oversight

Farm Service Agency: Additional Actions Needed to Address Employee Conflict-of-Interest Issues

Published by the Government Accountability Office on 1997-04-25.

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

                  United States General Accounting Office

GAO               Report to the Chairman, Committee on
                  Agriculture, Nutrition, and Forestry, U.S.
                  Senate


April 1997
                  FARM SERVICE
                  AGENCY
                  Additional Actions
                  Needed to Address
                  Employee
                  Conflict-of-Interest
                  Issues




GAO/RCED-97-104
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-276432

      April 25, 1997

      The Honorable Richard G. Lugar
      Chairman, Committee on Agriculture,
        Nutrition, and Forestry
      United States Senate

      Dear Mr. Chairman:

      Through its farm credit programs, the U.S. Department of Agriculture’s
      (USDA) Farm Service Agency (FSA) provides loans at less than market
      interest rates for borrowers of limited resources. Farmers borrow about
      $2.5 billion annually through these programs.

      The potential for conflicts of interest1 in federal farm loan programs
      increased with the creation of FSA in 1994. At that time, the farm credit
      programs of the former Farmers Home Administration (FmHA), most of the
      functions of the former Agricultural Stabilization and Conservation
      Service (ASCS), and other USDA activities were merged. Consequently, FSA
      now has federal employees, former ASCS nonfederal employees,2 and
      members of county farmer committees (county committees), as well as
      the family members and business associates of these groups, participating
      in the farm credit program. Prior to the creation of FSA, ASCS federal and
      nonfederal employees were not involved in the administration of the farm
      loan programs and were eligible to participate in USDA’s farm programs. In
      contrast, FmHA employees were not permitted to receive FmHA farm loans,
      and their relationships with borrowers had been subject to review to avoid
      conflicts of interest. FSA has started to phase out the eligibility of all of its
      employees for farm loans and has been working to identify cases requiring
      action to avoid conflicts of interest through a nationwide survey of
      employees and county committee members. FSA’s instructions on
      addressing conflicts of interest are based on FmHA’s instructions and the
      definition of conflict of interest in USDA’s regulations.

      1
       In this report, the term conflict of interest refers to both actual and apparent conflicts of interest as
      used in FSA’s instructions. A conflict of interest is defined as a situation in which the private interest,
      usually of an economic nature, of an FSA federal employee, nonfederal employee, or county farmer
      committees member conflicts with his or her government duties and responsibilities. An apparent
      conflict of interest is defined as a situation in which it could reasonably be concluded that a private
      interest of an FSA federal employee, nonfederal employee, or county committee member is in conflict
      with his or her government duties and responsibilities, even though there may not actually be such a
      conflict.
      2
       Nonfederal employees staffed and administered ASCS’ farm programs in county offices nationwide.
      FSA continues to use this nonfederal employee workforce in addition to its federal employees. FSA’s
      nonfederal employees are paid from Commodity Credit Corporation funds and are hired by the county
      executive director, who in turn is hired by the each county committee.



      Page 1                GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
                   B-276432




                   Because of concerns about conflicts of interest in FSA’s farm loan program,
                   we reviewed the (1) number of FSA’s federal and nonfederal employees and
                   county committee members who have FSA farm loans; (2) comparative size
                   and repayment history of farm loans to FSA’s federal employees, FSA’s
                   nonfederal employees, county committee members, and other FSA
                   borrowers; (3) number of cases FSA has identified requiring action to avoid
                   conflicts of interest; and (4) actions FSA has taken to address these cases.

                   Starting in 1995, FSA directed its state offices to survey their employees
                   and county committee members to identify (1) those with loans and
                   relationships with borrowers and (2) cases in which action was needed to
                   avoid conflicts of interest. However, FSA’s state offices were not required
                   to report to headquarters on the cases they reviewed. Accordingly, we
                   surveyed FSA’s state office directors to obtain information that had been
                   reported to FSA’s state offices on employees’ and county committee
                   members’ loans and relationships with other borrowers, as well as the
                   determinations of these state offices on actions to avoid conflicts of
                   interest.


                   As of September 30, 1996, FSA’s loan portfolio indicated that 414 of about
Results in Brief   16,300 FSA federal and nonfederal employees and 1,209 of about 8,150
                   members of county committees had 4,089 FSA farm loans.

                   While the outstanding principal of the loans of FSA’s federal and nonfederal
                   employees and county committee members was about $265 million of FSA’s
                   outstanding loan principal of $16.9 billion, these employees’ loans differed
                   in size when compared with the loans of other FSA borrowers. As of
                   September 30, 1996, the loans of FSA’s federal employees averaged about
                   $197,700 per borrower; the loans of nonfederal employees averaged about
                   $127,000; the loans of FSA’s county committee members averaged about
                   $183,500; and the loans of all other borrowers averaged about $145,200 per
                   borrower. With respect to repayment history, FSA’s federal and nonfederal
                   employees and county committee members were delinquent and needed
                   debt relief on their farm loans less often than other borrowers. However,
                   when these employees received debt relief, it was greater than the relief
                   granted other borrowers—53 percent, on average, for FSA’s federal
                   employees, and 7 percent and 2 percent, respectively, for nonfederal
                   employees and county committee members.

