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Department of the Interior

Effective Date: 11/12/86

Series: Financial Management

Part 344: Debt Collection

Chapter 10: Direct and Guaranteed Loans

Originating Office: Office of Financial Management

10.1 General. The purpose of this Chapter is to provide general debt collection policy and guidelines for the collection of loans in all direct and guaranteed loan programs within the Department.

10.2 Definitions. For the purposes of this Chapter, the following definitions apply:

A. Direct Loan: A direct loan is:

(1) a disbursement of funds (not in exchange for goods or services) that is contracted to be repaid with or without interest;

(2) a purchase of private loans through secondary market operations;

(3) an acquisition of guaranteed private loans in satisfaction of default or other loan guarantee claims; or

(4) a sale of agency assets on credit terms of more than 90 days duration.

B. Guaranteed than: A guaranteed loan is a contingent liability of a bureau, and:

(1) any debt obligation on which the bureau pledges to pay part or all of the amount due to a lender or holder in the event of default by the borrower; and

(2) a direct Federal loan that a bureau sold under a guarantee or agreement to repurchase.

10.3 Responsibility. Bureaus having statutory authority to enter into loan relationships are responsible for promulgating policies and procedures necessary to effectively and efficiently manage such loan programs in accordance with the requirements and within the limitations imposed by statute. Such policies and procedures are to include, when not excluded by statute, the applicable debt collection policies outlined in this Part and in OMB Circular A-129, dated May 9, 1985. Every reasonable effort will be taken to prevent and minimize potential losses.

10.4 Loan Extension and Pre-screening. Bureau credit programs generally provide credit on more favorable terms than is otherwise available. In some cases credit is extended to high risk applicants. However, there must be a reasonable expectation that the borrower will repay the loan. The fact that the role of the lender is one of Alast resort@ does not lessen the need to determine the degree of risk involved. Screening of applicants is intended to assure that actual credit risks are consistent with program objectives. The following standards apply to credit extension and screening of applicants:

A. Application Screening. All applications for direct and guaranteed loans should be screened for credit worthiness and ability to repay. Bureaus should:

(1) Review information presented in applications and verify it by comparisons to credit reports and by use-of other credit management verification procedures;

(2) Obtain credit reports for all new applicants, when refinancing, and when loans are rescheduled;

(3) Obtain credit reports on individuals and on commercial organizations through Federal Supply Schedule contracts negotiated by the General Services Administration (GSA);

(4) Screen applicants for loans against Internal Revenue Service delinquent tax files; and

(5) Require financial institutions to submit credit reports with defaulted guaranteed loans returned for reimbursement to facilitate bureau determinations of the next collection steps to be pursued.

B. Taxpayer Identification Number. Bureaus will obtain taxpayer identification numbers for all new loan applicants. Bureaus also will attempt to obtain taxpayer identification numbers for all existing loans, in conformity with the provisions of the Privacy Act, if collection action is to be taken.

C. Credit Analysis and Ability to Repay. Bureaus will make an analysis of each credit application and will assess the applicant=s credit worthiness, financial responsibility, and ability to repay. The analysis should include the following:

(1) For individuals: employment history, current income and indebtedness, repayment of prior debt, assets, and potential future income and indebtedness;

(2) For commercial organizations: balance sheet, income statement, cash flow statement, market position, marketing strategy, strength of competition, working capital assessment, asset ratios, analysis of market share, ownership, management expertise, and appraisals of guarantees and collateral;

(3) Review of audited financial statements and income tax returns;

(4) Determination whether collateral is insured or pledged on other debt;

(5) Determination that the actual credit risks and costs are compatible with program objectives by:

(a) investigating credit histories;

(b) determining risk ratios in accordance with OMB Circular A-129, Appendix 3; and

(c) comparing risk of individual applicants with program objectives established by enabling statute.

(6) When a credit analysis concludes that an applicant is likely to qualify for private financing, the bureau will refer the applicant to private sources unless authorizing statutes provide otherwise.

D. Loan Origination and Application Fees. If authorized by law, loan origination fees will be assessed on all direct loans to defray administrative and other costs or to comply with statutory, regulatory, or other requirements.

(1) Fees will be charged to recover the cost of obtaining credit reports. Exceptions may be made for unsuccessful applicants on the basis of need;

(2) Fees will be collected upon approval of a loan, or subtracted from the initial disbursement; and

(3) Fees will be required on guaranteed loans to cover bureau administrative and servicing costs and all or a portion of the estimated cost to the Government of default.

