Debt Collection: Improved Reporting Needed on Billions of Dollars in
Delinquent Debt and Agency Collection Performance (Letter Report,
06/02/97, GAO/AIMD-97-48).

Pursuant to a congressional request, GAO reviewed debt collection issues
for nontax debts, focusing on: (1) reported governmentwide data on
credit receivables and delinquencies for federally managed loans; (2)
the status of efforts at four major credit agencies to resolve
delinquencies; (3) the dollars collected using various
legislatively-established collection tools; and (4) ways debt collection
reporting can be enhanced to evaluate progress in collecting debt, and
thereby assess agency efforts to meet the mandates of the Debt
Collection Improvement Act of 1996. GAO did not verify the accuracy of
the information provided to it by the Office of Management and Budget
(OMB), the Financial Management Service (FMS), or by the four agencies
included in the review.

GAO noted that: (1) governmentwide reporting to the Congress indicates
that the amount of debt federal agencies are directly managing has
remained about $200 billion for the 5 years ended September 30, 1996;
(2) during that time, reported delinquencies for these federal credit
receivables varied between $31 billion to $38 billion; (3) at September
30, 1995, the most recent data available on program-level collection
performance at the time of GAO's field work, the housing agencies were
dealing with more than half of their delinquent debt through various
involuntary collection tools and, for almost a third of their delinquent
debt, were attempting to contact borrowers to get them to resume
payments on the original or revised terms; (4) the Department of
Education and its agents were attempting to locate and confirm or revise
repayment agreements associated with about 70 percent of Education's
delinquent debt; (5) contacting borrowers with delinquent student loans
is an especially difficult task since they tend to be younger and thus
more transient; (6) collection on such unsecured loans tends to be more
difficult because there is no collateral to be seized if borrowers do
not pay; (7) delinquent student loans accounted for 40 cents of every
dollar of delinquent nontax debt directly managed by the government and
over half of the delinquent federal credit receivable debt; (8) GAO
identified several enhancements that would facilitate valid assessments
of agency collection efforts; (9) better data and key analyses are
crucial aspects of federal efforts to measure success in accomplishing
the charter for a more business-like credit management environment as
set out by the Debt Collection Improvement Act of 1996; (10) progress in
this area will be especially critical to the success of FMS as it
assumes new debt collection management and reporting responsibilities
under the act; (11) such data is central to effective day-to-day
management in terms of selecting collection strategies and deploying
available staff and contract resources; and (12) among the enhancements
are: (a) developing a reporting framework to identify and assess the
status of agency efforts to collect delinquent balances; (b) providing
more information on how actively, successfully, and cost-effectively
agencies are using individual collection tools; (c) reporting actual
delinquent amounts that agencies are trying to collect and showing how *

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-97-48
     TITLE:  Debt Collection: Improved Reporting Needed on Billions of
             Dollars in Delinquent Debt and Agency Collection
             Performance
      DATE:  06/02/97
   SUBJECT:  Debt collection
             Government guaranteed loans
             Direct loans
             Collection procedures
             Student loans
             Mortgage loans
             Delinquent loans
             Reporting requirements
             Loan defaults
             Loan accounting systems
IDENTIFIER:  Federal Family Education Loan Program
             HUD Multifamily Housing Loan Program
             HUD Single Family Housing Loan Program
             HUD Title I Housing Loan Program
             Dept. of Education Stafford Student Loan Program
             Dept. of Education Parent Loans for Undergraduate Students
             Program
             Dept. of Education Supplemental Loans for Students Program
             VA Home Loan Guaranty Program
             VA Vendee Single Family Housing Loan Program
             USDA Direct Section 502 and 504 Single Family Housing
             Program
             USDA Multifamily Housing Direct Loan Program
             GAO High Risk Program

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Cover
================================================================ COVER

Report to the Chairman, Committee on the Budget, House of
Representatives

June 1997

DEBT COLLECTION - IMPROVED
REPORTING NEEDED ON BILLIONS OF
DOLLARS IN DELINQUENT DEBT AND
AGENCY COLLECTION PERFORMANCE

GAO/AIMD-97-48

Debt Collection

(918896)

Abbreviations
=============================================================== ABBREV

  CFO - chief financial officer
  FASAB - Federal Accounting Standards Advisory Board
  FFEL - Federal Family Education Loan
  FHA - Federal Housing Administration
  FMS - Financial Management Service
  GAO - U.S.  General Accounting Office
  GMRA - Government Management Reform Act
  GPRA - Government Performance and Results Act
  HUD - Department of Housing and Urban Development
  IRS - Internal Revenue Service
  JFMIP - Joint Financial Management Improvement Project
  OMB - Office of Management and Budget
  PLUS - Parent Loans for Undergraduate Students
  RHS - Rural Housing Service
  SLS - Supplemental Loans to Students
  VA - Department of Veterans Affairs

Letter
=============================================================== LETTER

B-275282

June 2, 1997

The Honorable John R.  Kasich
Chairman, Committee on the Budget
House of Representatives

Dear Mr.  Chairman:

As agreed with your office, this report responds to your request that
we review debt collection issues for nontax debts.  It deals with
outstanding lending program debt that is being directly managed by
federal agencies and discusses programs under which federal agencies
disbursed the loans as well as defaulted guaranteed loans for which
agencies reimbursed private lenders and are now attempting to collect
themselves.  Generally, this debt is referred to as federal credit
receivables.  This report specifically focuses on (1) reported
governmentwide data on credit receivables and delinquencies for
federally managed loans, (2) the status of efforts at four major
credit agencies to resolve delinquencies, (3) the dollars collected
using various legislatively established collection tools, and (4)
ways debt collection reporting can be enhanced to evaluate progress
in collecting debt, and thereby assess agency efforts to meet the
mandates of the Debt Collection Improvement Act of 1996.  We did not
verify the accuracy of the information provided to us by the Office
of Management and Budget (OMB), the Department of the Treasury's
Financial Management Service (FMS), or by the four agencies included
in our review.

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Governmentwide reporting to the Congress indicates that the amount of
debt federal agencies are directly managing has remained about $200
billion for the 5 years ended September 30, 1996.  During that time,
reported delinquencies for these federal credit receivables varied
between $31 billion to $38 billion.  Our report focuses on the four
program activities that had about two-thirds of this delinquent debt:
the Department of Education's Federal Family Education Loan Program
with $20 billion and housing programs at the Departments of Housing
and Urban Development (HUD), Veterans Affairs (VA), and Agriculture,
which cumulatively had another $5 billion.

To gain a perspective on agency performance, we assessed the status
of agency efforts to collect on delinquent debts.  At September 30,
1995, the most recent data available on program-level collection
performance at the time of our field work, the housing agencies (1)
were dealing with more than half of their delinquent debt through
various involuntary collection tools, such as foreclosure and
adjudication initiatives and (2) for almost a third of their
delinquent debt, were attempting to contact borrowers to get them to
resume payments on the original or revised terms.  Education was
experiencing similar challenges in collecting delinquent debt.
Education and its agents, which include state or private non-profit
guaranty agencies, were attempting to locate and confirm or revise
repayment agreements associated with about 70 percent of Education's
delinquent debt.  Contacting borrowers with delinquent student loans
is an especially difficult task since they tend to be younger and
thus more transient.  Also, collection on such unsecured loans tends
to be more difficult because there is no collateral to be seized if
borrowers do not pay.  Delinquent student loans accounted for 40
cents of every dollar of delinquent nontax debt directly managed by
the government and over half of the delinquent federal credit
receivable debt.

We identified several enhancements that would facilitate valid
assessments of agency collection efforts.  Better data and key
analyses are crucial aspects of federal efforts to measure success in
accomplishing the charter for a more business-like credit management
environment as set out by the Debt Collection Improvement Act of
1996.  Progress in this area will be especially critical to the
success of FMS as it assumes new debt collection management and
reporting responsibilities under the 1996 act.  But more importantly,
such data is central to effective day-to-day management in terms of
selecting collection strategies and deploying available staff and
contract resources.  Among the enhancements that we discuss are (1)
developing a reporting framework to identify and assess the status of
agency efforts to collect delinquent balances, (2) providing more
information on how actively, successfully, and cost-effectively
agencies are using individual collection tools, (3) reporting actual
delinquent amounts that agencies are trying to collect and showing
how those figures relate to amounts reported on agency financial
statements, and (4) improving the reliability and consistency of
reporting on delinquencies and credit receivables.

   BACKGROUND
------------------------------------------------------------ Letter :2

With credit programs involving outstanding loan balances approaching
a reported $1 trillion (including direct and guaranteed loans), the
federal government is the nation's largest credit manager.  In
carrying out this responsibility, federal agencies are faced with the
challenge of ensuring that this debt, much of which is managed
day-to-day by private sector lenders and state or private non-profit
guaranty agencies, is collected from millions of borrowers, and that
billions of dollars in delinquent debt are effectively pursued and
collected.

Our review specifically focused on the $25 billion of delinquent
credit program debt that four of the larger federal credit agencies
were managing directly.

  The Department of Housing and Urban Development's Federal Housing
     Administration (FHA) Single Family and Multifamily Housing Loan
     Programs and Title I Program.  The Single Family Housing program
     insures mortgages on one-family to four-family housing units.
     The Multifamily Housing program insures mortgages on projects
     such as rental properties of five or more units, housing for the
     elderly, hospitals, and nursing homes.  The Title I Program
     insures loans for home improvements or the purchase of
     manufactured housing.  These programs serve first-time home
     buyers with incomes that range from low to moderate, and the
     elderly and disabled who require special housing.

  The Department of Education's Federal Family Education Loan (FFEL)
     Program, which includes Federal Stafford Loans, subsidized and
     unsubsidized; Federal Parent Loans for Undergraduate Students
     (PLUS); and Federal Supplemental Loans to Students (SLS) (no new
     SLS loans were originated after July 1, 1994).  The FFEL Program
     is the largest post secondary education guaranteed loan program
     of the federal government and its primary purpose is to increase
     post-secondary educational opportunities for eligible students.

  The Department of Veterans Affairs' (VA) Guaranty and Vendee Loan
     Programs.  Under the Loan Guaranty Program, VA guarantees loans
     to veterans and current service personnel to purchase,
     construct, or improve homes.  Through the Vendee Loan Program,
     direct loans are made to purchasers of VA-owned houses acquired
     as a result of defaults on guaranteed loans.

  The Department of Agriculture's Rural Housing Service (RHS) Single
     Family and Multifamily Housing Direct Loan Programs.  Single
     Family Loans are made to low- and moderate-income families to
     purchase or repair homes in rural areas.  Borrowers of single
     family loans are required to "graduate" from the direct loan
     program when their incomes are sufficient to afford private
     credit.  Multifamily Housing Loans are made to provide moderate
     cost rental housing to persons of low and moderate incomes in
     rural areas.

The above programs represent about half of the reported $50 billion
in reported delinquencies for credit programs and noncredit nontax
programs as of September 30, 1995.  Of the reported $50 billion,
approximately $38 billion was attributable to credit programs.  The
residual, categorized as "nontax, noncredit," includes such things as
fines, penalties, and overpayments associated with a variety of
government functions.

At the end of fiscal year 1995,\1 the credit programs included in our
review comprised 19 percent of reported outstanding direct loans\2
and 75 percent of reported defaulted guaranteed loans receivable.

--------------------
\1 Our review focused on selected programs at FHA, VA, RHS, and
Education and for those programs, fiscal year 1995 amounts were the
most recent data available when we performed our field work.

