oversight

Issues Surrounding the Role and Mission of the Farmers Home Administration's Farm Loan Programs

Published by the Government Accountability Office on 1990-01-25.

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

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                                                                                             7



                       United States General Accounting Oil!lce / qb
                       Testimony
’ GAO
                                                                       Hlll
                                                                        III
                                                                         140466

    For Release on     Issues Surrounding   the Role and M ission
    Delivery           of the Farm ers Hom e Administration's
    Expected at        Farm Loan Programs
    1O:OO a.m . EST
    January 25, 1990




                       Statem ent of
                       John W . Harm an, Director
                       Food and Agriculture      Issues
                       Resources,   Com m unity, and Econom ic
                       Developm ent Division
                       Before the
                       Subcom m ittee on Conservation,       Credit,
                         and Rural Developm ent
                       House Com m ittee on Agriculture




    GAO/T-RCED-90-22                                                   GAO Form 160 (12/n)
Mr.    Chairman    and Members of the        Subcommittee:

       We are pleased to be here today to discuss             our efforts          in
examining     the Farmers Home Administration's          (FmHA) I.UIYI",sm.U,
                                                                  farm , ,(.loan(8"
programs and related       issues.    Since enactment of the Food Security
Act in December 1985, we have carried            out a number of reviews of
FmHA's programs and financial         condition.      We are issuing          our most
recent report     on FmHA's financial      statements     today.     Appendix I
provides   information     about each of the 17 reports          we have issued
during this period.        Many of these reports       include    matters        for
congressional     consideration    as well as recommendations          to FmHA for
program improvements.

        In summary, the continued    deterioration      in FmHAls financial
condition,      despite a general improvement      in the overall
agricultural      economy, and the many problems faced by FmHA in
carrying     out its mission   leads us to believe      that the Congress
needs to reexamine FmHA's role.        Specifically,       our work has shown
that:

       --   The financial       condition    of FmHA's farm loan portfolio             has
            deteriorated      to the point where about one-half               of its
            $23 billion     in outstanding        direct      farm loan principal      is
            owed by delinquent         borrowers     and vulnerable       to future
            losses.      In addition,      material      internal    accounting    control
            weaknesses exist.

       --   FmHA's loan making policies  have provided  farm loans to
            borrowers  who are unable to repay them and, as a result,
            borrowers  require extensive loan servicing  actions.

       --   Rather than a source of temporary    credit,     FmHA has become a
            continuous  source of subsidized  credit     for many farmer
            program borrowers.
  '0
t




           --      While funding emphasis has shifted          from direct   to
                   guaranteed    loans, most guaranteed      loans are being made to
                   existing   commercial    lender customers and few direct         farm
                   loan borrowers      have shifted   to guaranteed    farm loans.
                   Consequently,     the government's    overall   financial    exposure
                   has increased.

    My testimony        also includes     information    about     ongoing work,
    including        our recent report      examining   certain     aspects of the
    Agricultural        Credit Act.

           Balancing    the role of FmHA as both an assistance              and a loan-
    making agency is difficult         and requires      basic policy     decisions   that
    can be made only by the Congress.            These decisions       should consider
    such factors      as budgetary    impacts,   the extent to which farmers who
    are facing extreme financial          stress can be helped by credit
    assistance,     the length of time that such credit             should continue,
    the impact of continued        credit    on farmers'     financial    viability,    and
    the implications       of these decisions      on rural     communities.

           In any event, we believe        a reevaluation      of FmHA's role and
    mission     is needed.      Without change, the likely       outcome is continued
    deterioration       in FmHAls farm loan portfolio         and further    losses.
    We have identified         several  key issues the Congress may wish to
    consider      as it deliberates     FmHA's future     role and mission      in
    providing      farm credit    to the nation's    distressed     farmers.

    FINANCIAL        CONDITION OF FmHA'S
    pm

           Our reports       on the   financial    condition      of FmHAls farm   loan
,


    portfolio1     show that the outstanding        principal     in FmHA's direct
    farm loan     programs,2    as well as delinquencies         and loan losses,       have
    increased dramatically         since the mid-19708,       placing   the federal
    government and, ultimately          the taxpayers,     at considerable       risk.
    The deterioration        in FmHA's farm loan portfolio          has continued
    despite    the improvement      in the overall     farm economy.        In addition,
    our financial      audits   of FmHA have uncovered material           internal
    accounting     control    weaknesses.

          Outstanding     principal     for FmHA's direct          farm loan programs was
    about $5 billion      as of June 30, 1976, and about $23.3 billion                  as of
    September 30, 1989.3          Outstanding      principal     owed by delinquent
    borrowers    was about $723 million          in 1976 and about $11.1 billion            as
    of September 30, 1989. Outstanding                principal      for FmHA guaranteed
    farm loans was about $484 million              as of September 30, 1984, and
    about $3.2 billion       as of September 30, 1989.              Outstanding   principal
    owed by guaranteed       delinquent     borrowers       was about $135 million       as
    of September 30, 1987, and about $197 million                    as of September 30,
    1989.    Tables 1 and 2 provide         further      information     on FmHA's direct
    and guaranteed     farm loans as of September 30, 1989.

    l-Farmers Home Administration:           An Overview of Farmer Prosram Debt.
    Qelincuencies,       and Loan Losses (GAO/RCED-86-57BR; Jan. 2, 1986);
    Farmers Home Administration:           Farm Prooram Debt, Delinquencies,            and
      oan T,osses
              .      as  of  June  30,  1987  (GAO/RCED-88-134BR;       May    20, 1988):
                 Audit : Farmers Home Administration's            Losses Have
    Lncreased .  Sisnificantlv       (GAO/AFMD-89-20;      Dec. 20,  1988); and
    Financial    A udit:     Farmers   Home  Administration's     Financial
    Statements     for 1988 and 1987 (GAO/AFMD-90-37; Jan. 25, 1990).                 The
    last two reports        focus on all of FmHA's financial         activities,
    including    farm loan programs.
    2FmHAfs current        major direct    farm loan programs include    farm
    ownership     loans to buy and improve farm land and to construct,
    repair,     and improve buildings:        farm operating  loans for feed, seed,
    fertilizer,      livestock,      farm and home equipment,    living expenses,
    and seasonal hired labor: and emergency loans for actual losses
    caused by natural         disasters.
    3A11 fiscal    year 1989 data used in this testimony    is preliminary,
    unqudited,    and subject to audit adjustment   at a later  date.

                                               3
                              Farm I,mns and Delinau~         Status, Se&ember 30, 1989
Dollars       inMillians
                                                 nllelqency    Eicmomic
                                     ol3emtinq    disaster    exmcme.ncya                 TotalC

   hod                     109,389      98,225       88,575      37,120     13,133   346,442
mm
 hod                       23,775       35,006       35,082      17,267      3,607   114,737
mincruerrt
  ho-as
  a pelxent of
                             21.7         35.6         39.6        46.5       27.5         33.1

yitiiz-                    $7,046       $5,229       $7,683      $3,065       $259   $23,282

   principalowed
   EZ                      $2,015       $1,940       $5,252      $1,818       $104   $11,130

   principalowed
   bymm
   bormwersasa
   pezent       of imtal     28.6         37.1        68.4         59.3      40.2          47.8

a?hese loans were authorized frcxn 1978 to 1984; the prqram has not been authorized
since September 30, 1984.
bmi!3 category includesallotherindividualdirectf~loans,suchassoiland
water loans to help farmers andranchersdwelop,m~                e, andproperlyuseland
andwater-.




          w
                                                 4
      1e2, .     ~GuaranteeaFarinIoansandDelinciuencv           Status, Se?Aenker 30. 1989
Dollars        in Millions




--                                  5,549            23,670          797     30,016
Delh3l-t
 hod                                  300             1,063          217      1,580
D@lbl-=Jnt
 borrowersas
 a percent of
                                      5.4               4.5         27.2        5.3

     whipal                          $772            $2,371         $101     $3,244

     principalowed
     bywinciuent
     bo-                              $44             $120           $33       $197

     principdlowed
     ECa
     percent of total                5.7               5.1          32.7        6.1

alBiscategory          includes allotherguaranteed     farmloans,     suchas emergency livestock
loans.




            The cumulative         results    of operations     for FmHA's Agricultural
     Credit     Insurance      Fund (ACIF) --the revolving         fund from which all
     farmer program loans are made --shows a multibillion                    dollar
     accumulated       deficit     since it was established          in 1946.    The report
     we are issuing         today--Financial       Audit:    Farmers Home
         Y
         Inistrationls         Financial     Statements   for 1988 and 1987--shows that
                                                   5
the ACIF has incurred      cumulative   net losses of about $39.6 billion
since its inception,      while receiving     cumulative  reimbursements  for
losses  (appropriations     from the Congress) of about $11 billion.
The cumulative    results   of operations     for the ACIF as of September
30, 1988, was a deficit       of $28.6 billion.

        A significant        portion     of the nearly $40 billion          in cumulative
net losses for the ACIF was recognized                  by FmHA during fiscal         years
1987 and 1988 when FmHA increased               its allowances        for loan and
related     interest      losses by a net $10.6 billion           and $2.9 billion,
respectively.          During 1987, FmHA initially           established       an
allowance      for loan losses,         to conform with generally           accepted
accounting       principles,       which resulted     in unusually       high adjustment
for losses being charged to fiscal                year 1987 expenses.           The
adjustment       for losses in 1987 was not attributable                 to a single
adverse event in 1987, but was the cumulative                    effect     of the
declining      trend in the agricultural           economy over the past several
years.      Consequently,        the 1987 adjustment       for losses on loans
included     both a provision          for 1987 and an adjustment           for prior
years'    losses.

        As the report we are issuing        today shows, in fiscal         year 1988,
FmHA reported      $30.5 billion     in unpaid principal        and interest     on the
ACIF's direct      farm loan portfolio.        The allowance       for losses
established     for the direct     farm loan portfolio        totaled
$19.0 billion,      or 62 percent of the unpaid principal              and interest.
FmHA also reported        that the guaranteed     unpaid principal        on the
ACIF's guaranteed        farm loans totaled     $3.6 billion.         The allowance
for losses established         for the guaranteed     farm loan portfolio
totaled    $1.2 billion,      or 33 percent of the guaranteed           unpaid
principal.

