oversight

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

Published by the Government Accountability Office on 1990-02-08.

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

                            United States General Accounting   Ofllce   14057.3
                            Testimony
1

                                                                                             I
                                                                                     140573

    For Release on           Issues Surrounding the Role and Mission
    Delivery                 of the Farmers Home Administration's
    Expected at              Farm Loan Programs
    2:00 p.m. EST
    February  8, 1990




                             Statement   of
                             John W. Harman, Director
                             Food and Agriculture    Issues
                             Resources,   Community, and Economic
                             Development    Division
                             Before the
                             Subcommittee  on Agricultural    Credit
                             Senate Committee on Agriculture,
                               Nutrition,  and Forestry




     O/T-RITED - 90 - 2'f
                                            /
                                                         Y                   ' GAO   Form   160(1%/m)
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I                   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        (F'mHA) farm loan
                    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 the use of FmHA's fiscal year 1988 loan funds
                    today.    Appendix I provides information    about each of the 18
                    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 FmHA's 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 F'mHAls role.   Specifically,   our work has shown
                    that:

                          -- The financial       condition   of F'mHA'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.
                      Y
      -- 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 and our
recent reports examining certain aspects of the Agricultural
Credit Act and the use of FmHA's loan funds.

       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,
how such credit       should be used, 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 F'mHA'S
FARM LOAN PORTFOLIO

     Our reports   on the financial       condition   of FmHA1s farm loan




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      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-1970s, placing the federal
      government and, ultimately       the taxpayers,     at considerable    risk.
      The deterioration      in FmHAIs farm loan portfolio       has continued
      despite the improvement in the overall          farm economy. In addition,
      our financial     audits of FmHAhave 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 FmHAls direct
      and guaranteed farm loans as of September 30, 1989.

      'Farmers Home Administration:      An Overview of Farmer Prosram Debt,
      Delinauencies,   and Loan Losses (GAO/RCED-86-57BR; Jan. 2, 1986);
      Farmers Home Administration:      Farm Prosram Debt, Delinauencies,  and
      Loan Losses as of June 30, 1987 (GAO/RCED-88-134BR; May 20, 1988);
      Financial Audit:     Farmers Home Administration's  Losses Have
      Increased Sianificantlv     (GAO/AFMD-89-20; Dec. 20, 1988); and
      Financial Audit:     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.
      2FmHA1s 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,
      unaudited,    and subject to audit adjustment at a later date.

                                           3
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   le1 : F'nHADxectF'annImnsandDel-stakrs.B3                        0. 1989
Dollaxs in Millions



Total
  bormwersd           109,389   98,225       88,575   37,120    13,133    346,442
Delinquent
 bo-d                 23,775    35,006       35,082   17,267     3,607    114‘737
Delinquent
 borrowersas
 apementof
 total                  21.7      35.6         39.6     46.5      27.5        33.1
Total ou-
  principal           $7,046    $5,229       $7,683   $3,065      $259    $23,282
outstanding
  principalowed
  by delinquent
  bolzImwers          $2,015    $1,940       $5,252   $1,818      $104    $11,130
outstanding
  principal aWed
  by delinquent
  borruwersasa
  pe?xeIkofbtal         28.6      37.1         68.4     59.3      40.2        47.8


aThese loans were authorized from 1978 to 1984; the prcqxam has not been authorized
since Sew       30, 1984.




     w

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                                                                   ,   Sew&&&e 30. 1989
      Dollars in Millions



      Total
        hod                      5,549           23,670      797         30,016
      Delinquent
       hod                        300             1,063      217          1,580
      Delinquent
       bo-as
       a percent of
                                  5.4              4.5      27.2            5.3
      ToGlloutsbn3iq
        principal                $772            $2,371     $101         $3,244
      outstanding
        principalowed
        by delinquent
        borrawers                 $44             $120       $33           $197
      outstarrling
        principalclwed
        by delinquent
        borrowersasa
        percentoftotal            5.7              5.1      32.7            6.1

      aTbiscategory includesallotherguaranteed     farmloans, suchasemergencylivestock
      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. Our January
        25,,1990, report --Financial   Audit:  Farmers Home Administration's
        Financial  Statements for 1988 and 1987--shows that the ACIF has
                                            5
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            incurred cumulative net losses of about $39.6 billion         since its
            inception,    while receiving    cumulative reimbursements for losses
            (appropriations     from the Congress) of about $&l 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 F 'mHAduring fiscal                years
            1987 and 1988 when F 'mHAincreased its allowances for loan and
            related    interest    losses by a net $10.6 billion        and $2.9 billion,
            respectively.        During 1987, F m H Ainitially     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 January 25, 1990, report shows, in fiscal             year 1988,
            F m H Areported $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.
            F m H Aalso 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 F?nHA's system of internal   accounting
            controls,   we noted material weaknesses in the loan classification
            sy&em used to estimate losses on individual     farm loans.    Changes
                                                    6
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          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) FmHA's Acquired
          Property Tracking System contained inaccurate and incomplete
          information,     (2) FmHAhas 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) FmHAhas 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 FmHA's 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.