\2 Most of the remaining outstanding direct loans relate to the
Department of Agriculture's farm loan program, which we have reviewed
extensively in other reports and testimony.  See Consolidated Farm
Service Agency:  Update on the Farm Loan Portfolio
(GAO/RCED-95-223FS, July 14, 1995).

      HOW CREDIT PROGRAMS WORK
---------------------------------------------------------- Letter :2.1

Under direct loan programs, a federal agency generally makes a direct
disbursement to an approved borrower and then services and collects
on the loan.  These loans may be secured, as in the case of the
Department of Agriculture rural housing loan programs, or unsecured,
as are Department of Education direct student loans.  Under
guaranteed loan programs, federal agencies rely on private sector
lenders to originate and service loans within federal guidelines.
All or a part of the interest and loan principal are guaranteed by
the government in the case of borrower default.  As with direct
loans, guaranteed loans may be secured by property or unsecured.
(For more information on the growth of guaranteed loan programs in
recent years and on what happens when borrowers default on guaranteed
loans, see appendix II).

In general, federal direct loan and loan guarantee programs have
legislatively mandated provisions to accomplish certain social and
economic results.  However, because many federal loan programs are
targeted at borrowers who, due to their financial situation, cannot
otherwise obtain private financing, the government's risk is
generally greater than that of private lenders.  By their nature,
many of these programs can be expected to result in a cost to the
government--the cost of achieving a program's social or economic
goals--and agencies are faced with achieving these goals in
conjunction with good credit management practices.  Costs are
incurred on direct and guaranteed loans when (1) interest rate or
other subsidies are provided or (2) debts are not fully repaid and
liquidation of any available collateral is insufficient to recover
the unpaid balance.  Whether or not a program is cost-effective
depends largely on securing repayment and on the timeliness of those
loans repayments.  Therefore, within the objectives and provisions
set out for each federal credit program, controlling and mitigating
the risk of nonpayment are important, as are measuring and reporting
on performance to hold agencies accountable for program results and
costs.  Figure 1 explains how failing to mitigate risks at any point
during the credit management process--when first extending credit,
when servicing accounts, or when recovering delinquent debt--can
affect loan payment.

   Figure 1:  Credit Management
   Functions and Risks

   (See figure in printed
   edition.)

      DIFFERENCES IN CREDIT
      PROGRAMS
---------------------------------------------------------- Letter :2.2

It is important to note that differences among credit programs affect
the validity of efforts to compare and contrast performance.  In
general, secured loans offer better recovery options than unsecured
loans chiefly because delinquencies can be recovered by seizing or
foreclosing on the asset securing the loan rather than by pursuing
the borrower.  By program design, some housing programs collect fees
when the loan is originated to help cover the default costs of the
program and generally do not record receivables or pursue shortfalls
on loans after foreclosure.  In contrast, because of the
legislatively mandated structure of the FFEL Program, Education
attempts to collect on all defaults, since there is no collateral to
seize, and loan origination fees collected are not designed to cover
all default costs.  Other program differences and their effect on
debt reporting are noted throughout this report.

      PRIOR GAO WORK AND
      LEGISLATIVE INITIATIVES
      AFFECTING FEDERAL CREDIT
      PROGRAMS
---------------------------------------------------------- Letter :2.3

Federal loan programs have been a major focus of GAO's High-Risk
Program.\3

We have designated high risk areas involving loan programs at three
of the four major credit agencies included in our review.  Recent
reports on our High-Risk Program discuss:  the Department of
Agriculture's farm loans, the Department of Education's entire
student financial aid program, and the Department of Housing and
Urban Development.  Our audits, those by the inspectors general, and
others, have consistently disclosed serious weaknesses in agency
systems used to account for and manage receivables.  Audits have
shown that some information for credit and debt management is not
accurate or complete.

Over the past 15 years, numerous legislative and other
initiatives--some of which were in response to our
recommendations--have strengthened agency debt collection efforts or
its oversight, including the Debt Collection Act of 1982, the Debt
Collection Improvement Act of 1996, OMB's nine-point credit
management program, the Chief Financial Officers (CFO) Act of 1990,
as expanded by the Government Management Reform Act (GMRA) of 1994,
the Government Performance and Results Act (GPRA) of 1993, the
Federal Credit Reform Act of 1990, and the establishment of the
Federal Accounting Standards Advisory Board (FASAB).  Among other
things, these initiatives clarified and strengthened agency authority
for collecting debt, provided the underpinning for improving
financial and program management and accountability in federal
agencies, and revised budget and accounting requirements for federal
credit programs.

The Federal Credit Reform Act of 1990, in particular, changed the
budgetary treatment of loans and loan guarantees so that the
government could better measure and control its subsidy costs for
loan programs.  Under the act, agencies are required to estimate and
budget for the full net present value cost of direct loans and loan
guarantees, before credit is extended.  Recovery of delinquent debt
is a factor not only in determining the estimated cost of the loan
program but also in controlling the cost of the program.  Higher
recovery rates for delinquent debt translate into lower program
costs.  The Federal Credit Reform Act of 1990 and the other
initiatives are discussed in further detail in appendix III.

--------------------
\3 Our High-Risk Program, which began in 1990, represents a special
effort to review and report on the federal program areas we
considered high-risk because they were especially vulnerable to
waste, fraud, abuse, and mismanagement.  The effort has brought much
needed focus to problems that were costing the government billions of
dollars.  In February 1997, we issued a series of reports on the
status of efforts to address problems in designated high-risk areas
(High-Risk Series GAO/HR-97-20SET, February 1997).

      THE DEBT COLLECTION
      IMPROVEMENT ACT OF 1996
---------------------------------------------------------- Letter :2.4

The Congress also just last year took an important step in improving
debt collection efforts by expanding collection tools and authorities
available to agencies.  The Debt Collection Improvement Act of 1996,
which we supported, allows the public dissemination of information
regarding the identity of persons with delinquent nontax debt.  In an
effort to reduce future delinquencies, it also requires agencies to
screen potential borrowers--except for disaster loan applicants--and
requires denial of credit to anyone who is delinquent in repaying
federal debt (except for tax debt).  The 1996 act also calls for
centralizing the servicing of debt that is more than 180 days
delinquent at Treasury's FMS and designated collection centers.  In
certain circumstances, the act provides authority for agencies to
retain and use a portion of collections, if appropriated.  The act
also transferred the responsibility to prepare annual reports to the
Congress regarding agency debt collection efforts from OMB to FMS.  A
more extensive description of this new legislation and the expanded
responsibilities accorded FMS are provided in appendix IV.

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

In carrying out our review, we analyzed debt collection information
available from OMB and the agencies included in our review for fiscal
years 1992 through 1996.  Amounts for fiscal year 1995 were used to
show the status of delinquent debt for the selected FHA, VA, RHS, and
Education programs discussed in this report because it was the most
recent information at the program-level available at the time our
fieldwork was done.  Because preliminary governmentwide debt
collection information for fiscal year 1996 just became available in
February 1997, we included this data in our report where possible.
We also reviewed the Debt Collection Act of 1982, the Debt Collection
Improvement Act of 1996, and other significant applicable legislative
and regulatory provisions affecting the programs included in our
review.  We analyzed information in the Analytical Perspectives
section of the Budget of the United States Government Fiscal Year
1997 and Fiscal Year 1998 and other selected program data used by
agencies to manage their credit programs.

To determine progress toward resolving outstanding delinquent debt in
the programs reviewed, we analyzed data provided by agency officials
describing actions taken to resolve delinquent debt.  We did not
verify the accuracy of the information provided to us by OMB, FMS, or
the four agencies included in our review.  We did, however, consider
the results of financial statement audits, and sought to determine
whether agencies reported debt collection information on a consistent
basis, for the agencies included in our review.

We conducted our work from October 1995 through March 1997 in
accordance with generally accepted government auditing standards.
Details on the scope and methodology of this review are included in
appendix I.

We requested comments on a draft of this report from the Department
of the Treasury; the Office of Management and Budget; and the
Departments of Agriculture, Housing and Urban Development, Veterans
Affairs, and Education.  At a joint meeting on April 17, 1997, we
received oral comments from those agencies.  Their comments are
discussed in the "Agency Comments and Our Evaluation" section of this
report.

   REPORTED CREDIT RECEIVABLES AND
   DELINQUENCIES
------------------------------------------------------------ Letter :4

OMB's data showed that as of September 30, 1996, federal agencies
were responsible for directly managing about $204 billion of the
approximately $1 trillion attributable to government lending
programs.  The federally managed segment of the overall credit
portfolio (credit receivables) included (1) $164 billion of direct
lending and (2) $40 billion of defaulted guaranteed loans for which
agencies had reimbursed private lenders and were now trying to
collect directly from borrowers.

Of the total reported $51 billion of governmentwide delinquencies,
about $36 billion (down from $38 billion in fiscal year 1995) was
associated with the federal credit programs.  The remaining $15
billion of delinquencies were nontax noncredit receivables resulting
from such actions as grant overpayments and civil monetary fines.

The numbers reported indicate that total credit receivables and
delinquencies on agency books were steady from 1992 to 1996.  As
discussed later in this report, caution must be exercised in using
this data for comparison or analytical purposes because agencies did
not uniformly report data and reliability issues have surfaced during
audits of agency financial statements.

      RECEIVABLES
---------------------------------------------------------- Letter :4.1

Table 1 shows the reported credit receivables from fiscal year 1992
through fiscal year 1996.  For financial reporting purposes, credit
agencies wrote off about $20 billion of credit-related debt during
these years including:  $3 billion in fiscal year 1992, $3 billion in
fiscal year 1993, $8 billion in fiscal year 1994, $3 billion in
fiscal year 1995, and $3 billion in fiscal year 1996.  As discussed
later in this report, although the write-offs allow financial
statements to depict amounts the agency reasonably expects to
collect, some agencies continue to pursue amounts that have been
written off.

                                Table 1

                 Credit Receivables Reported by OMB for
                     Fiscal Years 1992 Through 1996

                         (Dollars in billions)

Credit receivables                        1992  1993  1994  1995  1996
----------------------------------------  ----  ----  ----  ----  ----
Direct loans                              $157  $157  $161  $160  $164
Defaulted loan guarantees                   49    48    37    44    40
======================================================================
Total                                     $206  $205  $198  $204  $204
----------------------------------------------------------------------
Source:  Debt collection reports and FMS.

Table 2 shows these same reported credit receivables for fiscal years
1992 through 1996 by lending agency.  As the table indicates, most of
these receivables belonged to the Department of Agriculture.  We
extensively reviewed most of Agriculture's receivables in our
reports, entitled Consolidated Farm Service Agency:  Update on the
Farm Loan Portfolio (GAO/RCED-95-223FS, July 14, 1995) and Farm
Service Agency:  Update on the Farm Loan Portfolio (GAO/RCED-97-35,
January 3, 1997).

Table 2 also shows an $18 billion increase in Education receivables
between fiscal years 1994 and 1996.  This was primarily the result of
(1) $12 billion in loan growth from fiscal years 1994 to 1996 for the
direct loan program, which was not part of our review,\4 and, as
explained later, (2) Education increasing the recorded net financial
value of its receivables based on the audit of its fiscal year 1995
financial statements.

                                Table 2

                 Credit Receivables Reported by Lending
                                 Agency

                         (Dollars in billions)

Agency                                    1992  1993  1994  1995  1996
----------------------------------------  ----  ----  ----  ----  ----
Department of Agriculture                 $108  $108  $111  $109  $104
Agency for International Development        16    16    16    16    15
Department of Housing and Urban             21    21    21    20    16
 Development
Small Business Administration                6     7     9    10    10
Department of Education                     15    13    14    24    32
Department of Veterans Affairs               3     3     3     3     3
Export Import Bank                           9     8     6     7     9
All other agencies\a                        28    29    18    15    15
======================================================================
Total                                     $206  $205  $198  $204  $204
----------------------------------------------------------------------
\a Amounts for 1992 and 1993 include $10 billion and $8 billion,
respectively, in accrued interest that were not distributed among
agencies until 1994.

