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Title: Farmers Home Administration's Farm Loan Programs
Subtitle:
Report No.: GAO/HR-93-1 Date: December 1992
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Author: United States General Accounting Office
Addressee: High-Risk Series
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CONTENTS
Overview
- The Problem
- The Causes
- GAO's Suggestions for Improvement
Fmha's Farm Loan Programs
Billions of Dollars Are at Risk
- Billions of Dollars in Debt Relief Provided to Delinquent Borrowers
- Billions of Dollars Still at Risk
Agency Standards Have Not Been Implemented Effectively
- Noncompliance With Loan-Making Standards
- Noncompliance With Loan-Servicing Standards
- Noncompliance With Standards for Managing Inventory Property
- Reasons for Noncompliance With Agency Standards
Some Policies Are at Odds With Fiscal Controls
- Lax Loan-Making Policies
- Imprudent Loan-Servicing Policies
- Costly Policies for Managing Inventory Property
Clarification of FmHA's Role Is Necessary
Conclusions and Action Needed
Related GAO Products
High-Risk Series
- Lending and Insuring Issues
- Contracting Issues
- Accountability Issues
Office of the Comptroller General
Washington, DC 20548
December 1992
The President of the Senate
The Speaker of the House of Representatives
In January 1990, in the aftermath of scandals at the Departments of Defense
and Housing and Urban Development, the General Accounting Office began a
special effort to review and report on federal government program areas that
we considered "high risk."
After consulting with congressional leaders, GAO sought, first, to identify
areas that are especially vulnerable to waste, fraud, abuse, and
mismanagement. We then began work to see whether we could find the fundament
al
causes of problems in these high-risk areas and recommend solutions to the
Congress and executive branch administrators.
We identified 17 federal program areas as the focus of our project. These
program areas were selected because they had weaknesses in internal controls
(procedures necessary to guard against fraud and abuse) or in financial
management systems (which are essential to promoting good management,
preventing waste, and ensuring accountability). Correcting these problems is
essential to safeguarding scarce resources and ensuring their efficient and
effective use on behalf of the American taxpayer.
This report is one of the high-risk series reports, which summarize our
findings and recommendations. It describes our concerns over the Farmers Hom
e
Administration's (FmHA) direct and guaranteed farm loan programs and about t
he
agency's management of farm properties obtained as a result of defaults on
federal loans. It focuses on the failure of FmHA field office lending
officials to comply with existing loan and property management standards and
on program policies that contribute to financial risks. We have made numerou
s
recommendations to the Congress and to the Secretary of Agriculture that are
aimed at improving program management and reducing risk.
Copies of this report are being sent to the President-elect, the Democratic
and Republican leadership of the Congress, congressional committee and
subcommittee chairs and ranking minority members, the Director-designate of
the Office of Management and Budget, and the Secretary-designate of
Agriculture.
The Farmers Home Administration (FmHA), an agency of the U.S. Department of
Agriculture (USDA), is the third largest institutional lender to the nation'
s
agricultural sector. Its mission is to provide temporary financial assistanc
e
to farmers who are unable to obtain commercial loans at reasonable rates and
terms.
FmHA has two principal and often conflicting roles: (1) to provide high-risk
borrowers with temporary credit to enable them to stay in farming until they
are able to secure commercial credit and (2) to do so in a way that protects
the taxpayers' investment.
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===
The Problem
FmHA's loan program is marred by a high rate of defaults. This past April, w
e
published a study of FmHA's outstanding loans as of September 30, 1990. This
study revealed that of FmHA's roughly $20 billion direct loan portfolio, 70
percent--or more than two-thirds--was held by borrowers who were either
delinquent or whose loans had been restructured as a result of, or to avoid,
delinquency. Because of defaults, in recent years FmHA reduced or forgave
delinquent debt totaling about $7.6 billion.
Furthermore, FmHA has evolved into a continuous source of subsidized credit
for nearly half of the agency's borrowers. As repeated loan servicing has
increased their debt and reduced their equity, some FmHA borrowers have
actually had their financial condition worsen.