          FmHA LOAN-MAKINGAND 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,   FmHAhas placed heavy emphasis on keeping


          4Farmers Home Administration:   Sounder Loans Would Reuuire Revised
          Loan-Makins Criteria   (GAO/RCED-89-9; Feb. 14, 1989).
                                                7
farmers in business.          In short, F'm?iAis 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        F'mHAto reinstate     the "continuation
policy@' rescinded by l?mHAin 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


                                       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 F'mHA'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.

TIME PERIOD FOR PROVIDING
CREDIT ASSISTANCE

      Our work5 has also shown that authorizing       legislation and
implementing regulations    governing FYnHA'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.

5Farmers Home Administration:   Farm Loan Proarams 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.

The
g      :          0   e so                                   I                 rams
and Number of J,oans Received     for    All   Active   Borrowers    as of
SePtember 30, 1989
       Years        Number of      Percent            Number of          Percent
     in F'mHA       borrowers      of               Jeans 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            $02.326               16.7
  Total   under 7    $22,212            57.4             333.271,             54.3
     7 to 10             16,342                          48,298                7.9
    lO+ over             74,276         3::;            231.943               37.8
  Total   over 7         90,618         42.5            280.241               45.6
Not determineda          224               .                 503                 .1
  Total              213!054        100-o                614.OE              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
servicing    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 FmHA 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 F'mHAassistance,        the borrower's    reported net worth
declined from $20,368 in 1971 to a negative $6,635 in 1986.

SHIFT FROMDIRECT TO
GUARANTEEDFARM 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
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          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        F'mHAdirect borrowers obtaining
          guaranteed loans.      Our analysis of FmHA 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-w
          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.


          6J?arne
           1      s om Admi 's                            he Shift From
          Direct to Guaranteed Farm Loans (GAO/RCED-89-86; Sept. 11, 1989).
          'This 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 FM-IA 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.

        While FmHA'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
diqect loan program.


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

CONTINUING EFFORTSTO EXAMINE
SIGNIFICANT FmHA ISSUES

      Our work on F'mHAissues is continuing.        For example, we are
examining (1) implementation      of the debt restructuring     provisions
of the Agricultural     Credit Act (report expected in the spring of
1990), (2) farm program debt, delinquencies,        and loan losses as of
June 30, 1989 (report expected in the spring of 1990), (3) controls
for identifying     and reporting  cases of fraud, waste, and abuse in
FmHA's farm loan programs, (4) the selling       price for farm inventory
properties,     and (5) FmHAls fiscal   year 1989 financial    statements.
We plan to report the results      of the last three assignments later
in 1990. In addition,      we are issuing our latest     report today on
the use of FmHA loan funds by farmer program borrowers.

      As part of our work examining the Agricultural    Credit Act, we
issued Farmers Home Administration:     Loan Servicing  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.

      FmHA determined that borrowers acted in bad faith because of
various actions,   such as (1) selling or otherwise disposing of
property securing loans without FmHA approval:     (2) repaying other


8We use the      phrases   *@borrowers who act in bad faith"    and 'Ibad 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
FrnHA loans.
                                        16
.




    lenders more than required and, at the same time, becoming
    delinquent  on F~HA 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, FmHAprovided 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 million
    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.

            The report we are issuing today9 shows how an estimated $2.2
    billion    in fiscal year 1988 FmHA loan funds were used.1°   The

    'Farmers Home Administration:  Use of Loan Funds bv Farmer Program
    Borrowers (GAO/RCED-90-95BR; Feb. 8, 1990).
    loLoan use information   is based on a randomly selected sample of
    loans which was used to estimate various loan characteristics.
    Alse, the information  is based on borrowers1 planned uses of loan
    funds and statements regarding use refer to the planned use.
                                      17
report focuses on four types of farmer program loans (direct       farm
ownership loans, direct   farm operating loans, guaranteed farm
ownership loans, and guaranteed farm operating     loans) and the
extent to which loan funds were used to refinance      farmers' existing
debts.   Also, the report contains information    on guaranteed farm
loans based on interviews    of commercial lenders who made loans that
FmHA guaranteed.