Source:  Debt collection reports and FMS.

It should be noted that the credit programs at FHA, VA, RHS, and
Education that we reviewed in more detail represent only a portion of
the amounts in table 2.  Table 3 identifies the credit receivables
for the programs we reviewed as of the end of fiscal year 1995, which
was the latest data available for the programs included in our
review.

                                Table 3

                Credit Receivables for Programs Reviewed
                          for Fiscal Year 1995

                         (Dollars in billions)

                                                                Credit
                                                                receiv
Program reviewed                                                 ables
--------------------------------------------------------------  ------
Education: FFEL Program                                            $20
HUD--FHA: Single and Multifamily Housing and                        10
 Title 1 Loan Programs
Agriculture--RHS: Single and Multifamily Housing Loan Programs      30
Veterans Affairs: Guaranty and Vendee Loan Programs                  3
======================================================================
Total                                                              $63
----------------------------------------------------------------------
Source:  Agencies' Report on Receivables Due From the Public.

--------------------
\4 The direct loan program at Education was started in 1994 and was
not included in our review because, as a new program, it did not have
significant delinquencies.

      DELINQUENCIES
---------------------------------------------------------- Letter :4.2

Table 4 shows that from fiscal year 1992 to fiscal year 1996,
reported delinquencies on credit receivables started and ended at $36
billion with interim fluctuations.  At September 30, 1996, $26
billion, over 70 percent of the credit receivable delinquencies, was
attributable to defaulted loan guarantees, primarily student loans.
The remainder was attributable to direct loans.  Reported
delinquencies for the programs we reviewed accounted for about $26
billion (two-thirds) of the $38 billion in delinquent credit
receivables managed by federal agencies at September 30, 1995.

                                Table 4

                 Delinquent Credit Receivables Reported
                  by OMB for Fiscal Years 1992 Through
                                  1996

                         (Dollars in billions)

Loans                                     1992  1993  1994  1995  1996
----------------------------------------  ----  ----  ----  ----  ----
Direct loans                               $11   $10   $12   $10   $10
Defaulted loan guarantees                   25    21    22    28    26
======================================================================
Total                                      $36   $31   $34   $38   $36
----------------------------------------------------------------------
Source:  Debt collection reports and FMS.

On the surface, delinquencies from defaulted guaranteed loans appear
to be a greater problem than those for direct loans.  However, it is
not possible to calculate the percentage of guaranteed loans that are
delinquent because, according to OMB, no governmentwide data exists
on the status of delinquencies for the $760 billion of guaranteed
loans currently being serviced by private lending institutions.
Without this information, reliable comparisons of delinquencies for
direct and guaranteed loans are not possible.  See appendix II for an
analysis of guaranteed loans outstanding.

While the amounts of reported delinquencies for the programs changed
at each of the four agencies included in our review, the largest
change related to Education's Federal Family Education Loan Program,
which grew from $14 billion to $20 billion from fiscal years 1992 to
1995.  The major part of this increase was a result of Education
increasing the net financial value of its receivables by $5.6 billion
based on an independent audit of its fiscal year 1995 financial
statements.  Specifically, the audit revealed that Education should
recognize a receivable for expected collections from loans previously
considered uncollectible.

The changes in the amounts reported as delinquent for fiscal years
1992 through 1995 at the three housing agencies included in our
review are highlighted below.  More specific information on the
status of collection efforts of the housing programs and Education
are discussed in the next section of this report.

  FHA's reported delinquencies declined from $2.6 billion to $2.3
     billion due to loan sales, loan restructuring, foreclosures, and
     property dispositions.  In March 1994, FHA began an aggressive
     program to sell defaulted FHA-insured single and multifamily
     mortgages.  This initiative was undertaken as part of HUD's
     overall reinvention efforts.\5 As discussed later in this
     report, however, FHA officials acknowledged that reported
     delinquencies would have been significantly higher if they were
     consistent with FMS criteria.

  VA's reported delinquencies declined from $2.2 billion to $1.5
     billion due to pre-foreclosure loan servicing activity, debt
     waivers and the Veterans Home Loan Indemnity and Restructuring
     Act of 1989.  Under this act, borrowers pay a higher funding fee
     to cover defaults.  VA does not pursue any remainder due on the
     loan after foreclosure.\6 Thus, the delinquencies in VA's
     portfolio primarily represent efforts to collect on defaults
     resulting from pre-1990 loans.  A VA official said that the
     amount of delinquencies should continue to decline because few
     new housing delinquencies are being added, allowing VA to
     concentrate on resolving older delinquent debt.

  RHS' reported delinquencies stayed steady at about $1.2 billion
     during the 4-year period.  This amount is attributable solely to
     RHS' direct lending program.

In addition, our January 1997 report\7 on farm loans showed that
reported delinquencies had dropped from 28 percent to 23 percent
during fiscal year 1996, largely due to a write-off of $1.1 billion
of interest and principal during the year.  As noted in the overview
report (GAO/HR-97-1, February 1997) for our series of reports on
high-risk federal programs, the Congress passed the Federal
Agriculture Improvement and Reform Act of 1996, which made
fundamental changes in loan-making, loan-servicing, and property
management policies.  Agriculture is still in the process of
implementing the mandated reforms and their impact on the loan
portfolio's financial condition will not be known for some time.

--------------------
\5 For more information about HUD's reinvention program, see
High-Risk Series:  Department of Housing and Urban Development
(GAO/HR-97-12, February 1997).

\6 Except when fraud or misrepresentation is proved.

\7 Farm Service Agency:  Update on the Farm Loan Portfolio
(GAO/RCED-97-35, January 3, 1997).

   STATUS OF AGENCY EFFORTS TO
   RESOLVE DELINQUENCIES
------------------------------------------------------------ Letter :5

We obtained information on efforts to resolve delinquencies from the
four agencies included in our review and grouped their efforts under
four general categories:

  attempting to contact delinquent borrowers to seek resumption of
     voluntary payments by confirming or rescheduling loan terms,

  receiving payments under those agreements,

  applying involuntary collection tools if payment is not made
     voluntarily, and,

  deciding whether or not to terminate collection activity.

Agency debt collection officials agreed that categorizing collection
action in this manner would be useful for assessing progress in
collecting delinquent debt.

      DESCRIPTION OF COLLECTION
      PHASES
---------------------------------------------------------- Letter :5.1

For internal management purposes, agencies tracked delinquent debt
using various formats and phases.  A breakdown of delinquent debt on
a uniform basis according to where it is in the debt collection
process is useful to determine the status of efforts at agencies to
resolve delinquencies.  Such a breakdown can serve as an initial
framework by those responsible for overseeing agency and
governmentwide credit management to identify where backlogs of work
may be occurring or factors that may be preventing timely debt
resolution.  Figure 2 illustrates, on a very general level, the debt
collection process.  A more detailed explanation of each activity
follows.

   Figure 2:  Major Debt
   Collection Activities

   (See figure in printed
   edition.)

         ATTEMPTING TO CONTACT
         BORROWERS
-------------------------------------------------------- Letter :5.1.1

Debt collection activity is to be initiated when a borrower does not
make a scheduled payment.  Since most loan payments are received from
borrowers who have been routinely making payments, the ultimate goal
is to restore delinquent loans to a current status.  The first step
involves contacting the borrower to determine the cause of the
delinquency, whether the cause was a temporary or permanent
condition, and whether the borrower is capable of resuming timely
voluntary payments under the original or rescheduled loan terms.
These contacts and the associated procedures are intended to give the
borrower the opportunity to resume making timely payments.  Sometimes
the reason for the delinquency can not be readily determined because
the agency has difficulty locating the borrowers due to missing or
incorrect names, addresses, or social security numbers.  Also,
borrowers sometimes do not acknowledge attempts to contact them.

Depending on the reason for the borrower not making payments, the
agency has several options.  If the cause of the delinquency is a
temporary condition, the agency may negotiate a repayment agreement
for the full liability or lesser amounts.  The agency can turn to
involuntary collection techniques if efforts to work out a repayment
agreement with the borrower are unsuccessful.  Depending on program
policy, if the borrower cannot currently pay or has no assets to
offset, collection actions may be suspended or terminated.

         DELINQUENT DEBT BEING
         REPAID
-------------------------------------------------------- Letter :5.1.2

When borrowers resume payments on formerly delinquent debt, some
agencies reclassify it as current; others leave it classified as
delinquent for the life of the loan.  Regardless of how it is
classified, for installment loans such as the ones included in our
review, the repayment period may extend over a long period of time
(up to 30 years, depending on loan terms).  This category also
includes loans subject to moratoriums under which payments can be
deferred for up to 2 years.

         INVOLUNTARY COLLECTION
         TOOLS
-------------------------------------------------------- Letter :5.1.3

If the agency cannot collect either under the original payment terms
or under modified terms as discussed above, more aggressive
collection actions can be attempted, including the following.

  Offsets:  Tax refund offsets allow the agency, in coordination with
     IRS, to offset (withhold) delinquent amounts from a debtor's
     income tax refund.  If the debtor is a federal employee, an
     agency can arrange to withhold 15 percent of his or her
     disposable income.  Agencies can also use administrative
     offsets, which allow them to withhold other types of payments
     due the debtor from the federal government, such as retirement
     pay.

  Foreclosure:  If the loan is secured by property, the government,
     or its agent, may seize the mortgaged property.  Foreclosure
     terminates all borrower rights in the mortgaged property.

  Adjudication:  This refers to delinquent debt that is in an
     administrative appeals process, being litigated by the agency or
     the Department of Justice, or being collected by the Department
     of Justice.

  Bankruptcy:  The agency may become involved as a creditor in
     bankruptcy proceedings.\8

FMS policy stipulates that if either litigation or bankruptcy is
being pursued, the agency cannot pursue offsets.

--------------------
\8 Bankruptcy is initiated by the borrower and therefore is not an
agency tool.  We have included it in this section because OMB tracks
debt in bankruptcy along with adjudication and foreclosure.

         TERMINATING COLLECTIONS
-------------------------------------------------------- Letter :5.1.4

When the cause of the delinquency is permanent, such as permanent
disability of the borrower, debt collection efforts are sometimes
terminated.  If the debtor is deceased, the agency is to file a claim
against the debtor's estate for liquidation of the debt.  Debt at
this stage also includes amounts being considered for write-off.

      COLLECTION EFFORTS OF
      AGENCIES INCLUDED IN OUR
      REVIEW
---------------------------------------------------------- Letter :5.2

For the housing agencies included in our review, figure 3 shows the
status of efforts to collect delinquent debt at the end of fiscal
year 1995.  We present data for the three housing programs and
student loan program separately because of the different nature and
the status of the debt.  A separate analysis for each agency follows.

   Figure 3:  Distribution of
   Housing Delinquent Debt as of
   September 30, 1995 (Dollars in
   billions)

   (See figure in printed
   edition.)

Source:  Reports on Receivables Due from the Public and other agency
schedules.

         FEDERAL HOUSING
         ADMINISTRATION
-------------------------------------------------------- Letter :5.2.1

Table 5 shows the distribution of FHA's reported delinquent debt for
debt collection activities related to the Single Family, Multifamily,
and Title 1 housing programs as of the end of fiscal year 1995.