E. Monthly Payments. Bureaus will establish a payment schedule for each type of loan similar to that prevailing in the private sector for that type of debt. Monthly payments should be the usual arrangement.

F. Debt Collection Certification. Bureaus will inform loan applicants of Federal debt collection policies and procedures prior to extending credit. Applicants will be required to sign an appropriate certification statement developed by the bureau issuing the loan similar to the examples in OMB Circular A-129, Appendix 4.

10.5 Account Servicing. Account servicing involves the proper maintenance of files, and the proper review and management of accounts. Account servicing standards must ensure that collections are received and accounted for, delinquent accounts are identified promptly, and reports are produced comparing actual results to previously established objectives. If appropriate, where private sources are available, they should be looked to first to provide services needed.

A. Documentation. Bureau loan files will contain standard information on the history and status of each loan. Loan files must include at least:

(1) Applicant or debtor name, address, telephone number and taxpayer identification number;

(2) Amount and nature of debt;

(3) Payment schedules;

(4) Account status;

(5) Summary of contacts between the bureau and the applicant;

(6) Credit approval documentation (screening measures and subsequent approval actions);

(7) Credit risk rating;

(8) Financial and market analyses for commercial loans;

(9) Appraisal of collateral including values of guarantees for secured loans;

(10) All legal documents related to the loan; and

(11) Payment history including any rescheduling.

B. Invoicing. Bureaus will establish procedures for routine invoicing of amounts due and for timely collection.

C. Account Review and Loan Loss Estimates. Bureaus will establish procedures, including the use of credit reports, for an annual assessment of the risks associated with their portfolio.

(1) Review procedures will be used to determine a risk rating based on performance, changes in financial position, the degree of compliance with reporting requirements, or changes in the status of collateral or security (see OMB Circular A-129, Appendix 3);

(2) Risk ratings will be used, along with historical loss experience, characteristics of borrowers, type of credit transactions, and other relevant information to determine loan loss estimates;

(3) Loan loss estimates will be recorded in bureau accounting records as AAllowance for Uncollectible Accounts.@

D. Referral of Account Information to Credit Reporting Agencies. Bureaus will refer delinquent account information to credit reporting agencies in accordance with the provisions set forth in 344 DM 2.3.

E. Follow-up Procedures. Bureaus will establish procedures for written follow-up on past due accounts based on the procedures outlined in 344 DM 2.1.

F. Automation of Loan Servicing. Bureaus will develop and implement plans to automate loan portfolios whenever justified by volume to ensure:

(1) Timely generation of invoices and follow-up letters; and

(2) Production of complete and systematic reports on the status of accounts.

G. Management Reporting. Bureaus will establish internal management reporting systems to provide information on results of credit program operations compared to objectives.

10.6 Loan Collections. Bureaus will have efficient systems for the collection of routine loan payments. They will employ the special debt collection measures outlined in 4 CFR Parts 101-105.

A. Delinquent Accounts. Bureaus will identify all loans that have been delinquent six months or more, and for which normal account servicing and debt collection efforts have failed. These accounts will be considered Anon-performing@ and their entire amount separately identified in the accounting records. In addition, when permitted by law, regulation, and contracts, the entire amount of such debt will be declared due and the debtor so notified. Bureaus may refer such accounts to an internal working group, a private collection agency, or to the Department of Justice (DOJ) for litigation.

B. Interest, Penalties, and Administrative Costs. Interest, penalties, and administrative costs will be assessed as prescribed in 344 DM 2.11.

C. Administrative Offset. Bureaus will implement administrative offset in accordance with 344 DM 3 and with 4 CFR 102.3 and 102.4.

(1) Credit reports on delinquent accounts will be obtained to identify avenues of offset; and

(2) Bureaus will determine on a case-by-case basis whether to engage in offset. At a minimum, a bureau will consider holding up award or further disbursement of funds until the delinquent debtor and the agency requesting offset have reached a satisfactory resolution of the debt.

D. Collection by Collection Agencies. Collection referrals to private collection agencies must be done in accordance with the provisions set forth in 344 DM 2.4.

E. Referral for Litigation. The referral of delinquent debts to DOJ for collection by litigation must be done in the manner prescribed in 344 DM 6.