       In our latest report on FmHA's system of internal      accounting
controls,   we noted material    weaknesses in the loan classification
syqtem used to estimate     losses on individual  farm loans.      Changes
                                            6
are needed to correct           these weaknesses so that future           loss
provisions      are properly       estimated.      Furthermore,      our report
discloses     the following        material   internal     accounting    control
weaknesses related          to acquired property:          (1) FmHAls Acquired
                                                                           .,,,_,,
                                                                               ,
Property     Tracking      System contained      inaccurate     and incomplete
information,        (2) FmHA has not completed system modifications                  which
would allow it to properly             record acquired      property    at fair market
value or to record the associated              gain or loss at the time of
acquisition,       and (3) FmHA has not developed a methodology                  for
determining       property    holding     and disposition      cost factors      for
estimating      loan losses and for computing the acquired                property
balance.      Our opinion       on FmHAls fiscal       year 1988 financial
statements      is qualified       for these reasons.        Our report     includes
recommendations        to correct      each problem area.

        While FmHA has made progress            in improving      the financial
management of its operations,             there remain several        areas of
concern.       The agency's    financial      management systems do not provide
the kind of cost information            that program managers need to
effectively      evaluate   the results       of their    decisions.       There is also
a need for more effective          accountability        reporting.      The
preparation      and audit of annual financial            statements     is now in its
third    year.    This provides      excellent     financial     management
discipline      and deterrence     to waste and mismanagement,             and we
strongly     recommend continuance          of this practice.

      lOAN-MAKING AND LOAN-SERVICING
POLICIES AND PRACTICES

       The major report we issued relating    to FmHA's loan-making  and
loan-servicing    policies   and practices4 shows that,  as directed by
congressional    action,   FmHA has placed heavy emphasis on keeping


4QFarm
     1 s om Adm' istrat'on:
LoaW+lakina Criteria (GAO/RCED-89-9;              Feb.   14, 1989).
                                            7
farmers in business.           In short,     FmHA is on a loan-making           and
servicing      treadmill.      Optimistic      loan-making     decisions--which       are
based on a cash flow analysis             that does not consider          contingencies
or equipment replacement            and tends to overstate         income--are
followed     in many instances        by the need for servicing           actions,    such
as rescheduling,          and additional     loans, which are also based on
optimistic       cash flow projections.           Often borrowers      cannot repay the
initial    loan or the subsequently            serviced    loan and the cycle
continues.

         FmHA was established            to serve as the "lender                of last resort"
for family       farmers unable to obtain credit                   elsewhere at reasonable
rates and terms.             It has traditionally             played a critical            role in
helping     financially          stressed      farmers stay in business.                 Assistance
is obtained        through loans that are expected to be repaid to protect
the government's           and ultimately            the taxpayers'        interests.         FmHA
must balance how much credit,                    if any, should be provided               while
maintaining        fiscal      responsibility.            If FmHA makes loans to
borrowers       with little         chance of repayment,           it lessens its fiscal
responsibility.            In addition,         the resulting        loans may erode
borrower equity           and ultimately           lead to the financial            failure     of the
borrower and government losses.                        Conversely,     if FmHA's loan-making
criteria      are too stringent,            the agency will          limit     assistance       to
financially        stressed        farmers and perhaps force many out of
business.

        Recent congressional        direction     has generally     been aimed at
keeping financially         stressed     farmers in business.         For example, in
July 1987 the Congress directed              FmHA to reinstate      the "continuation
policy"    rescinded     by FmHA in November 1985.            This policy    allows
existing    borrowers     to obtain additional          FmHA operating    loans
without    showing the ability         to repay prior      loans.     The Congress
also enacted the Agricultural             Credit Act of 1987 that directed           FmHA
to consider      reducing    delinquent      borrowers'    debt if, because of


                                                 8
inadequate     collateral,    it was better      financially     for the government
than loan    foreclosure     and liquidating       borrowers'    assets.

       In making loan decisions,           FmHA uses a-cash flow criterion        that
requires   borrowers'        expected revenues to cover projected          expenses,
including    loan repayment.          However, we found that because
optimistic     financial       data are used, FmHA's cash flow analysis          has
frequently     been unreliable        for determining    loan repayment ability
and, by itself,       is not a good indicator         of creditworthiness.       For
example, although         not projectable,     a review of 100 of 160 randomly
selected   borrowers'        files   (for which sufficient      financial   data were
available)     showed that repayment ability           and cash farm income had
been overstated,         on average, by about 24 percent and over 18
percent,   respectively.

       As a result,      borrowers     often cannot make their          scheduled
payments and require         extensive     servicing    actions,     such as reducing
interest     rates or increasing        the repayment period.           For example,
FmHA made a total        of 414 loans in 1986 to our sample of 160
borrowers.       Of this number, 264 loans, or about 64 percent,                   were
servicing     actions    on loans originally         made prior    to 1986.      These
prior    loans involved      a total    of 469 servicing       actions--264      actions
in 1986 and 205 actions          before 1986 (each servicing            action   resulted
in a new loan) --the average time between servicing                   was 2.8 years
and the final       scheduled payment date was lengthened               an average of 8
years.      One loan had gone through nine servicing               actions     over a
period of about 4.5 years.

      We updated selected     data for the 414 loans made to the 160
sampled borrowers.      As of September 30, 1989, 116 loans, or 28
percent of the 414 loans, had been serviced       by rescheduling,
reamortization,    or consolidation.     Another 41 loans, or 10 percent,
were no longer active     because the borrowers   were in bankruptcy,
had debt settled,    or, under the provisions    of the Agricultural
   Y)

                                          9
Credit Act, had bought           out of their       FmHA debt     at the    net   recovery
value of the collateral.

       A consequence       of extensive       loan servicing         is that short-term
debt that has repayment periods               extended several         times eventually
becomes long-term         debt.     This long-term        debt may no longer be
adequately       secured.     FmHA does not require           additional       security     for
serviced      loans, even if the original            security      is no longer
adequate.        These actions      help temporarily        but frequently         result     in
heavier      debts and reduced borrower equity,               which in the long run
weaken the borrower's           financial     condition.       Loan servicing          also has
a financial       impact on the government.              FmHA has estimated         that
implementation        of the debt restructuring            provisions        of the
Agricultural       Credit Act will        result   in about $9.4 billion             in FmHA
farmer program debt being written                down or written         off.

        In January 1987, FmHA proposed revised                criteria        to improve its
loan-making      decisions.         The proposed criteria,         which included        a
credit-scoring       system, attempted         to ensure that FmHA made loans to
borrowers      who had a reasonable         chance of repaying           their   debt.
Current loan-making          criteria,     as modified    by the continuation
policy,     do not attempt to sort out or adequately                   identify    existing
borrowers      who will    likely      not survive   financially         even with
additional      FmHA assistance.

       While the credit-scoring        system as originally     proposed could
have denied assistance       to a large percentage       of existing   FmHA
borrowers,     it attempted    to draw the line between those financially
troubled    farmers who could be helped and those who could not be
helped with FmHA loans.          It also identified    the degree of risk
associated     with each borrower and loan, something not disclosed
under the cash flow requirement.

       Congressional  concern over the potential    denial  of further
assistance    to many borrowers as a result   of the credit   scoring
                                             10
system, the lack of a published         impact study, and the relatively
short comment period that FmHA provided            interested   parties
eventually  led to FmHA's withdrawal          of the proposed criteria.
However, in the Agricultural        Credit Act of 1987, the Congress
allows for future    revision     of certain    FmHA loan-making      criteria      if
the agency adequately      studies   the impact of such a revision             on its
borrowers  and provides     appropriate      congressional    committees       with
sufficient  time to review the results.

        On September 28, 1989, FmHA awarded a contract                to conduct a
study of loan approval       and borrower selection         criteria.      The study
is scheduled     for completion       in May 1990.    The agency has indicated
that when the study is completed,           FmHA will    (1) evaluate      the
results    and revise   its regulations      as appropriate        and (2) consult
with the Congress early and often on the study to obtain
congressional     support for the necessary changes in loan approval
and borrower selection       criteria.

\
    DIT ASSISTANCE

      Our work5 has also shown that authorizing             legislation     and
implementing   regulations     governing     FmHA's farm loan programs
mandate that the agency is to be a temporary             source of credit        and
that borrowers    graduate to non-FmHA sources of credit               when they are
able to do so.     However, FmHA has evolved into a continuous                source
of subsidized   credit     for nearly one-half      of its borrowers.         For
example, as of December 31, 1986, nearly 112,000 borrowers,                   about
42.5 percent of all FmHA direct          farm loan borrowers        at that time,
had had at least one active        loan continuously      for 7 years or more.
This included   about 57,600 borrowers         (about 22 percent)        who had had
at least one loan continuously         for 10 years or more.

'Farmers Home Administration:           Farm Loan Programs Have Become a
Continuous Source of Subsidized          Credit  (GAO/RCED-89-3; Nov. 22,
1988).
                                         11
      As table 3 shows, the total   percentage    of borrowers that have
had at least one FmHA loan continuously      for 7 years or more has
remained unchanged at 42.5 percent.       A major change, however, was
in the 10 years or more category which increased       from about 22
percent  in 1986 to about 35 percent    in 1989.

    le 3.. Number of Ye ars of Involvement in FmHA's Farmer Proarams
md Number of Loans Received for All Active    Borrowers as of
September 30, 1989
       Years              Number of    Percent        Number of         Percent
     in FmHA              borrowers    of total    loans received       of total
      0 to 3                34,079       16.0            76,330                 12.4
      3 to 5                53,872       25.3           154,615                 25.2
      5 to 7                34.261       16.1           102,326                 16.7
  Total   under       7    122.212       57.4           333.271,                54.3
      7 to 10               16,342        7.7            48,298                  7.9
     lO+ over               74,276       34.9           231,943                 37.8
  Total   over    7         30,618       42.5           280,241                 45.6
Not determined"            224                               503            -       1
  Total                                 100.0                               100.0
aWe excluded from our calculations loans with a closing              date       prior
to 1954 and those where data were not available.
Source:    GAO analysis       of FmHA data.