                   As of March 1997, FSA had identified 1,767 cases in which its federal and
                   nonfederal employees or county committee members had loans or



                   Page 2          GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
             B-276432




             relationships with other borrowers that required action to avoid conflicts
             of interest. These cases were identified through FSA’s review of 3,622 cases
             in which FSA’s federal and nonfederal employees and county committee
             members reported that they or their relatives or business associates had
             FSA farm loans. The total number of cases is likely to increase as FSA
             proceeds with its efforts to identify cases requiring action to avoid
             conflicts of interest.

             Although FSA has made progress in dealing with conflicts of interest, it has
             not provided its state offices with clear and consistent guidance on how to
             identify and address conflict-of-interest cases. Furthermore, FSA
             headquarters has not reviewed the state offices’ efforts to address
             conflicts of interest. As a result, FSA’s state offices vary in the extent to
             which they have identified and taken action on cases to avoid conflicts of
             interest.


             FSA provides credit assistance through direct loans funded by the federal
Background   government and through guaranteed loans, which are made by commercial
             lenders to farmers and generally guaranteed by the government for up to
             90 percent of the face value of the loan. FSA offers several types of loans,
             such as farm operating loans, farm ownership loans, and emergency
             disaster loans. Farm operating loans are authorized for buying feed, seeds,
             fertilizer, livestock, and farm equipment; paying family living expenses;
             and refinancing existing debt. Farm ownership loans are authorized for
             buying and improving farmland; constructing, repairing, and improving
             farm buildings; and refinancing existing debt. Emergency disaster loans
             are for farmers whose operations have been substantially damaged by
             adverse weather or by other natural disasters.

             FSA’s full-time permanent workforce included about 5,940 federal and
             10,365 nonfederal employees at the time of our review. FSA’s federal
             employees consist of headquarters staff, former FmHA county loan
             specialists, former ASCS state executive directors, state committee
             members, district directors, and state office employees. FSA’s nonfederal
             employees consist of former ASCS county executive directors and county
             office staff. Prior to FSA’s creation, FmHA’s policy precluded the agency’s
             employees from obtaining farm loans to avoid conflicts of interest. Unlike
             former FmHA employees, former ASCS employees were not involved in the
             administration of the farm loan programs and were eligible to receive the
             benefits of USDA’s farm programs and FmHA’s farm loans.




             Page 3          GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
                      B-276432




                      FSA uses county committees, consisting of about 8,150 locally elected
                      farmers, to assist in implementing agricultural programs, including the
                      farm loan program. USDA pays county committee members for their
                      services. Among other tasks, county committees review loan applications
                      to determine if the applicants have sufficient farming experience to qualify
                      for an FSA farm loan. In addition, each FSA state office has a committee of
                      farmers who provide advice on farm program operations.

                      Within FSA, the operations and offices of the former FmHA and ASCS offices
                      have been consolidated. Former ASCS employees who have FSA farm loans
                      may be physically located at the same office as the FSA employees who
                      approve and service these loans. In addition, FSA anticipates that some
                      former ASCS employees will be assigned to assist in administering farm
                      loans.

                      FSA has adopted procedures to avoid conflicts of interest in loan-making
                      and servicing decisions. These rules are similar to those used by the
                      former FmHA. For example, loan-processing, approval, servicing, and
                      review activities can be conducted only by FSA employees who are not
                      immediate family members or relatives of loan applicants and who have
                      not had a business or a close personal association with these applicants.

                      To avoid conflicts of interest, FSA is phasing out the eligibility of former
                      ASCS employees for FSA farm loans. In December 1995, FSA announced that
                      its employees, including former ASCS nonfederal employees, would no
                      longer be eligible for direct farm ownership loans. However, it stated that
                      FSA employees would still be eligible for direct emergency loans and
                      guaranteed loans. Those in an employee’s household with existing direct
                      loans may be considered for annual operating loans through September 30,
                      1998. Employees were also authorized to co-sign (and are therefore
                      considered borrowers) for direct annual operating loans until
                      December 1998 if they were already a cosigner on such a loan.


                      Our analysis of FSA’s loan portfolio database showed that 414 employees
Number of Employees   and 1,209 county committee members had FSA farm loans as of
and Committee         September 30, 1996. FSA’s federal employees and county committee
Members With FSA      members had slightly more loans per borrower than other FSA borrowers,
                      while FSA’s nonfederal employees had slightly fewer loans per borrower
Farm Loans            than other borrowers. Table 1 provides information on the number of
                      direct and guaranteed loans obtained by FSA’s federal employees,




                      Page 4          GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
                                       B-276432




                                       nonfederal employees, and county committee members, as well as other
                                       borrowers.

