Summary

GAO has begun a special audit effort focusing on 16 high-risk federal programs to help identify and eliminate fraud, waste, abuse, and mismanagement. This report examines one of those high-risk areas--the Farmers Home Administration's (FmHA) farm loan programs. In GAO's view, FmHA seems destined to continue losing millions of dollars annually in bad loans as long as its mandated mission--to keep high-risk farmers on their farms--conflicts with normal fiscal controls and policies that minimize risk and financial losses. GAO recommends that FmHA establish a system to ensure that (1) lending officials stick to the agency's loan standards, (2) delinquent borrowers are prohibited from receiving direct loans, (3) FmHA establish a range of guarantees that places the highest percentage guarantee on the least risky loan and a lower percentage guarantee on the most risky loan, and (4) FmHA uses competitive methods in selling farm inventory properties.

GAO found that: (1) almost $14 billion, or about 70 percent of the FmHA direct loan portfolio, is at risk, since the loans are held by delinquent borrowers or by borrowers whose debts had been rescheduled because of repayment difficulties; (2) FmHA estimates potential losses of $1.2 billion, or about 28 percent of its guaranteed loan program, but plans to revise its loss-projection formula; (3) in the direct loan program, field lending officials did not comply with FmHA loan-making and loan-servicing standards established to safeguard federal financial interests; (4) FmHA loan-making and servicing policies, some congressionally directed, increase the government's risk of losses; (5) in the guaranteed loan program, FmHA lending officials approved guarantees without obtaining proof of borrowers' creditworthiness and inadequately monitored commercial lenders' loan-servicing; (6) FmHA policies permitting commercial lenders to refinance existing farm debt and obtain maximum-rate guarantees for most loans, regardless of risk, encouraged lenders to shift their high-risk farm debt to the government; (7) FmHA estimated that, as of September 30, 1991, it had acquired about 3,100 farms from borrowers who had not repaid their loans; (8) FmHA did not ensure proper maintenance of the properties in its inventory; (9) legislative mandates regulating property sales limit FmHA returns on the properties and increased holding costs; and (10) management weaknesses contributing to the longstanding loan management problems include poor management information systems and weak financial controls.