GAO

United States General Accounting Office

Report to the Subcommittee on 

Government Management, Information 

and Technology, Committee on 

Government Reform, House of 

Representatives

August 2000 DEBT COLLECTION

Treasury Faces 

Challenges in 

Implementing Its 

Cross-Servicing 

Initiative

GAO/AIMD-00-234

Page 1 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Contents

Letter 3

Appendixes Appendix I: Objectives, Scope, and Methodology 12

Appendix II: GAO’s June 8, 2000, Testimony 15

Appendix III: Comments From the Financial Management Service 48

Abbreviations

CFO Chief Financial Officer

DCIA Debt Collection Improvement Act

FMS Financial Management Service

OMB Office of Management and Budget

PCA private collection agency contractor

PMAC PCA Monitoring and Control

SOP standard operating procedures
Page 2 GAO/AIMD-00-234 FMS Cross-Servicing Implementation
Page 3 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

United States General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-285723 Letr

August 4, 2000

The Honorable Stephen Horn

Chairman

The Honorable Jim Turner

Ranking Minority Member

Subcommittee on Government Management, 

Information and Technology

Committee on Government Reform

House of Representatives

On June 8, 2000, we testified before your subcommittee on the Department 

of the Treasury’s Financial Management Service’s (FMS) implementation of 

the cross-servicing provision of the Debt Collection Improvement Act 

(DCIA) of 1996.1

 In our testimony, we reported that for FMS’ crossservicing program to become a fully implemented and mature program, 

many challenges lie ahead that must be overcome to assure success in the 

collection of delinquent debt. 

In our testimony, we pointed out that the success of FMS’ cross-servicing 

program significantly depends on agencies identifying and promptly 

referring eligible delinquent debt to Treasury because as delinquent debt 

ages, the likelihood of collection diminishes. In addition, we identified the 

following issues that FMS needs to address.

• FMS officials stated that as of September 30, 1999, about 89 percent of 

the $59.2 billion of debts over 180 days delinquent were excluded from 

cross-servicing. However, the accuracy and completeness of amounts 

reported by agencies including exclusions from cross-servicing were not 

required to be, and were not, independently verified. In addition, several 

agencies’ reporting of debt balances and related aging was not accurate. 

For example, a December 1999 report2

 stated that of the 16 agencies 

1

Debt Collection: Treasury Faces Challenges in Implementing Its Cross-Servicing Initiative

(GAO/T-AIMD-00-213, June 8, 2000).

2

PCIE/ECIE Review of Non-Tax Delinquent Debt, The President’s Council on Integrity and 

Efficiency, the Executive Council on Integrity and Efficiency, and Department of the 

Treasury Office of Inspector General (December 1999).
B-285723

Page 4 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

reviewed, 5 had inaccurate accounts receivable balances as of the end of 

fiscal year 1998, and 3 did not accurately age their accounts receivable. 

• FMS reported that as of April 2000, about $3.7 billion of the 

approximately $6.4 billion of eligible debt had been referred for crossservicing. Because the eligible amount is as of a specific date and the 

amount reported as referred is a cumulative amount covering about 

3-1/2 years, these two amounts are not comparable. The cumulative 

figure includes debts that have been returned to the agencies, such as 

invalid debts that were not eligible for cross-servicing. For purposes of 

comparison to the debts eligible for referral amount, such debts should 

not be included in the eligible debts referred amount.

• Many of the eligible debts were not promptly referred by the agencies or 

simply not referred by certain agencies. In addition, the debts referred 

were not always eligible for cross-servicing because they were not valid 

and legally enforceable. In an effort to encourage debt referrals, in the 

spring of 1999, FMS requested written debt referral plans from 22 of the 

24 Chief Financial Officer (CFO) Act agencies.3

 The plans were of 

limited use because (1) FMS had no assurance that agencies had 

properly identified all nontax debts that were eligible for crossservicing, (2) many of the plans did not include debt amounts or time 

frames for referral, and (3) FMS did not use the plans to closely monitor 

actual agency referrals.

• As the sole operator of a governmentwide cross-servicing debt 

collection center, FMS had well-developed written standard operating 

procedures (SOP) for its collectors and requirements for its private 

collection agency contractors (PCA). However, its staff and some of the 

PCAs did not always follow established procedures and requirements or 

effectively use certain debt collection tools. For example, we found no 

evidence that FMS’ collectors had tried to contact about 48 percent of 

the debtors from our sample after the demand letters were issued. We 

also found that about 96 percent of the compromised debt files that we 

selected and tested did not indicate why FMS collectors compromised 

debts or the basis used to determine how these debts met FMS’ criteria 

for compromising.