Table 1: Number of FSA Farm Loans
Per Borrower for FSA Employees,                                                                        Number of     Number of
County Committee Members, and                                     Number of          Number of        guaranteed      loans per
Other Borrowers, as of September 30,   Type of borrower           borrowers         direct loans           loans      borrower
1996                                   Federal employee                     77                 65             138            2.6
                                       Nonfederal
                                       employee                           337                 578             158            2.2
                                       County
                                       committee
                                       member                           1,209                2,525            625            2.6
                                       All other
                                       borrowers                     138,469             260,217           60,381            2.3
                                       Source: GAO’s analysis of FSA’s loan file database.




                                       While the outstanding principal of the direct and guaranteed loans of FSA
Differences in the Size                employees and county committee members was about $265 million of the
and Repayment                          $16.9 billion in FSA’s outstanding loan principal as of September 30, 1996,
History of Loans to                    we found some differences in the average amount of loans, loan
                                       delinquencies, and debt relief received by FSA employees and county
FSA Employees,                         committee members in comparison with other FSA borrowers.
County Committee
                                           has not developed information about the comparative loan sizes for
Members, and Other                     FSA
                                       these groups nor examined why these groups would differ in their loans,
Borrowers                              repayment history, and debt relief. Consequently, FSA officials do not have
                                       specific information that would explain the sources of these differences.
                                       However, an FSA official said that these differences may be influenced by,
                                       among other things, (1) a comparison of groups of borrowers that vary in
                                       number; (2) the incomes of FSA employees, which would enable them to
                                       have larger farm operations than some other borrowers; and (3) the
                                       inclusion of several hundred cases in which borrowers have debt of
                                       $1 million or more. In addition, according to USDA officials, committee
                                       members are likely to have larger farm operations than many other
                                       producers, which could lead to differences in loan amounts and debt-relief
                                       decisions.3

                                       More specifically, our analysis shows that FSA’s federal employees and
                                       county committee members had obtained loans that were somewhat


                                       3
                                        USDA’s Payments Through County Offices (GAO/RCED-96-102R, Apr. 8, 1996).



                                       Page 5              GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
                                            B-276432




                                            larger, while nonfederal employees’ loans were somewhat smaller than the
                                            loans of other FSA borrowers. Table 2 shows the status of outstanding FSA
                                            farm loans, as of September 30, 1996.


Table 2: Loan Amounts and Loan Debt of FSA Employees, County Committee Members, and Other Borrowers, as of
September 30, 1996
                                Average          Percent       Average         Percent                          Percent
                                  direct      difference    guaranteed      difference  Average debt         difference
Type of borrower                   Loan     from others           loan    from others   per borrower       from others
Federal employee                  $65,800                  37.7            $79,300                 (37.6)         $197,700                  36.2
Nonfederal employee               $46,700                  (2.3)          $100,100                 (21.2)         $127,000                 (12.5)
County committee member           $52,400                   9.6           $143,500                  13.0          $183,500                  26.4
All other borrowers               $47,800                                 $127,000                                $145,200
                                            Source: GAO’s analysis of FSA’s loan file database.



                                        With respect to delinquencies, FSA’s federal employees were delinquent on
                                        their direct farm loans slightly less often than other borrowers. FSA’s
                                        nonfederal employees and county committee members were delinquent on
                                        their direct farm loans about half as often as other borrowers.4 However,
                                        the average amounts of the delinquencies for FSA’s federal employees and
                                        county committee members were somewhat larger than the delinquencies
                                        of other borrowers, as shown in table 3.

Table 3: Delinquencies on Direct
Loans for FSA Employees, County                                                                                                       Average
Committee Members, and Other                                     Number of                  Number of           Percent of            amount
Borrowers, as of September 30, 1996                          borrowers with                 delinquent          delinquent         delinquent
                                            Type of borrower    direct loans                borrowers           borrowers        per borrower
                                            Federal employee                     31                    6                19.4          $169,344
                                            Nonfederal
                                            employee                            301                  37                 12.3          $136,961
                                            County
                                            committee
                                            member                              969                 110                 11.4          $162,906
                                            All other
                                            borrowers                      114,473                24,179                21.1          $147,032
                                            Source: GAO’s analysis of FSA’s loan file database.




                                            4
                                             We did not include guaranteed loans in our analysis of delinquencies and debt relief because about
                                            only about 4 percent of FSA borrowers had been delinquent on guaranteed loans as of Sept. 30, 1996.
                                            This compares with a delinquency rate of over 21.1 percent for borrowers with direct loans.



                                            Page 6                 GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
                                       B-276432




                                       Finally, with respect to debt relief, all of FSA’s employee groups received
                                       more debt relief per borrower than others who received debt relief, as
                                       shown in table 4.

Table 4: Debt Relief on Direct Loans
for FSA Employees, County Committee                                                  Number of       Average             Percent
Members, and Other Borrowers, as of                                                  borrowers amount of debt         difference
September 30, 1996                                                               receiving debt     relief per       from other
                                       Type of borrower                                   relief   borrower          borrowers
                                       Federal employee                                         32    $278,300              52.8
                                       Nonfederal employee                                     168     195,300               7.2
                                       County committee
                                       member                                                  231     185,032               1.6
                                       All other borrowers                                   78,572    182,165
                                       Source: GAO’s analysis of FSA’s loan file database.



