head about $218 mubon, or 17 percent of the oral prstanding principal $5.3 bubon, Much of the increase in guaranteed can delinquencies is concentrated in a few states. The FAIR Act made signźcant changes to PSA's ending programs. These changes were aimed at strengthening the Snancial condition of the farm loan portfolio and improving the operation of the programs. They aclude modifying or eimmanng ending policies that added to PSAs risk and clarifying PSA's fundamental ending moie and cussion. Because USDA is in the process of implementing these changes, their impact will not be known for some time. However, we believe that they should go a long way to reducing the risk associated with the farm joan programs and to improving her operanons. BACKGROUND FSA provides credit to farmers and ranchers who are able to coram finds elsewhere at reasonable rates and terms. The agency provides credit assistance brough direct loans. which are funded by the government, and brough guarnized cans, which are made by commercial lenders and guaranteed by the government. Generaly the makes pem guarantee is 30 percent, however, the FAR Act slows the guarantee to be higher in certain distances. PSA's assistance is tended to be temporary once farmers and ranchers have become Snunculy made, dey re I graduate to commercial sources of credit. PSA MCHES JOsses in the direct joan program drough various types of debt renef assistance offered to borrowers who have trouble repayng their cans. Two such debt reieť opacos are reducing a borrower's debt so that the borrower connnnes farming x rencong and remains an FSA dient-referred to as restructuring with write-down-and I forgring debt by allowing a borrower who does 30t quality for restructuring to make a payment to FSA that is based on the value of collateral security and that is less than the outstanding debt-referred to as recovery value buy-out with write-off. FSA has a third option when one of these two approaches does not resolve a borrower's delinquency-debt settlement. Typically, this option involves writing off part or all of the unpaid loans for borrowers who are no longer farming. FSA also incurs losses as a result of guaranteeing farm loans. If a borrower defaults, FSA reimburses the commercial lender for the guaranteed portion of lost principal, accrued interest, and liquidation costs. STATUS OF FARM LOAN PORTFOLIO, AS OF SEPTEMBER 30, 1996 As of September 30, 1996, the outstanding principal on FSA's farm loans-direct and guaranteed-totaled about $17 billion. Of this amount, delinquent borrowers held about $4 billion. Table 1 shows that direct loan delinquencies decreased while guaranteed loan delinquencies increased between the end of fiscal years 1995 and 1996. Table 1: Outstanding Principal and Amount Owed by Delinquent Borrowers, by Loan Type. as of *The total number of borrowers may include some borrowers who are counted twice because they have both direct and guaranteed loans. Source: GAO/RCED-97-35. The amount of direct loans owed by delinquent borrowers varied by state. As of September 30, 1996, nine states had borrowers who held at least $100 million in delinquent loans. Collectively, these states had about 51 percent of the total $3.6 billion held by delinquent borrowers. Specifically, delinquent borrowers in Texas owed $483 million, those in Mississippi owed $255 million, and those in California owed $223 million. Delinquent borrowers in Oklahoma, North Dakota, New York, Louisiana, Minnesota, and South Dakota owed more than $100 million but less than $200 million. On guaranteed loans, borrowers in nine states accounted for about 64 percent of the delinquency. Specifically, as of September 30, 1996, delinquent borrowers in Oklahoma owed $43 million, and those in Texas owed $38 million. Delinquent borrowers in Nebraska, Louisiana, Minnesota, Wisconsin, Kansas, South Dakota, and Iowa owed more than $10 million but less than $20 million. Additionally, much of the increase in delinquencies on guaranteed loans in fiscal year 1996 involved borrowers in three statesTexas, Oklahoma, and Louisiana Table 2 shows that during fiscal year 1996, FSA incurred losses of about $1.1 billion on Borrowers in four states accounted for slightly more than half of the total losses on FSA's direct loans. Specifically, during fiscal year 1996, FSA reduced or forgave $224 million on direct loans for borrowers in California, $135 million for those in Mississippi, $103 million for those in Texas, and $101 million for those in Louisiana. On guaranteed loans, the highest amount of loss payments involved borrowers in two states-$6.8 million in Louisiana and $5.5 million in Oklahoma. FAIR ACT'S CHANGES TO THE FARM LOAN PROGRAMS Title VI of the FAIR Act contains fundamental reforms to the farm loan programs that are intended to reduce the risks associated with the programs and clarify FSA's basic lending mission. In particular, the act modifies or eliminates certain lending and servicing policies that had, in the past, increased the risk of loss. Specifically, the act, among other things, does the following: Prohibits borrowers who are delinquent on FSA direct or guaranteed farm loans from obtaining direct farm operating loans. Generally prohibits borrowers whose past default resulted in loan losses from obtaining new direct or guaranteed farm loans. Specifically, FSA may not make a new loan to a borrower if the borrower's prior direct loans were reduced or forgiven or if a payment had to be made to a commercial lender on the borrower's prior guaranteed loan. One exception to this prohibition is allowed: A direct or guaranteed farm operating loan for paying annual farm or ranch operating expenses-that is, for purchasing seed, feed, fertilizer, insecticide, and farm or ranch supplies, and for meeting other essential farm or ranch operating expenses, including cash rent-may be made to a borrower whose restructuring resulted in debt forgiveness. Limits borrowers to one instance of debt forgiveness on direct loans. Requires borrowers, as a measure of protection on loans made by FSA, to |