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===
The Causes
FmHA and the Congress share responsibility for many of FmHA's problems.
Although some contributing factors--such as the general decline of the
agricultural economy in the 1980s--have been beyond the control of FmHA or t
he
Congress, two major ones do lie within their authority. First, FmHA field
office lending officials often fail to follow the agency's own standards for
making loans, servicing loans, and managing property. Second, FmHA loan- and
property-management policies--some of which are congressionally directed--do
not adequately protect the taxpayers' interests. For example, these policies
allow borrowers who have defaulted on past FmHA loans to obtain new ones.
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GAO's Suggestions for Improvement
We have recommended that FmHA establish a system to ensure that its field
office lending officials adhere to the agency's loan standards and that the
Congress enact various policy and program changes to reduce the assistance
program's exposure to risk.
However, losses can be expected to continue until the Congress tells FmHA ho
w
to better balance its mission of assisting financially troubled farmers with
its obligation to provide that assistance in a fiscally responsible manner.
We
believe that, to protect the taxpayers' interests, the balance should be
shifted more toward prudent lending.
Furthermore, we believe that the Congress needs to recognize that not all
financially stressed farms can be saved and that not all farm families can b
e
expected to benefit from a government assistance program intended to keep th
em
in farming. With this in mind, the Congress should, among other things, give
FmHA firm guidance on the following: (1) the level of loan losses that the
Congress is willing to accept; (2) the length of time over which borrowers
should be allowed to receive FmHA assistance; and
(3) the kind of assistance, if any, that should be made available to
unsuccessful borrowers who want to leave farming.
Under the authority of the Consolidated Farm and Rural Development Act, as
amended--known as the Con Act--FmHA provides financial assistance to farmers
through direct loans, which are funded by the government, and through
guaranteed loans, which are made by commercial lenders and guaranteed up to
90
percent by the government. To be eligible for a direct loan, a borrower must
be unable to obtain commercial credit at reasonable rates and terms. To obta
in
a loan guarantee, a lender must certify that it is unwilling to make the loa
n
without a guarantee. As of September 30, 1990, FmHA's $23.6 billion farm loa
n
portfolio comprised $19.5 billion in direct loans and $4.1 billion in
guaranteed loans. By June 30, 1992, the total portfolio had decreased to abo
ut
$20.5 billion--$15.9 billion in direct loans and $4.6 billion in guaranteed
loans.
FmHA incurs a loss on a direct or a guaranteed farm program loan when a
borrower defaults and the proceeds from selling the loan collateral do not
equal the outstanding loan amount plus the costs of acquiring and disposing
of
the collateral. FmHA also incurs interest subsidy expenses because it (1)
lends money at rates below its cost of borrowing and (2) provides payments t
o
commercial lenders so that they will lend money at rates below their cost of
borrowing.
When a borrower is unable to repay a loan, FmHA may acquire the farm propert
y
that was pledged as security for the loan and subsequently try to sell that
property to recover some or all of the unpaid debt. As of June 30, 1992,
FmHA's inventory comprised almost 3,100 farms valued at about $400 million.
The Con Act provides several options for a former owner to recover a farm
property after it has entered FmHA's inventory, such as leasing or purchasin
g
either the entire farm property or the farm homestead, including farm
buildings and up to 10 acres of land.
BILLIONS OF DOLLARS ARE AT RISK
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In recent years, FmHA has provided about $7.6 billion in debt relief to
delinquent borrowers in addition to interest subsidies. Despite relief of th
is
magnitude, billions of dollars more in outstanding direct and guaranteed loa
ns
are held by borrowers who are unlikely to meet some or all of their loan
obligations.