                                       Additional information about the debt relief FSA has provided to federal
                                       employees and other borrowers is included in appendix I.


                                       Starting in 1995, FSA’s state offices began to survey FSA employees and
Number of Cases                        committee members to identify those with loans and relationships with
Requiring Action to                    borrowers so that the offices could take action to avoid conflicts of
Avoid Conflicts of                     interest in FSA’s farm loan program. However, FSA’s state offices were not
                                       required to report to headquarters on the cases they reviewed.
Interest                               Accordingly, we surveyed FSA’s 50 state office directors to obtain
                                       information that they had developed on employees’ and county committee
                                       members’ loans and relationships with borrowers, as well as state offices’
                                       determinations on cases requiring action to avoid conflicts of interest.

                                       As of March 1997, according to the data we obtained from the 50 FSA state
                                       offices, 1,767 employees and county committee members (about
                                       7 percent) had loans or loan-related relationships that required action to
                                       avoid conflicts of interest. FSA identified these cases through its state
                                       offices’ (1) surveys of employees and committee members and (2) reviews
                                       of individual cases to identify those whose loans and relationships with
                                       borrowers required action to avoid conflicts of interest. However, the
                                       information we obtained from state offices shows that not all employees
                                       and committee members had responded to the state office surveys and
                                       that some state offices had not reviewed all cases in which employees
                                       reported that they or their relatives had farm loans. Consequently, the
                                       number of cases requiring action by FSA’s state offices to avoid conflicts of



                                       Page 7              GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
                                   B-276432




                                   interest can be expected to increase as these offices complete their case
                                   reviews. Table 5 summarizes the results of the state offices’ surveys. (See
                                   app. II for state-by-state information on these surveys.)

Table 5: FSA Employees and
Committee Members With Loans or                                                 Number with
With Close Relatives or Business                                                loans or with
Associates Who Had Loans, as of                                                     relatives                             Cases
March 1997                                                                             and/or                         requiring
                                                                                    business                    action to avoid
                                   Type of                    Number of           associates              Cases     conflicts of
                                   employee                   employees            with loans          reviewed         interest
                                   Federal employee                  4,010                  583             394             182
                                   Nonfederal
                                   employee                         12,055                2,000            1,532            776
                                   County
                                   committee
                                   member                            8,539                1,896            1,696            809
                                   Total                            24,604                4,479            3,622          1,767
                                   Note: Not all state offices responded to each of our questions.

                                   Source: GAO’s analysis of survey responses from 50 FSA state offices.



                                   As table 5 indicates, as of March 1997, FSA’s state offices had reviewed
                                   3,622 of 4,479 cases, leaving 857 cases that needed review.

                                   In addition to these cases, as table 6 shows, 11 states had not received
                                   responses to their survey questions from every employee and county
                                   committee member.




                                   Page 8               GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
                                        B-276432




Table 6: Response Rates of FSA
Employees and County Committee                                                                                        Percentage of
Members to FSA’s Conflict-Of-Interest                                             Percentage of       Percentage of         county
Survey in 11 States Without Complete                                                    federal          nonfederal      committee
Responses, as of March 1997                                                          employees           employees        members
                                        State                                       responding          responding      responding
                                        Arizona                                               100                98              7
                                        Colorado                                                18               25             32
                                        Florida                                               100               100             39
                                        Idaho                                                   90               90             90
                                        Louisiana                                               28               23             63
                                        New Jersey                                            100               100             50
                                        New Mexico                                              50               80             50
                                        Oklahoma                                                90               84             82
                                        Rhode Island                                            10               0              10
                                        Texas                                                   96               95             84
                                        Wisconsin                                             100               100             99
                                        Source: GAO’s analysis of survey responses from 50 FSA state offices.



                                        Furthermore, the responses of FSA’s state offices to our survey shows that
                                        the information gathered from members of county committees varied
                                        widely among these offices. For example, only 126 of 8,539 county
                                        committee members reported to their FSA state office that they had
                                        business relationships with FSA borrowers, and 77 of these cases occurred
                                        in just three states, according to responses we received from FSA’s state
                                        offices. Committee members in 27 states did not report to their FSA state
                                        office any business relationships with other borrowers. In other cases,
                                        some members indicated that they were reluctant to reveal this
                                        information. In one state we visited, three county committee members,
                                        including the county committee chairman, had submitted statements to
                                        FSA saying that it was “none of [FSA’s] business” if they had farm credit
                                        loans themselves or had relationships with other borrowers. During our
                                        review, we found that one of these individuals, the county committee
                                        chairman, had two FSA loans.




