HB-2-3550

CHAPTER 7: SPECIAL COLLECTIONS

7.1 INTRODUCTION

Although most borrowers fulfill their obligations, special collection efforts are sometimes 

required. This chapter describes the procedures for recovering unauthorized assistance; 

collecting debts owed the Agency due through administrative, salary and IRS offsets; and debt 

settlement.

It is the Agency’s policy to collect unauthorized assistance, whether the assistance was 

received as a result of error or deception, unless any applicable Statute of Limitations has 

expired. Even if the error was made by Agency staff, the borrower is responsible for repaying 

the unauthorized amount. The Agency will provide assistance to help borrowers who received 

unauthorized assistance based on an error. Section 1 of this chapter provides instructions for 

identifying, investigating, and correcting instances of unauthorized assistance. 

In the case of unauthorized assistance or any other debt owed the Agency, amounts owed 

to the Agency may be collected by offsetting payments due a borrower from Federal agencies 

including Internal Revenue Service (IRS) tax refunds and Federal employee salary and 

retirement payments. Section 2 of this chapter provides instructions for obtaining offsets of debt 

from these sources.

When all other collection attempts have failed, the Agency may elect to accept a portion 

of the remaining debt to settle and close the account. Debt settlement procedures are provided 

in Section 3. 

SECTION 1: UNAUTHORIZED ASSISTANCE [7 CFR 3550.164]

7.2 OVERVIEW OF UNAUTHORIZED ASSISTANCE

The process used to collect unauthorized assistance differs depending upon the form of 

unauthorized assistance and whether it was received based on false information or an error.

Inaccurate information includes incorrect information inadvertently provided, used, or 

omitted without the intent to obtain benefits for which the borrower was not eligible. The error 

may be caused by the borrower, a third party, or the Agency; the source of the error is irrelevant. 

The Statute of Limitations for collecting unauthorized assistance as a result of inaccurate 

information is 6 years.

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Paragraph 7.2 Overview of Unauthorized Assistance

False information includes information that: (1) the borrower knew was incorrect or 

should have known was incorrect; and (2) was provided or omitted for the purpose of obtaining 

assistance for which the borrower was not eligible. If both false and inaccurate information was 

provided or omitted, the account is serviced as if the unauthorized assistance is solely the result 

of false information. A borrower is held accountable for false information provided by a third 

party if the borrower knew or should have known that the information provided was incorrect. 

The Statute of Limitations for collecting unauthorized assistance as a result of false information 

is 10 years.

A. Three Types of Unauthorized Assistance

1. Unauthorized Loan 

Loans made to unqualified loan borrowers, written at the wrong interest rate, or made 

for an ineligible purpose are considered unauthorized assistance. Borrowers are not 

considered to have obtained unauthorized assistance if, due to inaccurate information, 

they obtained a loan despite inadequate payment ability, or received a program loan when 

private credit would have been available. 

2. Unauthorized Subsidy

Subsidy received by a borrower for which they were not eligible. The Agency only 

seeks collection of the unauthorized assistance if the amount received is equal to or 

greater than $550, in which case the borrower must repay the full amount of unauthorized 

subsidy received. 

Unauthorized assistance will not be pursued when an individual who is eligible for a 

same rates and terms assumption under HB-1-3550, Paragraph 13.14 B. has been 

occupying the security property, receiving subsidy based on their household income, and 

executes a same rates and terms assumption. As these cases are identified, the 

Unauthorized Assistance Unit will notify the individuals occupying the security property 

in writing that unauthorized assistance will be pursued unless an assumption agreement is 

signed within 90 days. A task will be sent to the Field Office informing them of the 

unauthorized assistance and a request to have the individuals execute a same rates and 

terms assumption. If the assumption is not executed within 90 days and the Field Office 

has not requested an extension to complete the processing of the assumption, collection 

of the unauthorized assistance will be pursued.

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Paragraph 7.2 Overview of Unauthorized Assistance

3. Unauthorized Grant

Grants made to unqualified borrowers, or for an ineligible purpose, are considered 

unauthorized assistance.

B. Consequences for borrowers

1. Assistance Based on False Information

Borrowers who obtained unauthorized assistance based on false information must pay 

off the loan and repay the subsidy within 30 days of the expiration of all appeal rights. A 

borrower who received a loan without being eligible, or the loan was approved for 

unauthorized purposes, must repay the outstanding loan balance. 

A borrower who received unauthorized subsidy must repay the unauthorized amount 

in a lump sum. If the unauthorized subsidy is repaid within the required time frame, the 

loan may be continued. The borrower also may continue to receive payment subsidy for 

the authorized amount. 

2. Assistance Based on Inaccurate Information 

Borrowers who obtained unauthorized assistance based on inaccurate information 

also are required to correct the situation within 30 days of the expiration of all appeal 

rights. However, the Agency may permit the borrower to retain the loan, with some 

adjustments, and may assist borrowers who cannot repay delinquent amounts in a lump 

sum. 

• Loan to over-income borrowers. If a Section 502 borrower’s income was above the 

moderate-income level at loan approval or closing, the borrower must refinance with 

private credit, or the loan must be converted to a nonprogram loan. If a Section 504 

borrower’s income was above the very low-income level at loan approval or closing, 

the loan must be converted to a Section 502 loan. 

• Loan to ineligible borrowers. If a borrower was not eligible for a loan, the Agency 

cannot continue the loan and must require that it be repaid within 30 days. 

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Paragraph 7.2 Overview of Unauthorized Assistance

• Loan to other borrowers. The loan can be continued on existing terms if the loan 

was approved for unauthorized purposes, or the borrower’s income was incorrect, but 

the borrower still qualified as income-eligible.