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BILLIONS OF DOLLARS IN DEBT RELIEF PROVIDED TO DELINQUENT BORROWERS
During fiscal years 1989 through the first three quarters of 1992, FmHA
forgave about $3.1 billion in direct loan obligations under the debt-servici
ng
provisions of the Agricultural Credit Act of 1987, writing down (reducing)
some debts by about $1.2 billion and writing off (forgiving) other obligatio
ns
by about $1.9 billion. FmHA wrote off another $4.5 billion in the course of
settling direct loan obligations with borrowers who had generally ceased to
farm.
During this 3-3/4-year period, FmHA also paid commercial lenders about $200
million to cover guaranteed loan losses.
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BILLIONS OF DOLLARS STILL AT RISK
FmHA's farm loan portfolio continues to be financially stressed. As of June
30, 1992, borrowers were delinquent on $7.6 billion, or about 37 percent, of
the $20.5 billion in outstanding loans--about $7.3 billion of the $15.9
billion direct and about $300 million of the $4.6 billion guaranteed loan
debt.
However, the amounts owed by borrowers classified as delinquent represent on
ly
part of the risk associated with FmHA's portfolio. Additional risk is posed
by
the substantial portion of FmHA's borrowers who are technically current but
hose loans have been restructured (loan terms have been rescheduled or debts
reduced) in response to past defaults or rescheduled to avoid delinquency. A
s
we estimated in _Farmers Home Administration: Billions of Dollars in Farm
Loans Are at Risk_ (GAO/RCED-92-86, Apr. 3, 1992), as of September 30, 1990,
70 percent of FmHA's direct loan portfolio was held by borrowers who either
were delinquent ($8 billion, or 40 percent of total outstanding direct loans
)
or whose loans had been restructured as a result of, or to prevent,
delinquency ($5.9 billion, or 30 percent).
As of September 30, 1990, FmHA categorized about 28 percent of its guarantee
d
loan portfolio as a potential loss. FmHA revised its estimates of potential
losses on guaranteed loans to about 18 percent as of September 30, 1991.
AGENCY STANDARDS HAVE NOT BEEN IMPLEMENTED EFFECTIVELY
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Ineffective implementation of agency standards has significantly weakened
FmHA's financial position. In both the direct and guaranteed loan programs,
FmHA field office lending officials often fail to implement loan-making and
loan-servicing standards established by the agency to safeguard federal
financial interests. In addition, field office officials often do not follow
standards for managing farm inventory property.
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NONCOMPLIANCE WITH LOAN-MAKING STANDARDS
In the direct loan program, FmHA field office lending officials often approv
e
loans based on unrealistic estimates of production, income, and expenses. Fm
HA
reviews of direct loans made from fiscal years 1988 through 1991 disclosed
that 554 sampled loans, or 13.5 percent of the 4,101 loans reviewed, did not
meet the lenient cash flow standard that FmHA uses to test a borrower's
repayment ability. Fiscal year 1992 reviews through June 30, 1992, disclosed
that 10 percent of the 653 loans reviewed did not meet this key FmHA standar
d.
Our own work suggests that some FmHA officials consider making loans more
important than adhering to the agency's loan-making standards. For example,
when one loan applicant's actual production yields were too low to demonstra
te
a positive cash flow, a county supervisor substituted higher county averages
in order to approve a $49,000 loan. The next year, the borrower, who had oth
er
outstanding FmHA loans, defaulted and subsequently received $122,000 in debt
relief.
Also, in the direct loan program, FmHA field office officials often fail to
verify borrowers' existing debts, as required. FmHA reviews in fiscal year
1991 showed that borrowers' debts had not been verified for 18 percent of th
e
loans sampled; reviews in the first three quarters of fiscal year 1992 showe
d
that debts had not been verified for 20 percent of the loans sampled. One
borrower who was $545,000 delinquent on loans from one county office moved t
o
another county and applied at a second office for new financing without
disclosing the delinquent debt. The county supervisor in the second office d
id
not verify the borrower's debts and approved two new loans totaling about
$33,000. The borrower subsequently defaulted on the new loans.