                                Table 5

                Distribution of FHA's Delinquent Debt as
                         of September 30, 1995

                         (Dollars in millions)

Collection activity                                             Amount
--------------------------------------------------------------  ------
Agency or private collection firm attempting to contact           $380
 borrower
In repayment                                                       ___
Adjudication, foreclosure, or bankruptcy                         1,784
Collection action terminated or suspended                           87
Status not readily determinable                                     49
======================================================================
Total                                                           $2,300
----------------------------------------------------------------------
Source:  FHA.

According to FHA officials, the $380 million relates to Title I
delinquent loans for mobile homes or for improvements to existing
homes.  Comparable data for single and multifamily debt were not
readily available.

FHA does not list any delinquent debt in the repayment status
category.  Debt being paid in accordance with original or rescheduled
loan terms is reclassified as current.

Over 70 percent of FHA's delinquent single family and multifamily
debt is in adjudication, foreclosure, or bankruptcy.  Of the total
$1.784 billion in these categories, according to FHA reports, $576
million relates to foreclosures on multifamily loans and $600 million
relates to adjudication of single family debt.

FHA identified $87 million being considered for termination.  FHA
explained that this debt represented Title I cases that had cycled
through all phases of its debt collection process with no resulting
recoveries.  FHA holds this kind of debt in a special inventory for
up to 3 years and then liquidates it through sale or write-off.

         VETERANS AFFAIRS
-------------------------------------------------------- Letter :5.2.2

Table 6 shows the distribution of delinquent debt for VA housing and
nonhousing programs according to the debt collection activities.
Although collection activity for the individual programs was not
readily available, VA officials told us that $2.18 billion total
delinquent debt represents $1.5 billion of delinquent housing loans
(VA Guaranty and Vendee loan programs) and $.68 billion pertaining to
non-housing programs such as the compensation and pension programs.

                                Table 6

                Distribution of VA's Delinquent Debt as
                         of September 30, 1995

                         (Dollars in millions)

Collection activity                                             Amount
--------------------------------------------------------------  ------
Agency or private collection firm attempting to contact         $1,200
 borrower
In repayment                                                       420
Adjudication, foreclosure, or bankruptcy                           230
Collection action terminated or suspended                          330
Status not readily determinable                                    ___
======================================================================
Total                                                           $2,180
----------------------------------------------------------------------
Source:  VA Debt Management Center.

VA officials informed us that most of VA's delinquent debt is
attributable to housing loans that were made before 1990.  Prior to
that time, VA billed borrowers who lost their homes through
foreclosure for residual amounts not recovered through the sale of
the property.  The Veterans Home Loan Indemnity and Restructuring Act
of 1989, as amended, restructured the program to require borrowers to
pay up-front fees, ranging from 0.5 to 3 percent of the loan, to help
compensate for defaults.  For loans closed after December 31, 1989,
amounts not recovered through the foreclosure and/or sale of the
property to a third party have not been recorded as a receivable or
pursued, unless fraud or misrepresentation is proved.

Most of the $1.2 billion in the first stage of collection represents
debt referred to private collection firms.  If VA cannot locate the
borrower, it uses two major private collection firms to contact the
debtor and work out repayment terms.  If these firms cannot contact
the borrower, VA will consider writing off the debt.  One reason for
debt in this category is that VA is legislatively prohibited from
using tax refund offsets, administrative offsets, and salary offsets
in pursuing collections on delinquent housing loans in certain
circumstances.

VA reported that the loan terms for $420 million in delinquent debt
were rescheduled, for example, by reducing monthly payments and
extending the repayment period.  VA typically negotiates monthly
payment plans over 1 to 3 years, depending upon the borrowers'
financial condition.  Longer terms are negotiated for very large
debts.

VA reported $230 million in adjudication or bankruptcy.  Over half
the debt in this category represents amounts for which adjudication
actions were being pursued, after the failure of other collection
actions.  The remaining debt represents amounts for which the
borrower had filed bankruptcy and VA was waiting to secure a portion
of the payment due, pending completion of bankruptcy proceedings.

Two-thirds of the $330 million in the terminated or suspended phase
represents amounts that have been returned to VA from private
collection firms or the Department of Justice as uncollectible.  The
remaining amounts represent debts owed by borrowers who died and for
which VA is awaiting receipt of death certificates and debt that was
suspended because the borrower is unemployed, in prison, or currently
unable to pay.

         RURAL HOUSING SERVICE
-------------------------------------------------------- Letter :5.2.3

Table 7 shows the distribution of RHS' delinquent debt according to
the debt resolution activities for its direct lending for single
family and multifamily housing programs as of the end of fiscal year
1995.  Most of the debt relates to loans for single family homes.

                                Table 7

                Distribution of RHS' Delinquent Debt as
                         of September 30, 1995

                         (Dollars in millions)

Collection activity                                             Amount
--------------------------------------------------------------  ------
Agency or private collection firm attempting to contact           $---
 borrower
In repayment                                                       307
Adjudication, foreclosure, or bankruptcy                           860
Collection action terminated or suspended                            3
======================================================================
Total                                                           $1,170
----------------------------------------------------------------------
Source:  RHS.

RHS has no debt identified in the first category because the agency
did not track how many borrowers it was contacting to determine the
reason for delinquent loan payments if payments were not made on
time.  In addition, RHS policy did not require the use of private
collection firms.  RHS officials stated that they were currently
studying the option of using this tool.

In addition, RHS officials informed us that since most of their debt
is tracked by number of borrowers rather than by dollar amount, the
amounts shown in repayment were estimates.  Dollar amounts were,
however, tracked for amounts in adjudication, foreclosure,
bankruptcy, and collection action terminated categories.

As table 7 shows, $307 million was in repayment.  RHS loan servicing
guidance encourages avoiding foreclosure whenever appropriate.  RHS
officials reported that the agency has many options for getting the
borrowers into a repayment status.  Borrowers are offered various
types of loan restructurings (e.g., loan extension) to give them an
opportunity to make loan payments on time.  Borrowers may qualify for
a moratorium, also known as forbearance, if their financial hardship
is temporary and likely to improve.  Under the moratorium program, no
payments are required for up to 2 years.

Most of RHS' delinquent debt--about 74 percent--was in bankruptcy,
foreclosure, or adjudication.  Roughly half of this amount represents
amounts for which the borrowers have declared bankruptcy and debt
recovery is delayed until bankruptcy proceedings are finalized.  The
majority of the remaining amounts in this category represent amounts
in foreclosure.

         EDUCATION
-------------------------------------------------------- Letter :5.2.4

Education's defaulted guaranteed loans represent over half of the
reported credit program delinquencies and about 40 percent of the
federal government's total delinquent nontax debt.  Figure 4
categorizes Education's reported $20 billion in delinquent debt as of
the end of fiscal year 1995.  Table 8 offers an additional data
breakout by identifying how much in the four categories is being
administered by Education itself versus its agents--state and private
non-profit guaranty agencies\9 --with which Education shares its
collection process.

   Figure 4:  Distribution of
   Education's Delinquent Debt as
   of September 30, 1995 (Dollars
   in billions)

   (See figure in printed
   edition.)

Source:  Reports on Receivables Due from the Public and other agency
schedules.

                                Table 8

                 Distribution of Education's Delinquent
                     Debt as of September 30, 1995

                         (Dollars in millions)

                                         Guaran
                                             ty
                                         agenci    In-house      Total
Collection activity                          es  management     amount
---------------------------------------  ------  ----------  =========
Agency or private collection firm        $10,24      $4,246    $14,486
 attempting to contact borrower               0
In repayment                              2,460         355      2,815
Adjudication or                           1,680          87      1,767
 bankruptcy
Collection action terminated or             140         702        842
 suspended
Other\a                                       0         229        229
======================================================================
Total                                    $14,52    $5,619\b    $20,139
                                              0
----------------------------------------------------------------------
\a Other debt includes debt owed by borrowers with multiple student
loans in various stages of the debt collection process.

\b Education's Debt Collection Service center records showed an
additional $3.6 billion, which includes accumulated interest and
other amounts legally due from borrowers being pursued for a total of
$9.2 billion.

Source:  Department of Education.

Education and the state or private non-profit guaranty agencies were
trying to contact and establish repayment agreements with borrowers
owing 72 percent of outstanding delinquencies.  Although success in
getting borrowers into a repayment status was somewhat elusive,
Education had collected from some of these borrowers by having
Treasury intercept their tax refunds.  Education officials told us
that the $4.2 billion of the $5.6 billion that Education was managing
in-house had cycled through the resolution process several times.

About $2.8 billion, 14 percent, was in repayment status.  Education
considers borrowers to be repaying if at least two payments were made
during the quarter being reported.  Education had about $1.8 billion
that was in the process of being resolved through bankruptcy or
adjudication proceedings and was awaiting the completion of these
activities.  Debt for which collection action was terminated or
suspended totaled $842 million.  Reasons for termination include the
death or permanent disability of the borrower.

Delinquent student loans are harder to collect than the other types
of loans discussed in this report for several reasons.  First, unlike
the housing loans, student loans are unsecured, leaving the
government and private lenders with no collateral.  Second, for the
loans on which Education itself is trying to collect, delinquent
cases are not received until both lenders and the guaranty agencies
have attempted collection, a process which typically lasts at least 4
years after the debt became delinquent.  Third, it is more difficult
to locate and contact borrowers who frequently relocate after
attending post secondary schools, experience name changes in the
event of marriage, and, in general, tend to have more frequent
changes in residences.

Other federal entities, such as the U.S.  Postal Service and the
Internal Revenue Service, can assist in finding addresses, but those
efforts still leave some gaps.  Education's Debt Collection Service
sent 3 million delinquency notices to borrowers during 1995.  About
662,000 (23 percent) were returned by the U.S.  Postal Service as
undeliverable.  Although the Internal Revenue Service (IRS) was one
source for providing more current addresses for about 400,000 of
these borrowers, its data could not provide current addresses for
about 240,000 borrowers.

Several other problems associated with student loans also make it
difficult to collect.  Our February 1997 high-risk series report,\10
for example, noted that many student borrowers have little or no
means to repay their loans because they attended poor quality
proprietary schools that failed to provide them with marketable
skills.  In addition, we have also reported that, in the past, many
student loans were initiated absent important controls critical to
mitigating risks up front, including checks to identify prior
defaults on the part of applicants.

Notwithstanding the difficulty of finding a segment of the borrower
population, some may not respond to notices or may not honor
repayment agreements.  In the latter cases, the contact process has
been reinitiated and involuntary collection measures have been used.

--------------------
\9 Guaranty agencies are responsible for verifying that lenders
properly service and attempt to collect loans, making payment to the
lending institutions for the guaranteed portion of loans that are
terminated for default, and, subsequently, attempting to collect on
those defaulted loans.  If successful, the guaranty agencies retain a
portion of amounts collected, in part to cover their collection
costs.  They are also reimbursed for certain administrative costs.

\10 High-Risk Series:  Student Financial Aid (GAO/HR-97-11, February
1997).

   GOVERNMENTWIDE REPORTING ON
   DOLLARS COLLECTED THROUGH FIVE
   SPECIFIC TOOLS
------------------------------------------------------------ Letter :6

In examining each agency's efforts to collect on delinquent debt
above, we focused on some of the returns they were able to generate
from five mandatory collection tools:  tax refund offsets, federal
employee salary offsets, administrative offsets, private collection
firms, and litigation.  At OMB's direction, agencies provided
information on collections from these tools.  Figure 5 shows that
three of these tools--tax refund offsets, litigation, and private
collection firms--accounted for more than $2 billion in collections
across government--86 percent of the $2.4 billion collected with the
five techniques during fiscal year 1995.  OMB's report also revealed
that the use of these five tools generated twice as much in fiscal
year 1995 as in fiscal year 1992.  Additional information about the
tools and related collections is provided in appendix V.

