
         agency with respect to the debt; and an offer to enter into’a written’repayment agreement with the, agency.
     l   identify, at the end of the notification period, the debtors that remain delinquent and are;eligi,ble for referral.
                                                                                   .. i               ,, ‘..,.,
     l   offset delinquent ,debts internally before referral to TOP, where applicable. .,                           i
     l   transmit to TOP eligible new debts, and increase, decrease,or delete previously reported .debts.
     l   apply.collections received through the TOP process to debtor accounts in accordance.with applicable.
         payment application rules.                                                                   .
     l   record offset fees in accordance with agency program requirements;. ” .I ‘. : ’ l         :      ,, ; .’ j
     l   update the~loaninformation store to reflect TOP status.                                         G ,, _’
     l   update the’ core financial system to record collections from TOP..                         ’ ’ :-                     ’
     l   process agency refunds given to borrowers erroneously, offset and transmit this information to Treasury in a
         helyman&.            ‘.          *,                 .,,,       ‘. ~,,. .  ,, ‘, ;     ,. ;          ., ,
     l   record refunds given by Treasury, and adjust,the,loan information store accordingly.                    e                 :   :

Garnishment of Non-Federal *ages. The DCIA’ of 1996 authorizes Federal agencies administratively to garnish
up to 15 percent of the .disposable pay of a debtor to sa+sfir delinquent non-tax debt. Prior to the enactment of the
DCIA, agencies were required to obtain a court judgment before garnishing’ the ,wages of non-Federal emp$yees. :
Wage garnishment is a,processwhereby an employer withholds amounts’ from an emp!oyee’s wages”‘and pays those
amounts to the employee’s creditor insatisfaction of’a,withholding order..                                  I , ’ ,,
                                                                             At least 30, days before; an agency
initiates garnishment proceedings, the agency must give the debtor wrnten notice of @:mtent. ;.,.            */: :  ,,.
An automated system should:                                                                                          :,   ‘i               _, ,
     l generate written notice informing the borrower of the agency’s,mtention to initiate, proceedings to,collect the
     i debt through deductions from pay, the nature and amountI of,the debt to be :‘i.
                                                                                   collectedj,arid the debtor’s
                                                                                                          ‘_
       rights.                          ;                             ‘,               ~ ,:r* :,          ,’
       document  .‘.that the wage ,garnishment order was                           ,
     l
          ;                                            >’ sent to the employer..
     l  provide ad hoc reporting capability needed to monitor the amounts recovered throughnonFederal wage
        g=n+wnt.                                                                   ,                              i.      ,’
     l  document that the agency provided debtors a hearing, when requested., : 7                                 .
     l ‘interface with the core financial system to record receipts remitted to. the agency..
                                                       .
     . apply collections received through wage garmshment      according to agency ‘apljlic’ation rules. ’ ’
                       ‘, ,‘_                                                                         ,\l,
Refer to Collection Agencies. This activity determines. and)refers delinquent loan accounts to collection agencies
for collection. Agencies can refer debts to a private collection contractor for collection for a period of time
                                                                                                                     ‘,,
determined by Treasury.                                              i.                                        ‘(
             :
Ana~tomat~dsystei;nshould:             :                              :.~-5.’ ., .1’.,.. .i.: ‘t,,,.::9 -,i : : : -‘,;: ,,:::7 /..s;: f
                                                                                                              “.                     ,
     . Compare delinquent account data, to agency program collection agency referral criteria to select,delinquent
        loan accounts for referral to collection agencies.
     l   Sort and group delinquent loan accounts based on type of debt (consumer or commercial), age of debt, and
         location of debtor.
                                         ‘/    .,.

52                                                                                                  Direct:Loan .System:Jequirements
                                                                                       Delinquent Debt CollectionlTroubled      Debt Servicing


                                                                                       ;     :
                        y Calculate outstanding interest, penalties, and administrative ‘chargesfor each delinquent loan, account to be
                          referred.                                                                                   .’
                                      >,’                                                ,,.                       ,                                  !
                        l Assign selected delinquent loan account groupings to appropriate collection agencies ‘based on collection
                                                                                                                                                      //
                          agency selection criteria for agency programs;                 :      .. ‘,               : _,
                                                                                                                                                      7
                    l       Document sthat’the delinquent account has been referredto a.collection agency.
                                                                                                                                                      I
                    l       Generate and receive electronic transmissions of account balance data and status updates. to and from
                                                                                                                           .’                         ~
                            collection agencies.
                    l       Record receipts remitted to the collection agencyand forWarded .to the agency.         ‘, -: :, .’
                    l       Update the loan ,information store to, reflect receipts, adjustments+ and other status changes; including
                            rescheduling, compromise, and.other resolution. decisions:          :, ,,               .’ ,, ,.’    ‘. ,:
                l           Accept and match collection agency invoices with agency records.                                           ,’   ,,
                l           Generate payment to the collection agency for services rendered through the core financial system.
                l  Request, reconcile, and record returned accounts from collection agencies. .              I
                0. Interface with the core fmancialsystem  to record collections processed through
                                                i                                            8.    ‘,collection agencies.
Refer I+, LitigAti,Tn &&ities.’       OtiB Circular A-129 requiresagencies to refer delinquent accounts to the
Department of Justice (DOJ), or use other litigation authority that may be available, as soon as there is sufficient
reason to’,conclude that full or partial recovery of the debt can best be,achieved through litigation. This activity
determines and refers selected accounts for litigation. Referrals to DOJ should be made’!m accordance with the
Federal Claims Collections Standards.

An automated system should:                                     ’                                                     ..I.

            l                Compare delinquent, loan account -information against the agency’s litigation referral criteria to identify
                             delinquent loan accounts eligible for ‘referral. Support ‘identification of accounts to be referred to counsel for
                             filing of proof of claim based on documentation that a debtor has declared bankruptcy.
        l                    Provide an electronic interface withcredit bureaus to ,obtain credit’bureau reports that will enable assessment
                            .of the debtor’s, ability to repay before a claim is’referred to legal counsel..
        l                   Calculate the outstanding balance, including principal, interest penalties, and administrative charges, for each
                            delinquent loan account to be referred to legal counsel.
        l                   Generate the Claims Collection Litigation Report (CCLR). The CCLR is used to capture collection actions
                            and current debtor. information and transmit this information to DCJ. ,..,,         ,.i
        l                   Receive electronic transmissions of account data and status updates to and from DOrs Central Intake Facility
                            or the agency’s,Office of General Counsel’s (OGC) automated system for referrals. ‘j
        l                   Update the loan status to reflect referral for litigation so that the loan’can be excluded from other collection
                            actions, and to alert the agency to obtain approval from counsel before accepting voluntary debtor payment.
        Track-filing of pleadings and,other motions, including proofs of claims in bankruptcy, to&sure
        l                                                                                                                         swift legal     ’
        action’and to monitor litigation activity.
    (‘,
    d Match agency litigation referrals withDOJ listing of agency litigation referrals.      ’     ”
    ; Record and track recovery of judgment decisions.
    l Update the loan information store to reflect receipts and adjustments.                      .’ ;j
    . Interface with the core financial system to record any collections resulting from litigation.

Difect Loan Sjstem, Requir,ements
Delinquent Debt Collection~Troubl’ed~ Dibi Ser’vikihg :


Delinquent Debt Collection: White-Oji and Close-OutsProctjf                                                                                                                                                                                                                         I

OMB Circular A-129 and the Credit Supplement to the TFM describe effective write-off and close-out procedures
for delinquent,loan accounts. As shown in Illustration 24, the Write-offs andClose-outs process consists of the
following major activities:         I’    :
                                                                                                                       6


    l   Identify and Document Accounts Selected for Write-off,
                                                      ,’                                                                                                                                                                                                 ‘.       I
    l   Monitor Written-off Accounts, and
    l   Document Close-out of Uncollectible Accounts.                                                                                                    ,,,                         ,,_                             ,                                        .
                                                                                                                                                                                                                                                                                    I
Iden*     and ‘Do&n&t     Accosts Selected for Wriie-Off. This activity identifies and p;rbceSsesaccounts for
write-off based on past collection history and a system-prepared debtor ‘financial profk Write-offs of loan
accounts that exceed a pre-determined amount in accordance.with program require,mentsrequire approval of the
DOJ.