In the guaranteed loan program, FmHA field office lending officials often fa
il
to enforce requirements that commercial lenders comply with FmHA's loan-maki
ng
standards. FmHA reviews of guaranteed loans made from fiscal years 1988
through 1991 showed that 349 sampled loans, or 13.4 percent of the 2,613 loa
ns
reviewed, did not meet FmHA's cash flow standard. In the first three quarter
s
of fiscal year 1992, about 8 percent of the 585 loans reviewed did not meet
this standard. One borrower received four guaranteed loans totaling almost
$533,000. Each loan had problems indicating that it should not have been
approved: Projected yields were not based on production records, debt paymen
ts
and operating expenses were understated, and security was overvalued. The
borrower subsequently defaulted on two of the loans and FmHA paid a lender's
$251,000 loss claim.
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NONCOMPLIANCE WITH LOAN-SERVICING STANDARDS
In the direct loan program, FmHA field office officials have not always, as
required, annually inspected property offered as loan collateral or conducte
d
supervisory visits with borrowers. Consequently, property securing FmHA loan
s
has disappeared or deteriorated. For example, according to a USDA Office of
Inspector General (OIG) report, property pledged as loan security and valued
at about $92 million was missing, and livestock valued at about $36 million
had been disposed of without FmHA's authorization. FmHA reviews in fiscal ye
ar
1991 and the first three quarters of fiscal year 1992 disclosed that about 1
2
percent of the sampled loans showed no evidence that collateral had been
inspected.
FmHA's loan-servicing standards also require field office officials annually
to analyze borrowers' operations, assist borrowers in developing and using
sound farming and management practices, and help borrowers plan for future
farming operations. FmHA reviews in fiscal year 1991 and the first three
quarters of fiscal year 1992 found that 20 percent and 15 percent of the
sampled loans, respectively, had no evidence of such activities. An FmHA
supervisor at one county office with 122 borrowers told us that he had never
analyzed the operations of any of them.
In the guaranteed loan program, the story is similar. FmHA field office
officials have not always, as required, monitored commercial lenders'
compliance with standards for inspecting collateral, providing the same
servicing for FmHA-guaranteed loans as for other loans, and ensuring proper
uses of loan funds. FmHA reviews in fiscal year 1991 and the first three
quarters of fiscal year 1992 showed that field office officials had not
reviewed commercial lenders' servicing of about 25 percent and 31 percent,
respectively, of the sampled loans.
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===
NONCOMPLIANCE WITH STANDARDS FOR MANAGING INVENTORY PROPERTY
FmHA owns about $400 million worth of farm real estate that it acquired from
borrowers who did not repay their loans. Protecting the taxpayers' interest
requires prudent management of this property, but FmHA field office official
s
often fail to follow agency standards for leasing, inspecting, appraising, a
nd
maintaining farm inventory properties. According to the OIG, properties have
frequently been used without FmHA's permission, rented without written lease
s,
or leased for amounts below prevailing rental rates. The OIG disclosed in on
e
report that 74 percent of 57 properties reviewed in 10 states had not been
maintained well enough to protect the government's interest. The OIG disclos
ed
in another report that it had found errors or omissions on appraisals for 46
of 95 farm properties that it reviewed. In an earlier review, we found no
record of property appraisal reviews for 69 of 72 properties that we analyze
d
in seven states.
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REASONS FOR NONCOMPLIANCE WITH AGENCY STANDARDS
FmHA has not systematically analyzed why its standards have not been
implemented. Agency officials have suggested various reasons for
noncompliance, including limited resources, insufficient training, and lack
of
accountability on the part of lending officials. In the direct loan program,
some FmHA officials seem to believe that keeping farmers on the land is more
important than making prudent lending decisions. In the guaranteed loan
program, FmHA's emphasis on making loans has left the impression that the
number of loans is more important than their quality. Furthermore, violation
of property management standards reflects, in part, FmHA's having given high
er
priority to making and servicing loans than to managing inventory property.
