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I served on the FHA county committee at the same time that Mike Heck was the FHA loan officer. I found the experience to be enjoyable as well as educational. At the time, I was very pleased with the FHA program.
Presently, I am very disappointed in the FHA program. Since receiving my FHA guaranteed loan, the program seems to be "going down hill". Below I have listed some reasons for my disappointment and disgust with the program.
First of all, FHA has for some reason shown distrust in my operation from the time that I applied for the loan. To my understanding, FHA did not think that my operation would survive. After receiving the loan, I was accused of paying carry-over debt. Twice, I was accused of buying a new pick-up because someone had falsely reported the information to FHA. FHA notified my banker of this false information without verifying it. My operation has been scrutinized and picked apart causing delays in advances which caused delays with creditors, that in turn delayed critical parts of my farming operation. Timing is a very critical factor in farming.
Secondly, the expense that accrues while getting the loan negatively affects my farming operation. Over two thousand dollars was spent on individual wages for someone to correctly prepare the loan. One thousand four hundred dollars was paid to FHA for handling fees. Three hundred fifty dollars was spent on a farm management class containing material that was already common to my ordinary farming operation. Approximately one to two thousand dollars was spent out-of-pocket on traveling expenses, long distance phone bills, fax machine fees, and lost operation hours while trying to prepare the loan documents.
I went to FHA for help, not unjust criticism. The money spent on preparing the loan could have been used to pay bills. Then, when FHA was so slow in completing the paperwork for advancements, my farming operation was delayed. I believe that the FHA guaranteed loan program could be more beneficial to its clients if it were organized more efficiently, more cost-effective to the applicant, and if it were to build a better trust between the FHA loan officer and its clients. Thank you for your time.
Jern a Palha
Terry W. Pattison
Mr. Chairman and Members of the Subcommittee:
Thank you for inviting us to provide this statement for the record as part of the Subcommittee's oversight hearing on the farm loan programs administered by the U.S. Department of Agriculture's (USDA) Farm Service Agency (FSA). You asked us to (1) summarize our January 1997 report,' which updated prior reports on the financial condition of FSA's farm loan portfolio, and (2) discuss changes to the farm loan programs that were mandated by the Federal Agriculture Improvement and Reform (FAIR) Act of 1996 (P.L. 104-127, Apr. 4, 1996).
In summary, our January report shows that a significant portion of FSA's direct farm loan portfolio continues to be at risk because it is held by delinquent borrowers. As might be expected, a much smaller percentage of FSA's guaranteed loan portfolio is held by delinquent borrowers. Specifically:
As of September 30, 1996, $3.6 billion, or about 34 percent of the total outstanding principal on direct loans ($10.5 billion), was held by delinquent borrowers. This level of delinquency is an improvement over the $4.6 billion, or about 41 percent of the total outstanding principal ($11.4 billion), that was held by delinquent borrowers at the end of fiscal year 1995.
During fiscal year 1996, FSA lost $1.1 billion of principal and interest by
As of September 30, 1996, about $280 million, or 4.4 percent of the total putstanding principal on guaranteed loans ($6.4 billion), was held by delinquent borrowers. In comparison, at the end of fiscal year 1995, delinquent borrowers
'Farm Service Agency: Update on the Farm Loan Portfolio (GAO/RCED-97-35, Jan. 3, 1997).
held about $218 million, or 3.7 percent of the total outstanding principal ($5.9 billion).
Much of the increase in guaranteed loan delinquencies is concentrated in a few
The FAIR Act made significant changes to FSA's lending programs. These changes were aimed at strengthening the financial condition of the farm loan portfolio and improving the operation of the programs. They include modifying or eliminating lending policies that added to FSA's risk and clarifying FSA's fundamental lending role and mission. 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 loan programs and to improving their operations.
FSA provides credit to farmers and ranchers who are unable to obtain funds elsewhere at reasonable rates and terms. The agency provides credit assistance through direct loans, which are funded by the government, and through guaranteed loans, which are made by commercial lenders and guaranteed by the government. Generally, the maximum guarantee is 90 percent; however, the FAIR Act allows the guarantee to be higher in certain instances. FSA's assistance is intended to be temporary; once farmers and ranchers have become financially viable, they are to graduate to commercial sources of
FSA incurs losses in the direct loan program through various types of debt relief assistance offered to borrowers who have trouble repaying their loans. Two such debt relief options are (1) reducing a borrower's debt so that the borrower continues farming or ranching and remains an FSA client-referred to as restructuring with write down-and (2) forgiving debt by allowing a borrower who does not qualify 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