An automated system should:




                        Delinquent
                              ;    Debt Collection: Write-offs and Close-outs Proceys

                                                                 /-,                5
                                                                                                                                                                                             DOJ/ Agency Counsel

                                                                                                                                                                                         ---m--e
                                                                                           Appmval for Tmnination
                                                                                             of Collection Actjon                 >                                                                        IRS
                                                                                                                                                                                     \                                              J
                                                           I                          I.
                                                                                                                      .      :.                       ~~~~~,,~,~~~~~~~.~.~.~~
                    :.:.:,:.:.:.::       ”   ”           . ,,.........               v
                                                                                                :.:.:.:.:.:.:.:.:.:.:                                   ,‘.‘.‘,~,~.‘.~.‘.~.~.’
                    :.:.:.:.:.:.:.                                                              .‘.‘.‘.~.‘.‘.‘.‘.‘.‘.                                   .‘.‘.‘.‘.‘.~.‘.‘.‘.~.’                                                           ,‘_‘.‘.‘.‘.’
                                                                                                                                                        .‘.‘.‘.‘.‘.‘.‘.‘.‘.~.’
                    ,‘,‘,‘.~.~.~.~                           l&ntifyand                       ::::::::::::::::::::::
                    .‘.‘.‘.‘.‘.‘.’ . .                                                                                                                                                          Document Close-out                       ;
                                                                                                                                                                                                                                         :‘.‘.‘.‘.‘.’
                                                 D,y,,,c”,                Ace,,““&            :::::‘:;:::::::::::‘:’
                    ‘.‘.‘.‘.‘.‘.‘.
                    .,;,:.:.:.:.:.:
                           . .. .                                                                                                                                                                  ofUncollectible                        I ‘.‘.‘,‘.’
                                                                                      . .. . .. . .. . .. . .. . .. . ...*
                                                                                                                      . ..
                                                             Selectedfor.                                                                                                                                                                  ., :,:.:.:.
                     ‘.‘.‘.‘.‘.‘.‘.                                                                                                                                                                    ‘Accounts
                                                              W~‘~-o~                    :,:,:,:,:,:,:,:. . ::.I.: 1                                                                                                                     .:.:.:.:.:.:
                                                                                         ,‘,‘.~,~,~.‘.‘.’ ..‘.                                                                                                             ,’             :::::::::::
                    ...; ...,.,.,
                            . . .;;;;;;                  ,.,., ~,~,.,~,~.~,.,~,~,.,:.:,:::::::::::::::: :.:.                                                                                  t
                    .: ,...:,., .;;;;;;                  ::, .;..;,.,...;;:                                         . I ::                                                           ,:,:,:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:         .,.;;;;;;,

                                                                                                                                                                                 I                                              I




                                                                                                                                  Illustration   24

                                                                                                                                                                                                                                                                      ---..-...._
                                                                                                                                                                                                                                                                                -.;-
54’                                                                                                                                                                                                                                       Direct~Lo~an~System
                                                                                                                                                                                                                                                            Requirements        -
                                                                                      Dejjqquent Debt Col.lection/Trou:b;le,d Debt $w@ing.
                                                                                                                                        --.


                        l   Compare delinquent loan account information to agency program write-off criteria to       &kt delinquent    loan
                            accounts for possible write-off.
                    l       Classify debtors based on financial profile and ability to repay.                                 ,
                    l       Have indicators of the financial well-being of a debtor, including debtor financial statements, credit bureau
                            reports, and payment receipt history.
                    l       Produce a CCLR for each loan account to.be referred to agency counsel or the (DOJ) for approval of
                            termination of collection action. Update the loan status to reflect the referral.
                                                                                                                    !
                            Update the loan information store to reflect approval or disapproval by agency counsel or?the DO
                                                                                                                           .. J for
                l
                                                                                                                                 i
                            termination of collection action.
                l           Update the loan information store and provide an automated interface with the core financial system to
                            record the write-off of the receivable.                            ‘,
Monitor Written-Off                          Aqmnts.      This 4,”
                                                                activity monitors / and
                                                                                    / peri<od$lly reevaluates inactive acco,untsfor possible
                                                                   I A ,:,,,               .’ a
reclassification.
                                                                    I ,,                1,
An automated system should:

            l               Maintain a suspens,efile of inactive (written-ofQ loan accounts,
            l               Reactivate written-off loan accounts at a system user’s request if the debtor’s financial status or the account
                            status changes.                      ,

Document Close-Out Of Uncollectible &counts. This activity completes agency action on accounts determined
to be uncollectible. Closed out accounts over a pre-determine amount must be reported to the IRS on Form
1099-C. When a debt is’reported, the 1RS:will match the agency’s Form 1099-C report against individual tax
returns to determine if the discharge of the,debt has been reported by the debtor as income.

An automated system should:

        l                   Compare loan account data to agency close-out criteria to identify debtor accounts eligible for close-out and
                                                                                                                        .I
                            1099-C reporting.
        l                   Prepare and send a Form 1099-C to the IRS if the debtor has not responded within the required time
                            period.
    . Update the loan information store to reflect receipts, adjustments, and other status changes, including
      rescheduling, compromise, and other resolution decisions.
    l                       Retain electronic summary records of close-out account-activity for a period of five years for use in agency
                            screening of new loan applications.


Collateral                         Requirements                                                                          1,
                                           .,,                                                         :
Collateral activities, where applicable, are an integral part of the delinquent debt collection function. For
collateralized loans, agencies should pursue foreclosure/liquidation of collateral after providing the debtor a
reasonable time to cure the loan. Illustration 25 provides an overview of the Foreclose and Liquidate Collateral
function. As shown, the Foreclose and Liquidate Collateral function consists of the following major processes:



Direct Loan Syste,m: .Requ.irements
DeHnquent D,ebt Co~llection/Tr~ubled~~Oebt.~S~r~ici~~~
                                                    ’ ’                                   ‘,                                    :


                                                               . . .’            ‘7,                     ,.                         ‘, .,             ,               ., ‘,
         Foreclose on Collateral Pro&s, and,’               ‘:                                                         ,’
                                                               ,’ :,      ” :,                                                                                           ,,
     l
                                                         ,.                                              1
     l   Manage/Dispose of Collateral Process.          % ‘. ‘, :,                                   ,                                                    ;

                                                                                                                        .
Forecloseand Liquidate Collate&: Forecloseori Collateral           :.

 As shown on Illustration 26, the Forejose & Fll&$i             pi-o$si cqixists of thk follkving                                major activities:
                                         r’.         ,.           ., ‘..
     lIdentify Foreclosure Candidates, and                                -. I’,
                                                “:, I’:
     lForeclose.                                                                  il
                                         !   .I.                         ‘. ’          , .‘., ,,..,                                     .‘.,                  %
                          .:               I       ,               ,‘., ,,                  ,r




                                                a Direct Loan System
                                                                                                                                                -/,




         (From Delinquent
         Debt Collection)



                                                                                                                            Collection)                 P~pcrty
                                                                                                                                                      Management
                                                                                                                                                      Conmctom

                                                                                                                                                 4J




                                                        Illustration 25
                                                   .,                                                         .’                          ,,,
                                                                                                                                    :
                                                                                                                   ”
                                                                                                                                                                                      /


                                                                                                                                                  -_~--                 ..,._____._.._.-

56                                                                                                             Direot~toan.Syst;em                             dtequirements

                                                                                 _ - ~...-------._
                                                                                                                                                                 ,