F. Calling Guarantees and Foreclosing on Collateral. Where loans have been guaranteed by a third party, and collection from the principal debtor appears unlikely, the Government=s rights under the guarantee will be exercised. When other collection measures have failed, bureaus and DOJ are authorized to enter into foreclosure proceedings.

G. Federal Employee Salary Offset. When the debtor is a Federal employee, salary offset may be effected in order to satisfy the indebtedness. Bureaus must adhere to the policy on salary offset as set forth in 370 DM 550 and 5 CFR Part 550.

H. Income Tax Refund Offset. Referral of delinquent accounts for income tax refund offset will be made in accordance with guidance provided by the Internal Revenue Service (IRS) and OMB. The referral does not relieve the bureau of its responsibility to continue collection efforts through the means provided in this Part. Debts written-off and reported as income to the IRS cannot be referred for tax refund offset.

I. Rescheduling. Rescheduling of payments will be permitted when it is in the best interest of the Government and where the bureau has determined that recovery of all or a portion of the amount owed is reasonably assured. Bureaus will maintain records of accounts rescheduled and amounts will be reported on the Schedule 9 of Standard Form 220.

10.7 Write-Off and Close-Out. Bureaus will develop write-off procedures that identify and remove uncollectible accounts from receivables and close-out procedures that cease collection activity in accordance with guidelines outlined in 344 DM 5. Procedures will take full advantage of the Department=s write-off system and apply administrative offset if appropriate.

A. Write-Off. Appropriate adjustments will be made in the allowance for uncollectible loans account, accounts written-off will be closed, and the debtors= account ledgers removed from active bureau files.

B. Close-Out. Despite write-off, it may be appropriate for bureaus to maintain subsidiary records of individual accounts that may be collected subsequently by offset against future benefit claims. Amounts written-off will also be recorded with debtor identifying information in an IRS referral log, accumulated for the calendar year, and forwarded to IRS in January of the following year on IRS Form 1099. In addition, bureaus may reinstitute collection action on closed-out accounts if there is subsequent evidence that a debtor has new ability to repay.

10.8 Portfolio Sales. The sale of bureau portfolios should be considered if the sale of loans for cash can be accomplished without recourse, repurchase agreement, or other Federal guarantees.

10.9 Management Review. Credit management requires an ongoing review and evaluation of whether programs are meeting their objectives in the most cost effective manner.

A. Annual Improvement Plan. Improvement plans will be written each year for the loan programs of the Department and submitted to OMB. Each plan will include at a minimum: collection targets, loan loss estimates, program subsidy levels, write-offs, claims on guarantees, defaulted loans, delinquencies, non-performing accounts, and rescheduled accounts, as well as strategies for reducing risk and the use of reporting and appraisal systems to track progress and ensure accountability.

B. Other Performance Measures. Bureaus will establish performance measures to assess the degree of risk the Government is exposed to at various points in the direct or guaranteed loan cycle. The performance measures should be prepared by the year in which loans were issued or by groupings of two or more years. Performance data should not be presented on a cumulative basis for programs with maturity cycles extending over a number of years. In addition, loss rates estimates will be determined by considering historical rates of default and write-off and applying the appropriate rates to current loan activity. The following rates will be calculated in dollars by year or group of years:

(1) Delinquency rate	=	Delinquent loans Loans outstanding
(2) Default rate	=	Defaulted loans Loans disbursed
(3) Default/write-off rate	=	Loans written-off Defaulted loans
(4) Write-off rate	=	Loans written-off Loans disbursed

C. Independent Credit Review. Bureaus will arrange for a loan review and portfolio analysis to assess the quality of credit allocation decisions and to allocate servicing and collection resources properly. Guidance for this review is found in OMB Circular A-129, paragraph 13e.

D Performance Appraisal. Achievement of program objectives and performance measures will be considered in the performance appraisal of individuals with credit management responsibilities.

10.10 Accounting and Reporting. Bureaus will establish accounting and reporting systems consistent with 344 DM 1.3B and will submit such reports as part of the annual improvement plans. The reports should include operating statements, statements of financial position, and cash flow statements. In addition, reports will be consistent with or reconcilable to amounts reported in the budget and on the Schedule 9, SF 220.

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12/3/84 #3443

Replaces 12/3/84 #2607