        Over the past several    decades, FmHA's temporary      credit    role
and graduation      mandate have been deemphasized in favor of a policy
of keeping farmers in business        for long periods   regardless      of their
financial    condition.     This has been accomplished     in a variety      of
ways that involved      all three branches of the government.          For
example, the congressionally       approved continuation     policy    keeps
farmers in business with new loans even if they cannot show an
ability    to repay all outstanding      debts. FmHA provides      continuous
se&icing     of loans to keep farmers in business.        And the courts,
                                       12
through various      orders and injunctions,    temporarily          suspended     FmHA
foreclosure    actions    in the past until   FmHA clarified          certain
notices    and procedures    for its borrowers.

      While F'mHA has been successful         in keeping farmers in
business,      it has not been without     cost.    For example, in our
November 1988 report we estimated          that during 1986 the government
interest     rate subsidies    received   by FmHA farm program borrowers--
the difference       between the interest     rate charged the farmer and the
interest     cost the government incurred        to obtain the funds it
loaned--was      between $612 million     and $1.6 billion.     FmHA borrowers
also have a financial        advantage over other farmers who must pay
higher interest       rates to borrow money from non-FmHA lenders.         We
estimated     this advantage amounted to between $1.2 billion         and
$2.2 billion      during 1986.

        For example, after        15 years in FmHA's farm loan programs,            a
farmer,    raising     corn, soybeans, and cattle,           had received    39 loans.
He had 14 loans with a balance of $435,790 outstanding                    as of
December 31, 1986.          For 38 loans on which we could develop reliable
histories     from FmHA files,         FmHA had taken 17 loan servicing
actions,    including      rescheduling,     reamortization,       and debt set-
aside.     The 38 loans ranged from $2,500 to $90,524 and totaled
$501,357. We estimated            in constant    1986 dollars      that the borrower
had received       $49,053 in government interest            rate subsidies    and
$98,141 in financial          advantage over non-FmHA farm borrowers.
Despite FmHA assistance,            the borrower's    reported     net worth
declined    from $20,368 in 1971 to a negative               $6,635 in 1986.

  IFT FROM DIRECT TO
GUARANTEED FARM LOANS

       Since.1984,    FmHA has been shifting   its farm lending      from
direct    to guaranteed   farm loans.    This shift   was authorized     by the
Food Security      Act and subsequent appropriations.      Our September
                                          13
1989 report6       showed that the increase               in guaranteed        lending--from
about $71 million          to $1.3 billion         between fiscal         years 1983 and
1988--has resulted           primarily      from private        lenders obtaining          loan
guarantees      for their       existing      customers who had become financially
stressed     rather     than existing         FmHA direct       borrowers      obtaining
guaranteed      loans.       Our analysis       of F'mHA loan data showed that only
2 percent of the borrowers               with direct        farm operating        and/or
ownership     loans between 1985 and 1987 also obtained                        the same type
of guaranteed        farm loans.7         Direct      lending     declined--from       about
$2.4 billion       to $1.0 billion          between fiscal         years 1983 and 1988--
primarily     because of earlier            availability        of government farm
program payments,          fewer borrowers,          reduced farm operating            expenses,
and reduced direct           farm ownership lending             authorizations.

       The impact of the shift            to guaranteed       lending varies       among
borrowers,      lenders,      and the government and cannot be easily
measured.       Although      guaranteed      loans help high-risk         borrowers
obtain credit       from private       lenders on better          loan terms, these
borrowers     have higher costs of money, stricter                   loan terms, and, at
the time of our work, greater               likelihood      of liquidation       because of
lender policies        than do FmHA direct           loan borrowers.        These factors
are disincentives          for direct     loan borrowers        to seek guaranteed
loans.      Guaranteed loans benefit             lenders by reducing        financial    risk
and loan losses,         improving     liquidity       and profitability       from selling
the guaranteed        portion    of loans in the secondary market,                and
upgrading     the classification          of their      loan portfolios       with bank
regulators.



+armer      Home Administration:  Imnlications  of the Shift From
Qirect    to Guaranteed Farm Loans (GAO/RCED-89-86; Sept. 11, 1989).
7This analysis    was further      supported by the U.S. Department of
Agriculture's    Office    of Inspector      General in a September 1988
report that projected       that about 1 percent of the 15,585 guaranteed
farm loans totaling       $1.5 billion     in its sample universe  were used
to,finance    FmHA direct     loan borrowers.

                                              14
        The impact of the shift              on the government is mixed.               The
increase      in guaranteed         lending has helped keep some farm lending                 in
the private           sector and reduce budgetary            outlays       needed to make new
direct     loans.         However, because few direct            loan borrowers        have
switched      to guaranteed         loans, and most likely            will    not because of
their     poor financial         conditions,       continued     substantial       budget
outlays      will      probably    be needed to provide          financing       to help them
stay in business.              In addition,      the increase       in outstanding
principal         for guaranteed       loans has outpaced the decrease in that
for direct          loans, by about $570 million            between fiscal         years 1986
and 1988.          Consequently,       despite     the progress       in shifting      from
direct     to guaranteed         lending,     the government's          overall    financial
exposure has increased.

       WhileFmHA's guaranteed    farm operating   and ownership   loan
activity  has significantly   increased   since 1984, losses on these
loans have grown at a faster     rate.  Loan delinquencies     are also
growing,  and FmHA projects   that losses on guaranteed     loans will
increase  in the future.

       Because lenders generally             obtain guarantees      on loans for
financially       stressed     farmers,    losses on such loans can be expected.
Although      some loan losses may be attributable              to uncontrollable
factors,      such as adverse weather conditions            and a poor farm
economy, problems in FmHA's assessment of borrowers'                     financial
conditions      prior    to guarantee      loan approval    and in FmHA's
oversight      of lenders'      servicing     of guaranteed     loans after     approval
have also contributed           to guaranteed      loan losses.      These problems
are similar       to those that FmHA has with its direct              farm loans.      As
the shift      continues     from direct      to guaranteed     farm loans,
correcting      the problems with the guaranteed            loan program grows in
importance:         to control     the mounting losses,       prevent the loss of
the shifts'       budgetary     advantage,      and avoid the experience        with the
direct     loan program.
    w

                                             15
       In our September 1989 report we included  three case studies                  on
borrowers   who had defaulted on FmHA-guaranteed   loans to illustrate
many of the problems we identified.    The three case studies      are
included   as appendix II.

CONWING       EFFORTS TO EXAMINa



        Our work on FmHA issues is continuing.              For example, we are
examining      (1) the planned use of fiscal         year 1988 direct    and
guaranteed      farm operating    and farm ownership loans (report          expected
within    the next month),      (2) implementation       of the debt
restructuring       provisions   of the Agricultural        Credit Act (report
expected in the spring of 1990), (3) farm program debt,
delinquencies,        and loan losses as of June 30, 1989 (report           expected
in the spring of 1990), (4) controls            for identifying      and reporting
cases of fraud, waste, and abuse in FmHA's farm loan programs,                    (5)
the selling      price for farm inventory      properties,       and (6) FmHA's
fiscal    year 1989 financial      statements.       We plan to report the
results     of the last three assignments         later   in 1990.

       As part of our work examining the Agricultural        Credit Act, we
issued Farmers Home Administration:        Loan Servicincr   Benefits   for
Bad Faith Borrowers     (GAO/RCED-90-77FS; Nov. 29, 1989).        This report
provides   examples of FmHA delinquent     borrowers    who have acted in
bad faith8    and who have received   benefits,     or will be eligible     to
receive   benefits,  under the provisions      of the act.

       F'mHA determined   that borrowers      acted in bad faith   because of
various   actions,    such as (1) selling      or otherwise disposing    of


8We use the phrases      Vtborrowers who act in bad faith"          and "bad faith
borrowersIt to refer     to those FmHA delinquent         borrowers     whose
delinquency   was due    to circumstances      within   their   control    or who
did not act in good      faith   in connection     with the terms of their
FmHA loans.
                                        16
property      securing    loans without      FmHA approval:    (2) repaying    other
lenders more than required             and, at the same time, becoming
delinquent      on FmHA loans:        (3) abandoning the property      securing    FmHA
loans:     and (4) having resources          available   that could have been, but
were not, used to make FmHA loan payments.                  In appendix III we
include     the eight case examples from our November 1989 report to
illustrate      FmHA bad faith       determinations    and how bad faith
borrowers      benefited,     or will    be eligible   to benefit,    under the
terms of the Agricultural            Credit Act.

        In January 1990, FmHA provided            members of Congress with a list
of 218 bad faith         borrowers   throughout     the country that it said had
committed      fraud, waste, or conversion          of security     property        and who
were involved        in net recovery value buyouts.           Forty-two         of those
borrowers      had bought out their        debt at a net recovery           value and 58
other borrowers         were in the process of buying out their                 debt.
These 100 borrowers          include   8 borrowers     who bought out or were in
the process of buying out their              debt that will     result      in a write
off of more than $1 million            each.     For example, one borrower with
proven fraud owed FmHA $11.8 million               and was offered       a $1.1 miliion
net recovery       value buyout.      This borrower will        receive       a
$10.7 million       write    off of his FmHA debt if he pays the buyout
amount.      In addition,       118 borrowers     on the national      list      were
offered     net recovery value buyout, but they did not accept the
buyout offer.          These borrowers     will   be eligible    to reacquire         their
farmland,      or farm homestead,       if FmHA forecloses       on their
properties.