                                                                  Del~i,rquent.~D:eb:t
                                                                         I          Cullection/Tr.ouble& D,ebt Se,rvic..ing.-,.
                                                                        :.“,
                                                                             .’
                                                                              ..
 Identify Foreclosure Candidates. Foreclosure.on collateral may be initiated upon recogmtion of an unresolvable
 delinquency on collateralized direct loans. Collateral foreclosure includes identifying accounts eligible for
 foreclosure by comparing delinquent account data,to agency collateral foreclosure selection criteria;             I

 An automated system should:

        l    Compare d+inquent ,’account data,.to collateral
                                                    .i       foreclosure, selcc@oncriteria.
        l    Sort and group selected delinquent accounts by type of collateral (single’ family or multifamily, commercial,


                                Foreclose and Liquidate. Colisteral: Foreclqsb on ,Collateral, ,Process




                                                                                                                                                                                                                                                       A
                                                                                                                                                                                                                                                                            /                      \
                                            .                                                                                                                                                 ,‘,
                                                                                                                                                                                                                                                 :                                      DOJ&pWy
                                                                                                                                                                                                                                                                                   ,,    ~,COImd

                                                                                                                                                                                                                                                                                                   J




              ::
              ::
              .‘.’
             ::::                                          Identify
             ::::                                      For+sure
             ::::                                                                                                 _.;,.;, ,.,.,._.,.,., .(.;.; .,.,.,.,.,.,.,.,.,.
                                                        Caodidates                                               ‘,‘.~.‘.‘.‘,‘.~.‘.‘,~.‘.~,‘.~,~.~.’,’,~.~,’,’.’,~                                                                                           ::::
             ::::                                                                                              ..,~.‘.‘.‘,‘,~_‘.‘.~,~,~.‘.‘.~,~,‘.~,’,~,~,~,’,~,~
                                                                                                                    .. .. .. .. ... .. ... .. .. .. ... .. .. .. ... .. .. .. ... .. ..
             :*:.                                                                                                                                                                                                                                            ::::
             ::::          .,                                                                                  .‘.‘.‘.‘.~.~.‘.‘.~.~.‘.‘.‘.~.‘.~.’,’.~.~.~,~,’.~.~
                                                                                                                    . . .. . . . . . .. . . . . . . .. . . . . .                                   .’                                                        L.1.
                                                                                                            .:   ,‘.‘.‘.‘.‘.‘,~,‘.‘.‘.‘.‘.‘.‘.‘.‘,’.’.’.’,’.’.’.‘,
                                                                                                                        .,. .,.                                  .,
             .‘.’
             ,.,.,._.    ,.,.,.;;_.;                .: . .,.,...,.,.,....
                                                             . . . . . . . . .>..‘,‘...,.,,‘,‘,.,          . . ‘.~.‘.~.‘.‘.‘.‘,~.~.~.~.‘.‘.~.‘.’.’.~.~.’.’.’,~,’
                                                                                   . . . . . . .;;;. . .,.,.~.~.,.~.~.~.,.,.,.,.~~,.,.,.,.~.,.,.~.~.~.,.~.,.,.~.,.,.,.~.,
                                                                                                                . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .;;,...,.;; . . . . . . :.....                                                   .:.:
                                                  .
             .. .. ... .. .. .. .. ... .. ... .. .. .. .. . . . . . . . . . . ..~.......................................                                                                                 . . ::. .‘. . . . ..I.‘.‘. ‘.‘.‘. :::;:
                                                                                                                                                                                                    .‘,~,‘.‘.~.‘.‘.‘.‘.‘.‘.‘.~.~.‘.‘,’,’.’.’.’,’,’,‘.‘,‘,’


                                                                                                                                                                                                                                                                     ReceivnbleAdjustnpnts




                                                 I                                   I                 hrn       Data

                                                                                                                                                                                                                                                     General        Ledger Management

                                                                                                   Collateral        Data                                                        1,
                                                                                                                                                                         .,-.’




            farm, etc.), location, loan-to-value ratios, and amount of debt.
    l       Calculate outstanding principal, interest, penalties, and administrative charges for each loan account selected
            for review for foreclosure.




Direct Loan--System.:Reqricements’                                                                                                                                                                                                                                                                     57,
Delinqient Debt CoIIection/TroubIe.d Debt Servicing                                                                           -.-


Foreclose.. Once all outstanding principal, interest, penalties, and administrative charges for each foreclosure                       ,
candidate have been calculated, the loan may be foreclosed. Foreclosing includes monitoring the foreclosure
process and recording the results.                                           i                                                         1
An automated system should:                                                                                                            ‘!:
    l       Transmit a foreclosure notice to the .borrower.
    l       Transmit information necessaryfor the foreclosure to the ,DOJ and/or agency OGC, as applicable.                            /
    l       Record the results of the foreclosure proceedings and title conveyance to the agency.                                      I
    l       Provide an automated interface of data on acquired collateral; to the.,property management system for
            management and liquidation of the eroperty.
    * Provide an automated interface to the core financial system to record the value of the property acquired and
      to reduce the receivable amount.
    l       Generate or provide the information needed to manually prepare IRS Form 1099-A Acquisition or
            Abandonment of Secured Property.

Collateral acquired by the agency should be liquidated (sold) to provide funds to recover the delinquent debt. Due
to economic conditions, condition of the property, or other factors, the agency may decide to delay liquidation
until conditions are more favorable. In that situation, the property must be managed until it is liquidated; this may
involve making repairs, renting it out, etc.

Forecloseand Liqtiidate Collateral: ~ataagelDiss$wse~~f
                                                     Collateral Process

As shown in Illustration 27, the Manage/Dispose of Collateral process consists of the following major activities:

    l       Manage Collateral, and
    l       Dispose of Collateral.

Manage Cdllateral. This activity supports management of acquired collateral. If a property management system
exists, some of these activities may be supported by that system rather than the direct loan system.

An automated system should:

    l       Generate payments to property management contractors for services rendered.
    l       Track, record, and classify operations and maintenance expensesrelated to the acquired collateral.
    l       Document rental income and other collections related, to the acquired collateral.
        l   Post the expenses and income to the core financial system through an automated interface.

Dispose of Collateral.         This activity supports the sale or other disposal of acquired collateral.

An automated system should:

        l   Update the loan information store to record receipts resulting from the liquidation of acquired collaterai and
            the disposition of the collateral.
        l   Identify any deficiency balances remaining for the loan after collateral liquidation for further collection
            activities.
                                                                                                --_~        ---.        _-..,_-.    .____.
                                                                                                                                      ._
58                                                                                              Direct loan System Requirem.ents
                                                                                                                            Delinquent Debt Cellection/Troubledi Debt Servici.ng
                                                                                                                                                                             --




           Foreclose and Liquidate Collateral: 3Manage/DisposeCollateral.Pi-ocess
                                                               ,.I


                                                                                                                                                                    Pttnhssef
                                                                                                                                                                    /
                                                                                                                                                                 ,‘P
                                                                                                                                                                 Collaterel
                                                                                                                                                                              Payment
                                                                                                                                                                              Collateml
                                                                                                                                                                                              for




                          ......
                            .....                                                                                          ...
                                                                           ..................................................................................
                          ‘.~.~.‘,~,’
                          ......                                          .:.:.:.:.:.: .........................................
                                                                                            ................................
                           .....
                          ......
                           ........................................                                                                                                              .:::;
                          ......
                           .....                                          .....................................................................                                  ‘.‘.‘.‘,
                          ...........                                                                                                                             Dispose
                            .........
                          ......                             Manage       .i:i:i:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::
                           .....
                          ......                                          ...............................................................                             of         ..........
                           .....                           Collatetttl      .....................................
                                                                          ................................                                                                       .........
                          .: .... .                                         .....................................
                                                                          ....................                                                                   Collateml       .:.:.: :.
                         ‘.~,‘,~.‘,’                                      ............................................................................
                                                                                                                                                ..............
                         ‘.‘.‘.‘,‘,’                                                                                                                                              ....
                         ......
                           .....




                                                                                       Illustration                     27



    l   Provide an automated interface to the core financial system and the property management system to record
        disposal of the property and associated receipts.