3

According to FMS officials, no referral plan request was made to the Department of 

Education because it was deemed to be in substantial compliance with DCIA. In addition, no 

written request was made to the Department of the Treasury. According to FMS officials, 

FMS actively worked with the bureaus within Treasury to encourage debt referrals.
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FMS recently changed many of the SOP’s earlier requirements to 

perform various collection techniques from “will” be performed to 

“may” or “should” be performed. In addition, in 1999 FMS changed its 

written SOP to reduce the 50-day holding period to 30 days for 

performing cross-servicing procedures before referring the debts to a 

PCA. These actions and our discussions with FMS officials indicate that 

FMS is relying heavily on PCAs. However, FMS has not performed an 

analysis to determine the potential effect such reliance may have on net 

collections to the federal government. Such analysis may be warranted 

given that (1) as debts are not actively worked by FMS and are awaiting 

referral to PCAs, they continue to age and thus typically become more 

difficult to collect and (2) the federal government pays a 25-percent fee 

on debt amounts collected by the PCA that the government is not 

always able to recoup from the debtor.

• Our analysis of FMS’ distribution of debt accounts to PCAs from 

February 1998 through February 2000 showed that one PCA had 

received a significantly higher percentage of the debts with smaller 

balances and debts that were less than 1 year delinquent. Collection 

industry statistics as well as FMS’ collection experience to date have 

shown that collection rates are generally higher on debts with smaller 

dollar balances and debts that are less delinquent. Concerns relating to 

the distribution method have been raised by some of the PCAs. During 

our interviews with the 11 PCAs, we found that when asked how the 

debts should be distributed, the general consensus among them was that 

the distribution should consider the characteristics of the debts, such as 

age of delinquency, type of debt (consumer or commercial), agency 

referring the debt, and debt balance. Many of the PCAs indicated that 

stratifying the available debts by agreed-upon characteristics would 

result in each of the PCAs receiving a proportionate mix of the debts 

and would foster a more competitive environment.

• The cross-servicing fees FMS charged to agencies referring delinquent 

debts have not covered FMS’ estimated cross-servicing costs and are not 

likely to in the near future.

This report contains our recommendations to the Commissioner of FMS to 

assist FMS in implementing a viable cross-servicing operation. We 

performed our work from April 1999 through May 2000 in accordance with 

generally accepted government auditing standards. The objectives, scope, 

and methodology for our work are contained in appendix I and our 

testimony is reprinted in appendix II.
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In commenting on a draft of this report, FMS concurred with most of our 

recommendations and for several of those recommendations provided 

comments, which are discussed in further detail in appendix III. However, 

FMS did not concur with key parts of our recommendation to perform a 

comprehensive review of the cross-servicing process. Given the results of 

our testing of a statistical sample of delinquent debts which showed limited 

collection activity as contemplated under DCIA and FMS’ own procedures, 

we continue to believe FMS needs to assess its debt collection strategy and 

its standard operating procedures.

Recommendations To help ensure that eligible delinquent debts are identified and promptly 

referred by the agencies for cross-servicing and that reporting on the status 

of delinquent debts by the agencies and FMS are reliable, we recommend 

that the Commissioner of FMS take the following actions.

• Work with the Office of Management and Budget and the agencies’ 

Offices of Inspector General to develop and implement a process for 

obtaining periodic independent verification of the accuracy, 

completeness, and validity of debts reported by agencies as eligible and 

excluded from the DCIA cross-servicing provisions.

• Revise FMS’ reporting of debt amounts referred for cross-servicing to 

reflect the extent to which eligible debts reported by agencies as of a 

specific date have been referred to FMS.

• Establish and implement procedures for obtaining, reviewing, and 

monitoring written debt referral plans from CFO Act agencies and all 

non-CFO Act agencies with significant accounts receivable activity, to 

help ensure that (1) the plans are complete, agree with debt amounts 

agencies have reported as eligible for cross-servicing, and specify 

timetables for referral of all such debt, (2) actual agency referrals are 

compared with agency plans, and explanations for any significant 

deviations from planned referrals or revisions to the plans are obtained 

from the agencies, and (3) appropriate agency officials are notified and 

requested to initiate corrective actions when agencies do not 

substantially comply with their referral plans. 