• Loan at wrong interest rate. If the 

wrong interest rate was used on the 

promissory note, the account must be 

adjusted using the correct interest 

rate. 

• Subsidy. If a borrower received 

unauthorized subsidy based on 

inaccurate information, the borrower 

must repay the unauthorized amount. 

3. Unauthorized Grants

Borrowers who received an unauthorized Section 504 grant should correct the 

situation within 30 days of the expiration of all appeal rights, regardless of whether it was 

received based on false or inaccurate information. The grant borrower must repay it in a 

lump sum or execute a promissory note agreeing to convert the grant to a Section 504 

loan to be repaid over time, unless the borrower does not have repayment ability. 

If a borrower is unable to repay the 

unauthorized grant in a lump sum, the 

Servicing and Asset Management 

Office (Servicing Office) should 

evaluate the borrower’s current 

financial situation. If the borrower has repayment ability and agrees to repay the 

unauthorized assistance, the Servicing Office must execute Form RD 1940-16, 

Promissory Note. If the borrower has repayment ability but refuses to repay, the 

Servicing Office should document the information and seek a judgment on the 

account. 

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Loans Made at the

Wrong Interest Rates

If a loan was made at the wrong interest rate, but 

the borrower was granted subsidy at the correct 

interest rate, the unauthorized assistance is zero 

for the period of the subsidy agreement. The 

promissory note must be corrected to reflect the 

appropriate interest rate.

Best Practice

For grant of $7,500, seek the best lien 

obtainable to secure repayment.
HB-2-3550

7.3 IDENTIFYING AND INVESTIGATING CASES

The Agency may identify instances of 

unauthorized assistance through file reviews 

conducted by the Servicing Office, referrals 

made by a Field Office or private citizen, or 

audits conducted by the Office of the Inspector 

General (OIG) of the United States Department 

of Agriculture. Suspected cases of 

unauthorized assistance must be investigated to 

determine whether unauthorized assistance was 

actually received.

If the case does not involve false information, the Servicing Office must 

conduct the investigation and document all actions and findings. Any case of 

unauthorized assistance that may be the result of false information must be referred to 

OIG. OIG also becomes involved in cases discovered during OIG audits. Whenever 

OIG is involved, all the Servicing Office actions are deferred until the OIG investigation is 

completed, or OIG declines to handle the case and refers it to the Servicing Office. If OIG 

chooses to handle a case, no further the Servicing Office involvement is necessary, unless OIG 

requests assistance.

In the investigation of cases involving false information, OIG or the Servicing Office

must determine whether the borrower was aware of or should have been aware of false 

information submitted by a third party. Borrowers will not be penalized for false information 

submitted by a third party if they were not aware of the submission. In such a case, the account 

is serviced as if the unauthorized assistance is the result of inaccurate information.

OIG requires reports on the results of the investigation into any audit cases, regardless of 

whether the case is handled by OIG or the Agency. Cases involving grants or pending 

liquidation are not closed until the account is paid in full, otherwise satisfied, or liquidation is 

completed. 

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Suspension or Debarment

The Servicing Office Servicers should 

recommend suspension or debarment when false 

information has been provided by the applicant. 

The National Office will decide whether to 

accept or reject the recommendation. The 

ultimate decision is made by an Administrative 

Law Judge.
HB-2-3550

7.4 NOTIFICATION AND APPEALS AND ADMINISTRATIVE COST

A. Notify Borrower 

The Servicing Office must notify the borrower of the determination that unauthorized 

assistance has been received, specifying in detail the reasons the assistance was found to be 

unauthorized, and the amount to be repaid. The borrower has 30 days to consult with the 

Servicing Office or to dispute the claim.

B. Borrower Consultation

The borrower should contact the Servicing Office if he or she wishes to review 

the claim with the Agency. During the consultation, the Servicing Office should 

outline the reasons the assistance is believed to be unauthorized and document the 

borrower’s responses. If the borrower requests additional time to assemble 

documentation, the Servicing Office may grant an extension that is long enough to gather such 

information. The number of days granted for the extension must be documented so that the 

notice of determination is not sent before the extension has elapsed. 

C. Notice of Determination

At the end of the 30-day consultation period and after any extension period has elapsed, 

the Servicing Office should notify the borrower of the final amount of assistance determined to 

be unauthorized, where to send the payment, servicing actions to be taken by the Agency, and 

the borrower’s appeal rights. Servicing actions to recover unauthorized assistance cannot 

proceed until the 30-day period allowed to request an appeal has elapsed and any appeal that is 

filed has been concluded. 

D. Administrative Cost

Borrowers who are contractually obligated will be assessed a $300 administrative cost 

plus any additional third party costs if the borrower fails to repay unauthorized assistance or

enter into an Agency approved repayment plan to repay the lump sum amount within 30 days 

after the borrower’s appeal expiration date or final appeal determination date.

7.5 DETERMINING THE AMOUNT DUE

A. Determine Correct Interest Rate

If the loan was made at the wrong interest rate, the Servicing Office must determine the 

rate that should have been used at the time the loan was made.

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Paragraph 7.5 Determining the Amount Due

• For borrowers who were income-eligible at loan approval and closing, the Servicing 

Office should use the Agency interest rate in effect at the time of loan approval or 

closing, whichever is lower. 

• For borrowers who were not income-eligible for a Section 502 loan at loan approval 

or closing, the Servicing Office should use the nonprogram interest rate in effect at 

the time of loan approval. Appendix 6 contains a list of historical nonprogram 

interest rates.

• For borrowers who were not incomeeligible for a Section 504 loan or 

grant, the Servicing Office should 

use the program or nonprogram 

interest rate that would have been 

applicable at the time the loan or 

grant was made.

• Borrower may consent to reamortizing the 

B. Determine Correct Subsidy account; or

Amount • Servicing Office accelerates loan.