  TTERS FOR CONGRESSIONAL CONSIDERATION

      FmHA has the difficult           task of achieving         its assistance     goals
while also employing     sound       loan-making      policies.        Although  the
Congress and FmHA have used            existing    credit     policies     as a means of
keeping farmers in business            and assisting       rural    communities,    the
    u

                                           17
Congress may want to examine                  the        long-term   effect    such policies
have on borrowers.

       FmHA and its borrowers              need to realistically                assess borrowers'
chances of financial           recovery before they lose additional                          equity
through continued          borrowing.         Additional         loans to farmers who
cannot repay them have resulted                  in a decline          in the borrowers'
equity position,         the deterioration            of the financial              condition      of
FmHA's farm loan portfolio,                and increased           government loan losses.
To this end, we recommended that FmHA develop,                             in consultation          with
the Congress, a more comprehensive                    loan-making          criteria      for both
direct      and guaranteed      farm loans that assess an applicant's
financial      solvency,     profitability,           liquidity,         and repayment ability
prior     to making new loans.             This will       assist     borrowers        by providing
them with a more realistic               assesment of their              financial       condition
before they accept additional                 credit,      and also help improve the
financial      condition     of FmHA's farm loan portfolio.

        We recognize     that the Congress, through its recently           passed
legislation,      wants to continue    to assist     financially    stressed
farmers and keep them in business          if at all possible.         However, the
use of a cash flow criterion         in loan-making      decisions    and the trend
toward becoming a continuous         source of credit       raises  fundamental
questions     regarding     FmHA's mandate to serve as a temporary          source
of credit    while,     at the same time, fulfilling        its role as a lender
of last resort.

       In addition,       shifting      funding from direct       to guaranteed      farm
loans will      not solve FmHAls problems.              With the increased      credit
costs and the greater            risk of liquidation        associated    with
guaranteed      loans, coupled with direct            loan borrowers'      poor
financial     conditions,        it is unlikely     that significant       numbers of
direct    loan borrowers         will   shift  to guaranteed      loans in the future.
If direct     loan funding continues           to decline      and delinquent    direct
lam borrowers        continue        to request direct      loan financing     under
                                                    18
recent congressional        initiatives,      funding may not be sufficient          to
meet future  credit       needs of all     direct    loan borrowers.

      As we have reported,        the Congress may wish to reevaluate    the
current   and future    role    of FmHA by examining  several key issues,
including   the following:

      --   Are the    continuation      and debt restructuring
           policies     the best means of assisting        already
           heavily    indebted     farmers?

      --   At what point will        the cost of providing       continuous     credit
           assistance     to financially       marginal  farmers--including        the
           cost of loan losses,         interest    rate subsidies,     and
           administrative       expenses-- outweigh the benefits          to the
           government,      rural  communities,      and the farmer?

      --   If FmHA is to serve as a temporary            source of credit,    should
           specific   criteria      be developed-- such as time limits       and/or
           measurable     financial    improvement--to     decide when a borrower
           has had a sufficient        opportunity     to become financially
           sound and be in a position         to graduate to non-FmHA sources
           of credit?

      --   For those borrowers     who, after  a period of time, show
           little   or no prospect   for succeeding,      would it be more
           appropriate   to provide   other forms of assistance,       such as
           job training,   to aid in possible     transition    to other
           employment opportunities?

      In the final   analysis,     decisions   concerning   FmHA's future role
and mission will   require     congressional     judgments about complex, and
sometimes competing,     objectives.       We believe   the work we have
completed to date and the work that is underway will            aid the
    u

                                           19
Congress as it deliberates   how best to provide    farm credit
assistance to the nation's   distressed farmers.




     Mr. Chairman, this completes my prepared      statement.     I would
be happy to respond to any questions.




                                 20
APPENDIX I                                                                 APPENDIX I

          OVERVIEW OF RECENT GAO REPORTS HIGHLIGHTING FmHA ISSUES
        Since December 1985, GAO has issued 17 reports       that highlight
various     FmHA issues.   The following brief description      provides    the
report title,      number, and date, and summary information       from each
report.



        As requested   by the Chairman, Senate Committee on Agriculture,
Nutrition,     and Forestry,    this briefing     report provides     information
on the financial      condition    of the FmHA loan portfolio       for its five
major farmer loan programs:          farm ownership,     operating,     emergency
disaster,     economic emergency, and soil and water.            Specifically,
this report provides       both national     and state information        on (1)
total     farm debt and FmHAls portion       of that total,     (2) total      number
of loans and borrowers        and loan amounts for each of FmHA's major
farmer programs,      and (3) delinquencies       and loan losses occurring         in
these programs.
        The financial       condition     of farmers and their  lenders had
deteriorated        rapidly    between 1980 and 1985.      As a result,
increasing        numbers of farmers were turned down for financing           by
their     private    lenders and came to FmHA for credit        assistance.      FmHA
responded to these credit             requests by substantially    increasing    its
loan portfolio.           At that time, FmHA's major farmer program loan
portfolio       was increasingly       becoming at risk because delinquencies
were on the rise and loan losses were mounting.
Farmers       Home Administration:   Financial  and General         Characteristics
of   Farmer     Loan Prosram Borrowers   (GAO/RCED-86062BR;         Jan. 2, 1986)
        The Chairman, Senate Committee on Agriculture,               Nutrition,     and
Forestry,     expressed concern over the American farmers'               growing
reliance     on the resources        of FmHA. He noted that FmHA's
outstanding       farm loan portfolio      had increased     from about
$6 billion      in 1978 to almost $28 billion         in 1985.      With the
Congress addressing           the issue of financial    stress    in U.S.
agriculture,        including    FmHA's future   role in assisting       additional
farmers,     he asked GAO to inform the Committee of the current
financial     condition       of both FmHA borrowers    and the farm loan
portfolio.        This report and another report        entitled     Farmers Home
Administration:           An Overview of Farmer Proqram Debt, Delinauencies,
and Iloan LOSSeS (GAO/RCED-86057BR; Jan. 2, 1986) responded to his
request.
      At the time that this work was performed,  FmHA had a
computerized   data base, the Farmer Program Management Information
                                         21
     Y)
APPENDIX I                                                                          APPENDIX I

System (FARMS), that contained            certain    financial     and general
characteristics       of borrowers,     such as debt load and cash flow, the
type and size of farm operations,             and demographic data.           FARMS1
started    in 1983, used information          obtained     from FmHA loan documents
on borrowers     who had received       loans for (1) farm ownership,             (2)
annual operating       expenses,    (3) emergency disaster          losses,    and (4)
soil and water development          and conservation.          Although     FARMS did
have some limitations,        at that time it was the most complete source
of financial     information     available      on F'nMA borrowers.         FmHA said
this information       was representative         of all FmhA farmer program
borrowers     on a national    basis but was not projectable             to individual
states or counties.
       This briefing        report presents     information     on a total   of 65,893
FmHA borrowers       who received      117,366 farm loans during 1983 and 1984
 (about 53 percent of all farm loans made during that period).                    The
report provides        information     on borrower assets and liabilities,
debt-to-asset       ratios,     and equity positions:       discusses    the cash flow
position    of the borrowers;        provides     general characteristics      of
borrowers     including      farm type, size,      and demographic data; and
provides    our observations        related   to our analyses of the FARMS
data.
-Administration:                            Debt Restructurins  Activities Durinq
*he 1984-85 Farm Credit            Crisis     (GAO/RCED-860148BR; May 16, 1986)
       As requested  by the Chairman, Subcommittee    on Administrative
Practice   and Procedure,   Senate Committee on the Judiciary,       and
Congressman Cooper Evans, this briefing      report provides     information
on FmHA's debt restructuring      activities with private    lenders to
meet the 1984-85 farm credit      crisis.
       The report has four major sections                    and contains         (1) a
description     of FmHA's debt restructuring                   activities,       including     the
loan programs and types of loans used to help farmers restructure
their    farm debt;     (2) information            on the magnitude of FmHA debt
restructuring      and the substantial              increase      in this activity         between
fiscal    years 1984 and 1985; (3) case-study                     profile     information      on
borrowers'     farm income, debt-to-asset                 ratios,       average loan amounts,
and other related         financial       statistics       in four FmHA county offices;
and (4) comments from FmHA officials,                     national       banking
associations,      and local        lending     institutions          across six states on
why private     lenders were or were not participating                        in FmHA's debt
restructuring      activities.



lThe       FARMS data   base no longer        exists.
                                              22
       u
APPENDIX I                                                                    APPENDIX I

Farmers Home Administration:    Federallv Acaukred Farm Propertv
Presents a Manauement Challense    (GAO/RCED-86-88; June 13, 1986)
       This     report   is addressed to five congressional    requesters    and
discusses       the large number of farms that FmBA had acquired        as a
result    of    loan foreclosures    and other actions.    The report also
discusses       FmBA's management of this farm property      and the
procedures        used to sell or lease the property.
        In the report,     GAO projected      that FmBA would lose about
$190 million      on the 1,270 properties         in the 6 states     reviewed.
These losses would occur primarily              because the value of the
acquired     properties    will  be less than the defaulted-borrowers'
unpaid indebtedness        and the cost of acquiring,          managing, and
selling    the properties.       GAO made several        recommendations    to the
Secretary     of Agriculture     aimed at improving         FmHAls selling    efforts
for inventory      property,    reducing    the time that reserved properties
are held for sale to only FmHA-eligible               farmers,   and prohibiting
farmers from growing surplus           crops on FmHA-leased properties.
c           0                                               Eff   rt   Focus on
Continually       Delinuuent   Borrowers        (GAO/RCED-87-1yBRq     Nov.    12, 1986)
       The briefing    report  is addressed to the Chairman, Senate
Committee on Agriculture,        Nutrition,  and Forestry,   and provides
information     on the extent that FmHA borrowers       were continually
delinquent    on their    farm loans (defined   as borrowers    that were
delinquent    as of June 30 in each of 3 consecutive        years--1984,
1985, and 1986). The report shows the following:
        --Of approximately     261,000 total  FmHA farm borrowers,    50,033
           were continually    delinquent.   About 34,600 of these
           borrowers,   or 13 percent of the total    farm borrowers,
           accounted for 78 percent of the total      $6.8 billion
           delinquent   payments owed FmHA as of June 30, 1986.
        --Of the 50,033 continually           delinquent      borrowers,    8,043 had
           discontinued     or were discontinuing          farming as of July 1986.
           According    to FmHA records,       41,983 of the remaining
           delinquent     borrowers    were still     actively     farming.
           Information     was not available        on the status of the other
           seven continually       delinquent     borrowers.
        --Of the 41,983 continually      delinquent  borrowers  actively
           farming,  25,441 had not made a loan payment on at least                 one
           loan since 1983 or earlier,      and 1,364 had never made a
           payment on any of their     FmHA loans.