       Our analysis of the fiscal    year 1988 loans showed that
approximately     50 percent, or $1.1 billion,     was used for farm
operating expenses; 30 percent,      or $665 million,     was used to
refinance   existing   debts; and 6 percent,     or $131 million,   was used
to purchase farm property.      The remaining 14 percent,       or $310
million,   was used for a variety    of other purposes, such as
purchasing machinery, equipment, and livestock          and improving real
estate.    Our analysis also showed that $1.8 billion,         or 81 percent,
of the funds were received by existing         FmHA borrowers or borrowers
of the lenders who made loans that FmHA guaranteed.

        In the report,   we discuss how FmHA farm ownership and
operating loans are authorized           for a variety  of purposes without
prioritization      or preference     for a particular    purpose.    As a
result,      loan funds are used for any authorized        purpose if
eligibility,      repayment ability,      and security  requirements    are met.
Also, while there is no preference           in the processing of
applications,      use of funds, or the recipient       of funding,    FmHA told
us that county offices       have been advised that approved loans for
certain types of borrowers,          such as limited   resource borrowers,     may
receive funds before other types of borrowers.

      Our work showed that the level of refinancing        that occurred
in fiscal  year 1988 indicates    that lenders are using guaranteed
loans to enhance their loan security      on existing   debts rather than
to expand borrowers'  operations.      In addition,   while some
commercial lenders use the guaranteed programs for new customers,
                                      18
this use is limited.   Some commercial lenders do not make
guaranteed loans, and consequently their customers are not offered
the option of a guaranteed loan for refinancing  existing debts or
for other purposes.

       The use of loan funds is influenced       by the lender--FmHA for
direct   loans and commercial lenders for guaranteed loans.          FmHA
influences    the use of direct    loans by trying to shift new borrowers
and loans for refinancing      to guaranteed loans.     Although FmHA
approves loan guarantees,      commercial lenders decide whether or not
to seek a guarantee on loans they make. Therefore,           the use of
guaranteed loans is largely determined by commercial lenders.
Under this scenario,    farmers who are not existing       customers of
commercial lenders using guaranteed loans may be effectively
excluded from participating      in FmHA's farmer loan programs.       This
may include farmers starting       operations  or low-income farmers.

  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
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
dir&t   and guaranteed farm loans that assess an applicant's
                                      19
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 FmHAls mandate to serve as a temporary source
of credit while, at the same time, fulfilling          its role as a lender
of last resort.      The report we are issuing today also raises
questions as to whether limited        federal assistance   should be
directed     to (1) certain types of borrowers,     such as new or limited
resource operators,      or (2) certain credit purposes, such as
purchasing farm property or funding operating          expenses.

       In addition,      shifting       funding from direct to guaranteed farm
loans will not solve FmHA's 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
loan borrowers continue to request direct                   loan financing    under
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:



                                          20
            --
                 A re th e c o n tin u a tio n a n d d e b t restru c tu r i n g
                 policies th e b e s t m e a n s o f assisting a l r e a d y
                 heavily i n d e b te d fa r m e r s ?

                 A t w h a t p o i n t w ill th e cost o f providing c o n tin u o u s credit
                 assistance to financially                m a r g i n a l farmers--including  th e
                 cost o f l o a n losses, interest rate subsidies, a n d
                 a d m inistrative        expenses-- o u tw e i g h th e b e n e fits to th e
                 g o v e r n m e n t, rural c o m m u n i tie s , a n d th e fa r m e r ?

        --
                 If F m H Ais to serve a s a te m p o r a r y source o f credit,                      should
                 specific criteria            b e d e v e l o p e d - - s u c h a s tim e lim its a n d /or
                 m e a s u r a b l e financial    i m p r o v e m e n t--to d e c i d e w h e n a b o r r o w e r
                 h a s h a d a s u fficie n t     o p p o r tu n i ty to b e c o m e financially
                 s o u n d a n d b e in a positio n to g r a d u a te to n o n - F m H Asources
                 o f credit?

       --
                 For th o s e b o r r o w e r s w h o , a fter a p e r i o d o f tim e , s h o w
                 little         or n o p r o s p e c t for s u c c e e d i n g , w o u ld it b e m o r e
                 a p p r o p r i a te to p r o v i d e o th e r fo r m s o f assistance, s u c h a s
                 j o b tra i n i n g ,    to a i d in possible transitio n                to o th e r
                 e m p l o y m e n t o p p o r tu n i tie s ?