                                        Page 9              GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
                                          B-276432




                                          FSA’s state offices have made progress by taking action on a significant
FSA Has Taken Action                      number of cases to avoid conflicts of interest. Nevertheless, the guidance
to Avoid Conflicts of                     to state offices from FSA headquarters on dealing with conflicts of interest
Interest, but                             has been inconsistent, particularly regarding how state offices should
                                          address the loans of county committee members and their relatives, as
Additional Actions                        well as their business relations with other borrowers. Because of
Are Needed                                differences in how FSA’s state offices interpreted the guidance in these and
                                          other areas, state offices have varied in the extent to which they have
                                          taken actions to avoid conflicts of interest. Furthermore, FSA has not thus
                                          far followed up on the completeness or consistency of state offices’
                                          actions.


FSA’s Actions to Avoid                    Of the 1,767 cases that had been identified, FSA’s state offices reported that
Conflicts of Interest                     they had taken action on 1,441 cases, as shown in table 7. Typical actions
                                          were to transfer borrowers’ loan files from (1) one county to another for
                                          servicing or (2) one employee to another within the same office. These
                                          actions serve to ensure that those administering loan files do not have a
                                          personal interest in loan decisions.

Table 7: Actions Taken by FSA’s State
Offices to Avoid Conflicts of Interest,                                                Number of cases            Number of cases with
as of March 1997                          Type of employee                              requiring action                  action taken
                                          Federal employee                                             182                        133
                                          Nonfederal employee                                          776                        595
                                          County committee member                                      809                        713
                                          Total                                                      1,767                       1,441
                                          Source: GAO’s analysis of survey responses from 50 FSA state offices.



                                          Action had not yet been taken on 326 cases involving 14 states, as of
                                          March 1997.


Inconsistent Instructions                 Between October 1995 and May 1996, FSA issued several notices
by FSA                                    instructing its state offices on how to identify and deal with
                                          conflict-of-interest issues. An FSA headquarters official said that these
                                          notices were developed to respond to such issues as they were being
                                          raised. However, officials in FSA’s state offices said that these notices were
                                          difficult to implement because the (1) scope of conflicts they were to
                                          address changed from one notice to another and (2) instructions for
                                          resolving conflicts were difficult to interpret. FSA headquarters officials




                                          Page 10             GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
B-276432




said that they recognized there was inconsistency in their notices and that
the notices have been difficult for state offices to implement. As of
March 1997, FSA had not yet developed a specific plan of action to address
these inconsistencies.

FSA  twice notified its state offices to survey employees and committee
members and take action on conflict-of-interest issues—in October 1995
and in December 1995. Four states—California, Connecticut, Iowa, and
Tennessee—based their surveys on the October notice only. This notice
instructed FSA’s state offices to (1) survey employees and county
committee members to identify those with loans, (2) identify those whose
loan files were in the county in which they work, and (3) move those loan
files to another county or state for servicing to avoid conflicts of interest.
The December notice called for an expanded survey that was to identify
loans to employees and committee members, loans to close relatives of
employees, loans co-signed by employees, business relationships between
borrowers and employees, and the investment or managerial roles of
employees or their close relatives in firms doing farm credit business with
FSA. However, this expanded survey did not call for county committee
members to disclose loans that had been received by their family members
and business associates. As a result, some states did not collect this
information.

FSA’sOctober 1995 notice concerning employees’ and committee members’
loans was consistent with the former FmHA’s policy. FmHA’s policy had
stated that while county committee members were not employees, they
had a special relationship with the agency and therefore were subject to
conflict-of-interest restrictions. These restrictions included avoiding
certain situations, such as participating in decisions on loans for
themselves, family members, or business associates.

However, FSA’s March 1996 notice appears inconsistent with its
October 1995 position. This notice stated that the loan files of county
committee members did not need to be moved from the county in which
these members were serving unless there were unusual circumstances or
the files had already been moved and the state executive director
determined that they should remain in the new location. The notice did not
define unusual circumstances or provide other guidance on how to
determine when county committee members’ files should be moved. We
found that some states had returned these files to the original county
office, while others had not.




Page 11         GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
                               B-276432




                               In May 1996, FSA issued a notice providing instructions for dealing with
                               conflict-of-interest situations that it had not mentioned previously. This
                               notice stated that county committee members were not to act in an official
                               capacity in any decision or meeting involving an FSA borrower or potential
                               borrower when a business or family relationship was involved. However,
                               this notice also stated that county committee members were not
                               specifically prohibited from leasing real estate to FSA borrowers or loan
                               applicants (as are employees or state committee members), although FSA
                               stated that such leases were to be discouraged. As a result of this
                               inconsistency, the state office officials we interviewed expressed
                               frustration and confusion about the proper actions to take in such
                               circumstances.

                               Furthermore, the May 1996 notice emphasized that employees needed to
                               recognize an even broader range of relationships that could be identified
                               as posing conflict-of-interest concerns. This notice stated that employees
                               must examine the employment, activity, and financial interests of their
                               family members because these are considered the same as if done by the
                               employees and are crucial to determining if a conflict of interest exists.
                               These additional relationships had not been specifically mentioned in FSA’s
                               October and December 1995 notices. According to the responses of FSA’s
                               state offices to our questionnaire, 23 of these offices had completed their
                               reviews of cases to identify potential conflicts of interest before this notice
                               was issued and therefore did not obtain this information from their
                               employees.