Internal    Management                Information                        Requirements
 Listed below are internal management information requirements for the Delinquent Debt Collection function.
This information should be available to agency credit program managers and designated internal review off&Is on
a periodic or on an as requested basis. This list is not an all inclusive inventory of internal information
requirements for the Delinquent Debt Collection function. Each agency must determine the specific management
information needs necessary to manage its credit programs based on the agency mission and applicable statutory
requirements. Agencies must maintain fmancial.accounting information at appropriate levels of summary for
computational and reporting purposes. The main levels are: transaction, loan history, risk category, cohort, and
account. Each agency also must determine whether the information should be provided on hard copy reports or
through system aueries.                                        .-                   --.-----         --._- _.__._ ..-_,. ,.
Direct Loan System Requirements                                                                                                                                                                     59
                             ~.
Delinqueiit: Dibt: ~OllectiinlTreubled   Debt Servichg                                                                                  -


The direct loan system as shown in Illustration 28 should provide at least the following types of management
information:
                                          ,                               I
Detailed Transaction History. This summary provides detailed account information by cohort for internal
control and tracking and, in the absence of an electronic interface to external entities, may, be,used to transfer data
from the agency to the external entity to facilitate delinquent debt collection actions. Separate data summaries are
produced for offset referrals, collection agency referrals, litigation referrals, and write-offs and close-outs.
                     :                                  : ‘,                          ,,                      ‘:
Standard Management Con&ol/Activity.           This summary tracks the status of all referral activity including initial
referrals, status updates, and account’balance updates. Separate and summary listings are produced for individual
and total reporting and referral activity.

Exceptions. This summary highlights deficiencies .&at have occurred in the, referral process. Examples of subjects
for periodic exception information include: delinquent accounts eligible for reporting that have not been reported,
defaulted rescheduled ‘loat&; ,accotmt referrals that cannot be processed, collection .agency resolution percentage,
accounts without foreclosure or collateral management activity for a specified period of time, accounts referred for
litigation for which no litigation decision has been recorded, and delinquent’ accounts,without activity for long
periods of time that have not been written-off.

Offsetting Agency Description. This summary contains offsetting agency requirements to facilitate the offset
referral process. The summary includes content and transmission specifications, reimbursement fee data, account
selection criteria, and any other agency-specific details.

Trend Analysis/Performance. This summary highlights the effectiveness of different delinquent debt collection
techniques over time. The summary indicates the effectiveness of using different types of collection actions,for
different credit programs.
                                                 ‘, ;                                          ;
Collection Contractqr Compensation, This summary provides monthly account analysesto calculate, track, and
verify compensation for each contractor providing collection services to an agency. This information aids in the
verification of invoices received from the contractor, and highlights the differences in fee schedules among
contractors.

Collateral Management Activity and Expense. This summary provides detailed and summary data of collateral
management activity and expense data for monitoring collateral management activities that affect the value of the
agency-owned property prior to disposition, AlJ income earned and expenses incurred while the collateral is in the
agency’s possession must be recorded and tracked to support the agency’s ability to recover the expenses.




                                                                                                                                            I




                                                                                           __   _____.   ____   _..     --...-   . ._       :




60                                                                                        Direct Loan Sfstem          Requirements.
                                                                                                                                                                                                                Delinquent ,Deb.tCollection/T~roubled Debt Servicing-



                                                                                                                                                                                                                                                                                                                                                                     i




                                                                                  Delinquent Debt Collection Function, :                                                                                                                                                                                                                           ~
                                                                            Internal Msinagement Information
                                                                                                  ,,.II       Requireinents


                                         Detailed         Account




        ....................................................................................    ..........                                                                                                                                                          ..............................................................
      .... ..~.......~.......~...........~.........~...~.~.~.~.~.~.~.~                     .........                , .................................................................................                                                    .. ...>                                                ,‘,‘.‘.‘,,‘.‘,~,‘.‘,~,~.‘,‘.‘,‘,’,’.’,’.’,.,,~.~,~:~:.,
      ~..........:     ................................................................................................................................................
      ..............................                                                                                                                                                                                                           ....................................................................
                                                                                                                                                                                                                                                           :::‘.:.:.:.:.:.:.:.:.:.
       ........................................                                      .‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.~.‘.‘.‘.‘.‘.’.’.’.’.’.’.’.~.‘.‘.‘.‘.~.~.~.~., .,:;;                                ......
                                                                                                                                                                                              .................                   :.:.:.: .......................              ~,‘,‘,‘,‘,‘,‘,‘.‘,‘,‘,‘,~,~,‘,~.~~~~~
                                                                                                                                                                                                                                                                                 ......................................... .............................................
                                                                                                                                                                                                                                                                                                                                                    ‘,‘.‘.~.‘.‘.‘.‘.~,‘,‘.‘.~,~:
      ................................................................                       ...................................
      .............................
      .......................................................................................................................                                            .‘.‘.‘,‘.‘.‘.‘,‘*‘,’
                                                                                                                                                                           .........                    ..:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:                                     ............... ,
       ......................                                         ...........................................
                                                                        ...................................................                                                                                                                                                                     .;,.,.:     ........................                                 ~~~~~‘.‘.‘.‘.‘,‘,
      ..........
       .........                                                     .:.:.:.:.:.,:::,                                                                                              ..                                   ..........                                                              .::.: ...........
      ...........
      ...............................                                .........................................                                                         L                                                 ..‘.‘......‘.~ .........                                                                                                                   :.:,::~:~:~:~,I~.’
                                                                      ..................                                                      ...........................
                                                                                                                                            .....................                                                                                                                               ..........                                                                  :.:.:.:.:.:
       .........
      ............................                                    .‘.~~~.‘~‘~‘.‘.‘,’                                                                                                                               ...........................
      ..........                                                                                                                                 ........................                                                                                                                       “.:.:.:.:.‘.‘,‘.’
     .‘.‘.~,‘,~.‘.‘,‘,‘,                Transaction                  d:.:.:::::::*                       Loan History                      +................... )                RiskCategory                          !$:~:~:~:~:~:,~                               Cohori                    +.,.:.:.:.:.+                            Account                     .:.:.:.:.:.:.:.:.
       .........                                                     ..........                                                             ..........................                                                 ..........
     ‘.‘.‘.‘.‘.~.‘.‘.~.’
       ................................
    ..........                                                      .:.:.:.:.:::::,                                                         ...........................                                                .............................
    ...............................................                                                                                                                                                                      .........                                                              :,:.‘_‘,‘,‘,‘,‘,‘,’                                                 :.:.:::.:.:.:.:
                            ...................................................                                                               .........
                                                                                                                                        L .............................................
       ..;;;......;                                                                                                                                                                                                                                                                                                                                                 ::::~:~:.‘.‘,
                                                                    ..........
         ...............................................................................
                      ...............................................................                                    .
    ..:.:.:.:.:.:                                                  .......................                                              .‘.i.‘.‘.‘.‘.‘.~.‘.‘.‘,‘.‘.‘,‘,’                    .1.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.‘.’.’.’.’.’.’,’.‘,‘,‘,‘,‘,’,’,’.’
                                                                                                      .......... .......................................................................................................................                                                        “,:.‘.‘.‘.~.~.(.‘,.~             .....................         : : : :::::.:.:::.:.
     ................... ;.:.:.:.:.:.:.:.;.:.~.~.;.;.~ ................... :.: .....................................                                                 :.:.:.:.:.:.: .............................                          ;.~.‘,‘.‘:.~_~         .......  ~,;.~.~,~,‘,‘.‘.‘,‘,~,‘,‘,‘,’
                                                                                                                                                                                                                                                                    ...........                                        .............           ..:.:.:    ............       .:,:.:.:_:
     ...............................................................................                               :.:.:.:. ............................... .......................................                                              : , : .....................
                                                                                                                                                                                                                                                       ................................1.:.................................................................
                                                                                                                                                                                                                                                                                                                                     .........................
     :.:.:.:;;;;;             .............................................................................................                                                                                                                                                                                           :.:.,.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:,
                 ...................................................................                                                                                            ..::::.:.:.:.:.:.:.:.:.:.:.:.:.:.:                           .......... ..................................
                                                                                                                                       A                                                                                  A                                                                                              A




                                                                                                                         Effectiveness  of                                                               Monthly           Account                                                             Detailed and Summa&y Data
                                                                                                                     Different Delinquent                                                                                                                                                     ----------_________.
                                                                                                                                                                                                         Analysis           of Each
                                                                                                                        Debt Collection                                                                                                                                                                    Expense Data
                                                                                                                    Techniques Over Time’
                                                                                                               -,
                                                                                                                                                                                                        /




                                                                                                                                                                         ~IUustration 28




Direct Loan System Requirements                                                                                                                                                                                                                                                                                                                                                           61
OtherReporting
             Requirements
This chapter provides requirements for two types of reporting:

    l    Transaction History, and              .
    l    External Reporting Requirements.


