Farm Loans: Information on the Status of USDA's Portfolio

Published by the Government Accountability Office on 1997-02-21.

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

                    United States General Accounting Office

GAO                 Testimony
                    Before the Subcommittee on Forestry, Resource
                    Conservation, and Research, Committee on Agriculture,
                    House of Representatives

For Release
on Delivery
Expected at
                    FARM LOANS
9 a.m. CST
February 21, 1997
                    Information on the Status of
                    USDA’s Portfolio
                    Statement for the Record by
                    Robert A. Robinson, Director,
                    Food and Agriculture Issues,
                    Resources, Community, and Economic
                    Development Division

    Mr. Chairman and Members of the Subcommittee:

    Thank you for inviting us to provide this statement for the record as part
    of the Subcommittee’s oversight hearing on the farm loan programs
    administered by the U.S. Department of Agriculture’s (USDA) Farm Service
    Agency (FSA). You asked us to (1) summarize our January 1997 report,1
    which updated prior reports on the financial condition of FSA’s farm loan
    portfolio, and (2) discuss changes to the farm loan programs that were
    mandated by the Federal Agriculture Improvement and Reform (FAIR) Act
    of 1996 (P.L. 104-127, Apr. 4, 1996).

    In summary, our January report shows that a significant portion of FSA’s
    direct farm loan portfolio continues to be at risk because it is held by
    delinquent borrowers. As might be expected, a much smaller percentage
    of FSA’s guaranteed loan portfolio is held by delinquent borrowers.

•   As of September 30, 1996, $3.6 billion, or about 34 percent of the total
    outstanding principal on direct loans ($10.5 billion), was held by
    delinquent borrowers. This level of delinquency is an improvement over
    the $4.6 billion, or about 41 percent of the total outstanding principal
    ($11.4 billion), that was held by delinquent borrowers at the end of fiscal
    year 1995.
•   During fiscal year 1996, FSA lost $1.1 billion of principal and interest by
    reducing or forgiving the debt of delinquent direct loan borrowers.
•   As of September 30, 1996, about $280 million, or 4.4 percent of the total
    outstanding principal on guaranteed loans ($6.4 billion), was held by
    delinquent borrowers. In comparison, at the end of fiscal year 1995,
    delinquent borrowers held about $218 million, or 3.7 percent of the total
    outstanding principal ($5.9 billion).
•   Much of the increase in guaranteed loan delinquencies is concentrated in a
    few states.

    The FAIR Act made significant changes to FSA’s lending programs. These
    changes were aimed at strengthening the financial condition of the farm
    loan portfolio and improving the operation of the programs. They include
    modifying or eliminating lending policies that added to FSA’s risk and
    clarifying FSA’s fundamental lending role and mission. Because USDA is in
    the process of implementing these changes, their impact will not be
    known for some time. However, we believe that they should go a long way

     Farm Service Agency: Update on the Farm Loan Portfolio (GAO/RCED-97-35, Jan. 3, 1997).

    Page 1                                                                       GAO/T-RCED-97-78
                      to reducing the risk associated with the farm loan programs and to
                      improving their operations.

                      FSA provides credit to farmers and ranchers who are unable to obtain
Background            funds elsewhere at reasonable rates and terms. The agency provides credit
                      assistance through direct loans, which are funded by the government, and
                      through guaranteed loans, which are made by commercial lenders and
                      guaranteed by the government. Generally, the maximum guarantee is
                      90 percent; however, the FAIR Act allows the guarantee to be higher in
                      certain instances. FSA’s assistance is intended to be temporary; once
                      farmers and ranchers have become financially viable, they are to graduate
                      to commercial sources of credit.

                      FSA incurs losses in the direct loan program through various types of debt
                      relief assistance offered to borrowers who have trouble repaying their
                      loans. Two such debt relief options are (1) reducing a borrower’s debt so
                      that the borrower continues farming or ranching and remains an FSA
                      client—referred to as restructuring with write-down—and (2) forgiving
                      debt by allowing a borrower who does not qualify for restructuring to
                      make a payment to FSA that is based on the value of collateral security and
                      that is less than the outstanding debt—referred to as recovery value
                      buy-out with write-off. FSA has a third option when one of these two
                      approaches does not resolve a borrower’s delinquency—debt settlement.
                      Typically, this option involves writing off part or all of the unpaid loans for
                      borrowers who are no longer farming.