   Figure 5:  Reported Collections
   on Delinquent Debt Using
   Prescribed Tools, Fiscal Year
   1995 (Dollars in billions)

   (See figure in printed
   edition.)

Source:  Status Report on Credit Management and Debt Collection for
fiscal year 1995.

   IMPROVING DEBT COLLECTION
   REPORTING
------------------------------------------------------------ Letter :7

In recent years, the Congress has responded to the need to reform
government management through such initiatives as the Government
Performance and Results Act (GPRA) of 1993 and the Chief Financial
Officers (CFO) Act of 1990.  GPRA aims to provide systematic
information on the performance of government programs and to directly
link such information with the annual budget process.  The audited
financial statements required by the CFO Act, as expanded in 1994,
are intended to provide congressional and executive decisionmakers
with the reliable financial and program information that they have
not previously had.  This information is to be provided to
decisionmakers in results-oriented reports on the government's
program results and financial condition that, for the first time,
integrate budget, financial, and program information.  These reports
are also to include cost information that add critical information
about what citizens and the nation are receiving for each dollar
spent.

The 1982 and 1996 debt collection legislation are fully consistent
with these managerial concepts and established expectations that
agencies will make concerted efforts to collect debt.  As mentioned
earlier, Treasury's FMS has been charged with new debt management and
reporting responsibilities under the Debt Collection Improvement Act
of 1996.  FMS officials told us that they intend to evolve annual
collection reporting to a more evaluative perspective.  They envision
presenting data on the status of the delinquent debt being worked on,
what types of collection mechanisms are being used, the associated
costs, and what can be done to increase collection prospects.

Such reporting would offer the Congress better information, would
also address some of the underlying principles of GPRA and the CFO
Act, and would assist agencies in assessing the effectiveness of
their current strategies and identifying other potential strategies
for managing or increasing the collection of delinquent debt.
Another valuable benefit is that better data and analysis would
assist agencies in their day-to-day management of collection
activities.  Further, FMS could use such performance information on
the effectiveness of collection functions in deciding which agencies
should be named as debt collection centers.  Under the 1996 act,
these centers are intended to play a key role in helping FMS manage
delinquent debt that other agencies cannot resolve within 180 days
after the debt becomes delinquent.

We have identified a number of reporting enhancements that would be
valuable for assessing agency debt collection strategies and
providing better context for report users.  Systematically building
upon the available analytical data would help ensure that relevant
performance information exists to allow FMS and agencies to continue
progressing toward a more business-like debt management environment.
In particular, it would be useful in looking at the status of
delinquent debts, examining what agencies are doing and how much they
are actually trying to collect, and determining if any lessons can be
learned or experiences shared by analyzing debt with similar
characteristics.  Further, addressing quality issues, including
whether agencies are reporting on a consistent basis and whether
their data are reliable, would be valuable initiatives.

      ENHANCING DEBT COLLECTION
      REPORTS
---------------------------------------------------------- Letter :7.1

We identified four potential enhancements to annual debt collection
reporting to the Congress.  The first--developing a framework to
highlight the status of collection efforts--would pinpoint where
delinquent debt is in the debt collection process and thus highlight
backlogs and help to identify existing collection barriers.  The
second--assessment of agency use of collection tools--would expand
reporting beyond the five tools currently assessed to include
information needed to develop performance measures for tracking
agency progress.  The third--including additional information on the
amounts of delinquencies agencies are pursuing--would provide a
better sense of the workload managed by agency debt collection
functions.  The fourth--aggregating information according to program
characteristics (e.g., secured housing loans)--would better portray
program differences and highlight collection challenges of similar
programs.  Collectively, such data would provide a reasonable basis
for assessments of whether agencies are making concerted efforts to
collect delinquent debt.

         STATUS OF DELINQUENT DEBT
         IN THE COLLECTION PROCESS
-------------------------------------------------------- Letter :7.1.1

While various reporting frameworks could be used to report progress
in collecting delinquent loan balances, and thus prospects for
collections, a framework such as we discussed earlier would be one
approach.  Below, we highlight, for each phase of the debt collection
process, why developing this information is important.

Attempting to Contact Borrowers:  For much of the delinquent debt,
the primary challenge is to locate the borrower and/or borrower
assets to encourage and arrange for voluntary payments.  This
challenging task is now standing in the way of efforts to pursue the
collection of at least 40 cents of every dollar of delinquent nontax
debt that the federal government is reportedly trying to recover.  A
preponderance of debt in this category could mean that many borrowers
are unable to pay or are simply not responding to agency attempts to
contact them.  By working cooperatively to determine how much debt in
this category is attributable to each of these conditions, FMS and
agencies could formulate strategies on such matters as whether and
when to apply involuntary collection tools.

Delinquent Debt Being Repaid:  Knowing how much delinquent debt is
being voluntarily repaid is valuable information that could reflect
improvement in timely cash receipts for specific programs.  Three of
the four agencies included in our review can track outstanding debt
in repayment status.  For example, at September 30, 1995, about 14
percent of Education's delinquent portfolio was in repayment status.
In general, fewer resources should be required to service debt in
repayment status than to pursue delinquent accounts.  Discussion
among agency officials on successful strategies to get borrowers to
voluntarily pay their debt could serve as impetus for change by other
agencies attempting to collect similar types of debt.

Involuntary Collection Tools:  Reporting on secured or unsecured
delinquent amounts for which more aggressive collection strategies
are underway would also be revealing.  The nature of housing programs
would suggest that housing delinquencies would normally be resolved
through foreclosures or borrower conveyance of the property.
However, individual program policies may slow or reduce the amount of
debt in this category, such as forbearance programs.  Learning how
much debt is in this stage compared to other stages could help
agencies decide whether any strategic changes are needed in the use
of their collection tools.  A preponderance of debt in bankruptcy,
foreclosure, and litigation, for example, could indicate that all
reasonable attempts to persuade borrowers to voluntarily pay have
been exhausted.  A relatively minor amount in this phase of the
collection process could indicate that an agency had encountered
restrictions imposed by statutes or agency procedures in using some
of these more aggressive initiatives.

Terminating collection:  Including information on this phase in the
annual debt collection report would offer perspective on amounts no
longer being pursued due to death, disability, or expiration of the
time limit for collecting the debt.  Significant amounts of debt in
this category may indicate that the agency has taken a close look at
some of their older debt and determined that factors, such as lack of
borrower assets, preclude collection or that future collection
efforts would not be cost-effective.  Alternatively, significant
amounts in this category compared to others may mean that an agency
may not be doing enough to collect debt.

         USE OF COLLECTION TOOLS
-------------------------------------------------------- Letter :7.1.2

As discussed earlier in this report, debt reporting to the Congress
currently provides some useful information on the collections from
the use of five tools on a governmentwide basis:  tax refund offsets,
administrative offsets, federal employee salary offsets, private
collection firms, and litigation.  Enhancing this information would
provide agencies with a stronger basis for deciding whether all
appropriate actions to collect a debt have been exhausted and thus
whether agencies are making concerted efforts to collect delinquent
debt.  Agency automated information systems capture a variety of
program-specific data and may offer potential sources of information
needed for assessing the effectiveness of collection strategies.  The
agencies included in our review presented relatively little
information on how effectively they were using those tools in the
overviews to their fiscal year 1995 financial statements under the
CFO Act.  Instead, the overviews focused primarily on high-level
mission goals.

FMS could build upon current reporting on the use of collection tools
in several ways in order to provide useful performance information:
first, it could increase the number of tools reported on, and second,
it could offer data regarding tool use, success, and cost.  Some
options would include the following.

  Begin reporting on rescheduling of delinquent debt and garnishment
     of wages.  For the period January 1, 1995, through September 30,
     1995, Education queried its information system and found that
     $353 million, 69 percent, of the $512 million recovered by
     collection firms was attributable to rescheduled loan terms.
     Although the $353 million recovered is significant, a more
     complete analysis is needed to identify how much was spent to
     reschedule the debt and identify the expected and actual
     collections received under the new terms.  Assessing the extent
     to which borrowers continued to pay or actually completed
     payments without further delinquencies or defaults compared to
     the costs of establishing such agreements might be a factor in
     agency collection policies.  Relatively high costs of achieving
     or sustaining repayment agreements could suggest employing more
     aggressive collection tools sooner.  This kind of information
     could enhance debt management reporting and decision-making by
     showing the extent to which this tool had been used and how well
     it was working.

Education was authorized to use administrative wage garnishments by
the Emergency Unemployment Compensation Act of 1991.  The Debt
Collection Improvement Act of 1996 now allows all agencies to
administratively garnish wages.  Thus, FMS may want to include
information on this important tool in debt collection reports to the
Congress as agencies begin to pursue wage garnishments.

  Require information needed to develop debt collection performance
     measures.  FMS may want to consider requiring the following
     information from agencies in order to facilitate the development
     of performance measures for tracking the use of collection
     tools.  Our work showed that some information of this nature,
     including the following, is available at some agencies, but only
     the amount collected through tools had been formally reported to
     the Congress:

number of cases the tool was applied to,

amount of delinquent debt dollars these cases represented,

number of cases for which the agency was successful in applying the
tool (for example, how many "hits" were made on the cases submitted
for offsets),

amount collected through the tool, and

cost of using the tool.

This type of information would allow agency and governmentwide
assessments of how actively, successfully, and cost-effectively
delinquent debt was being pursued.  These types of data elements
could be used to develop performance measures such as the following.

  How many cases and dollars of delinquent debt were submitted for
     each offset tool compared to the total delinquent debt an agency
     was attempting to collect?  Tracking this measure year to year
     could highlight an agency's progress in attempting to increase
     usage of the tool.

  How often was the agency successful in applying each tool?
     Tracking this year-to- year could show upward and downward
     progress in applying a specific tool and therefore allow
     informed decisions on tool use.

  How much did the agency collect versus the cost of using a tool?
     Tracking the return on investment year-to-year could highlight
     increasing or decreasing effectiveness in using a tool.

Figure 6 illustrates how analyzing the performance of collection
tools can assist collections of delinquent debt.

   Figure 6:  Using Tax Refund
   Offsets at Education

   (See figure in printed
   edition.)

This example suggests that offsets are highly cost effective.
Analysis of cost-effectiveness, preferably couched in terms of unit
cost per result, would be a highly relevant measure of agency
efforts.  Measures of the comparative costs and yields from the use
of different collection techniques would be useful for managing
collection activities at the agencies.

         PROVIDING ADDITIONAL
         INFORMATION ON AMOUNTS OF
         DELINQUENCIES BEING
         PURSUED
-------------------------------------------------------- Letter :7.1.3

Agencies are required to report on their gross receivables in debt
collection reports, which is conceptually the same information that
is currently reported in the footnotes to the financial statements
(gross receivables, including the associated interest).  Because some
agencies continue to pursue other relevant amounts, we believe that
reporting to the Congress on debt collection should be augmented to
include (1) principle and interest that has been written off but that
is still being pursued and (2) accrued interest on delinquent debt,
presumed uncollectible, that is still being pursued.  This additional
information is necessary to provide a better picture of what debt is
outstanding and amounts that agencies are attempting to collect.