                                           23
    c
APPENDIX I                                                                        APPENDIX I

        --Emergency      disaster    loans accounted for 63 percent of the
           total   delinquent      amounts owed by the 41,983 active
           continually      delinquent    borrowers.

   ovided to ws              on 14 Reservationa           (GAO/RCED-87-79BR;         Mar.   11,
1987)
       This briefing      report    is addressed to the Chairman, Senate
Select Committee on Indian Affairs,              and Senator John Melcher and
provides     information     concerning      the potential    loss through
foreclosure      of reservation       land used by Indians        as collateral  when
obtaining      FmHA farm loans.         This work resulted      in obtaining
agricultural       credit  information       from 14 specified      reservations  in
Montana, North Dakota, and South Dakota.
        The report provides      statistics       on past, current,       and predicted
losses of land pledged by Indian borrowers                  as security     for FmHA
farm loans:       a description    of options      available    to help Indians
avoid the loss of reservation             land: historical      information     about
the use of the Indian Tribal           Land Acquisition        Program and
information       about tribal   interest      in its future use: a summary of
the working relationship         between FmHA and the Bureau of Indian
Affairs     (BIA) in issuing,      servicing,      and foreclosing      on FmHA farm
program loans to Indian borrowers:               and FmHA and BIA views on
possibly     shifting    FmHA loan functions        to BIA for farm loans made to
Indians.
           Home Administration: Problems and Issues Facincr the
mruencv      Loan Prosram (GAO/RCED-88-4; Nov. 30, 1987)
        This report     is addressed to the Ranking Minority                   Member,
Subcommittee      on Agriculture,          Rural Development,           and Related
Agencies,      Senate Committee on Appropriations,                  and discusses      how the
FmHA emergency loan program evolved over the previous                          several
years, why its delinquency              rate was so high, what alternatives                 were
available      to deal with debt that may be uncollectible,                     and any
changes needed in legislation                and/or program regulations            to make it
function      more effectively.          The report contains            no recommendations
for legislative       or program changes, in large part,                   because, at that
time, changes in legislation               and FmHA loan policies            should have
resolved      many of the program's           past problems.          The report does
include     issues for congressional             consideration        and raises     questions
about whether credit,           particularly         liberal    credit,    is the proper
vehicle     for providing       disaster      relief      to farmers.




                                             24
APPENDIX I                                                                    APPENDIX I

Parmers Home Administration:  Farm Proaram Debt. Delinuuencies, and
  an Losses as of June 30. 1987 (GAO/RCED-88-134BR; May 20, 1988)
       This report is addressed to Senator Kent Conrad and provides
updated information        on FmHA's farm loan program debt,
delinquencies,       and loan losses that was included       in our January
1986 report     entitled,    Farmers Home Administration:         An Overview of
                     Debt. Delinouencies,    and Loan J*ossess (GAO/RCED-86-
57BR; Jan. 2, 1986). The report shows the financial                condition      of
FmHA's farm loan portfolio         as of June 30, 1987, for FmHA's five
major farm loam programs:          farm ownership,   operating,     emergency
disaster,     economic emergency, and soil and water.            Specifically,
the report     provides    both national   and state information        on (1)
total     farm debt and FmHAls portion      of that total,      (2) total      number
of loans and borrowers         and loan amounts for each of FmHA's major
farm programs,       and (3) delinquencies    and loan losses occurring           in
these programs.

           ous Source of Subsidized         Credit     (GAO/RCED-89-3:      NOV. 22,
1988)
      As requested     by Senator Jesse Helms, Chairman of the Senate
Committee on Agriculture,       Nutrition,     and Forestry   at the time of
his request,    this report    determines    (1) if FmHA is graduating
borrowers    as intended,   (2) whether FmHA has evolved into a long-
term source of credit,      and (3) the amount of government          interest
rate subsidy and financial       advantage received       by FmHA borrowers.
The message of this report        is discussed    in the overall    testimony.
        cial   Audit:     Farmers Home Administration's      LoSSeS  Have
-ased          Siunificantly      (GAO/AFMD-89-20;     Dec. 20, 1988)
       This report is addressed to the Secretary         of Agriculture and
presents     the results     of our examination   of FmHA's financial
statements      for the year ended September 30, 1987, and our reports
on internal       accounting   controls  and compliance  with laws and
regulations.
        The financial      statements     reflect    a significantly       deteriorating
financial     condition     at FmHA for several          reasons:     (1) FmHA lends
money at interest        rates far below what it must pay, (2) many of its
borrowers     are, by commercial       standards,        not creditworthy,       (3) a
severe decline        in the agricultural         economy over the previous
several    years has led to congressional              initiatives     aimed at keeping
farmers in business,          and (4) many of the loans are delinquent                 and
unlikely    to be repaid.


                                           25
APPENDIX I                                                                     APPENDIX I

       Because of FmHA's operating        losses,    its accumulated      deficit       of
$36 billion,      and its present reliance       on Treasury borrowings          to
continue     operations,    we are concerned that FmBA will         require      direct
assistance     from the Congress at levels        significantly     greater      than
the Congress has provided          in the past.     FmHA borrowed $12 billion
from the Treasury        in fiscal   year 1987 to meet current       obligations.
The total amount due to the Treasury has steadily               increased      from
about $60 billion        in 1982 to $85 billion      in 1987, of which
$24 billion     was due by 1989.
      Our opinion    on FmBA's statement         of financial       position       reflects
our concerns over the agency's         inability      to repay its borrowings
and to meet its current       operations     without     incurring      additional
debt and the magnitude of its accumulated               $36 billion       deficit,
which includes    $22 billion      for losses recognized          in fiscal        year
1987.   Furthermore,    our opinion      is qualified       because FmHA does not
record property    received     by voluntary      conveyance at fair market
value at the time of acquisition           in accordance with generally
accepted accounting     principles     for federal       agencies.
     ers Home Administration:     Sounder Loans Would Reauire Revised
             Criteria     (GAO/RCED-89-9; Feb. 14, 1989)
        As requested    by Senator Jesse Helms, Chairman of the Senate
Committee on Agriculture,          Nutrition,     and Forestry      at the time of
his request,     this report determines          (1) whether the criteria       FmHA
uses to make and service         loans are adequate,          (2) how borrower
equity positions       (net worth) are affected           by FmHA loan-making
policies,     (3) whether security         for FmHA loans is adequate,        and (4)
what impact more stringent          loan-making      criteria    proposed by FmHA in
January 1987 would have on existing              borrowers.      The message of this
report    is discussed     in the overall      testimony.
Farmers Home Administration:  Status of Participation                      in the
rnterest Rate Reduction Proqram (GAO/RCED-89-126BRf                      June 15, 1989)
        This report      is addressed to Representative      Leon Panetta and
provides     information      on (1) the extent of use of the interest         rate
reduction      program for guaranteed       farm loans,   (2) reasons why
activity     is at its present level and the likelihood            of expansion,
 (3) the potential         impact of FmHA-guaranteed    farm loans with
interest     rate reduction       on the U.S. budget compared with that of
FmHA direct       loans, and (4) compliance      issues identified     by USDA's
Office     of Inspector      General.




                                           26
APPENDIX I                                                                     APPENDIX I

      era Home Administration:            Imnlem n at . n I                ncernina  Four
Sections   of the Food Securitv           Act   (~A~,R%D-8~?~~           %e    19, 1989)
       This report     is addressed to the Chairman, House Committee on
Agriculture,      and provides    information     on four provisions      of the
Food Security      Act of 1985 designed to help financially            distressed
farmers with FmHA farm loans:             (1) homestead protection,        (2)
disposition     and leasing    of farmland commonly referred         to as
"lease/buy-back,"        (3) conservation     easement, and (4) softwood
timber production.         The report discusses      the extent of program use
and whether the provisions         were modified     by the Agricultural       Credit
Act of 1987 and identifies          several   issues the Congress and the
Secretary    of Agriculture     should consider      in assessing    how the
provisions    are being implemented.
       For example, borrowers            could use the same land to benefit              from
both (1) the conservation             reserve program administered           by the
Agricultural       Stabilization       and Conservation         Service   and the
conservation       easement provision         and (2) the conservation           reserve
program and the softwood timber provision.                      Our work also showed
that FmHA charged interest             rates for softwood timber loans, which
were generally        lower than the maximum permitted               by the 1985 act,
and calculated        interest     on a simple,       rather than compound, interest
basis.      As a result,        we calculated      that at the end of the deferral
period the government would receive                  about $21.4 million       less in
interest     revenues for the 14 approved softwood timber loans (the
total    number of loans approved at the time of our review)                      than it
would otherwise         receive.      To illustrate       the significance       of the
potential     reduction       in interest     revenues for the maximum number of
acres that can be included             in FmHA's softwood timber program, we
calculated      that the government --under certain               assumptions--would
receive     over $1 billion        less in interest         revenues than it would
otherwise     receive      at the end of the deferral            period if all
allowable     acreage (50,000 acres) was to be enrolled                   in the program.