       --
                 ‘In a p e r i o d o f b u d g e tary pressures, s h o u l d F m H A
                 consider th e e x te n t to w h ich assistance c o n tin u e s
                 to b e u s e d b y F m H Aa n d commercial l e n d e r existing
                 custo m e r s versus n e w custo m e r s a n d th e level to
                 w h ich s u c h assistance is u s e d to refin a n c e existing
                 d e b ts versus n e w credit p u r c h a s e s ?

         In th e fin a l analysis, decisions c o n c e r n i n g F m H A 's fu tu r e role
a n d m ission w ill require congressional j u d g m e n ts a b o u t c o m p l e x , a n d
s o m e tim e s c o m p e tin g , o b j e c tive s . W e believe th e w o r k w e h a v e
c o m p l e te d to d a te a n d th e w o r k th a t is u n d e r w a y w ill a i d th e
    Y

                                                       21
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.




                                 22
APPENDIX I                                                            APPENDIX I

       -VIEW      OF RECENTGAO WPORTS HI-GHTING              FmHA ISSUES
        Since December 1985, GAO has issued 18 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 FmHA's portion of that total,         (2) total number
of loans and borrowers and loan amounts for each of FmHAIs 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.         FnHA
responded to these credit requests by substantially          increasing    its
loan portfolio.        At that tine, 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 Proaram Borrowers_ (GAO/RCED-86-62BR; Jan. 2, 1986)
        The Chairman, Senate Committee on Agriculture,         Nutrition,     and
Forestry,     expressed concern over the American farmers' growing
reliance     on the resources of FnHA. 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 Program Debt. Delinouencies.
and Loan Losses (GAO/RCED-86057BR; Jan. 2, 1986) responded to his
request.
     At the tine that this work was performed, FmHA had a
computerized data base, the Farmer Program Management Information

   *                                  23
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.         FARM+
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 FARMSdid
have some limitations,      at that time it was the most complete source
of financial    information   available   on FmHA 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.
Farmers Home Administration:   Debt Restru turina Activiti   Vurinq
the 1984-85 Farm Credit Crisis   (CAO/RCED~86=148BR: May ;zy 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.

   P                                     24
APPENDIX I                                                            APPENDIX I


                                                                             6)

       This   report is addressed to five congressional    requesters  and
discusses     the large number of farms that FmHA had acquired as a
result   of   loan foreclosures   and other actions.   The report also
discusses     FmI-iA'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 FmHA's selling       efforts
for inventory    property,     reducing the time that reserved properties
are held for sale to only FmBA-eligible           farmers, and prohibiting
farmers from growing surplus crops on FmBA-leased properties.
Farmers Home Administration:   Loan-Servicins Efforts  Focus on
Continuallv Delinauent Borrowers    (GAO/RCED-87-13BR; 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 FmBA 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 FmBA 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 FmBA loans.


                                      25
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.
Farmers Borne &Q&nistration : Information   on Auricultu al Credit
Provided to Indians on 14 Resenratim      (GAOIRCED-87-7tBR: 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.
Farmers Home Administration: Problems and Issues Facinq the
Fmerqencv Loan Proqram (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.




                                       26
APPENDIX I                                                            APPENDIX I


   an Lo@es as of June 30. 1987            (GAO/RCED-880134BRt 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,    mers      Home Administration. . An Overv iew of
Farmer Proaram Debt, Delinguencies.       and Loan Lossess (GAO/RCED-860
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 FxnHA's 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.
Farmers Home Administration:   Farm Loan Prourams Have Become a
Continuous 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.
Financial    Audit:     Farmers Home Administration's  Losses Have
Tncreased    Sianificantly      (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.


                                      27
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 FmHA 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 FmHA'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.
Fg    S   oe     dm       l   at'on:                            ire     evised
man-Makina     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
Interest Rate Reduction Procrram (GAO/RCED-89-126BR; 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
FmBA direct       loans, and (4) compliance issues identified     by USDA's
Office of Inspector        General.




                                       28
APPENDIX I                                                                APPENDIX I




       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
@1lease/buy-back,11 (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.
ZnfOXTIIatiOn Wanaaement:       Issues   ImDortant to Farmers Home
A3 'n's      '0                                 (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 FmHAls 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

   u                                     29
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.