The amount of subsidy borrowers were eligible to receive will be calculated based on the 

amount they were eligible for at the time the unauthorized assistance began, even if their 

eligibility has changed over time.

C. Reverse and Reapply Procedures

For unauthorized assistance resulting from payment subsidy, a fee may be established in 

accordance with Paragraph 7.6 B.2. For all other types of unauthorized assistance, borrower 

accounts must be adjusted retroactively to establish the amount of unauthorized assistance. This 

adjustment or fee amount calculation involves determining the amount paid by the borrower 

since the unauthorized assistance began and applying that amount to the monthly installments 

that should have been charged, as illustrated in Exhibit 7-1. This may create an account

delinquency in the amount of the unauthorized assistance that must be repaid.

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Consequences if a loan account 

adjustment results in delinquency:

In the case of false information: 

• Borrower must repay in a lump sum; or

• Servicing Office accelerates loan.

• Borrower may repay in a lump sum; or

In the case of inaccurate information: 
HB-2-3550

Exhibit 7-1

Reverse and Reapply Procedures

Mr. Smith received a loan in January 1996. An incorrect interest rate was used 

to calculate Mr. Smith’s monthly payment and the error was not identified until 

April 1996. Due to the error, Mr. Smith was making $400 payments but should 

have been making $450 payments. The following illustrates how his monthly 

payments were applied to his account at the incorrect rate and the application of 

payments at the correct rate after the account adjustments were made.

Month Incorrect Rate Correct Rate

January 400 450

February 400 450

March 400 450

April 400 250

 TOTAL 1,600 1,600

Mr. Smith’s account is now $200 past due.

7.6 SERVICING ACTIONS

A. Assistance to Borrowers

The Agency offers no assistance to loan borrowers who obtained unauthorized assistance 

based on false information. If the borrower is unable or unwilling to make the required payment 

within 30 days of the expiration of all appeal rights, the loan will be accelerated. 

If a borrower obtained unauthorized assistance SCRA OF 2003

based on inaccurate information and is unable to 

repay the amount due in a lump sum, the Agency 

will assist the borrower by reamortizing the loan Original mortgage interest rate must be 

to include the delinquent amount. If the borrower restored when loan is accelerated for borrowers 

fails to authorize reamortization within 30 days protected by the Act.

of the expiration of all appeal rights, the loan will 

be accelerated. Any lump sum payments received after the account is accelerated will be handled in 

accordance with Paragraph 6.5 B.5. 

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HB-2-3550

Paragraph 7.6 Servicing Actions

B. Processing Changes to the Account

1. Change in Interest Rate 

Any time an interest rate must be changed, Form RD 1940-16 must be amended and 

the borrower must initial the change. Based upon State law, and with the advice of the 

Office of General Counsel (OGC), the real estate mortgage or deed of trust may also need 

to be amended. If a borrower fails to execute Form RD 1940-16 or other required 

documents within 30 days, the Servicing Office should obtain advice from OGC and 

accelerate the account.

2. Change in Subsidy

If the current subsidy agreement is incorrect, the Servicing Office must reverify the 

borrower’s income, following the procedures discussed in Chapter 4, unless the required 

information has been gathered during the course of the unauthorized assistance 

investigation. The Servicing Office should send Form RD 3550-21 to the borrower. If 

the borrower fails to provide the required information within 30 days, the installment at 

the promissory note interest rate will be due. 

The amount of unauthorized assistance will be established as a fee on the account. 

The fee will be placed on the primary loan. The fee will be due and payable within 30 

days. If a lump sum payment is made, it will be applied against the fee.

3. Reamortization 

If a borrower received unauthorized assistance based on inaccurate information and is 

unable to repay the unauthorized amount within 30 days, the account can be reamortized 

to include the unauthorized amount using Form RD 3550-18, if the borrower occupies the 

property. If the borrower fails to sign Form RD 3550-18 within 30 days, the account will 

be accelerated. Escrow will be required at the time of reamortization if the borrower is 

delinquent on real estate taxes and insurance or does not have insurance. 

C. Reactivating Satisfied Accounts

If a former borrower with a satisfied account is found to have received unauthorized 

subsidy, the account must be reopened so that the necessary account adjustments can be made. 

The Servicing Office should attempt to contact the former borrower using the last known address 

and phone number to inform them of the unauthorized subsidy and to request repayment. If the 

borrower agrees to repay, he or she should execute Form RD 1940-16. The new Form RD 1940-

16 should be written at the interest rate that had been used for the initial loan. The term should 

be as short as feasible, given the former borrower’s ability to pay, but generally not more than 5 

years. If the real estate mortgage or deed of trust had not been released, OGC should be 

consulted about any changes in the documents necessary to secure repayment. _________________________________________________________________________________________

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If the borrower fails to repay the unauthorized subsidy, the Servicing Office should 

attempt to obtain financial information about the borrower. If the borrower has assets, the 

Servicing Office should seek a judgment to secure repayment. If financial information is not 

available or the borrower cannot be located, the Servicing Office should debt settle the 

unauthorized subsidy as described in Section 3 of this chapter. 

If the Real Estate mortgage or Deed of Trust has been released and the amount of 

unauthorized assistance is less than $550, the unauthorized assistance will not be pursued. 

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SECTION 2: OFFSETS [7 CFR 3550.210]

7.7 OVERVIEW OF OFFSETS

Any money that is or may become payable to an Agency borrower or debtor from 

the United States may be subject to offsets for the collection of a debt owed to the 

Agency. This section discusses three types of offsets.

Through an administrative offset, the Agency may collect money, such as retirement 

benefits or a Farm Service Agency contract payment, that is or may become payable to a 

borrower from a Federal agency. Administrative 

offsets must be conducted in accordance with 

the procedures in 7 CFR Part 3, Subpart B. 