                      FSA also incurs losses as a result of guaranteeing farm loans. If a borrower
                      defaults, FSA reimburses the commercial lender for the guaranteed portion
                      of lost principal, accrued interest, and liquidation costs.

                      As of September 30, 1996, the outstanding principal on FSA’s farm
Status of Farm Loan   loans—direct and guaranteed—totaled about $17 billion. Of this amount,
Portfolio, as of      delinquent borrowers held about $4 billion. Table 1 shows that direct loan
September 30, 1996    delinquencies decreased while guaranteed loan delinquencies increased
                      between the end of fiscal years 1995 and 1996.

                      Page 2                                                        GAO/T-RCED-97-78
Table 1: Outstanding Principal and Amount Owed by Delinquent Borrowers, by Loan Type, as of September 30, 1996, and
September 30, 1995
Dollars in millions
                                                                                                  Percentage owed by delinquent
                        Outstanding principal            Owed by delinquent borrowers                      borrowers
Loan type and                            Number of                                 Number of      Percentage of         Percentage of
year                     Amount          borrowers             Amount              borrowers              debt             borrowers
Sept. 1996
Direct                  $10,457.8            115,743           $3,578.1                24,326                34.2                   21.0
Guaranteed                6,360.3               39,653             279.9                1,957                 4.4                    4.9
Total                   $16,818.1            155,396a          $3,858.0                26,283a               22.9                   16.9
Sept. 1995
Direct                  $11,379.7            121,732           $4,627.5                29,676                40.7                   24.4
Guaranteed                5,932.6               38,671             217.7                1,567                 3.7                    4.1
Total                   $17,312.3            160,403a          $4,845.2                31,243a               28.0                   19.5
                                           The total number of borrowers may include some borrowers who are counted twice because
                                         they have both direct and guaranteed loans.

                                         Source: GAO/RCED-97-35.

                                         The amount of direct loans owed by delinquent borrowers varied by state.
                                         As of September 30, 1996, nine states had borrowers who held at least
                                         $100 million in delinquent loans. Collectively, these states had about 51
                                         percent of the total $3.6 billion held by delinquent borrowers. Specifically,
                                         delinquent borrowers in Texas owed $483 million, those in Mississippi
                                         owed $255 million, and those in California owed $223 million. Delinquent
                                         borrowers in Oklahoma, North Dakota, New York, Louisiana, Minnesota,
                                         and South Dakota owed more than $100 million but less than $200 million.

                                         On guaranteed loans, borrowers in nine states accounted for about 64
                                         percent of the delinquency. Specifically, as of September 30, 1996,
                                         delinquent borrowers in Oklahoma owed $43 million, and those in Texas
                                         owed $38 million. Delinquent borrowers in Nebraska, Louisiana,
                                         Minnesota, Wisconsin, Kansas, South Dakota, and Iowa owed more than
                                         $10 million but less than $20 million. Additionally, much of the increase in
                                         delinquencies on guaranteed loans in fiscal year 1996 involved borrowers
                                         in three states—Texas, Oklahoma, and Louisiana.

                                         Table 2 shows that during fiscal year 1996, FSA incurred losses of about
                                         $1.1 billion on direct loans (principal and interest) and about $42 million
                                         on guaranteed loans.

                                         Page 3                                                                     GAO/T-RCED-97-78
Table 2: FSA’s Direct and Guaranteed
Loan Losses, Fiscal Year 1996              Dollars in millions
                                           Loan type                                 Amount of loss Number of borrowers
                                           Restructured with write-down                        $26.8                 254
                                           Recovery value buy-out with write-off                50.9                 253
                                           Debt settled with write-off                       1,020.9               2,887
                                           Subtotal                                         $1,098.6               3,394
                                           Payments on loss claims                              41.9                 545
                                           Total                                            $1,140.5               3,939
                                           Source: GAO/RCED-97-35.

                                           Borrowers in four states accounted for slightly more than half of the total
                                           losses on FSA’s direct loans. Specifically, during fiscal year 1996, FSA
                                           reduced or forgave $224 million on direct loans for borrowers in
                                           California, $135 million for those in Mississippi, $103 million for those in
                                           Texas, and $101 million for those in Louisiana.