In
addition, the agency has placed responsibility for managing the properties i
n
the local county offices, where officials frequently have too few properties
to manage to become familiar with applicable standards.
SOME POLICIES ARE AT ODDS WITH FISCAL CONTROLS
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Violation of FmHA's standards is not the only problem. In some cases,
loan-making, loan-servicing, and inventory property management policies
themselves increase FmHA's vulnerability to loss. Reflecting the Congress's
and FmHA's goal to keep farmers in farming, these policies often show little
regard to cost and are frequently inconsistent with the prudent management
that would protect taxpayers' interests.
FmHA's policies for making both direct and guaranteed loans, some
congressionally directed, expose the agency to loss. First, borrowers who ha
ve
defaulted on past loans are free to obtain new loans. Specifically, borrower
s
whose delinquent direct loan debts have been written down or written off may
receive new loans. We identified 1,335 borrowers who had obtained about $89
million in direct or guaranteed loans from fiscal year 1989 through the firs
t
three quarters of fiscal year 1992 after having previously received about $2
03
million in debt relief. Furthermore, we identified 45 borrowers who had
received $5.4 million in new guaranteed loans after FmHA had paid $3.3 milli
on
in loss claims on their previous guaranteed loans. One borrower received a
$132,000 direct loan even though, just 2 months earlier, he had received abo
ut
$428,000 in debt relief. Another borrower received a $176,400 guaranteed loa
n
just 6 months after FmHA had paid $173,200 in loss claims on his previous
guaranteed loans.
Second, under a congressionally directed policy, borrowers can obtain new Fm
HA
direct loans for operating expenses without demonstrating the ability to pay
their existing FmHA debt. This policy enables borrowers who are delinquent o
n
their outstanding obligations to incur further obligations. From fiscal year
1988 through the first three quarters of fiscal year 1992, FmHA lent about
$107 million to delinquent borrowers. FmHA first established this policy in
1982 to assist financially stressed borrowers during a slump in the
agricultural economy. It rescinded the policy in 1985 following our disclosu
re
that many unsound loans were being made. However, in 1987, the Congress
directed FmHA to reinstate the policy to prevent farmers from failing. FmHA
officials said, and our work confirmed, that this policy makes it difficult
for them to act in a fiscally prudent manner.
Third, the criteria that FmHA has established for approving loans further
expose the agency's portfolios to loss. The cash flow method that FmHA uses
to
calculate a loan applicant's ability to repay a debt includes no provision f
or
contingencies and often creates an overly optimistic picture of the
applicant's financial circumstances. In 1987, FmHA proposed regulations to
strengthen its loan-approval criteria. FmHA withdrew the proposal in part
because Members of Congress expressed concern that the proposed regulations
would render many borrowers ineligible for farm loans.
Fourth, under provisions of the Con Act and FmHA's implementing regulations,
private lenders can use guaranteed loans to refinance existing customers'
debts and thereby shift to the federal government most of the risks of their
loans to financially stressed borrowers. About $550 million, or 44 percent,
of
the $1.2 billion in guaranteed loan obligations in fiscal year 1988 was used
to refinance borrowers' existing debts with lenders. Commercial lenders view
FmHA's guaranteed loans primarily as a vehicle for increasing the security o
f
their own agricultural loan portfolios. Experience has shown that this
practice is risky for the government. The OIG has reported that 35 of 45
borrowers who defaulted on guaranteed loans had obtained the loans to
refinance existing debt. Sixty percent of these 35 borrowers defaulted short
ly
after receiving the loans, often without having made a single payment.
Finally, FmHA's policy is to guarantee most loans at the maximum rate (90
percent), regardless of risk, even though the agency has authority to accept
a
smaller share of the risk. As we reported in April 1992, about 81 percent of
all guaranteed loans have been guaranteed at the 90-percent level. Loans to
borrowers who have defaulted on previous loans are guaranteed at the same ra
te
as loans to borrowers with more solid credit histories. Loans for refinancin
g
existing debt are guaranteed at the same rate as loans for new credit
purchases. This policy strengthens the incentive for commercial lenders to u
se
the guaranteed loan program as a way of transferring the risks in their own
loan portfolios to the federal government.