Salary offsets must be conducted in 

accordance with 7 CFR Part 3, Subpart C. The 

Agency may use a salary offset to collect a debt 

owed from a borrower’s pay if the borrower 

works for a Federal agency, the United States 

Postal Service, the Postal Rate Commission, or is a member of the United States Armed Forces 

or military reserve, or any other persons covered in 7 CFR Part 3, Subpart C. 

The Agency may offset a borrower’s Federal tax refunds to collect a debt owed. IRS 

offsets must be conducted in accordance with the provisions of 31 U.S.C. 3720A and 31 CFR 

285.2. 

Administrative and salary offset may be used simultaneously to cure a debt. Although 

the IRS offset is the tool most commonly used by the Agency, it can only be used if the debt 

cannot be obtained through administrative or salary offset and cannot be used in conjunction 

with the other two types of offset.

7.8 ANNUAL REVIEW OF DELINQUENT ACCOUNTS

At least once a year, delinquent accounts should be screened to identify borrowers 

eligible for offset. Offsets will not be considered unless the account is delinquent by more than 2

monthly payments and the delinquent amount is at least $25. Offsets are not permitted when any

of the circumstances listed below exist. 

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Applicability to Debtors

Offsets may be used to collect debts 

owed by present borrowers and former 

borrowers (debtors). For simplicity, the term 

“borrower” is used rather than stating borrower 

or debtor each time a reference is made.
HB-2-3550

Paragraph 7.8 Annual Review of Delinquent Account

• The account is accelerated and collection of the debt through offset would jeopardize 

foreclosure litigation or reinstate the borrower’s account. The Servicing Office

should consult with OGC for guidance on pending foreclosure cases; 

• The account is under the jurisdiction of a bankruptcy account or has been discharged 

in bankruptcy; 

• The borrower received the loan before entering full time active duty in the military 

service and is still on active duty; 

• The account is current under an approved adjustment, moratorium, or delinquency 

workout agreement, or the account has a suspend code that indicates a problem with 

the account; or

• The statute of limitations has expired.

7.9 SALARY AND ADMINISTRATIVE OFFSETS

If a borrower has salary or other income that can be offset, the Servicing 

Office must determine whether the offset is appropriate and, if an administrative or 

salary offset will not be pursued, document the reasons. If the Servicing Office plans 

to collect a debt through an administrative or salary offset, the borrower must be 

notified within 15 days of the determination.

A. Amount of Offsets

Payments effected by administrative offset are collected in a lump sum. If the borrower 

has multiple Agency loans, any amounts collected are applied based on the advantage to the 

Agency. 

For salary offsets, a borrower’s disposable pay, after taxes, is offset 15 percent each pay 

period. Disposable pay includes basic, special, incentive, retired, retainer, or other authorized 

pay. The dollar amount offset from a borrower’s pay may change if income increases or 

decreases. The borrower may volunteer to have a larger amount deducted by submitting to the 

Servicing Office Handbook Letter 103(3550), Agreement to Increase Salary Offset. If the 

borrower has multiple Agency loans, amounts collected are applied to the accounts based on the 

advantage to the Agency. 

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Paragraph 7.9 Salary and Administrative Offsets

B. Notifying the Borrower 

Handbook Letter 104(3550), 

Notification of Salary Offset should be used to Time Frames

notify the borrower of a salary offset, and An offset must not take effect until 30 

Handbook Letter 105(3550), Notification of days after the borrower receives notice of the 

Administrative Offset should be used to notify Agency’s intent to use offset. Time frames 

the borrower of an administrative offset. The begin once the borrower signs for the certified 

notification letter must be sent by both regular mail. If the certified mail receipt is not signed, 

and certified mail with a return receipt the time frame begins on the date of nondelivery 

for salary offset and 10 days after the regular requested. The letter should state the nature mail was sent for administrative offset. and amount of the debt, the intended date of 

collection, the facts giving rise to the determination, and an explanation of the borrower’s rights. 

The Agency is not required to provide notification before effecting an administrative 

offset if providing the notice would substantially affect the Government’s ability to collect the 

debt. However, if the borrower was not previously notified, the borrower should be notified as 

soon as possible using Handbook Letter 105(3550). 

C. Borrower Response and Appeals

Borrowers may avoid having their salaries or other payments offset by paying the 

delinquency within 30 days. If the account has been accelerated the full amount owed must be 

paid. If the account has not been accelerated, the borrower must make a payment sufficient to 

bring the account current.

Borrowers have the right to obtain copies Requests for Records

of their records, provide evidence against the 

claim, have a consultation with the Servicing Borrower requests for copies of their 

Office, and appeal the decision. Borrowers must records should be met as quickly as possible to 

make all requests in writing. The Servicing enable the borrower to review documents, 

Office should send a letter to advise the provide evidence to the Servicing Office, or to 

borrower of the decision for all requests made, file a petition. Copying costs may be charged to 

the borrower’s account. unless the borrower’s request was for copies of 

documents only. If the borrower’s request is 

denied, the letter should state the reasons for the denial and the borrower’s appeal 

rights. All decisions should be documented in LoanServ. 

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Paragraph 7.9 Salary and Administrative Offsets

1. Consultation with the Servicing Office and NAD Appeals 

A borrower who has any questions concerning the determination of the offset 

consult with the Servicing Office As a result of the consultation, the borrower ma

request that the Servicing Office review additional documentation to refute of the 

determination. Borrowers must state in the request the reasons for the review. If t

may 

y 

he 

borrower needs additional time to assemble documentation, an extension may be granted 

for the amount of time the Servicer believes will be needed to gather such information. 