       This report is addressed to the Chairman, Senate Committee on
Agriculture,     Nutrition,     and Forestry,  and provides information     on
FmIiA'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.
Farmers Home Administration:  Loan Senricinq         Benefits   for    Bad Faith
Borrowers (GAO/RCED-90077FS; 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.
F'na
b     cial   ud't:
Statements   for 1988 and 1987 (GAO/AFMD-90-37: Jan.        25, 1990)
       This report is addressed to the Secretary of Agriculture    and'
presents the results       of our examination of FmHAIs 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.
Farmers Home Administration:  Use of Lo n Funds bv Farmer Prosram
Borrowers (GAO/RCED-90-95BR; Feb. 8, 19tO)
       This report is addressed to the Chairman, Senate Committee on
Agriculture,     Nutrition,    and Forestry,  and provides information  on
the use of four major types of farmer program loans during fiscal
year 1988 (direct        farm ownership loans, direct   farm operating
loans, guaranteed farm ownership loans, and guaranteed farm
operating    loans), the extent to which loan funds were used to
refinance    farmers' existing     debts, and lenders'   views on using FmHA
                                     30
APPENDIX I                                                         APPENDIX I

loan guarantees.     The message of this   report   is discussed    in the
overall testimony.




                                    31
APPENDIX II                                                         APPENDIX II

        CASE   STUDIES OF GUARANTEED
                                   FARM LOAN PROGRAMBORROWERS
                     ;
       In our report entitled -Home.        AQ&nistration:
    locations  of the Shift From Direct  to Guarantee d Farm Loans
    O;RCED-89-86; Sept. 11 1989) we provide three case studies on
borrowers who had defaultAd on FmHA-guaranteed loans to illustrate
many of the problems we identified.     The three case studies from
that report follow.
Case Studv A
      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,

   w                                  32
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 $38,000 from the borrower despite the
apparent existence of ample assets on which to base a recovery.
Case Studv l$
       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 borrowerls      debt to help ensure survival      and obtain
the farm ownership loan guarantee.        The farm ownership loan
guarantee was approved by the F'mHAstate 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.
                                    33
APPENDIX II                                                           APPENDIX II


        --   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
             fanner'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.

   y1                                      34
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 go-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.


                                    35
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 FmHA's 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.
        VIOur 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

                                        36
    *
APPENDIX II                                                           APPENDIX II

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




                                     37
APPENDIX III                                                         APPENDIX III

                                               S WHOHAVE RECEIVED
                         L BE ELIGIBLE TO RECEIVE BENEFITS. UNDER
                 PROVISIONS OF THE AGBEI;;YI;TJITRAL
                                                  CWIT ACT

       * In ourBenefits
Servicinu
                 report entitled     Farmers Home Administratio
                         f or Bad Faith Borrowers (GA/RCED-9::77FS;
                                                                       . Loan
Nov. 29, 1989) we identified          several 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.
BACKGROUNQ
       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   llborrowers who act in bad faith"    and "bad faith
borrowers11    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.

   '0                                  38
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 F'mHAand 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
FmHA forecloses       on the real estate property securing their FmHA
loans.
BQRROWERS
        RECEIVING NET RECOVERY
UUR BUYOUTBENEFIT
      Example 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.
                                     39
    u
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 3110acre
farm, which could be acquired through the leaseback/buyback     option,
is $44,000.
        Ex mle   B    The FmHA county office       determined that this
borrowe: was &eligible         for loan restructuring      because he did not
act in good faith in connection with his loan agreements.                 The
county office      supervisor    told us the borrower sold equipment that
was FmHA security      property.      In addition,   a regional   attorney    in
USDA's Office of General Counsel wrote that the borrower had
converted FmHA security        property he owned and other property that
was pledged as security        for FmHA loans by another member of his
family.     The sales of properties       were made without county office
approval.      None of the proceeds from the sales were applied to the
borrower's     FmHA debt.
       The borrower appealed the county office's      decision.    The
appeals hearing officer      decided that while the borrower was
ineligible   for restructuring,      he was eligible for net recovery
value buyout since the net recovery value exceeded the present
value of the restructured       loans when the county office    ran the
DALRS program.     At the time of our review, the borrower had not
responded to the county office's        net recovery value buyout offer.
        According to the DALR$ 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.
      &camnle C 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

   Y                                  40
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.
      JZxamDle D. 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.
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 1470acre
farm.
BORROWERS
        RECEIVING PRESERVATIONBENEFIT
          amde   E    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.
      Examnle F. 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

   P
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.
          a de G . The FmHA county office        determined that this
borrowermwas 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
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.
       Examlsle*        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 $76,269 past due on his scheduled FmHA
payments.      Also, the borrower may have converted some FmHA security
property.      A letter    in the county office     files states that the
borrower sold cattle,        which was security     for an FmHA loan, without
county office      approval and did not pay any of the sales proceeds to
FmHA.
        The county office    determined that this borrower was not
eligible     for net recovery value buyout since the DALR$ 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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