To help ensure that debt collection efforts are efficient, cost-effective, and 

performed by the most capable entity (i.e., FMS, a PCA, or any agency 

approved to be a debt collection center) we recommend that the 

Commissioner of FMS perform a comprehensive review of FMS’ crossservicing process to determine whether FMS’ current debt collection 
B-285723

Page 7 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

strategy and standard operating procedures are appropriate for optimizing 

collections. This should be done by 

• analyzing the types of debts referred to FMS (e.g., by age of delinquency, 

debt balance, etc.) and the collection rates experienced on those debts; 

• assessing the level of effort FMS collectors should perform by 

considering the number of collectors assigned, the number and types of 

debts individual FMS collectors can be expected to effectively crossservice, and fluctuations in the volume of debts referred by agencies and 

the related impact, if any, on FMS collector workloads;

• revising, if necessary, the SOPs based on the assessment of the level of 

collection efforts FMS collectors should perform while maintaining 

appropriate internal controls and accountability over FMS collection 

efforts; 

• identifying specific types of debts, if any, that should be sent promptly to 

the PCAs for cross-servicing and determining the appropriate level of 

involvement by FMS collectors on such debts;

• enforcing compliance with established collection procedures performed 

by FMS collectors and taking appropriate corrective actions when 

deviations from established procedures are found; 

• enforcing compliance with established procedures for FMS staff to 

monitor PCAs’ collection activities and taking appropriate corrective 

actions when PCAs deviate from established requirements; and 

• periodically analyzing FMS’ cross-servicing costs and related fee 

structure.

To help ensure that a proportionate mix of debts is being distributed to the 

PCAs and competition among the PCAs is more fully promoted, we 

recommend that the Commissioner of FMS 

• work with the PCAs to determine what characteristics of the debts — 

age of delinquency, type of debt (consumer or commercial), agency 

referring the debt, or debt balance—should be considered when 

distributing debts to PCAs for collection and

• establish and implement a process to periodically analyze the 

distribution and collection data to determine whether adjustment to the 

distribution model is needed. 

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, FMS concurred with most of our 

recommendations and for several of those recommendations provided 

comments, which are discussed in further detail in appendix III. However, 
B-285723

Page 8 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

FMS did not concur with key parts of our recommendation to perform a 

comprehensive review of the cross-servicing process to determine whether 

FMS’ current debt collection strategy and standard operating procedures 

are appropriate for optimizing collections.

Specifically, FMS stated that its procedure for working a debt at its debt 

operations center for 30 days prior to sending it to a PCA is appropriate and 

that it should make full and appropriate use of the private sector. FMS 

stated that because debts are referred by federal agencies sporadically and 

randomly, an assessment of the level of effort FMS collectors should 

perform is impractical. In addition, FMS stated that most workload issues 

have occurred when new agencies begin to use cross-servicing and refer 

thousands of their old debts to FMS at one time. Further, FMS stated that it 

is prohibitively costly for FMS to temporarily staff up for these large 

numbers of referrals.

One of the very reasons that FMS should perform a comprehensive review 

of its cross-servicing processes is that large fluctuations in the number of 

debts referred at any particular time by agencies do occur and can have a 

significant impact on workloads. As we reported, our tests of the 200 

selected debts found that FMS collectors did not always adhere to FMS’ 

cross-servicing SOP. For example, we found that FMS collectors (1) did not 

always attempt to contact debtors or perform skiptracing to locate debtors 

who did not respond to demand letters and (2) did not always promptly 

refer all debts to the Treasury Offset Program or PCAs. FMS pointed out in 

its comments that FMS relies on the PCAs because they have a greater 

ability to react to fluctuating volumes. That being the case and in 

consideration of our testing results, FMS would benefit from a 

comprehensive review of its cross-servicing process to make informed 

decisions about how to strategically target its efforts and effectively use 

available resources, FMS collectors and PCAs.

As we reported, FMS maintains information on debt collection activities for 

both the FMS collectors and the PCAs. With this information, FMS can 

perform various analyses of the FMS and PCA debt collection activities, 

including analyses similar to those we conducted during the course of our 

work. For example, our analysis of collections of debt found that several 

agencies had referred debts with large average balances for which no 

amounts have been collected by either FMS or the PCAs. We also found 

that collection rates were generally higher on debts with smaller dollar 

balances and on those that are less delinquent. FMS could use this type of 

historical information to rank new agency debt referrals that should be 
B-285723

Page 9 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

worked on immediately over those that should be worked on as time 

permits and those that should be immediately referred to the PCAs over 

those that should be worked on by FMS. Further, through its outreach 

efforts to encourage debt referrals by agencies, FMS officials stated that it 

requested debt referral schedules from agencies for fiscal years 2000 and 

2001 detailing the specific debt amounts to be referred and the related time 

frames. FMS could use the information from the agency debt referral 

schedules to project future workloads to help the FMS collectors and PCAs 

plan for fluctuations in debt referrals and conduct their operations in a 

proactive rather than reactive manner.