Variations in the Actions of   Our review disclosed wide variations in the extent to which state offices
FSA’s State Offices            decided on whether action was needed to avoid a conflict of interest and
                               in the frequency of actions taken to address those cases. FSA state office
                               officials from Arkansas, California, Iowa, Mississippi, North Dakota, and
                               Texas said that their efforts to identify and address cases were hampered
                               by the unclear guidance from FSA headquarters. To illustrate, some states,
                               such as Iowa and Wisconsin, decided as a matter of procedure that every
                               case they reviewed in which an employee or committee member reported
                               a relationship with a borrower required action to ensure that conflicts of
                               interest would be avoided. However, other state offices decided action
                               was warranted less often. For example, North Carolina, Kansas, and
                               Missouri officials took action to avoid actual or apparent conflicts for only
                               42, 12, and 4 percent of the cases, respectively, that state office officials
                               had reviewed as of March 1997.




                               Page 12         GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
                             B-276432




                             In addition, as of March 1997, many state offices had not yet taken action
                             to address all of the cases in which action appeared to be needed to avoid
                             conflicts of interest. For example, according to the FSA director of state
                             agriculture credit in Missouri, his primary concern in deciding whether to
                             take action was to avoid inconveniencing borrowers by moving loan files
                             to distant county offices. Other FSA officials in state and county offices
                             agreed that the convenience of the borrower was one of the important
                             considerations in deciding where loan files should be maintained. On the
                             other hand, FSA officials in Mississippi made arrangements for borrowers
                             to continue to visit the same county offices for day-to-day loan
                             transactions, such as making payments on a loan, while their loan files
                             were moved to other counties for servicing decisions.


Lack of Follow-Up by the     While FSA headquarters instructed state offices to address conflicts of
National and State Offices   interest, it has had a limited role in following up on state offices’ efforts.
                             FSA headquarters addressed conflicts involving FSA state executive
                             directors and state committee members and responded to specific
                             inquiries from FSA state office officials. However, FSA headquarters has not
                             reviewed the actions of its state offices on county employee groups. FSA
                             headquarters officials said that while they have been very much concerned
                             about conflicts of interest, they have relied on FSA state offices to take
                             appropriate action because of staffing limitations and the need to focus
                             attention on FSA’s urgent program and organizational priorities.

                             We also found a lack of follow-up by state offices on actions that county
                             offices had taken to address conflict-of-interest cases. While some FSA
                             state offices are developing their own case-tracking systems for
                             monitoring these actions, others have no such systems. Officials in 13 of 50
                             state offices indicated they had no system for following up on actions
                             taken to address conflict-of-interest cases. Officials in the other 37 state
                             offices indicated that they have some method, generally informal, for
                             tracking such cases. These methods include having FSA district directors
                             follow up on conflict-of-interest cases or using manual tracking systems. A
                             few FSA state offices, such as Kansas and Wisconsin, have developed
                             computer-based information systems.

                             FSA headquarters officials recognized that additional follow-up efforts are
                             needed to address both state and county offices’ activities. In particular,
                             they specifically agreed that it is important for FSA to follow up on the
                             inconsistencies in the state offices’ surveys and actions. A tool that could
                             enhance FSA’s overall monitoring effort is a feature in its computer system



                             Page 13         GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
                  B-276432




                  that allows computer records to be marked to identify loans received by
                  employees, their relatives, and their business associates. However, FSA
                  would need to update the database to make its information current and
                  useful. Finally, FSA officials said that they plan to rewrite their policy
                  manual on how to address conflicts of interest.

                  In addition to the agency’s nationwide effort to identify existing
                  conflict-of-interest cases, FSA county offices make daily efforts to identify
                  and address future conflicts of interest whenever an individual applies for
                  an FSA farm loan. In this regard, FSA state office officials said that they
                  were following instructions that call for loan applicants and employees to
                  disclose relationships and associations so that conflicts of interest can be
                  avoided from the outset. Although this activity has not been reviewed
                  regularly, FSA headquarters officials said that they are considering the
                  development of a procedure for periodically reviewing state and county
                  offices’ activities.


                  FSA  has made a concerted effort to address conflict-of-interest concerns in
Conclusions       its state and county offices. It has delegated most of the responsibility for
                  dealing with conflicts of interest to its state offices. However, FSA has not
                  provided state offices with clear and consistent guidance on identifying
                  situations that constitute conflicts of interest and carrying out their
                  responsibilities, nor has it periodically reviewed how well the state offices
                  are fulfilling their roles. As a result, FSA has little assurance that state
                  offices have consistently identified and acted upon all conflict-of-interest
                  cases.


                  We recommend that the Secretary of Agriculture direct the Administrator
Recommendations   of FSA to (1) clarify FSA’s policy and guidance that define situations
                  constituting potential conflicts of interest and the actions that are needed
                  for addressing such cases, (2) require all state offices to address
                  conflict-of-interest cases using the revised policy and guidance, and
                  (3) monitor and review state and county offices’ actions to ensure that the
                  efforts to address conflicts of interest are adequate and thorough.