                     Svstems    Modernization        (GAO/IMTEC-89-64;        Aug.   21,
1989)
        This report      is addressed to the Acting Administrator,           Farmers
Home Administration,         and provides      information     on FmHA's planning
efforts     to redesign,     replace,    or enhance its automated systems at
an estimated       cost of at least $100 million           over the next 5 to 7
years.      The report discusses       several      issues that are critical     to
the success of FmHA's moderization               plans.    Those issues include     (1)
ensuring      that the modernization       program addresses the information
needs of all agency components,             (2) ensuring     that the agency has a
sufficient       number of qualified      managers and staff       to support its
continuing       day-to-day   operations     and to implement the modernization
                                            27
  11
APPENDIX I                                                                       APPENDIX I

program,     (3) developing    and following    instructions    for preparing
complete economic analyses to help ensure cost-effective
modernization      decisions,    and (4) providing     for a strong data-
administration       function  to develop and ensure compliance       with
standards,      so that individual    systems can easily     share information.
9
                                    (GAOIRCED-:9-:6;        Sept.   11, 1989)
        This report        is addressed to the Chairman, Senate Committee on
Agriculture,        Nutrition,       and Forestry,     and provides      information      on
FmHA's progress         in shifting      from direct       to guaranteed      farm loans
and the financial            condition   of the guaranteed        loan borrowers;       the
impact of this shift            on borrowers,      private    lenders,     and the
government;        and program problems that contributed               to losses on
guaranteed       loans.       The message of this report          is discussed       in the
overall     testimony.
                 Administration:         Loan Servicing       Benefits     for    Bad Faith
              (GAO/RCED-90-77FS;        Nov. 29, 1989)
       This report     is addressed to the Chairman, Subcommittee            on
Agricultural     Credit,   Senate Committee on Agriculture,         Nutrition,
and Forestry,     and provides     examples of FmHA delinquent        borrowers
who have acted in bad faith          and who have received     benefits,     or will
be eligible    to receive    benefits,     under the provisions     of the
Agricultural     Credit Act of 1987. The message of this report is
discussed    in the overall     testimony.
      cial Audit : Farm r Home Administration's  Financial
Statements for 1988 an: s987 (GAO/AFMD-90-37 ; Jan. 25, 1990)
        This report     is addressed to the Secretary     of Agriculture  and
presents      the results    of our examination  of FmHA's financial
statements       for the year ending September 30, 1988, and our reports
on internal       accounting   controls and compliance    with laws and
regulations.         The message of this report    is discussed    in the
overall     testimony.




                                           28
.


    APPENDIX II                                                                APPENDIX    If

             CASE STUDIES OF GUARANTEED FARM LOAN PROGRAM BORROWERS
                          0 HAD DEFAULTED ON THEIR LOANS
          In our report   entitled   Farmers Home Administration:
                ns of the Shift    From Direct  to Guaranteed Farm Loans
     (GAO/RCED-89-86; Sept. 11, 1989) we provide three case studies           on
    borrowers   who had defaulted    on FmHA-guaranteed   loans to illustrate
    many of the problems we identified.        The three case studies     from
    that report   follow.


          A borrower received       an operating    loan in April    1986 for about
    $118,000,    which FmHA guaranteed      at 90 percent.     This loan was for
    production     purposes and to make payments to other creditors           for the
    borrower's     son.    The borrower listed     no debts and total    assets of
    $215,000.      The assets consisted     of $10,000 in cash, $145,000 in
    savings,    and $60,000 in real estate.         It appeared that the borrower
    had sufficient      collateral   to obtain a loan without      the FmHA
    guarantee.      However, the guaranteed      loan was secured only by a crop
    lien and assignment        of ASCS payments on 600 acres of cotton and
    soybeans.      The borrower had no crop insurance        and leased land from
    his son for farming purposes.
            The county supervisor      indicated     on the guaranteed         loan
    evaluation    form that the security         offered     (crops) appeared adequate
    and that the borrower had been unable to obtain necessary credit
    without    a guarantee.      The county supervisor's           evaluation     of the
    borrower's    inability    to obtain credit        without     a loan guarantee
    appeared questionable        because (1) a letter          from the private      lender
    accompanying the loan application            did not state that credit           would
    be denied without       the guarantee and (2) the borrower had not signed
    the Conditional       Commitment for Guarantee certifying              that credit    was
    not available     at reasonable     rates and terms.
           The borrower's   repayment estimate      showed projected   income from
    crop production     of $112,750, government payments of $19,000,         and
    other income of $5,900 for a total        projected   income of $137,650.
    Loan records showed the borrower was actually           loaned $106,200 of
    the $118,000 approved and repaid only $72,781.             Of this amount,
    $64,600 was applied     to loan principal     and $8,181 was for interest
    on the loan.     In March 1987 the lender filed       a loss claim with FmHA
    for $42,286,    and in May 1987 FmHA paid the lender $38,409,
    including   accrued interest    until  date of payment, to honor its
    go-percent   guarantee.
           We identified  several problems with this guaranteed       loan.
    First,   the loan guarantee   request probably     should not have been
    approved because sufficient      assets, including    cash and savings,
                                             29
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APPENDIX II                                                             APPENDIX II

were available      to finance the farming operation        without a loan
guarantee.      Second, one of the loan's purposes--payment         of the
borrower's     son's debts--is     not a permissible    loan purpose under
FmHA's regulations.         Third,  accepting  crops as the only collateral
without    crop insurance      and when over $200,000 in unencumbered
security     was available    proved to be a costly     mistake because FmHA
paid the lender a loss claim of over $38,000.              Finally, until     our
inquiry    there was no evidence that either         FmHA or the lender
pursued recovery       of this $38,000 from the borrower despite          the
apparent existence        of ample assets on which to base a recovery.
Case Study    B
       In April   and May 1985 a lender obtained         two guaranteed       loans
for an existing      borrower,  a l-year   operating     loan for $95,000 and a
farm ownership loan for $275,000.          The operating      loan, secured by
1985 crops and guaranteed       at 50 percent,     was to be used for rent,
crop production      expenses, and the purchase of feeder pigs.               The
farm ownership     loan, guaranteed     at 90 percent,      was to cover
refinancing     of past operating    losses and capital       expenditures.         The
farm ownership     loan was secured by a third        lien position       on 400
acres of land and machinery.         The lender agreed to write           off
$30,000 of the borrower's       debt to help ensure survival           and obtain
the farm ownership loan guarantee.          The farm ownership         loan
guarantee was approved by the FmHA state office              because the loan
amount exceeded the county supervisor's           approval    authority.
      In September 1985 the lender sold the farm ownership             loan on
the secondary market.        By January 1986 the borrower was in default
on both loans, and the lender gave FmHA notice          of default    and
proposed liquidation      action.    FmHA approved the liquidation        of the
loan accounts in April       1986.   In June 1986 the lender advised FmHA
that other lenders had claims of $778,000 against             the 400 acres of
land and that it was unlikely        there would be any equity      to protect
on their   lien.    The lender obtained      sufficient funds from the
borrower to pay the balance due on the operating            loan but filed     a
loss claim for the outstanding         balance of $234,290 on the
guaranteed    farm ownership loan.       The guaranteed   loss amount was
$210,861.
       In reviewing  the case file,   the county supervisor    found
several   problems that resulted    in a recommendation   against   loss
payment because of lender misrepresentation.        Among these problems
were the following:
      --   The borrower made a major change in his farming operation
           between the time of loan application       and loan closing   that
           was not reported    to FmHA, nor was revised     financial  data
           submitted  to reflect   the new operation.
                                        30
.


    APPENDIX II                                                               APPENDIX II


          VW
               An after-the-fact        June 1986 lender submission          of financial
               information     on the     revised    farm operation,     according    to the
               county supervisor,         overstated     the projected    income and the
               farmer's    capacity     to operate at the level        indicated.
               The lender omitted     from the loan application       a Federal Land
               Bank debt of $51,000 against      the land, resulting      in
               significantly   overstating    the collateral    available    to
               secure the third    lien position    on the farm ownership       loan
               guarantee.
          --
               The land value shown in the borrower's           January 1985
               financial  statement   was significantly        higher than that
               shown just prior to the liquidation          decision    in December
               1985 ($936,600 versus $550,000),          causing the county
               supervisor  to question    the reliability       of the lender's
               appraisal  submitted   with the loan guarantee         request.
           In countering    the county supervisor's      recommendation,     the
    lender maintained     that the change in operation        had been discussed
    with an FmHA state official,        and this state official       said that no
    new cash flow projection        or amendment to the application        was
    needed.     The state official,     however, could not recall        such a
    conversation.      The county supervisor     maintained    that,   had he been
    informed    of the change in operation      and aware of the additional
    $51,000 lien against       the farm, the loan guarantee       request may have
    been denied.
            The dispute  over the loss claim continued     for about 2 years
    during which time interest      continued    to accrue on the outstanding
    balance of the farm ownership loan.          Another complicating    factor
    was that the farm ownership loan note had been sold in the
    secondary market,      and the holder was demanding the payments that
    the lender was supposed to collect        and forward under the servicing
    agreement.      On June 23, 1987, the lender acting     on behalf of FmHA
    notified    the holder to surrender     to FmHA the guaranteed    part of the
    loan and advised the holder to contact         the FmHA county office      to
    arrange for loss payment.       On June 25, 1987, the holder demanded
    that the lender repurchase      the unpaid guaranteed     portion  of the
    loan.     The lender refused this request and again advised the holder
    to demand payment of the guarantee        from FmHA.
          According  to a state official,   FmHA           submitted    the required
    paperwork for payment of a loss claim of               about $245,200 on May 13,
    1988.   However, at the time of our review,               FmHA apparently     still
    had a dispute   with the lender over $6,000             that it believed      the
    lender should pay FmHA. On June 2, 1988,                FmHA finally    paid the
    holder $247,735 to settle    the loss claim.

      w                                       31
.