In terms of financial reporting, it is fundamental that agencies make
realistic assessments of what they expect to collect.\11 However,
agencies also have a duty to have an effective debt management
program.  Therefore, it is not unexpected that the amount an agency
is estimating to be collectible on its financial statements would be
different than the amount it is trying to collect on.\12

This is particularly relevant for student loan debt since Education
does not have time limitations for collecting delinquent student
loans and continues efforts to collect for extended time frames.  In
concept, Education could even offset a portion of the social security
benefits of delinquent borrowers.  Consequently, the financial
reporting number used to report to the Congress reflects the agency's
gross receivables, not the amount that Education is still pursuing.
At the time of our review, Education was still trying to collect $3.6
billion not included in the amounts reported to the Congress.

We believe focusing upon amounts which remain in the collection
process would be beneficial primarily because it would offer the
Congress a better picture of both what borrowers owe and agencies'
debt collection efforts.  These data also provide a better basis for
calculating recovery rates for delinquent debt.  For example, to
calculate Education's Debt Collection Service recovery rate, one
would compare the amount of collections to the $9.2 billion on which
Education was attempting to collect, not to the $5.6 billion that is
recorded as a receivable.

--------------------
\11 This is in accordance with Statement of Federal Financial
Accounting Standards Number 1, Accounting for Selected Assets and
Liabilities, which states that in preparing financial statements, no
interest should be recognized on accounts receivable that are
determined to be uncollectible unless the interest is actually
collected, and also states that until the interest payment
requirement is officially waived by the government entity or the
related debt principle is written off, interest accrued on
uncollectible accounts receivables should be disclosed.

\12 Writing off a debt from financial records does not preclude an
agency from taking advantage of offset possibilities or other means
of collection, should they become available.  An agency can write off
debts from its receivables but at the same time maintain them in debt
collection records when the potential exists for offsets against
wages or future benefits to the debtor, but the possibility of offset
is so uncertain that it does not warrant retaining the debt as a
receivable or asset on the financial statements.

An agency determines, as part of its program management, how long it
intends to maintain information on its borrowers and how frequently
accounts will be reviewed for final disposition.  Agencies are
required, in accordance with FMS guidance, to report the amount of
debt that has been written off but is still being pursued for debt
collection.

         AGGREGATING INFORMATION
         ACCORDING TO SIMILAR
         PROGRAM CHARACTERISTICS
-------------------------------------------------------- Letter :7.1.4

An additional enhancement that should be considered in the annual
debt collection report to the Congress is aggregating the credit data
by program characteristics to more appropriately portray program
differences and to focus on collection challenges that are applicable
to similar programs.  The annual debt collection report to the
Congress includes governmentwide data by combining data from over 24
agencies and also reports certain data by agency.  Grouping
governmentwide data into categories similar to those areas used in
the annual budget (Analytical Perspectives), which presents an
analysis by education, housing agencies, business and rural
development, and insurance programs, would provide a better basis for
evaluating agency performance and finding alternative solutions for
decreasing delinquent debt.  Programs providing credit for similar
purposes may be experiencing the same types of collection problems
and therefore may seek similar strategies or innovations for
contacting borrowers and collecting delinquent debt or other
functions, such as disposing of properties acquired through
foreclosure.  For example, housing and other credit programs with
secured debt have sought economies of scale in disposing of real
property.  The interagency Government Owned Real Estate Program
conducts joint agency real estate fairs and auctions to facilitate
the management and disposal of real property, which has helped reduce
individual agency disposition costs.

      RESOLVING INCONSISTENCIES IN
      CLASSIFICATION OF DELINQUENT
      DEBT
---------------------------------------------------------- Letter :7.2

Agencies classify previously delinquent debt on which borrowers are
currently making payments differently.  Some reclassify such debt as
"current" but others keep it in a delinquent category regardless of
the current payment status.  Such inconsistencies do not offer an
accurate view of loan portfolios.  While such classification
practices may be suitable internally, they make it difficult to
compare agency performance or aggregate data for similar programs.
Examples of inconsistent reporting of these loans are listed below.

  VA loans maintain their delinquent status until the delinquency is
     repaid or written off.  Once the delinquency has been repaid and
     payments are being made according to the original terms of the
     loan, the loan is reclassified as current.

  FHA reclassified single family delinquent loans as in a current
     repayment status when borrowers complied with forbearance terms,
     which typically included making partial mortgage payments for up
     to 3 years.  More significantly, FHA officials told us that the
     agency had reported $2.3 billion as delinquent at September 30,
     1995, but these officials advised us that their systems did not
     produce delinquency data consistent with the FMS criteria.  They
     stated that amounts reported as delinquent would have been
     significantly higher under those guidelines.

  Education did not reclassify most delinquent loans that were in
     repayment status as current loans.  The majority of loans in
     repayment status maintained their delinquent status until the
     loan was repaid.\13

--------------------
\13 Some loans that achieved repayment status were restructured and
became direct loans.  Other loans that achieved repayment status were
consolidated and refinanced by a private sector lender with a new
loan guarantee.  As such, these new direct or refinanced loans were
deleted from Education's report to OMB on the status of defaulted
guaranteed loans and included in Education's report on direct loans
or outstanding guaranteed loans.

      IMPROVING DATA RELIABILITY
---------------------------------------------------------- Letter :7.3

None of the data submitted to OMB had been validated by financial
statement audits because agencies were required to submit data to OMB
before their annual financial statement audits were concluded.  Three
of the four agencies, including FHA, VA, and RHS, submitted unaudited
data for fiscal year 1995.\14 While the data from Education were
audited, Education's independent accountant disclaimed an opinion due
to the unreliability of FFEL Program student loan data.  Because
there are limited or no assurances concerning the accuracy of the
data under these circumstances, appropriate annotations that the data
were not audited would alert users of the reports to the limitations.
For example, FHA's reported gross receivables after completion of its
audit were $800 million more than the amount provided for
governmentwide reporting on debt collection.

Our audits, those by the inspectors general, and others have
consistently disclosed serious weaknesses in agency systems used to
account for and manage receivables.  Audits have shown that the
information for credit and debt management is not always accurate or
complete.  Our audits also found that long-standing weaknesses in
agency financial management systems used to produce information on
credit programs continue to diminish the reliability of amounts being
reported to the Congress.  The CFO Act is providing the impetus to
begin resolving these reliability problems.  Reliable data are not
only fundamental for good credit management, it would also permit
more accurate estimates of the costs of the credit programs in
accordance with the Federal Credit Reform Act of 1990.

--------------------
\14 FHA received an unqualified (clean) audit opinion after the data
were submitted to OMB.  RHS received a qualified opinion (as a
component of the Rural Economic and Community Development
consolidated financial statements) because of insufficient support
for credit receivables and other accounts.  VA received a qualified
opinion due to the inadequacy of hospital system accounting records
for net receivables and property plant and equipment.

   CONCLUSION
------------------------------------------------------------ Letter :8

Improvements in the availability and reporting of data and relevant
performance measures are critical to answering the call for a greatly
enhanced debt collection environment.  As FMS assumes its managerial
and governmentwide reporting responsibilities under the 1996 Debt
Collection Improvement Act, it has a good opportunity to make debt
reporting more useful to the Congress as well as to those with line
management responsibility who are attempting to collect the
delinquent debt.  Through such improvements, FMS can also ensure that
it has reliable and cogent agency data to use for making its own
decisions regarding how to proceed with its enhanced management and
governmentwide reporting role.

   RECOMMENDATIONS
------------------------------------------------------------ Letter :9

We recommend that the Secretary of the Treasury require the Assistant
Commissioner for FMS' Debt Management Services, in conjunction with
major credit agencies and OMB, to revise the framework and data
requirements for agency reporting on debt collection to ensure that
reports to the Congress do the following.

(1)Provide complete reporting on the status of agency efforts to
collect delinquent debt.  FMS should clearly specify the reporting
framework, such as the one discussed in this report, and ensure that
it is uniformly followed by reporting agencies.  Effective status
reporting will offer a clear picture of agency progress in collecting
delinquent debt and highlight any significant backlogs in resolution
phases meriting administrative action or legislative consideration.

(2)Offer an evaluation of agency use of individual collection tools.
This evaluation should include agency and governmentwide assessments
of how actively, successfully, and cost effectively agencies are
pursuing delinquent debt.  At a minimum, data should be available
concerning the collection tools predominantly used including (a) the
number of cases and the amount of delinquent dollars against which
each tool was applied, (b) the number of cases for which the agency
was successful in applying the tool, and (c) the cost of using the
tool in relation to the dollars collected.

(3)Report amounts that agencies are actually trying to collect.  This
would include the gross receivable and interest receivable amounts
that are currently included in the footnotes to their financial
statements, plus (a) principle that has been written off but that is
still being pursued and (b) accrued interest on delinquent debt that
is still being pursued.  The report should also explain differences
between these amounts.

(4)Provide information that is reliable based on independent audits
and disclose information about the reliability of pertinent account
balances that are questioned through audits.

(5)Report delinquent debt consistently from agency to agency or
disclose inconsistencies.

(6)Aggregate the credit data by similar program characteristics and
provide explanatory information where necessary in order to more
appropriately portray program differences and focus on collection
challenges unique to similar programs.

   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

In commenting on a draft of this report, officials from the
Department of the Treasury, the Office of Management and Budget, and
the agencies included in our review generally agreed with our factual
material, conclusions, and recommendations.

Treasury's Deputy Assistant Commissioner for Debt Management Services
informed us that an action plan was being drafted and will include
the establishment of an interagency task force in June 1997.  She
stated that one of the first projects the task force will work on is
the development of governmentwide reporting criteria so that
delinquency rates can be more fairly and accurately computed and
analyzed.

Agencies also provided a number of other comments, including the
following.

  Management of the entire credit process--extending credit, account
     servicing, and recovering delinquent debt--is important and, as
     our report states, each activity can affect credit program
     costs.

  Agency data need to be improved in order to accurately assess
     agency collection performance, evaluate current default rates,
     or draw comparisons between similar loan programs.

  Consistent application of governmentwide debt collection reporting
     criteria is essential.

  There are differences in how credit programs operate--for example,
     secured debt has better recovery options than unsecured debt.
     Therefore, as our report recommends, governmentwide reports
     should aggregate data for programs with similar characteristics
     in order to more appropriately compare agency collection
     performance.

--------------------------------------------------------- Letter :10.1

We are sending copies of this report to relevant congressional
committees and subcommittees, the Director of the Office of
Management and Budget, the Secretary of the Treasury, the Secretary
of Agriculture, the Secretary of Housing and Urban Development, the
Secretary of the Department of Veterans Affairs, the Secretary of the
Department of Education, and other interested parties.  We will send
copies to others upon request.

If you have any questions or wish to discuss the issues in this
report, please contact me at (202) 512-9450.  Major contributors to
this report are listed in appendix VII.

Sincerely yours,

Jeffrey C.  Steinhoff
Director of Planning and Reporting

SCOPE AND METHODOLOGY
=========================================================== Appendix I

As agreed with the House Committee on the Budget, our work
concentrated on the debt collection phases and did not focus on the
credit extension and account servicing phases of federal credit
management or on credit reform requirements.  We focused on lending
program debt at four federal credit agencies, including HUD's Federal
Housing Administration Single, Multifamily, and Title I Programs,
Education's Federal Family Education Loan Program, the Department of
Veterans Affairs' Guaranty and Vendee Loan Programs, and the
Department of Agriculture's Rural Housing Service Direct Loan
Programs.