                  We provided copies of a draft of this report to FSA for review and
Agency Comments   comment. Subsequently, we met with FSA’s Deputy Administrator and
                  Assistant Deputy Administrator for Program Delivery and Field Operations
                  and seven other FSA officials to discuss the information in this report.



                  Page 14         GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
              B-276432




              These officials agreed with the presentation of issues in the report and our
              finding that FSA’s instructions for addressing conflict-of-interest issues
              require clarification. They stated that our recommendations were
              reasonable steps that would address the issues.


              We analyzed USDA’s databases to identify FSA employees and county
Scope and     committee members who have received direct and guaranteed farm loans.
Methodology   We determined the extent of loans to these groups, compared their loans
              with loans to other FSA borrowers, and determined the extent to which the
              loans of borrowers were delinquent, restructured, or written off. We did
              not include the family members and business associates of FSA employees
              and county committee members in this analysis because FSA’s database
              identifies only a portion of these individuals, and we did not verify the
              accuracy of FSA’s loan database.

              We surveyed FSA’s 50 state executive directors to obtain information on
              conflicts of interest. The information we obtained includes data on the
              number of FSA employees with loans and relationships with borrowers and
              FSA’s state offices’ determinations on whether actions were needed to
              avoid conflicts of interest. We did not review the appropriateness of state
              offices’ decisions on individual cases. We visited and interviewed officials
              at FSA headquarters and selected FSA offices in California, Iowa, Kansas,
              Missouri, Mississippi, and Texas. Our work was performed from June 1996
              through March 1997 in accordance with generally accepted government
              auditing standards.

              As arranged with your office, unless you publicly announce its contents
              earlier, we plan no further distribution of this report until 10 days from the
              date of this letter. At that time we will make copies available to
              appropriate Senate and House committees; the Secretary of Agriculture,
              the Administrator of FSA; the Director, Office of Management and Budget;
              and other interested parties. We will also make copies available to others
              on request.




              Page 15         GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
B-276432




Please call me at (202) 512-5138 if you or your staff have any questions.
Major contributors to this report are listed in appendix III.

Sincerely yours,




Robert A. Robinson
Director, Food and
  Agriculture Issues




Page 16         GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
Page 17   GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
Contents



Letter                                                                                                     1


Appendix I                                                                                                20

Additional
Information on Debt
Relief
Appendix II                                                                                               21

Cases Reviewed by
FSA to Avoid
Conflicts of Interest,
According to FSA’s
State Offices’
Responses Received
From January
Through March, 1997
Appendix III                                                                                              23

Major Contributors to
This Report
Tables                   Table 1: Number of FSA Farm Loans per Borrower for FSA                            5
                           Employees, County Committee Members, and Other Borrowers,
                           as of September 30, 1996
                         Table 2: Loan Amounts and Loan Debt of FSA Employees, County                      6
                           Committee Members, and Other Borrowers, as of September 30,
                           1996
                         Table 3: Delinquencies on Direct Loans for FSA Employees,                         6
                           County Committee Members, and Other Borrowers, as of
                           September 30, 1996
                         Table 4: Debt Relief on Direct Loans for FSA Employees, County                    7
                           Committee Members, and Other Borrowers, as of September 30,
                           1996




                         Page 18       GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
Contents




Table 5: FSA Employees and Committee Members With Loans or                          8
  With Close Relatives or Business Associates Who Had Loans, as
  of March 1997
Table 6: Response Rates of FSA Employees and County                                 9
  Committee Members to FSA’s Conflict-of-Interest Survey in 11
  States Without Complete Responses, as of March 1997
Table 7: Actions Taken by FSA’s State Offices to Avoid Conflicts                   10
  of Interest, as of March 1997
Table I.1: Debt Relief Provided to FSA Employees and Other                         20
  Borrowers




Abbreviations

ASCS       Agricultural Stabilization and Conservation Service
FmHA       Farmers Home Administration
FSA        Farm Service Agency
GAO        General Accounting Office
USDA       U.S. Department of Agriculture


Page 19         GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
Appendix I

Additional Information on Debt Relief


                                         The Farm Service Agency’s (FSA) direct loan policies provide various types
                                         of relief assistance to help borrowers who are delinquent and having
                                         trouble repaying their loans. Two such options are (1) “writing down”
                                         (reducing) portions of restructured debt so that borrowers can continue
                                         farming and remain FSA clients and (2) allowing borrowers to satisfy the
                                         debt in its entirety by paying an adjusted amount based on the value of the
                                         loan collateral and “writing off” the remaining debt—referred to as “net
                                         recovery value buy-out with write-off.” A third direct loan-servicing
                                         option—the debt settlement process—also results in writing off debt.

Table I.1: Debt Relief Provided to FSA
Employees and Other Borrowers                                                       Average loan         Average loan    Average loan
                                         Type of borrower                               write-off          write-down         buyout
                                         FSA employees                                       $190,600        $135,000        $220,400
                                         Other borrowers                                      204,700         153,200         182,900
                                         Percent difference                                      (6.9)          (11.9)           20.5
                                         Source: GAO’s analysis of FSA loan file database.