    APPENDIX II                                                               APPENDIX II


           This case study illustrates            several program problems,
    including    questionable      loan approval,        possible   misrepresentation,
    questionable    collection       efforts,     and an untimely      loan loss payment.
    The questionable      loan approval        and other subsequent events resulted
    in a loss to FmHA of over $200,000, and, in not settling                     this loss
    claim promptly,      FmHA incurred        additional     losses of about $40,000
    because of interest        accrual.
    Case Studv     C
           This borrower received          two operating   loans that FmHA
    guaranteed      at 90 percent in May and June 1986--a $267,580 line of
    credit    for production        expenses and a $78,900 loan note guarantee       to
    refinance     three pieces of equipment.           The line of credit  was
    secured by a crop lien on soybeans, milo,              and cotton to be planted
    on 2,756 acres.           The loan note was secured by five pieces of
    equipment,     which had an estimated        value of $63,600 according     to the
    borrower's      financial     statement.    The maturity    date on the line of
    credit    was December 1, 1986.
          The borrower's     financial     statement    showed total  assets of
    $335,200 and total     liabilities      of $754,667,     for a negative    net
    worth of $419,467.       At the time of loan application,         the borrower
    had nine outstanding       direct   loans from FmHA with a total        loan
    amount of about $345,000.          Four of the loans were delinquent         but
    were rescheduled     and brought current         in order to approve the loan
    guarantees.
           In August 1987 the lender requested              in a letter    to the county
    supervisor      that FmHA pay its 90-;percent guarantee             on the line-of-
    credit     production       loan.    The lender advised FmHA that the borrower
    had paid a total         of $208,423 of the $267,272 advanced under the
    line of credit,         but the lender had advanced the borrower an
    additional      $12,674 to cover certain         harvesting    expenses, resulting
    in a principal        balance shown by FmHA of $71,431 (although             the net
    amount would appear to be $71,523).               With accrued interest        on the
    outstanding       principal       remaining,  the amount of loss claim on the
    line of credit        was $74,090, and FmHA paid the lender $66,681 to
    honor the guarantee.
            From the borrower's  loan file,   the lender's    letters          to FmHA,
    and discussions     with the loan officer    and FmHA officials,             we
    identified     the following problems with this case.
          --   The loan file      contained   no county committee      certification
               of loan eligibility        and no loan evaluation      form.


                                             32
APPENDIX II                                                                  APPENDIX II

       --   The borrower was technically         insolvent      with a negative    net
            worth of over $400,000 and had a series of FmHA direct
            loans,   some of which required        rescheduling      prior to
            approval   of the loan guarantees,         indicating     that approving
            an operating    loan guarantee with crops as the only security
            at 90 percent was highly      risky.
       --   The lender released      $12,674 of crop proceeds to the
            borrower to cover certain       harvesting    expenses without
            obtaining   the required    FmHA approval     for making the advance
            and, contrary   to FmHA regulations,       included   this advance in
            the loss claim.     FmHA included     the advance in settlement    of
            the loss claim,   which resulted       in FmHAls paying a loss that
            exceeded 90 percent of the unpaid balance of the loan.
       --   The lender did not provide     FmHA a notice   of default or a
            liquidation  plan prior    to submitting  a loss claim about 8
            months after  the maturity    date of the line-of-credit
            guarantee.
       According     to the lender and FmHA officials,               the borrower
continued    to farm in 1987 despite          the liquidation          of the line-of-
credit   guarantee     and FmHA's payment of a loss claim to the lender.
The borrower     still    experienced     financial     problems,       however, as
demonstrated     by the fact the he made no payments on his FmHA direct
loans or on the guaranteed          portion     of the line-of-credit          loan.    In
view of the borrower's         past and continuing         financial      problems,    we
asked FmHA state officials          of their     rationale     for guaranteeing
loans at 90 percent to this borrower.                 Their response follows.
       UOur policy        is to allow the maximum guarantee        in cases
       involving      financial      statements   such as that produced by the
       borrower provided          the security    value and repayment ability   are
       realistically         projected    as adequate.   Cases in this category
       are often salvable           and lenders would not make loans to this
       type client        without    a guarantee as additional    security.
       However, in cases projecting             more than adequate security   and
       other unencumbered assets with very marginal              repayment
       ability,      our policy      is to grant less than a maximum guarantee
       because the lender's            exposure is less and the government's
       protection       from losses are needed to a much lesser degree."
        This case study illustrates      how loan losses can result         from
inadequate     (1) evaluation   of a borrower's      financial   condition     prior
to approving     a loan guarantee request,      particularly     the assessment
of collateral     backing the loan and the determination           of the
percentage    of guarantee    and (2) monitoring       of a lender's    servicing
activities,     particularly   approving   lender advances to borrowers           and

                                           33
   Q
APPENDIX II                                                           APPENDIX II

requiring     proper and timely   submission   of default   notices     and
liquidation      plans.




                                      34
APPENDIX III                                                                 APPENDIX III

                       OF FmHA BAD FAITH BORROWERSWHO HAVE RECEIVED
                                        RJX TO RECEIVE BENEFITS, UNDER
                  pp
         In our report entitled           Parmers
                                            *       Home Administration:            Loan
Se~him          Benefits     for Bad Faeh B rr owers (GAO/RCED-90-77FS;
Nov. 29, 1989) we identified               sever:1 case examples in one FmHA
county office         of bad faith       borrowers1    who had benefited,         or will   be
eligible      to receive       benefits,      under provisions       of the Agricultural
Credit Act.         The examples, which demonstrate              the reasons for FmHA
bad faith       determinations        and the benefits       available     to bad faith
borrowers,       are based on a review of delinquent                borrowers'      files  and
discussions       with the FmHA county supervisor.                 The examples were
developed during our ongoing debt restructuring                       work for the
Chairman, Senate Committee on Agriculture,                    Nutrition,     and Forestry.
These examples do not include                 all bad faith,     or potential       bad
faith,     borrowers      who came to our attention           during our review.          For
example, the FmHA county supervisor                 in another office         identified    11
borrowers      who may have acted in bad faith,               but he did not pursue a
formal bad faith          opinion     from the USDA Office         of General Counsel to
deny their       restructuring        request since they qualified            for net
recovery     value buyout and not for restructuring.
  CKGROUND
       The Agricultural        Credit Act of 1987 directed           FmHA to modify
the debts of its borrowers           who were 180 days or more delinquent
through the use of a series of primary               loan servicing,      or
restructuring,        options   so that loan losses on farmer program loans
are avoided and borrowers           are able to continue         farming or ranching
operations.        The restructuring     options     include     loan consolidation,
rescheduling,       or reamortization:      interest      rate reduction;     deferral,
set aside,      or write down of outstanding           principal     and accumulated
interest;      or any combination      of these actions.           The act contains
various     conditions     that delinquent     borrowers      must meet to qualify
for restructuring.
       Borrowers who do       not qualify      for restructuring are eligible              to
buy out of their     FmHA     debt.      The buyout amount is based on an
adjusted    value of the      collateral     that secures their  debt and is
referred    to as the net      recovery value.


lWe use the phrases        "borrowers   who act in bad faith"         and "bad faith
borrowers"  to refer       to those FmHA delinquent         borrowers     whose
delinquency   was due      to circumstances      within   their   control    or who
did not act in good        faith   in connection     with the terms of their
FmBA loans.
                                            35
   u
APPENDIX III                                                             APPENDIX III

         In addition,     borrowers   who are not restructured,           and those who
do not buy out of their          debt at the net recovery value,             are subject
to foreclosure        by FmHA on the collateral        securing    their     loans.   The
Agricultural       Credit Act and the Food Security           Act of 1985 provide
preservation       loan servicing     options    to borrowers     whose real
property     is foreclosed.        These options    are the right       to purchase or
lease the farmland back from FmBA and the right                 to purchase their
farm homestead.         FmHA delinquent      borrowers who act in bad faith           are
eligible     for net recovery value buyout consideration                as well as
preservation       benefits    when they do not buy out of their             debt and
FmBA forecloses        on the real estate property         securing     their    FmHA
loans.
BORROWERSRECEIVING NET RECOVERY
VALUE BUYOUT BENEFIT
       Examde A      The FmHA county office        determined    that this
borrower was ineligible       for loan restructuring        because he did not
act in good faith      in connection   with his loan agreements.           The
county office     supervisor   told us the borrower sold some farm
equipment that was FmHA security         property.      Also, the borrower
subsequently     had another family    member, who is also an FmHA
borrower,    sell some additional     farm equipment.        In addition,     a
regional   attorney    in USDA's Office     of General Counsel wrote that
the borrower had converted        numerous items of FmHA security
property.     The sales of properties       were made without       county office
approval.     None of the proceeds from the sales were applied              to the
borrower's    FmHA debt.
        The borrower appealed the county office's         decision.    The
appeals hearing officer          decided that while the borrower was
ineligible      for restructuring,       he was eligible for net recovery
value buyout since the net recovery value exceeded the present
value of the restructured           loans when the county office    ran the debt
restructuring       software    program-- Debt and Loan Restructuring     System
 (referred    to by FmHA as DALR$).         At the time of our review,    the
borrower had not responded to the county office's             net recovery
value buyout offer.
       According   to the DALR$ printout,         this borrower owed FmHA
$625,952 in outstanding         principal    and unpaid interest.        The debt
covered six natural       disaster     emergency loans and two operating
loans, valued at a total         of $602,560 and $23,392, respectively.
The net recovery      value was $87,277.        In addition,     the appeals
hearing officer      wrote that the borrower          is also required    to pay
FmHA $30,000 for the value of other property                not accounted for in
the appraisal     of the loan security.         The total     buyout amount, which
covers real estate and chattels,           is $117,277.       The borrower will
receive    a $508,675 write-off        if he pays the buyout amount.
                                         36
   w
APPENDIX III                                                          APPENDIX III