For each program, we identified significant applicable legislative
and regulatory provisions.  We also reviewed recommendations made
under the National Performance Review, direct and guaranteed loan
system requirements issued by the Joint Financial Management
Improvement Program,\1 and recently published federal government
accounting standards for direct and guaranteed loans.\2

To determine the extent of changes in receivables, guaranteed loans,
defaults on guaranteed loans, and delinquencies from fiscal years
1992 to 1995--the most recent data available at the program-level at
the time of our review--we analyzed data in (1) the annual status
reports to the Congress on credit management and debt collection
(referred to as annual debt collection reports), (2) OMB's annual
Federal Financial Management Status Report and Five-Year Plan, and
(3) individual agency and FMS governmentwide summary Reports on
Receivables Due from the Public (formerly the SF 220-9)\3 and the
Reports on Guaranteed Loans (formerly the SF 220-8).\4

Preliminary information on fiscal year 1996 debt collection activity
became available in February 1997, and we incorporated it in this
report to the extent practical.  We also identified the amount of
delinquent debt by agency at September 30, 1990, and September 30,
1996, as separately requested by your office.  See appendix VI.

We also obtained information from program and/or agency financial
statement audit reports.  We used information in the Analytical
Perspectives section of the Budget of the United States Government,
Fiscal Years 1997 and 1998, and other selected program data used by
agencies to manage their credit programs.

To determine progress toward resolving outstanding delinquent debt by
the programs reviewed, we reviewed data provided by agency officials
describing actions taken to resolve delinquent debt.  We reviewed
federal debt collection policies, procedures, and guidance including
FMS' Managing Federal Receivables and OMB Circular A-129, Policies
for Federal Credit Programs and Non-tax Receivables.  We identified
the debt collection authorities and tools being used for each program
we reviewed, and discussed these procedures and actions being taken
to resolve delinquent debt with cognizant program officials.

During the course of our review, the Congress passed the Debt
Collection Improvement Act of 1996.  (See appendix IV for more about
this act).  We reviewed this act and assessed its governmentwide and
agency-level implications on debt collection efforts.

We conducted our work from October 1995 through March 1997 in
accordance with generally accepted government auditing standards.  We
did not verify the accuracy of the information provided to us by OMB,
FMS, or the four agencies included in our review.  We did however
review the results of financial statement audits, as well as seek to
determine whether the agencies included in our review reported debt
collection information on a consistent basis.

We requested comments on a draft of this report from the Department
of the Treasury, the Office of Management and Budget, and the
agencies included in our review.  At a joint meeting on April 17,
1997, we received oral comments from those agencies.  The agency
representatives who provided comments on the draft are listed below.

Agency                  Official providing comments
----------------------  ----------------------------------------------
Department of the       Deputy Chief Financial Officer
Treasury
                        Deputy Assistant Commissioner for Debt
                        Management Services

Office of Management    Senior Advisor for Debt Collection and Credit
and Budget              and Cash Management

Department of           Special Assistant to the Chief Financial
Education               Officer

                        Director of Debt Collection Service

Department of Housing   Director of the Office of Financial Services
and Urban Development,
Federal Housing
Administration

Department of           Director of Fiscal Policy of the Office of the
Agriculture, Rural      Chief Financial Officer
Housing Service
                        Senior Loan Specialist, Rural Housing Service

Veterans                Director of Cost and Debt Management Service
Administration
                        Deputy Chief Financial Officer for the
                        Veterans Benefits Administration
----------------------------------------------------------------------

--------------------
\1 The Joint Financial Management Improvement Program (JFMIP) is a
joint cooperative undertaking of the Office of Management and Budget,
the General Accounting Office, the Department of the Treasury, and
the Office of Personnel Management that aims to improve and
coordinate financial management policies and practices throughout the
government.

\2 FASAB publishes recommended accounting standards after considering
the financial and budgetary information needs of the Congress,
executive agencies, other users of federal financial information, and
comments from the public.  OMB, Treasury, and GAO then decide whether
to adopt the recommended standards; if they do, the standard is
published by GAO and OMB and becomes effective.

\3 The Report on Receivables Due from the Public covers the status of
outstanding receivables including unpaid principal on direct loans
and defaulted guaranteed loans acquired by the government, changes
for the period, use of debt collection tools, adjudication activity,
and other information.

\4 The Report on Guaranteed Loans covers the status of guaranteed
loans, defaulted loans and claims submitted by lenders, the age of
and collection probability of outstanding guaranteed loans, and
information activities to certify, review, and sanction lenders
participating in loan guarantee programs.  Also included are real
property inventories held by the agencies resulting from loan
defaults.

INFORMATION ON GUARANTEED LOANS
========================================================== Appendix II

Guaranteed loan programs grew about 13 percent--from $673 billion in
fiscal year 1992 to $760 billion in fiscal year 1996.  Increased
demand for student, housing, and other loans contributed to this
growth along with lower interest rates for some programs and funds
appropriated by the Congress for marginal program expansion.  The
government is liable for the risk that it assumes on guaranteed
loans.  Most loans are guaranteed for a specified maximum based on
the loan purpose and amount.  Figure 2.1 illustrates the growth of
guaranteed loan programs.  Figure 2.2 discusses the extent of loan
program growth at the agencies we reviewed.\1

   Figure 2.1:  Reported
   Governmentwide Trend in
   Guaranteed Loans

   (See figure in printed
   edition.)

Source:  Debt Collection Reports and FMS.

   Figure 2.2:  Cumulative
   Balances of Guaranteed Loan
   Programs From 1992 to 1995 at
   FHA, RHS, VA, and Education

   (See figure in printed
   edition.)

--------------------
\1 Our review focused on selected programs at FHA, VA, RHS, and
Education, and for those programs, fiscal year 1995 amounts were the
most recent available data.  Therefore, reported fiscal year 1995
amounts are used for the program-level data throughout this report.

      COLLECTING ON DELINQUENT
      GUARANTEED LOANS
------------------------------------------------------ Appendix II:0.1

When guaranteed loans become delinquent, the lending institution, not
the government, is required to contact the borrower initially and
carry out certain procedures to give the borrower the opportunity to
resume making timely payments.  If the lender still cannot collect,
the loan is considered in default.  Once a guaranteed loan defaults,
several actions may take place, depending on the nature of the
program.  If the guaranteed loan is secured, the lender would
normally initiate foreclosure action.\2 The foreclosed property would
generally be either (1) sold by the lender, with the government
paying the lender for the guaranteed portion of any difference
between the amount recovered on the sale and the uncollected portion
of the loan principal and interest or (2) turned over to the
government, with the government paying the lender for the guaranteed
portion of any uncollected loan principal and interest.

Depending on the nature of the guaranteed loan program, funds for
covering some or all losses come from loan guarantee or insurance
fees charged to borrowers and/or appropriations.  For example, the
Mutual Mortgage Insurance Fund, which represents almost 80 percent of
FHA's basic single-family home ownership program, is required to be
fully self-supporting from fees charged to borrowers.  In contrast,
Education and most other credit agencies receive annual
appropriations to cover estimated defaults and other costs.

Payments to lenders for default claims generally result in the
establishment of receivables for unsecured loans.  When the
government makes a payment to a lending institution for a defaulted
loan guarantee, the government records a receivable for the amount of
the payment and then tries to collect from the borrower, generally
using the same methods used for direct loans.  If borrowers do not
voluntarily resume making timely payments, agencies may use
involuntary debt collection tools such as federal salary offset, IRS
tax refund offset, and litigation.  The tools tracked by OMB are
described in appendix V.

If the government is unable to fully collect the amounts it
guaranteed and paid, actual program costs\3 are incurred.  Under
legislation governing the FHA and VA housing programs, which assess
insurance fees to cover losses, proceeds from disposition of assets
are considered to fully satisfy the debt and the government does not
pursue residual amounts due from the borrower.  Receivables are
recognized when a borrower fraudulently obtained a loan, or when an
agency, such as FHA, sought to avoid certain foreclosures by
acquiring loans from the lender and managing the loans itself.

--------------------
\2 Not all defaulted guaranteed housing loans have gone into
foreclosure.  For example, historically, for about 25 percent of the
FHA-insured single family loans that have defaulted, borrowers were
given an opportunity to avoid foreclosure by qualifying for FHA's
Assignment Program.  In these cases, FHA paid the mortgage debt owed
to the lender, acquired the mortgage from the lender, and developed a
new repayment plan for the borrower under which monthly mortgage
payments were reduced or suspended for up to 36 months.  The loans
were included in governmentwide receivables as defaulted guaranteed
loans.  However, the Congress suspended this program in April 1996
because it was not cost-effective.  For more information, see
Homeownership:  Mixed Results and High Costs Raise Concerns About
HUD's Mortgage Assignment Program (GAO/RCED-96-2, October 18, 1995).

\3 The Federal Credit Reform Act of 1990 requires agencies to
estimate these costs each fiscal year and budget for them before
credit is extended.  The agency is to reestimate subsidy costs,
generally annually, to incorporate the most recent data on actual and
estimated losses and other cost factors.

SUMMARY OF EFFORTS TO IMPROVE DEBT
COLLECTION
========================================================= Appendix III

This appendix summarizes (1) legislative and other efforts taken in
the past 15 years to strengthen agencies' debt collection
capabilities and to minimize losses, (2) other important initiatives
undertaken over the past decade which establish a framework for the
credit agencies to strengthen financial management and better measure
the results of their operations, and (3) our previous work on debt
collection.  The most recent legislative effort--the Debt Collection
Improvement Act of 1996--is discussed in detail in appendix IV.

DEBT COLLECTION INITIATIVES

Debt Collection Act of 1982 and Amendments:  This is one of the most
significant pieces of legislation affecting credit management and
debt collection.  Among other things, the act, which was passed
largely in response to our findings and recommendations on debt
collection

  clarified federal agencies' authority to use debt collection tools
     available in the private sector;

  established many of the fundamental credit management practices
     still in place today--for example, reporting delinquent debtors
     to consumer reporting agencies and contracting for collection
     services; and

  established a requirement for OMB to submit an annual report to the
     Congress on the management of the federal government's debt
     collection activities.

OMB and Treasury efforts:  Following the 1982 act, OMB and the
Department of the Treasury increased their focus on and level of
involvement in federal credit management programs.  In 1986, OMB and
Treasury agreed that Treasury would be primarily responsible for
overseeing agency credit management activities, while OMB would
continue to establish credit management policy, including setting
standards for extending credit, managing lenders participating in
guaranteed loan programs, servicing credit and nontax receivables,
and collecting delinquent debt.  Treasury develops and disseminates
operational guidelines for agency compliance with governmentwide
credit management and debt collection policy.

OMB's nine point credit management program:  Also in 1986, OMB set
out a nine-point credit management program targeted at further
improving federal debt collection practices, reducing delinquencies,
and improving management of receivables.  The nine-point program
required agencies, unless prohibited by legislation, to implement
initiatives in each phase of the credit management cycle--loan
origination, account servicing, collection, and write-offs.  The nine
initiatives required the use of (1) screening of loan applicants for
credit-worthiness, (2) account servicing to provide information on
the results of credit program operations, (3) credit bureau
reporting, (4) private collection contractors, (5) IRS tax refund
offset, (6) federal salary offset, (7) loan asset sales, (8)
litigation, and (9) write-offs.

OTHER LEGISLATIVE AND FINANCIAL
MANAGEMENT INITIATIVES

The Chief Financial Officers Act of 1990 and the Government
Management Reform Act of 1994:  These acts provide the underpinning
for identifying and correcting financial management weaknesses and
reliable reporting on the results of financial operations.  Moreover,
the CFO Act sets up expectations for

  the deployment of modern systems to replace existing antiquated,
     often manual, processes;

  the development of better performance and cost measures; and

  the design of results-oriented reports on the government's
     financial condition and operating performance by integrating
     budget, accounting, and program information.

The Government Performance and Results Act of 1993:  The act places
emphasis on managing for results and pinpointing opportunities for
improved performance and increased accountability.  As noted in this
report, in crafting the act, the Congress recognized that to be
useful, agency performance reports would not only need to document
performance levels, but also explain and describe the reasons for any
unmet goals and new plans for achieving those goals.