                                         Page 20             GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
Appendix II

Cases Reviewed by FSA to Avoid Conflicts
of Interest, According to FSA’s State Offices’
Responses Received From January Through
March, 1997
                                                              Number                  Cases with
                                                           with loans                      action
                                           Number of           or with                 needed to
                 Number of    Number of       county    relationships    Number of          avoid   Number of
                    federal   nonfederal   committee         with FSA        cases    conflicts of cases with
State            employees    employees     members       borrowersa      reviewed       interest action taken
Alabama                 66          238           189              52            52            52             52
Alaska                   8            5            12               3             1              1             0
Arkansas               119          290           325             166          153             16             16
Arizona                 22           48            42               5             5              0             0
California              71          145           147              19            19              4             4
Colorado                49          147           150              37            37            14              5
Connecticut             12           20            24               1             1              1             1
Delaware                13           10             9               8             8              7             7
Florida                 71          149           131              13            13            13             13
Georgia                102          411           335              92            81            49             49
Hawaii                  15           17            16               5             5              0             0
Idaho                   67          125           123              33            33            29              4
Illinois               144          578           282             197          196            166              6
Indiana                 92          419           263             109          109               4             4
Iowa                   219          790           300             151          151            151            151
Kansas                 123          516           312             242          242             30             30
Kentucky               129          409           414             281          281            113            113
                                                                                                  b             b
Louisiana              147          204           156             134          134
Maine                   37           45            43              24            24            21             21
Maryland                22           60            69               9             9              8             8
Massachusetts           24           24            34               9             7              7             7
Michigan                87          268           194              23            23            16             16
Minnesota              142          461           246             261          239             48             48
Mississippi            141          265           246             148          122            122            122
Missouri               153          448           286             347          347             13              8
Montana                 68          217           168             116          112            107            107
Nebraska               132          518           279             205          203             82             35
Nevada                  15           20            54               9             8              2             2
New Hampshire           11           16            30              10             8              8             8
New Jersey              23           31           124              37             6              3             3
New Mexico              36           77            96              38            38            18             18
New York                88          162           153              49            49            31             31
North Carolina         112          457           291              50            50            21             21
North Dakota           157          347           159             242            12            12              0
                                                                                                      (continued)


                          Page 21          GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
                           Appendix II
                           Cases Reviewed by FSA to Avoid Conflicts
                           of Interest, According to FSA’s State Offices’
                           Responses Received From January Through
                           March, 1997




                                                                       Number                      Cases with
                                                                    with loans                          action
                                                Number of               or with                     needed to
                 Number of     Number of           county        relationships     Number of             avoid   Number of
                    federal    nonfederal       committee             with FSA         cases       conflicts of cases with
State            employees     employees         members           borrowersa       reviewed          interest action taken
Ohio                    71              528              405                87               85               36                    3
Oklahoma               114              300              230               163               98               97                   97
Oregon                  43               97               88                23               23               16                   16
Pennsylvania            80              201              197                64               64               63                   63
Rhode Island             9                4               25                 6                 2                1                   1
South Carolina          67              177              121                31               31               31                   31
                                                             c
South Dakota           153              330                                240               34               22                   12
Tennessee              103              333              285                41               41               40                   40
Texas                  269            1066               613               395              162               13                   13
Utah                    33               73               86                42               42               42                   42
Vermont                 24               29               36                 7                 7                0                   0
Virginia                76              210              237                67               67               66                   42
Washington              53              110              106                14               14                 4                   4
West Virginia           41               96              138                36               36               29                   29
Wisconsin              128              505              208               124              124              124              124
Wyoming                 29               59               62                14               14               14                   14
Total                 4,010         12,055             8,539             4,479           3,622             1,767            1,441

                          a
                            The figures in this column include employees with loans, employees’ with close relatives with
                          loans, and employees having business relationships with other borrowers.
                           b
                            According to Louisiana FSA officials, FSA district directors in Louisiana identified cases requiring
                           action to avoid conflicts of interest and took the required actions. However, the district directors
                           did not report on these cases to the FSA state office.
                          c
                            South Dakota FSA officials did not obtain information on the total number of county committee
                          members.

                          Source: GAO’s analysis of survey responses from 50 state offices.




                          Page 22               GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
Appendix III

Major Contributors to This Report


               Charles M. Adams, Assistant Director
               Larry D. Van Sickle, Evaluator-in-Charge
               Daniel F. Alspaugh
               W. Carl Christian, Jr.
               Kelly S. Ervin
               Alice G. Feldesman
               Jerry D. Hall
               Judy K. Hoovler
               Carol Herrnstadt Shulman
               Robert C. Sommer




(150425)       Page 23        GAO/RCED-97-104 Conflict-of-Interest Issues in the Farm Service Agency
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 6015
Gaithersburg, MD 20884-6015

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov




PRINTED ON    RECYCLED PAPER
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested