Summary: In response to a congressional request, GAO examined the Farmers Home Administration's (FmHA) loan policies and practices to determine: (1) whether FmHA used adequate criteria to make and service loans; (2) how FmHA loan policies affected borrower equity; (3) whether security for FmHA loans was adequate; and (4) the potential impact of FmHA-proposed loan criteria on existing borrowers.
GAO found that: (1) FmHA analyses of its cash flow were overly optimistic, since it did not allow for unexpected expenses or equipment replacement and often overstated borrowers' repayment ability; (2) FmHA used extensive loan-servicing techniques, such as reducing interest rates and increasing repayment periods, to keep borrowers current on their loans; (3) loan servicing usually increased the outstanding loan principal by adding unpaid interest to the principal, and created long-term debts; (4) increased debt and the declining value of collateral assets decreased borrowers' equity; (5) although FmHA required adequate security to ensure repayment for new loans, it did not have similar security requirements for serviced loans; (6) FmHA proposed stricter eligibility and loan criteria in 1987 to speed loan processing and improve loan portfolio financial management; (7) although the proposed criteria would have denied assistance to a large percentage of existing borrowers, FmHA attempted to define those farmers whom it could help or not help with its loans and identified borrowers' degree of risk; (8) FmHA withdrew the proposal due to congressional and public concern over inadequate information on the proposal's impact and the denial of further assistance; and (9) Congress directed FmHA to reinstate the continuation policy that allowed existing borrowers to obtain additional loans without showing their ability to repay prior loans, but enacted new legislation that directed FmHA to consider reducing delinquent borrowers' debt if it was financially better for the government than liquidation.