The Federal Credit Reform Act of 1990:  Budgetary and accounting
requirements for federal credit programs were significantly revised
under the Federal Credit Reform Act of 1990.  The Federal Credit
Reform Act's goals are

  measuring more accurately federal credit program costs,

  placing the costs of credit programs on a budgetary basis
     equivalent to each other and to other federal spending,

  encouraging the delivery of benefits in the form most appropriate
     to the needs of beneficiaries, and

  improving the allocation of resources among credit programs and
     between credit and other spending programs.

Federal Accounting Standards Advisory Board:  Accounting standards
for federal credit programs were revised in 1993 in accordance with
recommendations by the Federal Accounting Standards Advisory Board
(FASAB).  The revised standards are consistent with provisions of the
Federal Credit Reform Act, and require that direct and guaranteed
loans be accounted for on a present value basis, fully recognizing
actual and expected credit program costs.

Statement of Federal Financial Accounting Standards Number 2,
Accounting for Direct Loans and Loan Guarantees, states that because
credit programs provide interest subsidies and sustain losses caused
by defaults, the costs of these programs are significant.  Accounting
information called for in this standard provides the basis for
evaluating program performance by comparing actual accounting data
with estimated budget data for direct loans and loan guarantees.

GAO WORK ON FEDERAL DEBT
COLLECTION

GAO has issued numerous reports in the past on federal debt
collection activities.  In two of our reports on debt
collection--Debt Collection:  Billions Are Owed While Collection and
Accounting Problems Are Unresolved (GAO/AFMD-86-39, May 23, 1986) and
Credit Management:  Deteriorating Credit Picture Emphasizes
Importance of OMB's Nine-Point Program (GAO/AFMD-90-12, April 12,
1990)--we reported that despite increased emphasis by the
administration and individual agencies on debt collection activities,
the government's overall credit picture had deteriorated, with
delinquencies and losses on federal loan and loan guarantee programs
continuing to increase.  We also reported that agency debt collection
efforts were being hampered by accounting systems which often did not
provide management with current and accurate information on the
status of outstanding debt.

Despite progress in some areas and continued efforts on the part of
OMB, Treasury, and the Congress to strengthen overall debt collection
procedures, in our September 1995 testimony, Financial Management:
Legislation to Improve Governmentwide Debt Collection Practices
(GAO/T-AIMD-95-235, September 8, 1995), we again concluded that many
federal credit program agencies continued to face long-standing
problems in collecting debt.

THE DEBT COLLECTION IMPROVEMENT
ACT OF 1996
========================================================== Appendix IV

The Debt Collection Improvement Act of 1996, passed by the Congress
and signed into law by the President in April 1996, provides
significant opportunities for improving agencies' and FMS' ability to
collect delinquent debt.  Key provisions of this act affecting FMS
and agencies are summarized below.

KEY PROVISIONS AFFECTING FMS

  FMS has authority to coordinate debt collection efforts across the
     federal government.

  FMS has the authority to service the debt of other agencies
     in-house, designate debt collection centers or private
     collection contractors to service the debt, or to refer the debt
     to the Department of Justice for litigation.  The centers it can
     designate to service debt are responsible for centrally
     administering an array of activities, including debt servicing,
     collection, compromise, or termination.

This represents a major change from the existing practice in which
agencies handle the debt from origination through resolution,
regardless of their success or the time involved.  The act requires
agencies to transfer delinquent debts to FMS after 180 days.  Several
noncredit programs, including the Nuclear Regulatory Commission and
Federal Trade Commission, have already transferred their delinquent
debt to FMS for collection.  Some credit agencies expressed
reluctance in turning their debt over to FMS during our review.
However, since the completion of our work, all four credit agencies
included in our review said that they were either in the process of
negotiating or were considering the transfer of debt to FMS.

  Responsibilities for reporting on debt collection to the Congress
     are transferred from the Director of OMB to the Secretary of the
     Treasury (FMS).  The act states that the agencies will now
     report annually to FMS.  The act states that within 3 years of
     the act, the Secretary of the Treasury is required to report on
     collection services provided by FMS and other entities
     collecting on behalf federal agencies.  The act also gives the
     Secretary joint responsibility--with the Attorney General--for
     program regulations (the Federal Claims Collection Standards),
     which was previously a joint duty between the Comptroller
     General and the Attorney General.

  The act also provides resources to FMS and agencies to resolve
     delinquent debt.  FMS is authorized to charge fees for
     collecting delinquent debt.  The act allows for payment of
     collection fees for delinquent debt to be taken out of amounts
     collected.  In addition, the act provides authority for agencies
     to retain a portion of collections to be used for improving debt
     collection activities.  The act calls for these amounts to be
     available to reimburse agencies for certain debt collection and
     related expenses.  But under the act, the availability of the
     funds is subject to appropriation, and it is too soon to tell
     whether this provision will achieve its intent of providing
     incentives to agencies to increase the collection of delinquent
     debt.

                                        Table IV.1

                             Key Provisions Affecting Federal
                                         Agencies

                    Requirements of the Debt
                    Collection Act of 1982 and    Requirements of the Debt Collection
Subject             amendments                    Improvement Act of 1996
------------------  ----------------------------  --------------------------------------
Contracting for     Agencies were generally       Treasury is required to maintain a
debt collection     authorized to contract for    schedule of private sector contractors
services.           debt collection services      and agencies are required to use those
                    through the General Services  contractors.
                    Administration.

Offsetting          Authority provided but not    Requires agencies to participate in an
salaries of         required under the 1982 act.  annual matching of records to identify
federal employees                                 federal employees delinquent on
who owe delinquent                                federal debts.
debt.

Reporting           This was authorized but not   Agencies are required to report
information on an   mandatory in the 1982 act     information about an individual's
individual's        and only covered delinquent   delinquent debts. Agencies have the
delinquent debt to  debt.                         option to report nondelinquent
credit bureaus.                                   individual debt and all commercial
                                                  debt to credit reporting agencies.

Using               This was authorized but not   Provides authority for disbursing
administrative      mandatory under the 1982      officials to conduct offsets and
offsets.            act.                          requires referral of debts over 180
                                                  days delinquent to Treasury for
                                                  offset.

Using               Not specifically authorized.  Specifically authorized and required,
administrative                                    as appropriate.
wage garnishment.

Screening loan      Authority provided but not    Agencies are required to deny credit
applicants.         required.                     to those who owe delinquent debt to
                                                  the federal government. With certain
                                                  exceptions, such as a borrower with
                                                  outstanding IRS debt, agencies must
                                                  refuse credit to a delinquent credit
                                                  applicant.

Referring           Agencies were required to     Agencies are required to refer
delinquent debts    refer delinquent debts to     delinquent debts to FMS for the
for IRS tax refund  IRS at least annually.        purpose of offsetting any payments,
offset.                                           including tax refunds.

Closing out debt    Required of federal           All agencies may close out debts
to IRS as income    executive agencies.           through FMS.
to the debtor.

Requiring taxpayer  Required for those borrowing  Required from all those doing business
identification      from credit agencies.         with the federal government.
numbers.

Publicly            Not specifically authorized.  Specifically authorized by statute.
disseminating
information
regarding the
identity of a
person and the
delinquent nontax
debt.

Allowing the        Not specifically authorized.  Specifically authorized by statute.
Departments of
Labor and Health
and Human Services
to release
information to
agencies and their
agents on employer
and government
data for the
purpose of
collecting and
reporting
delinquent debt.
----------------------------------------------------------------------------------------
APPLICABILITY OF THE ACT

As was the case for the 1982 legislation, the 1996 act does not apply
to IRS, Customs Service, or Social Security Administration debt;
however, these entities are participants in assisting agencies to
collect debt.  The 1982 act covered the executive and legislative
branch agencies, and the 1996 act also includes the judicial branch.

TOOLS TRACKED AND REPORTED
=========================================================== Appendix V

This appendix provides more information about the involuntary
collection tools tracked by agencies and included in the annual debt
collection report to the Congress.

TAX REFUND OFFSET PROGRAM

Tax refund offsets resulted in $965 million in collections for fiscal
year 1995--40 percent of the total collections of the five tools.
This program allows income tax refunds to be offset against
delinquent amounts owed to the federal government.  Since the tax
refund offset began in 1986, the government has recovered more than
$6 billion.

LITIGATION

Litigation resulted in $553 million in collection for fiscal year
1995--
23 percent of the total collections of the five tools.  Delinquent
debts which cannot be collected through other means can be referred
to the Department of Justice for litigation.  In addition to the $553
million in collections, agencies reported $121 million in
non-monetary settlements recovered by Justice.

PRIVATE COLLECTION FIRMS

Private collection firms brought in $533 million in fiscal year
1995--
22 percent of the total of the five tools.  Of the $533 million
collected, $512 million pertained to collections on student loans.

ADMINISTRATIVE OFFSET PROGRAM

Administrative offsets resulted in $330 million in collections in
fiscal year 1995--14 percent of the total for the five tools.
Agencies are authorized to collect delinquent debt on behalf of other
agencies by withholding or offsetting payments due to, or monies held
by, the federal government for the debtor.

FEDERAL EMPLOYEE SALARY OFFSET

Federal employee salary offsets resulted in $21 million in
collections in fiscal year 1995--just 1 percent of the total for the
five tools.  Under this program, delinquent accounts are matched
against the federal personnel rosters to identify employees
delinquent on federal debts.  Where matches are made, 15 percent of a
federal employee's disposable income, less amounts required by law to
be withheld, may be offset against delinquent amounts due.

AMOUNT OF REPORTED DELINQUENT DEBT
BY AGENCY AT SEPTEMBER 30, 1990
AND SEPTEMBER 30, 1996
========================================================== Appendix VI

                         (Dollars in millions)

                                                                Change
                                Delinquencie  Delinquencie   from 1990
Department/Agency                  s 9/30/90     s 9/30/96     to 1996
------------------------------  ------------  ------------  ----------
U.S. Department of Agriculture       $16,695        $8,758     $-7,937
Department of Commerce                   294            97        -197
Department of Defense                  1,667         3,369       1,702
Education\a                            9,882        19,156       9,274
Department of Energy                   1,518         2,377         859
Health and Human Services              1,123         3,783       2,660
Social Security Administration            \b           331         331
Department of Housing and              2,206         2,282          76
 Urban Development
Department of the Interior               527           438         -89
Department of Justice                    324           101        -223
Department of Labor                      239            95        -144
Department of Transportation             923           160        -763
Treasury (less IRS)                      383           508         125
Department of Veterans Affairs         3,851         2,462      -1,389
Agency for International                 860           794         -66
 Development
Small Business Administration          1,870         2,031         161
Export-Import Bank                     1,773         2,451         678
All other                              1,290         2,077         787
======================================================================
Total                                $45,425       $51,270      $5,845
----------------------------------------------------------------------
\a Because of the nature of the Federal Family Education Loan
Program, almost all of Education's receivables are at least 270 days
delinquent when acquired from guaranty agencies.

\b The Social Security Administration was part of Health and Human
Services at September 30, 1990.

Source:  OMB Debt Collection Reports and FMS.  This information was
not independently verified by GAO.

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C.

Julie S.  Tessauro, Assistant Director
Mary Ellen Chervenic, Assistant Director
Linda J.  Sellevaag, Communications Analyst
Cristina T.  Chaplin, Communications Analyst

OFFICE OF THE GENERAL COUNCIL

Franklin D.  Jackson, Senior Attorney

*** End of document. ***