                                           On guaranteed loans, the highest amount of loss payments involved
                                           borrowers in two states—$6.8 million in Louisiana and $5.5 million in

                                           Title VI of the FAIR Act contains fundamental reforms to the farm loan
FAIR Act’s Changes to                      programs that are intended to reduce the risks associated with the
the Farm Loan                              programs and clarify FSA’s basic lending mission. In particular, the act
Programs                                   modifies or eliminates certain lending and servicing policies that had, in
                                           the past, increased the risk of loss. Specifically, the act, among other
                                           things, does the following:

                                       •   Prohibits borrowers who are delinquent on FSA direct or guaranteed farm
                                           loans from obtaining direct farm operating loans.
                                       •   Generally prohibits borrowers whose past default resulted in loan losses
                                           from obtaining new direct or guaranteed farm loans. Specifically, FSA may
                                           not make a new loan to a borrower if the borrower’s prior direct loans
                                           were reduced or forgiven or if a payment had to be made to a commercial
                                           lender on the borrower’s prior guaranteed loan. One exception to this
                                           prohibition is allowed: A direct or guaranteed farm operating loan for
                                           paying annual farm or ranch operating expenses—that is, for purchasing

                                           Page 4                                                       GAO/T-RCED-97-78
    seed, feed, fertilizer, insecticide, and farm or ranch supplies, and for
    meeting other essential farm or ranch operating expenses, including cash
    rent—may be made to a borrower whose restructuring resulted in debt
•   Limits borrowers to one instance of debt forgiveness on direct loans.
•   Requires borrowers, as a measure of protection on loans made by FSA, to
    have, or agree to obtain, hazard insurance on the property that they
    acquire with farm ownership and operating loans. In addition, as a
    condition for getting disaster emergency loans, applicants are required to
    have had hazard insurance on property that was damaged or destroyed.
    The Secretary of Agriculture is to establish the levels of insurance that
    borrowers need to obtain on property acquired with farm loans and the
    level of insurance that borrowers needed to have had as a condition for
    obtaining an emergency loan.
•   Establishes a maximum indebtedness level of $500,000 for disaster
    emergency loans.
•   Allows FSA to (1) contract with commercial lenders to service the farm
    loan portfolio (2) use private collection agencies to assist in collecting
    delinquent amounts.
•   Requires borrowers to pay at least a portion of the interest on their loans
    as a condition for having the terms of their loans rescheduled or
    reamortized. In particular, borrowers who are unable to make their farm
    loan payments, but who are not 90 days past due, can have the terms of
    their farm loans rescheduled or reamortized if they pay a portion of the
    interest that is due on the loans. The Secretary of Agriculture is to
    establish the level of interest payments that borrowers need to make.

    The FAIR Act also clarifies FSA’s basic lending mission by, among other
    things, emphasizing that its assistance is to be temporary. Additionally, the
    act builds upon other legislation enacted earlier in the 1990s that
    emphasized helping beginning farmers and ranchers get started and
    progress in farming or ranching. The act also reinforces past congressional
    emphasis on shifting farm lending from direct loans to guaranteed loans.
    More specifically, the act, among other things, does the following:

•   Sets term limits for the receipt of direct farm ownership and operating
    loans. A person must have operated a farm or ranch for at least 3 years to
    be eligible to obtain a direct farm ownership loan. A borrower can obtain
    direct farm ownership loans during a 10-year period that starts when the
    person first obtains a farm ownership loan. A borrower can obtain direct
    farm operating loans during 7 years; these may be consecutive,

    Page 5                                                      GAO/T-RCED-97-78
               nonconsecutive, or a combination of consecutive and nonconsecutive
           •   Encourages the graduation of direct loan borrowers to conventional credit
               by allowing a 95-percent guarantee on loans made by commercial lenders
               to refinance the existing direct loans that borrowers have.
           •   Increases the guarantee percentage allowed on loans made by commercial
               lenders to beginning farmers and ranchers who participate in a farm
               ownership loan program that is targeted to them.
           •   Targets farm properties that are in FSA’s inventory for sale to beginning
               farmers and ranchers. If a beginning farmer or rancher does not offer to
               acquire the property at current market value within 75 days of FSA’s
               acquisition, then the properties are to be disposed of competitively.

               The changes in the FAIR Act address many of the problems that we have
               reported on in the past. While it is too early to gauge their impact on the
               financial condition of the portfolio, we believe that, if properly
               implemented, they will reduce the financial risk associated with the farm
               lending programs. We plan to continue to monitor and report on the USDA’s
               progress in implementing the FAIR Act’s credit provisions.

               This concludes our prepared statement.

(150427)       Page 6                                                     GAO/T-RCED-97-78
Ordering Information

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

Orders by mail:

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

or visit:

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

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

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

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


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


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

Address Correction Requested