       In addition, this borrower will  be eligible for preservation
benefits   if he does not pay the buyout amount and FmHA forecloses
on his property.    For example, the market value of his 311-acre
farm, which could be acquired through the leaseback/buyback       option,
is $44,000.
        -*          The FmHA county office        determined    that this
borrower was ineligible       for loan restructuring       because he did not
act in good faith     in connection     with his loan agreements.           The
county office    supervisor     told us the borrower sold equipment that
was FmHA security     property.      In addition,   a regional     attorney      in
USDA's Office    of General Counsel wrote that the borrower had
converted   FmHA security     property   he owned and other property           that
was pledged as security       for FmHA loans by another member of his
family.    The sales of properties       were made without      county office
approval.     None of the proceeds from the sales were applied               to the
borrowerVs    FmHA debt.
        The borrower appealed the county office's           decision.    The
appeals hearing officer         decided that while the borrower was
ineligible     for restructuring,      he was eligible     for net recovery
value buyout since the net recovery value exceeded the present
value of the restructured         loans when the county office        ran the
DALRS program.      At the time of our review,         the borrower had not
responded to the county office's          net recovery value buyout offer.
        According    to the DALR$ printout,        this borrower owed FmHA
$249,811 in outstanding           principal   and unpaid interest.       The debt
covered two operating          loans (totaling     $110,189),    one natural
disaster     emergency loan ($81,580),          one rural housing loan
($34,872),      and  one   farm   ownership   loan   ($23,170).    The net recovery
value, which covers real estate and chattels,                 was $164,353.   The
borrower will       receive    an $85,458 write-off       if he pays the buyout
amount.
       In addition, this borrower will  be eligible for preservation
benefits   if he does not pay the buyout amount and FmHA forecloses
on his property.    For example, the market value of his 636-acre
farm, which could be acquired through the leaseback/buyback       option,
is $153,000.
       Examgle.      The FmHA county office       determined    that this
borrower was ineligible       for loan restructuring       because the
delinquency     was due to circumstances     within    his control.     The
county office     supervisor   told us the borrower had previously
applied   to FmHA for loans to buy additional          land and equipment.
The county office      did not approve the applications         and advised     the
borrower that the equipment was excessive           to his needs.      For
                                        37
   'v
APPENDIX III                                                        APPENDIX III

example,  the county office   determined      that the equipment purchases
resulted  in the borrower having $268 per acre worth of equipment,
while the state average was $50 per acre.          Subsequently,   the
borrower made the purchases with loans from other lenders.             The
borrower repaid the other lenders,       including    making advance
principal   payments; however, he became delinquent         on his FmHA debt.
        The borrower appealed the county office's          decision.      The
appeals hearing officer         decided that while the borrower was
ineligible     for restructuring       because of his excessive      machinery
purchases,    he was eligible       for net recovery value buyout since he
did not have a feasible plan of operations,            including     a positive
cash flow, and the net recovery value exceeded the present value of
the restructured      loans when the county office        ran the DALR$
program.     At the time of our review,        the borrower had not responded
to the county office's         net recovery value buyout offer.
      According to the DALR$ printout,          this borrower owed FmHA
$186,616 in outstanding     principal     and unpaid interest.       The debt
covered four natural    disaster      emergency loans and two farm
ownership loans, valued at a total          of $117,716 and $68,900,
respectively.   The net recovery value, which covers real estate,
was $134,815.   The borrower will        receive    a $51,801 write-off   if he
pays the buyout amount.
       This borrower will    be eligible  for preservation    benefits if he
does not pay the buyout amount and FmHA forecloses          on his
property.     However, it will   be to his advantage to pay the buyout
amount if he wants to keep his farm because the market value of
his real estate exceeds his outstanding        FmHA debt.    He would have
to pay the amount of his outstanding       debt to exercise    the
leaseback/buyback     option since the market value of his 1,174-acre
farm is $188,000.
       Examgle*      The FmHA county office       determined    that this
borrower was ineligible      for loan restructuring        because the
delinquency    was due to circumstances      within    his control.     According
to information     in the county office     records,     in 1985 the borrower
abandoned the property     that had been pledged as security           for the
FmHA loans, made no effort      to maintain     the property,      and became
delinquent    on his FmHA debt.
         The county office    determined   that this borrower was eligible
for net recovery value buyout since he did not have a feasible             plan
of operations,      including   a positive    cash flow, and the net recovery
value exceeded the present value of the restructured            loans.  At the
time of our review,        the borrower had not responded to the county
office's     net recovery value buyout offer.

                                       38
    w
APPENDIX III                                                            APPENDIX III

      According   to the DALR$ printout,     this borrower owed FmHA
$151,605 in outstanding    principal     and unpaid interest.     The debt
covered one farm ownership loan and one natural         disaster   emergency
loan, valued at $146,458 and $5,147, respectively.            The net
recovery value, which covers real estate, was $12,515.            The
borrower will   receive  a $139,090 write-off      if he pays the buyout
amount.
       This borrower will be eligible  for preservation   benefits  if he
does not pay the buyout amount and FmHA forecloses      on his
property.    However, it will be to his advantage to pay the buyout
amount if he wants to keep his farm because the net recovery       value
buyout amount is less than the $23,000 market value of his 147-acre
farm.
BQRROW
       Examnle*      The FmHA county office          determined    that this
borrower was ineligible        for loan restructuring         because the
delinquency    was due to circumstances         within     his control.      The
county office     supervisor    told us this borrower's          application     for
restructuring     showed he had resources         available    that could have
been used to make his FmHA loan payments.                According     to information
in the county office       records,   the borrower had $83,400 in available
income and other assets that were not essential                to his farming
operation,    such as recreational       vehicles,      while his delinquency        was
$43,106.
        The county office       determined      that this borrower was not
eligible     for net recovery value buyout since the DALR$ program
showed he would have had a feasible                plan of operations   with
restructuring,      including      a positive      cash flow.   The borrower would
have been offered        restructuring       if he had not caused the
delinquency.      At the time of our review,            the borrower had appealed
the county office's         decision;    an appeal decision       had not been made.
         According   to the DALR$ printout,         this borrower owed FmHA
$279,890 in outstanding           principal    and unpaid interest.          The debt
covered three natural          disaster     emergency loans.        He will   be
eligible      for preservation       benefits   if FmHA forecloses         on his
property.        The market value of his 1,840-acre            farm, which he could
reacquire      through the leaseback/buyback           option,    is $201,000.
       -=          The FmHA county office      determined    that this
borrower was ineligible    for loan restructuring       because the
delinquency   was due to circumstances    within    his control.     The
county office   supervisor  told us this borrower rents his farm to
his son and claims that the son has not made any rental           payments.
However, the borrower's    restructuring   application      shows rental
APPENDIX III                                                              APPENDIX III

income and the county office      has documented           that the borrower has
been current     on payments to other creditors,             including advance
principal    reduction  payments.
        The county office       determined      that this borrower was not
eligible     for net recovery value buyout since the DALR$ program
showed he would have had a feasible                plan of operations   with
restructuring,      including      a positive      cash flow.   The borrower would
have been offered        restructuring       if he had not caused the
delinquency.      At the time of our review,            the borrower had appealed
the county office's         decision:    an appeal decision       had not been made.
        According   to the DALR$ printout,         this borrower owed FmHA
$650,185 in outstanding          principal    and unpaid interest.           The debt
covered three natural         disaster     emergency loans.        He will    be
eligible     for preservation       benefits   if FmHA forecloses          on his
property.       The market value of his 3,140-acre            farm, which he could
reacquire     through the leaseback/buyback           option,    is $470,000.      A
prior    lien in the amount of $224,906 exists              on the borrower's      farm
real estate.
            de G. The FmHA county office                determined    that this
borrower was ineligible         for loan restructuring           because the
delinquency     was due to circumstances           within    his control.     The
county office     supervisor      told us this borrower had resources
available    that could have been applied             to his delinquent      debt and
that he had paid other lenders more than his loan agreements with
them required     him to pay.        Specifically,       documentation     in the
county office     files     showed the borrower had $66,400 in income that
he could have applied,         but did not apply, to his FmHA debt.               Also,
the borrower repaid two other lenders,                including    advanced principal
payments to both, and became delinquent                 on his FmHA loans.       For
example, he repaid the two commercial               lenders a total       of $74,907;
his loans called        for payments totaling         $24,320.
        The county office      determined      that this borrower was not
eligible     for net recovery value buyout since the DALR$ program
showed he would have had a feasible               plan of operations   with
restructuring,      including     a positive      cash flow.   The borrower would
have been offered       restructuring       if he had not caused the
delinquency.      At the time of our review,           the borrower had not
appealed the county office's           decision.
      According   to the DALR$ printout,      this borrower owed FmHA
$371,604 in outstanding      principal   and unpaid interest.      The debt
covered two natural     disaster    emergency loans and one operating
loan, valued at a total       of $149,723 and $221,881,    respectively.    He
will  be eligible   for preservation     benefits  if FmHA forecloses    on
his property.     The market value of his 1,480-acre       farm, which he
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APPENDIX III                                                              APPENDIX III

could    reacquire  through the leaseback/buyback            option,  is $207,000.
A prior     lien in the amount of $82,246 exists            on the borrower@s farm
real    estate.
        -*              The FmHA county office       determined        that this
borrower was ineligible          for loan restructuring          because the
delinquency     was due to circumstances        within       his control.       The
county office      supervisor     told us this borrower's           application     for
restructuring      showed that he had resources            available      that could
have been used to pay his delinquent            amount.         Specifically,
documentation      the borrower submitted       to the county office            showed he
had $91,284 in his checking account when he applied                      for
restructuring;       he was $76,269 past due on his scheduled FmHA
payments.      Also, the borrower may have converted                some FmHA security
property.      A letter    in the county office        files     states that the
borrower sold cattle,         which was security       for an FM-IA loan, without
county office      approval    and did not pay any of the sales proceeds to
FlllHA.
        The county office       determined      that this borrower was not
eligible     for net recovery value buyout since the DALR$ program
showed he would have had a feasible                plan of operations   with
restructuring,      including      a positive      cash flow.   The borrower would
have been offered        restructuring       if he had not caused the
delinquency.      The borrower appealed the county office's              decision:
an appeals officer        upheld the county office's          decision.
       According    to the DALR$ printout,         this borrower owed FmHA
$348,223 in outstanding        principal     and unpaid interest.           The debt
covered two farm ownership loans (totaling                 $69,631),     one operating
loan ($242,742),        and one natural     disaster     emergency loan ($35,850).
He will   be eligible      for preservation       benefits     if FmHA forecloses       on
his property.      The market value of his 1,163-acre                farm, which he
could reacquire       through the leaseback/buyback            option,    is $151,000.
A prior    lien in the amount of $9,000 exists              on the borrower's       farm
real estate.




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