Transaction       History

The direct loan system must be capable of producing a complete transaction history of each loan.


External      Repo@hg         Requirements
                                                                                                        ,,
Agencies’ direct loan systemsmust be capable of supporting the external reporting requirements of QMB and
Treasury, including those associated with the FCRA of 1990 and the CFO Act of 1990. These external reports rely
on supplemental financial data resident in the direct loan system, although they are generated from the general
ledger. The reports are presented below.


                                                                                                             --I_          -‘--‘-‘-       3




 Title                Title              Purpose            Level               Frequency            Guidelines                           /
                                                                                                                                           !I
                                         Request for and                                                                                   !;
 Apportionment                                              Appropriation/
                                         status of                                                                                         //
 and                                                        Fund Account        Initial/As           OMB Circular                          \I
                      SF-132             apportionments
 Reapportionment                                            (Liquidating        required             A-34
                                         and                                                                                               /(
 Schedule                                                   Fund)                                                                          I/
                                         reapportionments                                                           ___.-_.               j
                                         Report on          Appropriation/                                                                 Ij
 Report on                                                                      Monthly/             OMB Circular                          /
                                         utilization and    Fund Account
 Budget               SF-133
                                         status of budget   (Liquidating        Final                A-34
 Execution                                                  Fund)                                                                          I/’!
                                         resources                                                                                        l/
 Report on                               Report on the                                                                                      j
 Accounts and                                                                   Quarterly/           1 TFM
                                         status of          Supporting form
 Loans                SF-220-9                                                                                                                il
                                         receivables due    for SF-220          Annually             2-4100
 Receivable Due                          from the public
 from the Public                                                              - ~_-.-        ---     _--.-.----         ..-...---..       4/



Other system outputs are described in the Functional Requirements chapters. These include items such as letters
and invoices to borrowers, SF-1151’s and SF-1081’s used in Treasury borrowing, and delinquent debt information
sent to credit bureaus, collection agencies, and the DOJ.




                                                                                 ~---                  ___---.-.-                     .._-.-

62                                                                                       Direct loan System         Requirements
 Appendix
       A:PoliciesGoverning
                        JFMIP
                            thect loanSystemRequirements
 -Sequential
 This appendix displays the requirements in sequential order as shown in Illustration 29.




   ‘pi--                                             ,’           Policies
        *JFMIP Guarauteed Loan System                                                        arid Submission of Budget Estimates
          Requirements                                       Governing JFMIP               BOMB Circular A-34, Instructions
                                                                                             on Budget Execution
        *JFMIP Improving      Travel
          Management
        .JFMIP Human Resources
                                                     Direct Loan System Requirements       BOMB Circular A-123, Management
                                                                                             Accountability      and Control    ,
          Payroll ,Systems Requirements                       (in sequential order)        #OMB Cirkular A-127, Financial
        .JFMIP Seized/Forfeited      Asset                                                   Maliagement      Systems
          System Requirements                                                              BOMB Circular A-129, Policies for
       l JFMIP Dir&t Loan Systems                                                            Federal Credit Programs and
          Requirements                          \                                            Non-Tax Receivables
       *JFMIP Core Financial Systems                                                       ,OMB Circular A-130.        Management
          Requirements                                                                       of Federal Information      Resources
       *Managerial     Cost Acdounting                                                     )OMB Circular A-134; Financial
                                                                                             Aiounting      Principles t&d Standards
                                                                                           0MB Bulletin 97-01 (October 1996)
                                                                                             Form and Content ofAgency
                                                                                             Financial Siatekznts


                                                               JFMIP Direct



   *Federal Managers’ Financial Integrity
      Act of 1982                                                                            *Federal Financial Assistah%
   Chief Financial O&en         Act of 1990                                                    Management      Improvement   Act of
   *Government      Management     Refwm Act
      of 1994                                                                              1 *Government   Waste. Fraud. and Error       I
   #Federal Financial Management
      Improvement     Act of 1996                                                         .I   Act of 1998

   *Federal Credit Reform Act of Id90
   ~Govemment Perfomwmce and Results
      Act of 1993
   *Debt Collection    Act of 1982
   *Debt Collection    Improvement     Act of 1996
   *Information    Technology   Management
      Reform Act of 1996.
   BFederal Financial Management        Act of
      1994




                                                                  Illustration   29




                                                                                       ___.------.--                           .__._. -. ..__._

Direct Loan System Requirements                                                                                                              63
Appendix A: Policies Gowning JFMIP Direct Loan‘ System Requirements-Sequenti.al                                      -
                                                         ,_                                                  ,’

OMB Circular A-11, Preparation and Submission of Budget Estimates (updated annually).‘Circular. A-l 1.
setsforth the policies and procedures, for preparation and submission of agency budget estimates to the OMB.
                     .,        ‘,
OMB Circular A-34 - Instructions on Budget, Execution: Credit Apportionment and Budget Execution’
(October 1991). Circular A-34; setsforth the requirements for apportionment and budget execution for all direct
loan programs covered by the Federal Credit Reform Act of I990.

OMB Circular A-123, Internal Control Systems (June 1995). Circular A-123 prescribes policies and
procedures to be followed by executive departments and agencies in establishing,,maintaining, and reporting on the
internal controls in their program and administrative activities.

OMB Circular A-127, Financial Management Systems (July 1993). Circular A-127 sets forth policies for financial
management systemsdevelo&‘nent, operations, and ev>a.luation.The circular establishes specific objectives related to
financial management and accounting.                        .I     ..,   ):                                   ,:.
            ,,,,.                                                                                        I
OMB Circular A-l29,,I?olicies for Federal Credit Programs and Non-Tax Receivables (January 1993). Circular
A-129 prescribes policies and procedures for justifying, designing, and managing Federal credit programs and for
collecting non-tax receivables. The circular discussesprinciples for designing credit programs, including the
preparation and review of legislation and regulations; budgeting for the costs of credit programs a.nd,minimizing
unintended costs to the Government; and improving the efficiency and effectiveness of.Federal credit programs. It
also sets standards for extending credit, servicing credit and non-tax receivables, and collecting delinquent debt.

OMB Circular A-130, Transmittal Memorandum 3 Management &f Federal Information Resources
(February 1996). Circular A-130 establishes policies and procedures, to be followed by executive departments and
agencies in ‘managing information, information systems,and information technology. The February 1996 revision
of the Circular contains updated guidance in the “Security of Federal Automated Information Resources,”
Appendix III, and makes minor technical revisions to reflect the Paperwork Reduction, Act ‘of 1995.

OMB Circular A-134,:Financial Accounting Principles and Standards (May 1993). This Circular establishes
the policies and procedures for approving and publishing financial accounting principles and standards. It also
establishes the procedures for O&lB review of FASAB statements of accounting principles, standards, or concepts,
If such a FASAB recommendation is agreed to by the Director of OMB, the Secretary of the Treasury, and the
Comptroller General, the Director of OMB issuesa SFFAS.

OMB Bulletin 97-01 (October 1996), and successor bulletins, Form and Content of Agency Financial
Statements. This Bulletin defines the form and content of the financial statements of the executive agencies. It
incorporates the concepts and standards contained in the Statements of Federal Financial Accounting Concepts
(SFFACs) and Statements of Federal Financial Accounting Standards (SFFASs) recommended by the FASAB and
approved as of October 1996. This Bulletin explains the financial accounting of “Direct Loans and Loan
Guarantees, Non-Federal Borrowers.”

OMB Bulletin 98-08 (August 1998), Audits of Federal Financial Statements. This Bulletin establishes
minimum requirements for audits of Federal financial statements. The Bulletin’s requirements implement the audit
provisions of the CFO Act, the GMRA, and the FFMIA.

Chief Financial Officers Act of 1990 (CFO Act). The CFO Act provides new tools to improve the management
of the Federal Government. It establishes CFO in 23 major executive agencies as iyell as a new Deputy Director for           I
Management and a Controller in the OMB. The CFO Act reinforces the need for and development of Federal
accounting standards; supports integration and modernization of the Government’s financial systems; and requires             ,:
the preparation of annual audited financial statements.                                                                      I,I

                                                                                                  ___-_.-     .._..._.
                                                                                                                   . _. _,

64                                                                                   Direct Loan Sy,stem Requirements        ,.
 .



                                     Appendix A: Policies Goferfling JFMIP Direct’loan System Requirements-Sequential                              :


 Go&@nent Management Reform Act (G&tRA) of 1994/Pederal Pinancia& Management Act (FFMA), of
 1994; The GMlL4 expand&’ the CPO Act and the FMFIA. Title’ IV.of the GMRAi (known .asThe Federal
 Financial Management Act) t Contains the financial management provisions. The FFMA requires the Treasury                                           [
 Department to prepare each year a~Governmentwide, consolidated financial statement that the Comptroller .General                                   i
 then audits. Pursuant to. the GMRA,,several agencies participated in a‘pilot program in which they issue         ,.                               ee
,accountability reports, consolidating their reporting under several statutes, including the CFO, Federal Managers’
 Financial Integrity (FMFIA), GPRA,‘Prompt Payment; and Debt Collection Acts. The accountability reports
include program and financial information, such as the audited financial statements and performance measures
reflecting performance in meeting key agency goals5 as well as the Government Performance and Results Act of
 1993 (GPRA) . The GPRA requires agencies to develop strategic plans, Set performance goals, and report annually                                   ~
on actual performance compared to goals.
                                                                                                  ,
       .              ‘. :                                        ,a                                        ,.    1,                               ::L
Federal Financial Management Imirovement Act &&A).                of 1996. The F&&         builds on the CFO Act and                               i;:
the GMRA by requiring agencies’ financial statement auditors to report whether agencies’ financial management                                      1
systems comply substantially with Federal financial management systemsrequirements, applicable federal
accounting standards, and the SGL at the transaction level.’ The FFMIA ,alsorequires the Treasury Department. to
prepare each year a Governmentwide, consolidated financial statement that the Comptroller General ,audits.
                  .’
Federal Mtia&rs’ Financial .Integrity Act (1982): The FMFIA requires that all executive agencies implement,
maintain, and report ‘on internal accounting’~and administrative controls. These .controls must provide reasonable                                 I
assurancesthat (i) obligations and costs comply with applicable law; (ii) funds, property,. and other assetsare                                    I
safeguarded against waste, loss, unauthorized use, or misappropriation; and (iii) revenues and expenditures are                                    I
properly recorded and accounted for. Agency heads must annually evaluate; and report on the control and financial
                                                                                                                                                   i
systems that protect the integrity of Federal programs. The FMFIA encompassesprogram, operational, and
administrative areas as well as ticcounting ,and financial management.                                                                             I

.Clinger-Cohen Act of 1996: The Clinger-Cohen Act requires the head of each executive ,agency to design. and
implement a process for maximiz’mg the value and assessingand managing the risks of information technology
acquisitions. Agency heads must use performance-and results-based management practices and prepare an annual
report to Congress ,regarding progress in achieving these goals. The Clinger-Cohen Act designates a Chief
Information Officer ‘(CIO) within each executive agency. It also requires the.head of each agency, in consultation
with the agency’s CFO and CIO, to establish policies and,procedures to ensure the integration of the agency’s
accounting, financial, assetmanagement, and other information systems,so that the systemseffectively provide
financial or program performance data for financial statements.

Debt Collection Act ,of 1982 (asamended). The Debt Collection Act prescribes the policies and procedures for
executive agencies in Federal debt collection activities.

Debt Collection Improvement Act of 1996. The Debt Collection.Act of 1996 provided several new tools to help
Federal agencies collect delinquent non-tax debt. It centralized many debt collection operations within the
Treasury’s Financial Management Service (FMS) and created a Treasury Offset Program enabling FMS to offset
Federal debts by ‘%$hholding” payments to delinquent debtors. In addition the,Act: ,

         l   required agencies to obtain taxpayer identifying numbers.                                     ;.               ;.
         l   barred agencies from giving financial assistanceto those already delinquent on Government debt.
     l       allowed agencies to ,establish procedures for garnishing non-Federal wages to recover delinquent debts not in
             repayment status.
     l       required agencies to transfer debts over 180 days delinquent to the Treasury for collection, unless the debts
             are in a specified exempt status.
                                                                                               -                ---.-.-..        --    __...,,.,   .~-

Direct Loan System Requirements                                                                                                       65           i
Appendix A: Policies Governing JFMIP Direct~loan System Requirements-Sequential
                                                                   .;                        ‘;


   . required Treasury to take action to collect referred debts including referral to another collection center;to
     private collection agencies or DOJ.
   . allowed agencies to retain fees charged for ,servicesfrom collection and to retain a portion of collections for
     improving debt collection activities.
   . required agencies to provide debtors all due process rights, including the ability to verify; challenge, and
     compromise claims.
   . encouraged agencies, when appropriate, to sell delinquent debt.
   . required agencies to submit debts for offset.
   . simplified salary offset processes,by formally establishing an interagency consortium and allowing agencies to
     make routine adjustments to pay, without using salary offset procedures.
     mandated electronic funds transfer.
     l




Federal Credit Refoim Act of 1990. The Federal Credit. Reform Act prescribes policies and requirements to
achieve four objectives: to measure more accurately the costs of Federal credit programs; to place the cost of credit
programs on a budgetary basis equivalent to other Federal spending; to encourage the delivery of,benefits in the
form most appropriate to the needs of beneficiaries; and to improve the allocation of resources among credit
programs and between credit and other spending programs.




                                                              _.       .:        ,’   ‘..




                                                                                              ___~       __,_ _.--.   .-   -......   :-

66                                                                                          Direct Loan System Requirements
                                                                                                     i

 Appendix
        B:PoliciesGoierihi JFMIP
                               Directloan‘System
                                               ‘kequirements
                                                         -
 Relational
 This appendix displays the requirements in relational subject order as shown in Illustration 30.




                                                                                    roucles
                                                                                Gd;verning$FMIP
            *JFMIP    Guaranteed     Loan System
                                                                       Direct Loan System Requirements,                       *OMR       Circular    A-129. Policies for
                                                                                                                                                      Prograins and Non-Tax


            *JFMIP Improving Travel
                                                                              (in relational subject order).                  ;OMti Circular         A-l: 27. Financial
                                                                                                                                Mnna.emP”t          gy.qt,
    I         Manaacment                                       I
            %IFMIPHuman      Resources Payroll                                                                                     Form and Content ofAgencv
              Systems Requirem&ts                                                                                                  Financial Stateinents          -     .
            *JFMIP Seized/Forfeited   Asset                                                                                    *OMF$ Bulletin 98-08 (August 19 198)
              ^                                                1                                                                    *-.>:A-   -=%.#iPral Oinanrial      Cltn
                                                                                                                             I I~UIIS UI P _“_._. . . ..-._._. ,.wtements.
    t         system
    1       *JFMIP Seized/Forfeited   Asset                                                                     /            1 l OMB Circular ~-3’
                                                                                   ,             ~         L/           ’    1 B.dSet~Ex;cut;o~‘~            l”structionson
              System Requirements                                                                                              *OMB Circular A-l I. Preparation
            *JFMIP Direct Loan Systems                                                                                             and Submission of Budget Estimates
              Reauirements                                                                                                       -.ln     -‘-- 1-r a-130, Management
                                                                                                                                                         Ition Resources
                                                                                                                                                                             lent




                                                                                                                                   *Federal   Financial   Assistance.