All reviews are based on written evidence, unless otherwise agreed upon by the Agency 

and borrower. Payments are not offset until the borrower is sent a letter about the 

Agency’s decision. 

The borrower may appeal a Servicing Office adverse decision to the National Appeals 

Division (NAD) following the procedures described in Paragraph 1.9. If a borrower 

appeals to NAD, action on the offset is suspended until NAD has made a determination. 

2. Delinquency Workout Agreement

If a borrower requests a delinquency workout agreement, the offer should be 

accepted if the amount offered is not less than the Agency would obtain from an 

offset. Extreme hardship or unfairness to the borrower due to the offset may be 

a consideration in the decision. If a borrower is exempted from offset because 

of extreme hardship or unfairness, the Servicing Office and the borrower must agree on a 

delinquency workout agreement, and the debt must have adequate security. Any decision 

to reject an offer for payment in lieu of a salary offset must be based on an analysis of the 

borrower’s financial situation.

3. Debt Settlement

A debt settlement offer in lieu of offset may be considered only if the account has 

already been accelerated or the delinquency is owed by a former borrower with an 

inactive account. If a borrower requests debt settlement, the borrower should be 

informed of the application procedures for debt settlement, but action on the offset should 

not be delayed. Debt settlement procedures are provided in Section 3 of this chapter. 

4. Petitioning for a Salary Offset Hearing or Administrative Offset Appeal

Borrowers who wish to request a hearing or appeal conducted by an Administrative 

Law Judge or other official not under the control of the Secretary of Agriculture must 

submit a petition to the Servicing Office within 30 days of the notification of salary and 

administrative offset. The borrower must state in the petition the reasons supporting the 

request and sign it. Petitions filed late are only accepted if the delay was beyond the 

borrower’s control. 

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Paragraph 7.9 Salary and Administrative Offsets

The Servicing Officemay choose to provide a borrower who has requested a salary 

offset hearing the opportunity for a review of file documents in lieu of a salary offset 

hearing, if the matter can be solved more efficiently in this manner. The borrower must 

be notified of the acceptance or non-acceptance of a petition and the time and place of the 

hearing, if applicable. Accepted petitions stay the collection of the debt.

Final decisions should outline the facts of the case and provide a repayment schedule, 

if applicable. Decisions are made within 60 days of the request for a salary offset hearing 

and 30 days of the hearing for administrative offset.

D. Processing Offsets

Paying agencies must be provided written certification that the debtor owes the Agency a 

debt. The certification outlines the basis for the offset, amount, due date, and a confirmation that 

the Agency abided by the regulations for offsets. If proper certification is not provided to the 

paying agency, the request will be returned to the Servicing Office. Once the Servicing Office

receives notice from the paying agency that the offset has been effected, the Servicing Office

should credit the borrower’s account in LoanServ for the amount offset.

1. Administrative Offset

To request an administrative offset, the Servicing Office should send Handbook 

Letter 106(3550), Request for Administrative Offset to the appropriate Federal agency. 

The Servicing Office must cancel administrative offset requests by written notification to 

the paying agency once the borrower’s account is brought current or otherwise satisfied. 

An agency may decline an administrative offset request if the offset would substantially 

interfere with or defeat the purposes of a program. 

Paying agencies should be notified as soon as practical of debtors eligible for 

administrative offset so that the paying agency can flag the debtor’s account. Early 

identification can help alleviate problems with collecting the debt under the statute of 

limitations. If at least 1 year has elapsed since the original administrative offset was 

requested from the paying agency, the debtor may offer a repayment plan in lieu of the 

offset.

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Paragraph 7.9 Salary and Administrative Offsets

2.

To request a salary offset, the Servicing Office s

107(3550), Request for Salary Offset to the paying a

103(3550) if the borrower has agreed to an offset of 

borrower’s salary. The Servicing Office must notify

cancellation once the borrower’s account is brought 

Generally, the paying agency will contact the Ser

resigning or retiring before the debt is complete. Ho

Salary Offset

hould submit Handbook Letter 

gency and attach Handbook Letter 

more than 15 percent of the 

 the paying agency by letter of the 

current or otherwise satisfied.

vicing Office if an employee is 

wever, if the Servicing 

Officebecomes aware of the resignation or retirement, they should contact the paying 

agency immediately to secure repayment of the debt. The Servicing Office should inform 

the paying agency of the remaining amount of debt owed by the borrower and request the 

borrower’s final salary payment and lump-sum leave to liquidate the debt. If the 

delinquency will not be resolved, the Servicing Office should instruct the paying agency 

to put a hold on the borrower’s retirement funds in order to offset the remaining debt and 

should submit a claim to the next paying agency. If the borrower changes employers and 

salary offset is still a viable option, the Servicing Office should submit a claim to the next 

paying agency. In this situation, the Agency is not required to provide the borrower with 

additional notification.

7.10 IRS OFFSET

Since most borrowers pay taxes to the IRS, offsetting tax refunds is an effective tool for 

collecting amounts owed from a large number of borrowers and is the type of offset used most 

frequently by the Agency. However, since taxes are refunded only once a year and borrowers 

must receive at least a 60-day notice before affecting an offset, the Agency must adhere strictly 

to IRS deadlines. Borrowers who are in debt both prior to and post acceleration may be offset. 

A. Amount of the Offset

Whenever possible, the Servicing Office should collect the amount equal to the debt. If 

this is not possible, the Servicing Office should collect the maximum amount of taxes and 

request an IRS offset again the following year. If an Agency borrower has multiple debts, the 

payment should be applied in the order the debts are accrued. 

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Paragraph 7.10 IRS Offset

B. Processing

Each year, IRS provides the Servicing Reporting Delinquencies Office with a schedule for submitting preliminary to a Credit Bureau and final lists of borrowers eligible for IRS offset. 

After LoanServ screens borrower’s accounts, the It is especially important to report delinquencies Servicing Officeshould submit to IRS a to a credit bureau when requesting an IRS offset 

preliminary list of the borrowers eligible for because the IRS will not offset a borrower’s tax 

offset. refund if the borrower has not been reported to a 

credit bureau.

Borrowers should be notified of the 

upcoming IRS offset using Handbook Letter 108(3550), Notification of IRS Offset. Borrowers 

have 60 days from the date of the letter to provide the Servicing Office with evidence against the 

determination in writing or to pay the delinquency. If the borrower provides documentation, the 

Servicing Office should determine whether offset will be exercised and send Handbook Letter 

109(3550), Confirmation of IRS Offset advising the borrower of the decision. 

If the documentation provided by the borrower demonstrates that the offset should not be 

used or should be for a lower amount, or if the borrower pays the amount owed, the Servicing 

Office should amend the list provided to IRS to reflect the changes. The Servicing Office must 

submit a final list of the borrowers eligible for offset to the IRS in accordance with the schedule 

provided by the IRS. Any revisions to the final list can only consist of removing borrowers from 

the list entirely or reducing the amount to be offset. Since an IRS offset cannot be canceled after 

the final request has been made, offset amounts that should not have been taken must be 

refunded to the borrower. 

IRS notifies the borrower after his or her tax refunds have been offset. The Servicing 

Office will credit the borrower’s account for the amount of the offset, less the IRS processing 

costs. 

7.11 REFUNDS

Offsets received by the Agency in excess of the debt must be returned to the 

borrower. For administrative offsets only, the refund will include interest on the 

overpayment calculated at the 90-day treasury bill rate (Exhibit B of RD Instruction 

440.1) within 45 days of determining that an overpayment was received.

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SECTION 3: DEBT SETTLEMENT

Debt settlement should be pursued when all other attempts to collect outstanding debt 

have failed. If the outstanding debt is secured, debt settlement cannot be pursued until the loan is 

accelerated or fully matured. If the outstanding debt is unsecured, debt settlement may be 

pursued at any time, whether or not it is due and payable. Settlement may be requested by the 

debtor or initiated by the Agency. Debt settlement, when complete, closes the debtor’s account. 

Debt settlement may take one of the following forms.

• Compromise. An agreement that permits the debtor to retain the security property 

and be released from further liability upon receipt of a specified lump sum that is less 

than the total amount due. In all instances a reasonable compromise offer is the most 

expedient and cost-effective method of settling the remaining balance on a debt. 

• Adjustment. An agreement to release a debtor from liability, generally upon receipt 

of an initial lump sum and the promise of additional periodic payments over a period 

up to 5 years. The debtor is not permitted to retain the security property, except in 

cases of valueless liens.

• Charge-off. An action taken by the Agency when a compromise or adjustment 

cannot be negotiated, but the debtor is not to be released from liability. 

• Cancellation. An action taken by the Agency to cease collection activities and 

release the debtor from personal liability for any remaining amounts owed. 

Form RD 3550-20, Application for Settlement of Indebtedness, is used to process all four 

forms of debt settlement. However, the Servicing Office may enter into a verbal agreement for a 

compromise offer which will be documented on LoanServ and confirmed by letter within 5 days 

to the borrower. The verbal agreement for the compromise should generally require payment 

within 30 days. Adjustment offers must always be documented on Form RD 3550-20. In 

addition, when the agency cancels debt without application, the basis for cancelling the debt will 

be documented on LoanServ in lieu of a RD 3550-20. 

7.12 COMPROMISE AND ADJUSTMENT OF DEBT [7 CFR 3550.253]

The Agency may agree to a compromise or adjustment for less than the debt owed and 

cancel the remaining debt. The debtor may request a compromise or adjustment by completing 

Form RD 3550-20. No payment should be accepted until an agreement has been approved; any 

payment submitted with Form RD 3550-20 must be returned to the debtor. _________________________________________________________________________________________

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Paragraph 7.12 Compromise and Adjustment of Debt [7 CFR 3550.253]

Before accepting a compromise or adjustment offer, the Agency must establish that the 

offer represents the maximum amount the debtor is able to pay based on available financial 

information as described in Paragraph 7.16. The Agency will not agree to a compromise or an 

adjustment if there is doubt about a debtor’s ability to pay that reduced amount. 

A. Compromise

A compromise involves the acceptance of a lump-sum payment of less than the total 

amount owed and cancellation of the remaining debt. A debtor may retain the security property 

under a compromise offer if the compromise payment is at least equal to the net recovery value 

of the property and it is in the best interest of the Government. 

B. Adjustment

An adjustment provides for payment of an initial lump sum representing the maximum 

amount the debtor can afford to pay and a new schedule of regular payments over the shortest 

period the debtor can afford, but no longer than 5 years. If the adjustment offer is for less than 

the full outstanding debt, any remaining balance is canceled once all payments under the 

adjustment agreement have been made. The debtor is not permitted to retain the security 

property, except in the case of a valueless lien.

When an adjustment offer is approved, the Servicing Office must establish an adjustment 

account, send regular billing statements, and archive any account balance in excess of the 

adjustment offer. In the event of a default on the agreement, the entire debt should be reinstated. 

The archived account balances should not be written off and reported to the IRS until the 

adjustment offer has been fulfilled or the entire remaining debt is canceled because the debtor 

has defaulted on the adjustment agreement.

A debtor whose adjustment account becomes past due should be contacted as soon as a 

payment is missed to determine their circumstances and to aggressively seek collection. Any 

account under an adjustment agreement that becomes past due should immediately be referred 

for offset, as described in Section 2 of this chapter.

Based on an analysis of the debtor’s present circumstances, the Servicing Office may 

decide to modify the adjustment agreement. The Servicer may approve only one amendment to 

an adjustment agreement. Any further amendments must receive prior authorization from the 

next-level supervisor. If the adjustment agreement is modified, it must be documented on Form 

RD 3550-20, or in LoanServ by the Servicing Office and confirmed by letter to the borrower. 

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Paragraph 7.12 Compromise and Adjustment of Debt [7 CFR 3550.253]

If the debtor is unable or unwilling to repay the debt, the Servicing Office must notify the 

debtor, in writing, that the adjustment agreement is canceled and inform the debtor of all 

available appeal rights. If an adjustment agreement is canceled, payments made by the debtor 

prior to the cancellation are retained by the Agency.

7.13 RECALL TREASURY DEBT

A debt is recalled from Treasury when the Agency has determined that it is in the best 

interest of the Government to end collection efforts that were used to resolve a Direct Single 

Family Housing debt remaining after the liquidation of the secured property. This determination 

is pursuant to the Debt Collection Improvement Act, - 31 U.S.C. 3711(a)(3) and USDA 

regulation 7 CFR 3.20; as well as, 31 CFR 903.3(a) which identifies the circumstances under 

which a debt may be terminated. 

 The Agency will evaluate if a substantial amount of debt is being collected by Treasury 

by reviewing both the amount of the debt owed (outstanding) and the amount collected 

regardless of the amount of the debt owed. Annual reviews of a three year collection history will 

be conducted to determine if: 

• Treasury collected at least 30% of the outstanding balance initially due during the 

past three year period or

• Treasury collected more than $3,600 during the past three years.

If a substantial amount of unsecured debt has not been collected by Treasury during the 

past three years, the debt may be recalled by the Agency. Once debts are recalled from Treasury,

the Agency shall cancel the accounts without further analysis. The Agency issues IRS Form 

1099-C (Cancellation of Debt) to borrowers whose debts have been cancelled.

7.14 CHARGE-OFF OF DEBT

A debt is charged off when a compromise or adjustment cannot be negotiated with a 

debtor, but available information indicates that the debtor is able to repay some part of the debt 

now or in the future. The Servicer should use Form RD 3550-20 to charge off a debt. 

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Paragraph 7.14 Charge-Off OF debt

A charge-off does not release the debtor from liability. Debtors whose debts have been 

charged off will be referred to Treasury for collection. If the Department of Treasury determines 

the debt is uncollectible and returns to the account to the Agency, the Agency will cancel the 

debt under paragraph 7.15. An account that has been charged off can be settled through a 

compromise, adjustment, or cancellation at any time. The debtor is not permitted to retain the 

security property, except in the case of a valueless lien or when the total debt against the secured 

property is $7,500 or less.

7.15 CANCELLATION OF DEBT

Debt will be canceled only if other means of debt settlement cannot be used, there is no 

security remaining, and the available information indicates that the debtor is unable to repay any 

part of the debt and has no prospects of doing so in the future. If the security is remaining, 

cancellation may be approved when the total debt against the secured property is less than $7,500 

and the account has been accelerated. Form RD 3550-20 is used to cancel a debt. f a cancellation

is approved based on a review of the borrowers account without the submission of Form RD 

3550-20, the decision will be documented in LoanServ without use of the RD Form. 

A. Application from Debtor

Upon application by the debtor, the debt may be canceled when there is no deficiency 

judgment or the debtor is unable to pay any part of the debt and has no reasonable prospects of 

doing so in the future. 

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Paragraph 7.15 Cancellation of Debt

B. No Application from Debtor

Without an application from the debtor, the debt may be canceled in any of the 

circumstances listed below.

• OGC has provided a written opinion indicating that the claim is not legally 

enforceable.

• The debt has been serviced by the Department of Treasury and returned to the 

Agency as uncollectible unless it can be documented that further monies can be 

collected (for example, if a debtor is due to receive an inheritance at a specific point 

in time). . 

• The debtor is deceased, and there are no other known assets from which collection 

could be made if: (1) a final settlement has been made and confirmed by the probate 

court, and the Agency has received all the funds to which it is entitled; or (2) a final 

settlement has not been made and confirmed by the probate court, but there are no 

assets from which there is reasonable prospect of recovery.

• The debtor has been discharged from the debt through bankruptcy. Such debtors are 

not personally liable for the debt, and no attempt should be made to collect. 

However, if debts were discharged, but the debtor executed a new promise to pay 

prior to the discharge that was properly affirmed by the court, the debtor is liable for 

the debt and cancellation would not be appropriate. 

• A judgment has been obtained, the Department of Justice (DOJ) file is closed, and:

◊ The debtor has no known assets or future debt-paying ability, has disappeared and 

cannot be found without undue expense, and there is no existing security for the 

debt; or 

◊ Three years have elapsed since any collections were made on the judgment and 

the debtor has no equity in the subject property. 

• A property sold at a foreclosure sale does not generate sufficient proceeds to satisfy 

the outstanding debt, deficiency judgment was obtained, and OGC has advised that no 

further collection efforts may be pursued. 

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Paragraph 7.16 Negotiating A Settlement

• Based on a review of the debtor’s case file and other available information, the debtor 

is unable to pay any part of the debt and has no reasonable prospects of doing so in 

the future. The decision will be thoroughly documented in the LoanServ system. 

7.16 NEGOTIATING A SETTLEMENT

Settlements must be negotiated consistently to avoid disparate treatment. If a 

living debtor is unable to act, an offer of debt settlement may be made by 

a party having legal authority to act for the debtor.

