Summary

Because it assists farmers who present less financial risk than direct loan borrowers, the Farmers Home Administration's (FmHA) guaranteed farm loan program has substantially lower rates of delinquency and loan losses than its direct loan program. Nonetheless, FmHA has hundreds of millions of dollars in guaranteed loans that are at risk, in part, because FmHA's lending policies allow borrowers who defaulted on past loans to obtain new guaranteed loans. Also, FmHA's field office officials have not always followed the agency's standards for servicing guaranteed loans, which are meant to protect the government's financial interest. The guaranteed loan program has not been effectively used as a tool to graduate direct loan borrowers to commercial credit. As a result, some borrowers may have direct loans longer than justified, taking advantage of the more favorable terms. Commercial lenders told GAO that changes are needed to FmHA's farm loan programs in order for lenders to consider taking on more direct loan borrowers as clients. They suggest changing the direct loan program to provide incentives for borrowers to seek commercial credit and changing the guaranteed loan program to make it more attractive to lenders.

GAO found that: (1) the guaranteed farm loan program has substantially lower delinquency and default rates than the direct loan program because its borrowers present fewer financial risks; (2) FmHA increases the government's risk exposure by permitting borrowers who have defaulted on past loans to obtain new guaranteed loans and by failing to follow FmHA loan servicing standards; (3) FmHA has not effectively used the guaranteed loan program to graduate direct loan borrowers to commercial credit; (4) only 4 percent of direct loan borrowers obtained guaranteed loans in fiscal years 1991 through 1993, partially because FmHA did not fully implement its procedures for identifying and graduating qualified direct loan borrowers; (5) Congress has required FmHA to propose regulations to improve borrowers' transition to commercial credit; (6) FmHA and commercial lenders believe that many direct loan borrowers will never qualify for guaranteed loans; and (7) commercial lenders believe that FmHA should provide incentives for borrowers to seek commercial credit and make the guaranteed loan program more attractive to commercial lenders.