        I
           .Chiet’FiAancial      Ot?icers Act of 1990
                                                                                                                                     of IYYK
          *Government        Manapment       Reform                                                                 y                Ma’
             Act of 1994                                                                                                           *Government   Was,=, T1aLIU. al,
          *Federal Financial Management                                                                                              Error Act of 1998
        i    lmorovement       Act of I996                 I                                                                  I                                                     I




                                                                                                                              IJ
          .Fcdkral Credit Reform Act of 1990
          *Government        Performance and
             Results Act of 1993
          -Debt Collection       Act of 1982
          ‘Debt Collection       Improvement     Act of
             I996
          *Information      TechnologJl Management
             Reform Act of 1996
          *Federal Financial Management           Act of
             1994




                                                                   .
                                                                                                                                                                          --_.___         ..-
                              .     T’
                                                                                       lllustiation30




                                                                                                                ~-.---------~_-.                                                    _..- .._^

Direct loan System Requirements                                                                                                                                                         67
Appe’ndix B: Proposed Policies,Govewing JFMIP..Direct loan System Re.quirements ‘:
                       ~

OMB Circular A-129, Policies for Federal Credit Programs and Non-Tax Receivables (January 1993). Circular
A-129 prescribes policies and procedures for justifying, designing, and managing Federal credit programs and for
collecting non-tax receivables. The circular discussesprinciples for designing credit. programs, including the
preparation and review of legislation and regulations; budgeting for the costs of credit programs and minimizing
unintended costs to the Government; and improving the efficiency and effectiveness of Federal credit programs, It
also sets standards for extending credit, servicing credit and non-tax receivables; and collecting delinquent debt.

OMB Circular A-127$ Financial Management Systems (July 1.993). Circular A-127 setsforth policies, for
financial management systemsdevelopment, operations, and evaluation. The,circular establishes specific objectives
related to financial management and accounting.                        , .                         .“.      i

Chief Financial Officers Act of 1990 (CPO Act). The CFO Act provides new tools to improve the management
of the ,Federal Government. It establishes Chief ~Einancial.Offricers in 23, major .executive agencies as well as:a new
Deputy Director for Management and a Controller in the Qffice of Management and Budget. The CFO Act
reinforces the need for and‘development of Federal accounting standards; supports integration and modernization
of the Government’s fmancialsystems; and requires the preparation of ,annual audited ,fmancial statements.. ! ,’

Government Management Reform AC:, (GMRA) of !994/Federal Financial +.n?geme& Act (FPMA) of
1994; The GMRA expands the CFO Act and the’FMFIA. Title IV of the’GMRA: (known &The Federal
Financial Management Act). Contains the financial management provisions. The FFMA requires the Treasury
Department to prepare each year a Governmentwide, consolidated financial statement that the Comptroller General
then audits. Pursuant to the GMRA, several agencies participated in a pilot program in which they issue
accountability reports, consolidating their reporting under several statutes, ,including the CFO, Federal Managers’
Financial Integrity (FMFIA), GPR, Prompt Paymgnt, and Debt Collection Acts. ‘The accountability reports
include program and financial information; such as the audited financial statements and performance measures
reflecting performance in meeting key agency goals, as well as the Government Perfdrmance and ResultsAct of
1993 (GPRA). The GPRA requires agencies to develop strategic plans, Set‘performance goals, and ,report annually
on actual performance compared to goals.                                                                 ;
Fede&l Financial Management Improvement Act (FFMIA) of 1996. The FFMIA builds on the,CFO Act and
the GMRA by requiring agencies’ financial statement auditors to report whether agencies’ financial management
systemscomply substantially with Federal fmancial management systems,requirements, applicable federal
accounting standards, and the SGL at the transaction level. The FFMIA also requires the Treasury Department to
prepare each year a Governmentwide, consolidated financial statement that the Comptroller General audits.

Clinger-Cohen Act of 1996. The Clinger-Cohen Act requires the head of each executive agency to design and,
implement a process for maximizing the value and assessingand managing the risks of information technology
acquisitions. Agency heads must use performance-and results-based management practices and prepare an ‘annual
report to Congress regarding progress in achieving these goals. The Clinger-Cohen Act designates a Chief
Information Officer (CIO) within each executive agency. It also requires the head of each agency, in consultation
with the agency’s CFO and CIO, to establish policies and procedures to ensure the integration of the agency’s
accounting, financial, assetmanagement, and other information systems,so that the,systems effectively provide
financial or program perfdrmance data for financial statements.
                                                                 .,,          ,/                               _
OMB Bulletin 97-01 (October 1996), and successor bulletins, Form and Content of AgF,?cy Firiakial
Statements. This Bulletin defines the form and content of the financial statements of the executive.agencies. It
incorporates the concepts and standards contained in the Statements of Federal Financial Accounting Concepts!
 (SFFACs) and Statements of Federal Financial Accounting Standards (SFFASs) recommended by the Federal
Accounting Standards Advisory Board (FASAB) and approved as of October 1996. This Bulletin explains the
financial accounting of “Direct Loans and Loan Guarantees,’ Non-Federal Borrowers.”
                                                                                                     --.-----.2.__         _ -.-7
                                                                                                                                    I-




68                                                                                      Direct,Loan,System Bequire.ments            L
                                           Appendix B: Proposed PoHcies Governing JFMIP Direct loan System .flequirements
                                                                                                                ___--


OMB Bulletin 98-08 -(August ‘1998), Audits of Federal Financial Statements: This Bulletin establishes minimum
requirements for audits of Federal financial statements. The Bulletin’s requirements implement the audit provisions
of the CFO Act, the GMRA, and the FFMIA.
          .,
Debt Collection Act of 1982 (as amended). The Debt Collection Act prescribes the policies and procedures for
executive agencies in Federal debt collection activities.                                                                             1

Debt Collection Improvement Act of 1996. The Debt Collection Improvement Act of 1996 provided several
new tools to help Federal agencies collect delinquent non-tax debt. It centralized many debt collection: operations
within the Treasury’s Financial Management Service (FMS) and created a Treasury Offset Program enabling FMS
to offset Federal debts by %ithholdin~ payments to delinquent debtors. In addition the Act:
                                                                                                          i
       required agencies to obtain taxpayer identifying numbers.
            l



    9 barred agencies from giving financial assistanceto those ,already <delinquent on Government debt.                               ‘b
            l   allowed agencies to establish procedures for garnishing non-Federal wages to recover delinquent debts not in          E
                repayment status.
            l   .required agencies to transfer debts over 180 days delinquent, to the Treasury for collection, unless the debts   j
                are in a specified exempt status.                                                                                     I
        l       required Treasury to take action to collect referred debts including referral to another collection center, to
                private collection agencies or DCJ.
        l       allowed agencies to retain fees charged for services fromcollection and to retain a portion of collections for
                improving debt collection activities.
        l       required agencies to provide debtors all due process rights, including the ability to verify, challenge, and
                compromise claims.
        l       encouraged agencies, when appropriate, to sell delinquent debt.                    ,,
        . required agencies to submit debts for offset.
        l       simplified salary offset processes,by formally establishing an interagency consortium and allowing ‘agenciesto
                make routine adjustments to pay, without using salary offset procedures A,
    l           mandated electronic funds transfer.

Federal Credit Reform Act of 1990. The Federal Credit Reform Act prescribes policies and requirements to
achieve four objectives: to measure more accurately the costs of Federal credkprograms; to place the cost of credit
programs on a budgetary basis equivalent to other Federal spending; to encourage the delivery of benefits in the
form most appropriate to the needs of beneficiaries; and to improve the allocation of resources among credit
programs and between credit and other spending programs.

OMB Circular A-34 - Instructions on Budget Execution: Credit Apportionment and Budget Execution
 (October 1991). Circular A-34, sets forth the requirements for apportionment and budget execution for all direct,
loan programs covered by the .Federal Credit Reform Act of 1990.
                                                 ,,‘.,,  .’
OMB Circular A-11, *reparation and Submission of Budget l&hates (updated annu&). Circular A-11 sets
forth the policies and procedures for preparation and submission of agency budget estimates to the Office of
Management and Budget.

OMB Circular A-130, Transmittal Memorandum 3 Management of Federal Information Resources                                              ,
(February 1996). Circular A-130 establishes policies and procedures to be followed by executive departments and
agencies in managing information, information systems,and information technology. The February 1996 revision-. ._--. ._.._            I-

Direct loan System          Requirements                                                                                       69’    ,
Appendix B: Proposed Policies Governing JFMIP Direct Loan System Requirements
                                                                    .,              .,            ,

of the Circular contains updated guidance in the “Security of Federal Automated Information Resources,?’                          1
                                                                                                                                  ,
Appendix III, and makes minor technical revisions to reflect the Paperwork, Reduction Act of 1995.

OMB Circular A-123, Internal Control Systems (June 1995). Circular A-123 prescribes policies and procedures
to be followed by executive departments and agencies in establishing, maintaining, and reporting on the internal                  ?
controls in their program and administrative activities.
                                                                                                                                  I
OMB Circular A-134, Pinandal Accounting Principles and Standards (May 1993). This Circular establishes the                        1
policies and procedures for approving and publishing fmancial accounting principles and standards. It ‘also                       1
                                                                                                                                  1
establishes the procedures for OMB review of FASAB statements of accounting principles, sta.ndards;or
concepts. If such a FASAB recommendation is agreed to by the Director of OMB, the Secretary of the Treasury,
and the Comptroller General, the Director of OMB issuesa Statement of Federal Financial Accounting Standards’                     i
                                                                          .’ :                            9
(SFFAS).                                                                                                                          :
Federal Managers’ Pin&&l Integrity Act (1982). The FMFIA requires that .all executive agencies implement,                         :
maintain, and report on internal accounting and administrative controls. These,controls must provide’reasonable                   L
                                                                                                                                  F
assurancesthat (i) obligations and costs comply with applicable law; (ii) funds, property, and other assets,are
safeguarded .against waste, loss, unauthorized use, or misappropriation; and’(iii) revenues and expenditures are
properly recorded and accounted for. Agency heads must annually evaluate afid reporton the control and financial
systemsthat protect the integrity of Federal programs. The FMF@ encompassesprogram, operational; .and
administrative’areas as wellas accounting and financial management. ”
                                                                                                  ‘, ?                            1




                                                                                                           _.--   -.-.. -.   ,-
                                                                                                                             r

70                                                                                 Direct Loan System Requirements           j
 Appendix
        C:Proposed
                 PoliciesGoverning
                                JFMIP
                                    Direct‘LoanSystem
 Requirements
Proposed Policies                                                                                                               i-

Government W&te, Fraud, and Error Reduction Act of 1998, H.R. 4243 (in House committee) Proposes -
Financial statements of agencies are required to be submitted to Congress as well as to the Director of OMB;
Technical revisions to CFOA, GMRIP, and FFMW, agencies have the authority to accept electronic payments;
technical corrections to the Debt Collection Improvement Act of 1996; delinquent Federal debtors would be
ineligible to obtain Federal loans or loan insurance guarantees; Federal agencies would not be permitted to
terminate collection action on a debt unless the debt had been referred to a collection agency or Federal debt
       .

collection ‘service; the sale of debts owed to the’ United States; and encouragement of electronic payments to
vendors/contractors.

Federal Financial \&istance lkknagement Improirkment Act of 1998, H.R. 3921, S. 1642 (in House a&l
Senate committees) Proposes - Streamlining and simplification of Federal financial assistanceadministrative
procedures and reporting requirements; establishment of a uniform application and common rules for Federal
financial’assistance programs that serve similar purposes and are administered by different Federal agencies; process
for applicants to apply electronically for and report the use of funds from Federal financial assistanceprograms;
improvement of interagency and inter-governmental coordination of information collection and sharing of data
pertaining to Federal fmancial assistanceprograms; and establishment of 1%month timeline for agency compliance
with the Act.




                                                           .-                      ---            -- --.--.. -.---   .-   _..   :- -

Direct Loan System Requirements                                                                                      n          i
Appendix
      II: Glossary
Requirements: The JFMIP system requirements are either mandatory or value-added. The definitions of these two
categories are:

   mandatory - Mandatory requirements describe,what the system must do and consists of the minimum
   acceptable functionality, necessary to establish a system, or are based on Federal laws and regulations.
   Mandatory requirements are those against ,vhich agency heads evaluate their systemsto determine substantial
   compliance with systems requirements under the FFMIA. These requirements apply to existing systemsin
   operation and new systemsplanned or under development.
                                                          I
                                                                                                                                          I
   value-added - Value-added requirements describe features or characteristics and may consist of any. ,, ,:, (
   combination of the following: (1) using state of the. art technology, (2) employing the .preferred or best I                           i
   business practices, or (3) meeting the special management needs of an individual agency. Value-added,         :                        1
   optional, and other similar terminology may be used to describe this category of requirements. Agencies should                         ~
   consider value-added features when judging systemsoptions. The need for these value-added features in agency
   systemsis left to the discretion of each agency head.


                                                                                                                                      i/




                                                                                                    -~.-.         .._   _._...L
                                                                                 ---
                                                                                                                                      .




                                                                                       Direct lean System Requirements            i

                                                                                                                                  i
 Appendix
       E:Contributors                                                                          ,




J&hat Financial rhanaaement Improvement        Program   Greg Spencer
 Steering Committee

 Donald Hammond, ,Chair
                                                         U.S. Departkent      ofA@cultwe
  Department. of the Treasury
         :<
 Karen Clear-y Alderman                                  Victoria Bateman
  Executive Director, JFMIP                              Chris Burgess
 Tom Bloom                                               Mark Huntley
   General Services Administration
                                                         Glen Richter
 Gene Dodaro
                                                         Terry Young
  U.S. General Accounting Office
                                                         Richard Guyer
 J: Gilbert Seaux
   Office of Personnel Management
 Woody Jackson                                           U.S. Genbal Accounting        Oflie
  Office of Management     and Budget
                                                         Linda Calborn,
                                                         Shirley Able
Joint Financial   Management     Improvement   Pro&ram
                                                         Daniel Blair
Karen Cleary Alderman
 Executive Director, JFMIP                               Department of Veterans A@h
Dennis Mitchell                                          Dean Errigo
 Systems Accountant
Linda Taylor
  Women’s Executive Leadership Program,                  Federal Emegency Managementeency
  Department of State
                                                         Betty Whitehead

Depuv-tment of Education     (Sponsoring Agency)
                                                         Department      of Commerce
Linda Lee Paulsen (Project Sponsor)
                                                         Mildred Ingels
Maureen S. Harris (Project Team Leader)
                                                         Fred Jaakkola
Paul Valentic
                                                         Jeff Martin
Isiah Dupree
Daniel Pollard
Keith Ingram
Eileen Par-low




Direct Loan System Requirements
                                 Requestsfor Publications
JFMIP documents may be accessedelectronically on FinanceNet Internet site:
http://www.financenet.gov/financenet/fed/jfmip/jfmip.htm

 The JFMIP uses the General Accounting Office’s Document Distribution Center to llfill
publication requests which are made after mail list distribution. The first copy of each
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Orders by mail:
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Orders may also be placed by calling 202/512-6000, by fax 202/5 12-6061 or TDD
202/512-2537.
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