FmHA's policies governing loan servicing, some the result of legislation, al
so
invite losses. To keep borrowers' loans technically current, FmHA routinely
reschedules and reamortizes loan terms, thereby extending the period for
repaying a loan. Typically, FmHA adds the unpaid interest to the outstanding
loan principal without increasing the loan security. These actions often
result in excessive debt and loss of equity for borrowers and undersecured
loans for the government. Although the Con Act limits borrowers to $200,000
in
new direct loan obligations, it does not limit the debt that they can
accumulate through rescheduling or reamortizing existing loans. We identifie
d
1,940 borrowers who, as of June 30, 1992, had accumulated debts totaling abo
ut
$67 million in excess of the individual $200,000 limit.
In addition, although FmHA requires borrowers to pledge adequate security fo
r
new loans to ensure repayment in the event of default, it does not, when
rewriting a loan, require additional security. Therefore, the new principal
balance may exceed the value of the loan security. If the borrower defaults,
the collateral may no longer cover the debt. As we reported in February 1989
,
loan security was inadequate for 111 of 160 borrowers in our sample.
The Agricultural Credit Act of 1987 also established a policy for servicing
delinquent debts that runs counter to principles of sound financial
management: debt write-down for borrowers whose loans are restructured and
debt write-off for borrowers whose loans do not qualify for restructuring.
These practices are expensive for the taxpayer--costing about $3.1 billion
during fiscal years 1989 through the first three quarters of 1992--and also
provide incentives for farmers to default intentionally on their loans in
order to qualify for debt reduction. As we reported in August 1990, 18 of 30
nondelinquent borrowers whom we interviewed told us that they felt penalized
for paying their debts, and some said that they were looking for ways to
become delinquent so that they could qualify for debt reduction.
FmHA's debt-restructuring practices have generally failed to strengthen the
financial positions of delinquent borrowers. In many instances, the
beneficiaries of these actions have returned for additional debt
restructuring, continuing the delinquency-restructuring-delinquency cycle. A
s
our August 1990 report disclosed, over 90 percent of the 160 borrowers whom
we
reviewed remained financially weak after their delinquent debts were
restructured. According to FmHA, about 9,500 borrowers, or about 43 percent
of
those whose delinquent loans were restructured from November 1988 to March
1990, became delinquent again. Furthermore, we identified 6,222 borrowers wh
o
received multiple debt restructuring from January 1989 to June 1992. For
example, one delinquent borrower's loans were restructured in 1989. At that
time, he received a $65,760 write-down. In 1990, he was delinquent again, hi
s
debt was once more restructured, and he received another loan. In 1991, he w
as
delinquent again and received still another loan.
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COSTLY POLICIES FOR MANAGING INVENTORY PROPERTY
The Con Act, as amended by various laws, requires FmHA to dispose of its
inventory of farm properties in ways that are inconsistent with prudent
management, reducing the government's opportunity to recoup losses. FmHA is
required to determine whether a property is suitable for agricultural use an
d,
if it is, to offer it at a fixed price to selected buyers, such as former
owners or new farmers, to enable them to continue farming or to start new
operations. These requirements may prevent the agency from obtaining the
highest selling price and, by extending the time that properties remain in
inventory, increase property management costs. Furthermore, this costly
practice may not even promote farming and is subject to abuse by some target
ed
buyers. For example, one former owner who repurchased property sold part of
the land 17 months later for almost twice as much as he had paid FmHA for th
e
entire property. In 1991, he was developing part of the remaining land for
commercial use.
CLARIFICATION OF FmHA'S ROLE IS NECESSARY
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---
FmHA has neither acted as a prudent lender nor enhanced the creditworthiness
of the nation's financially stressed farmers. As the lender of last resort t
o
borrowers whom commercial lenders do not consider creditworthy, FmHA would b
e
expected to incur some losses through defaults on loans as well as through
interest subsidies. However, the billions of dollars in direct loans that Fm
HA
has already lost or may lose in the future far exceed the losses that might
be
anticipated even for a lender of last resort. Furthermore, the guaranteed lo
an
program, which may grow significantly in the coming years, is vulnerable to
loss because it is experiencing many of the same problems as the direct loan
program.
Neither FmHA nor the Congress could have controlled some factors that have
contributed to the agency's losses, such as the general decline of the
agricultural economy in the 1980s. However, other factors contributing to
FmHA's problems have been within FmHA's and/or the Congress's ability to
influence. FmHA has failed its responsibility to manage its farm loan progra
ms
in that
-- it has not ensured adherence to agency standards,
-- it has adopted program policies that have increased the government's
exposure to risk, and
-- it has not provided its managers with the information that they have need
ed
to operate programs effectively.
But by emphasizing FmHA's role as an assistance agency over its role as a
prudent lender, the Congress may have contributed more to FmHA's problems th
an
have deficiencies in the agency's program management. In 1987, the Congress
discouraged FmHA's efforts to impose more stringent loan-making standards, a
nd
it directed FmHA to reinstate the policy of making operating loans to
borrowers who are unable to pay their existing FmHA debt. The Congress also,
through the Agricultural Credit Act of 1987, allowed delinquent farmers to
obtain billions of dollars in debt relief and created incentives for
nondelinquent borrowers deliberately to become delinquent.
More than fraud or other illegal attempts to circumvent established financia
l
controls, these practices and policies--while well-intentioned--have
jeopardized the federal government's multibillion-dollar investment in farm
oans. Furthermore, although these actions by FmHA and the Congress have
reflected a desire to help farmers remain in farming until they could secure
commercial credit, they have failed in many instances to achieve this
objective. Nearly half of FmHA's borrowers have come to rely on the agency a
s
a continuous source of subsidized credit. Moreover, the financial condition
of
some of these borrowers has deteriorated over time as repeated loan servicin
g
has increased their debt and reduced their equity.
CONCLUSIONS AND ACTION NEEDED
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---
FmHA has not succeeded in operating simultaneously as a fiscally prudent
lender and as an assistance agency. We believe that, to protect taxpayers'
funds, a shift in the agency's emphasis toward prudence is in order. However
,
the Congress is ultimately responsible for defining FmHA's role and deciding
how fiscally prudent the lender of last resort to the nation's farmers shoul
d
be.
We have made numerous recommendations to the Secretary of Agriculture and to
the Congress to improve compliance with loan and property management standar
ds
and to strengthen policies and program design in the direct loan, guaranteed
loan, and farm inventory property areas. For example, we recommended in our
April 1992 report that
-- FmHA establish a system to ensure that lending officials adhere to the
agency's loan standards,
-- the Congress enact legislation to prohibit delinquent borrowers from
receiving direct loans,
-- the Congress enact legislation to require FmHA to establish a range of
guarantees that places the highest percentage guarantee on the least risk
y
loan and a lower percentage guarantee on the most risky loan, and
-- the Congress enact legislation to require that FmHA use competitive metho
ds
in selling farm inventory properties.
Many of our recommendations were directed toward improving FmHA's program
management. However, if the losses in FmHA's programs are to be brought unde
r
control, the Congress needs to make clear that it expects FmHA to act as a
prudent lender. In our opinion, the Congress needs to recognize that not all
marginal, financially stressed farm operations can be saved and that not all
farm families can benefit from attempts to keep them in farming. To
communicate this recognition to FmHA and its managers, the Congress should,
among other things, establish guidance concerning (1) the level of loan loss
es
that it is willing to accept, (2) the length of time that borrowers may
receive financial assistance from FmHA, and (3) the type of assistance, if
any, that should be made available to help unsuccessful borrowers who want t
o
leave farming.