A. Assessing the Debtor’s Financial Condition

The Servicing Office must assess the financial condition of the debtor 

before negotiating a settlement. Only the financial situation of signatories to 

the note and any cosigners should be considered, except in common property 

States. The Servicer should consider the following factors in evaluating 

offers:

• Prior liens against the security;

• Value of the existing security, as determined by a current appraisal;

• Debtor’s equity in assets not pledged as security for the Agency debt; 

• Debtor’s total present income and probable income over the next 5 years, including 

any possible inheritances; and 

• Amount of other debt. 

This information can be obtained from Form RD 3550-20 which includes a section on 

household expenses and provides a formula by which the amount of income available for debt 

payments can be established. Form RD 3550-20 may be completed either by the debtor, by the 

Servicing Office (in the absence of the debtor), or as a joint effort between the Servicing Office and 

the debtor. 

Once Form RD 3550-20 has been completed, the Servicing Office should send a letter 

requesting that the debtor submit additional information within 30 days, so that their financial 

situation can be verified. The Servicing Office should review the following information as part of 

the financial assessment:

• Verification of income such as paystubs or copies of Social Security checks; 

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Paragraph 7.16 Negotiating A Settlement

* Debtors’ expense verifications such as medical expenses;

* Tax returns and bank statements;

* County records, such as personal property tax rolls, to determine what other assets the 

debtor has or may have recently disposed of; and 

* Department of Labor wage information, where available.

Some of this information may already be available if there has been a recent subsidy renewal. If 

additional verifications are needed, they should be conducted in accordance with the policies described in 

Chapter 4. Any costs involved in obtaining the needed financial information are charged to the debtor’s 

account. Credit reports will only be obtained if there is reason to believe the debtor has not provided 

complete and accurate financial information.

* If a compromise, adjustment, or cancellation agreement is to be reached 

with one of several joint debtors because the other parties will not or 

cannot join the application, the Servicer must document the reasons the 

other parties are not included on Form RD 3550-20 in order to justify 

settlement with those joint debtors. Joint debtors can not be included on the 

application if they are deceased, discharged in bankruptcy, or have disappeared. 

B. Special Case Debtors

1. Deceased Debtors

An offer to settle the debt of a deceased debtor may be made by a duly-appointed 

executor or administrator. Claims against estates are to be settled based on the value of 

the security property and the expected value of the estate after paying expenses that have 

priority over Agency claims, such as the cost of administration, allowances of minor 

children and/or surviving spouse, allowable funeral expenses, and dower or curtsey 

rights.

2. Debtors Who Have Disappeared

Before charging off or cancelling the debt of a debtor who has 

disappeared, reasonable efforts must be made to locate the debtor. Such 

efforts generally include contact with Post Offices, motor vehicle licensing 

authorities, telephone or city directories, utility companies, local, State, and 

other Federal Government agencies (such as Health and Human Services and the 

Department of Labor), known relatives and friends, former neighbors and employers, the 

children’s schools, skip-tracing agencies, and the Social Security Administration. Efforts 

to locate the debtor must be thoroughly documented. 

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Paragraph 7.16 Negotiating A Settlement

3. Settlement Where Debtor Owes More Than One Type of Agency Loan 

[7 CFR 3550.252(c)] 

A loan on a property should not be settled while other USDA Agency (such as FSA) 

loans on the same security property remain active, unless settlement is in the best interest 

of the Government. 

7.17 PROCESSING DEBT SETTLEMENTS

A. Escrow and Unapplied Funds [7 CFR 3550.252(h)]

Escrow disbursements continue until debt settlement is complete or the Agency no longer 

has a security interest in the property. All remaining funds held in escrow or unapplied when the 

debt is settled will be applied against the debt.

B. Approved Settlements

Once a settlement has been approved, the Servicing Office must take the following actions. 

* Execute Form RD 3550-20.

* Notify the debtor, in writing, that a settlement offer has been approved. The 

notification should outline the specific terms and conditions of the settlement and 

Form RD 3550-20 should be attached. 

* In the case of a cancellation that has not been requested by the debtor, notify the 

debtor that the debt has been canceled.

* In the case of a compromise, adjustment, or cancellation, cancel the offset by 

notifying the paying agencies that have been contacted for offset. 

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Paragraph 7.17 Processing Debt Settlements

C. Rejected Settlements

When a settlement offer is rejected, 

rejection on Form RD 3550-20 and execute

the reasons that his or her settlement offer h

the Servicing Office must document the reasons for 

 the form. The debtor must be notified, in writing, of 

as been rejected and must be informed of their appeal 

rights. The original form should be sent to the Field Office for filing in the debtor’s case file and 

a copy should be attached to the debtor’s settlement rejection letter.

D. Notify the IRS and Credit Agencies [7 CFR 3550.252(e)]

In accordance with the requirements of the IRS, the Servicing Office must report to the 

IRS debts that have been settled. IRS Form 1099-C, Cancellation of Debt is used to report any 

debt (principal balance and any administrative costs) settled through cancellation, compromise, 

or adjustment. After reporting the debt to the IRS, no further efforts to collect the debt should be 

made. Credit reporting agencies also must be notified of debt settlement actions.

7.18 DISPOSITION OF PROMISSORY NOTES AND RELEASE OF SECURITY 

INSTRUMENTS

When the debt is satisfied through any of the debt settlement mechanisms, the Field 

Office must generate the appropriate satisfaction and/or release letter.

If the debtor requested the settlement, the Field Office should indicate on the note the 

method by which it was satisfied and return it to the debtor, along with the satisfaction and/or 

release letter and the mortgage. 

If the debtor did not request settlement and the Agency chooses to cancel the debt, the 

satisfaction letter should be sent to the Field Office and retained in the debtor’s case file. In 

cases of cancellation or chargeoff, the note will not be returned to the debtor. 

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