*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
direct loans (principal and interest) and about $42 million on guaranteed loans.

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
have, or agree to obtain, hazard insurance on the property that they acquire
with farm ownership and operating loans. In addition, as a condition for
getting disaster emergency loans, applicants are required to have had hazard
insurance on property that was damaged or destroyed. The Secretary of
Agriculture is to establish the levels of insurance that borrowers need to obtain

on property acquired with farm loans and the level of insurance that borrowers needed to have had as a condition for obtaining an emergency loan.

Establishes a maximum indebtedness level of $500,000 for disaster emergency loans.

Allows FSA to (1) contract with commercial lenders to service the farm loan portfolio (2) use private collection agencies to assist in collecting delinquent amounts.

Requires borrowers to pay at least a portion of the interest on their loans as a condition for having the terms of their loans rescheduled or reamortized. In particular, borrowers who are unable to make their farm loan payments, but who are not 90 days past due, can have the terms of their farm loans rescheduled or reamortized if they pay a portion of the interest that is due on the loans. The Secretary of Agriculture is to establish the level of interest payments that borrowers need to make.

The FAIR Act also clarifies FSA's basic lending mission by, among other things, emphasizing that its assistance is to be temporary. Additionally, the act builds upon other legislation enacted earlier in the 1990s that emphasized helping beginning farmers and ranchers get started and progress in farming or ranching. The act also reinforces past congressional emphasis on shifting farm lending from direct loans to guaranteed loans. More specifically, the act, among other things, does the following:

Sets term limits for the receipt of direct farm ownership and operating loans. A person must have operated a farm or ranch for at least 3 years to be eligible to obtain a direct farm ownership loan. A borrower can obtain direct farm ownership loans during a 10-year period that starts when the person first obtains a farm ownership loan. A borrower can obtain direct farm operating

loans during 7 years; these may be consecutive, nonconsecutive, or a
combination of consecutive and nonconsecutive years.

Encourages the graduation of direct loan borrowers to conventional credit by allowing a 95-percent guarantee on loans made by commercial lenders to refinance the existing direct loans that borrowers have.

Increases the guarantee percentage allowed on loans made by commercial lenders to beginning farmers and ranchers who participate in a farm ownership loan program that is targeted to them.

Targets farm properties that are in FSA's inventory for sale to beginning
farmers and ranchers. If a beginning farmer or rancher does not offer to
acquire the property at current market value within 75 days of FSA's
acquisition, then the properties are to be disposed of competitively.

The changes in the FAIR Act address many of the problems that we have reported on in the past. While it is too early to gauge their impact on the financial condition of the portfolio, we believe that, if properly implemented, they will reduce the financial risk associated with the farm lending programs. We plan to continue to monitor and report on the USDA's progress in implementing the FAIR Act's credit provisions.

This concludes our prepared statement.

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