The intent of our recommendation is that FMS establish a management 

review process whereby FMS’ debt collection strategy and related SOPs are 

evaluated and refined, as needed, to maximize the effectiveness of crossservicing and to meet the priority management objective of improving debt 

collection by effectively using the tools provided by DCIA to reduce the 

amount of delinquent debt and increase collections. Our recommendation 

was also made to help ensure that

• appropriate actions are taken by FMS management to correct problems 

and issues identified in our report;

• debt collection procedures make sense based on an assessment of the 

level and mix of debt collection efforts that should be performed by 

FMS and the PCAs;

• debts are promptly referred to the entity (i.e., FMS, a PCA, or any other 

agency approved to be a debt collection center) that has been 

determined as the most capable of maximizing collections based on an 

assessment of past performance;

• FMS and PCA debt collection efforts are monitored, established policies 

and procedures are complied with, and management objectives are 

being met efficiently and effectively; and

• debt collection efforts are conducted at the least cost to the federal 

government.

As stated in our report, our analysis of FMS cross-servicing fees and related 

operating costs found that collection volume would need to rise more than 

sevenfold above its fiscal year 1999 collections to put FMS cross-servicing 

operations on a full cost-recovery basis. Carrying out these efforts 

successfully should help FMS come closer to achieving at least break-even 

operations for the cross-servicing program.
B-285723

Page 10 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

We are sending copies of this report to Senator Fred Thompson, Chairman, 

and Senator Joseph I. Lieberman, Ranking Minority Member, Senate 

Government Affairs Committee; Representative Dan Burton, Chairman, 

and Representative Henry A. Waxman, Ranking Minority Member, House 

Committee on Government Reform; the Honorable Jacob J. Lew, Director, 

Office of Management and Budget; the Honorable Lawrence H. Summers, 

Secretary of the Treasury; Donald V. Hammond, Fiscal Assistant Secretary, 

Department of the Treasury; Richard L. Gregg, Commissioner, Financial 

Management Service; the Honorable Jeffrey Rush, Jr., Inspector General, 

Department of the Treasury; and other interested parties. Copies will be 

made available to others upon request.

Please contact me at (202) 512-3406 if you or your staff have any questions 

on this report. I can also be reached by e-mail at engelg.aimd@gao.gov. Key 

contributors to this assignment were Kenneth R. Rupar, Paula M. Rascona, 

Matthew F. Valenta, Michael S. LaForge, Gladys Toro, and Sophia Harrison.

Gary T. Engel

Associate Director

Governmentwide Accounting

and Financial Management Issues
Page 11 GAO/AIMD-00-234 FMS Cross-Servicing Implementation
Page 12 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

Our objectives were to determine (1) the status of nontax delinquent debts 

that agencies have referred to Treasury for cross-servicing and Treasury’s 

actions to encourage these referrals, (2) Treasury’s cross-servicing process 

for collecting referred debts, (3) Treasury’s method for allocating debts to 

PCAs for collection, and (4) Treasury’s estimated cross-servicing costs and 

related fees earned on collections. 

To accomplish our first objective, we interviewed FMS officials concerning 

the processes and procedures that were used to encourage federal agencies 

to refer delinquent debts for cross-servicing. We obtained and reviewed 

reports that FMS used in working with agencies to identify debts that were 

eligible for cross-servicing and to encourage agencies to refer all such debt. 

These reports included the Debt Performance Indicator Report and 

Summary Analysis of Delinquent Debt for the Federal Government. We also 

obtained and reviewed written debt referral plans that had been submitted 

to FMS by certain federal agencies.

To accomplish the second objective, we interviewed FMS officials on their 

processes for collecting delinquent debts. We reviewed all pertinent 

policies and procedures including FMS’ Cross-Servicing Implementation 

Guide (April 1997, Revised January 1999); Standard Operating Procedures: 

Debt Collection (December 1998, Revised May 1999 and February 2000); 

the Private Collection Agency Operations and Procedures Manual (March 

1998, Revised March 1999); and FMS’ contract with PCAs.
Appendix I

Objectives, Scope, and Methodology

Page 13 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

To determine whether FMS collectors performed collection activities and 

used appropriate collection tools in accordance with FMS’ established 

policies and procedures, we randomly selected a sample of 200 delinquent 

debts from a population of debts referred for cross-servicing from April 1, 

1998, through May 31, 1999.1

 We also used this sample to test, when 

applicable, whether PCA contractors documented performance of required 

debt collection activities in their respective debt collection systems as 

required by their contracts with FMS. In addition, we selected a random 

sample of 78 debts from a population of debts that had been compromised2

by FMS collectors to test whether the collectors followed FMS’ policies and 

procedures when compromising debts.3

 We reviewed debt history files, 

including Debt History Reports generated by FMS’ cross-servicing 

computer system, to determine whether FMS collectors performed the 

required collection activities (e.g., telephoning the debtor, obtaining 

support for compromises, etc.).

To accomplish the third objective, we obtained a written description of the 

debt account distribution methodology from FMS and its contractor and 

compared it with the distribution process portion of the PCA Monitoring 

and Control (PMAC) software source code. During our fieldwork, FMS 

tested its distribution methodology by manually distributing a sample of 

debt accounts and distributing those same accounts using a test copy of the 

PMAC system. We reviewed documentation of FMS’ test for 

reasonableness. We also obtained copies of pertinent data from the PMAC 

system (from February 1998 through February 2000) and performed 

various analyses of the debt account information, including distribution of 

the debt accounts to the PCAs, age of delinquencies, and collection rates.

To accomplish the fourth objective, we interviewed FMS officials on their 

methodology for estimating costs and recognizing fee revenues. We 

reviewed the contractor’s study that Treasury used to estimate costs for 

fiscal year 1999 to ensure that all significant relevant costs were included in 

the estimate. We also obtained and analyzed fee revenue and collection 

1

We selected debts with referred balances greater than $100 because this is the dollar 

threshold amount of debt FMS refers to its PCAs.

2

A debt compromise involves the government agreeing to accept less than the full amount of 

its claim in satisfaction of the entire debt.

3

The population sizes from which we selected referred delinquent debts and compromised 

debts were 61,269 and 644, respectively. Both samples were selected to allow projections of 

key results to the populations from which they were drawn with 95 percent confidence.
Appendix I

Objectives, Scope, and Methodology

Page 14 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

information for fiscal year 1999 from FMS’ cross-servicing databases and 

used this information to determine the amount of increase in collections 

necessary for FMS to fully cover its costs.

We performed our work in accordance with generally accepted government 

auditing standards from April 1999 through May 2000. We did not 

independently verify the reliability of certain information provided to us by 

FMS (e.g., estimated costs, debts eligible for cross-servicing, total debts 

referred for cross-servicing, and information in FMS’ debt referral and 

collection databases). We requested comments on a draft of this report 

from the Commissioner of FMS. FMS’ comments are discussed in the 

“Agency Comments and Our Evaluation” section of this report and 

reprinted in appendix III.
Page 15 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Appendix II

GAO’s June 8, 2000, Testimony ApendxiI

For Release on Delivery

Expected at

10 a.m.

Thursday,

June 8, 2000

GAO/T-AIMD-00-213

DEBT COLLECTION

Treasury Faces Challenges

in Implementing Its CrossServicing Initiative

Statement of Gary T. Engel

Associate Director, Governmentwide Accounting and

Financial Management Issues

Accounting and Information Management Division

Testimony

Before the Subcommittee on Government Management,

Information and Technology, Committee on Government

Reform, House of Representatives

United States General Accounting Office

GAO
Appendix II

GAO’s June 8, 2000, Testimony

Page 16 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 1 GAO/T-AIMD-00-213

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to appear before your subcommittee today

to testify on the Department of the Treasury’s progress in implementing

the cross-servicing provision of the Debt Collection Improvement Act

(DCIA) of 1996. As you know, the Director of the Office of Management

and Budget (OMB) designated the implementation of this legislation,

which your subcommittee was highly instrumental in passing, one of the

Priority Management Objectives in the government’s efforts to modernize

and improve federal financial management.

DCIA includes several tools to facilitate collection of defaulted obligations

to the federal government. Today, we are focusing on the collection of

nontax delinquent debt. Among the options available for recovering these

debts are (1) Treasury’s consolidated federal payment offset program,1

which the Financial Management Service (FMS) reported collected over

$2.6 billion in federal nontax debts and state child support debts in fiscal

year 1999, (2) wage garnishment, for which Treasury has issued a final rule

and is in the process of implementing, and (3) the transfer of nontax debt

over 180 days delinquent to Treasury for collection action, known as

“cross-servicing.” For this hearing, you asked us to address, the

effectiveness of Treasury’s use of the latter tool, cross-servicing, through

its FMS. FMS’ success in implementing its cross-servicing program, which

focuses on debts that federal agencies have been unable to collect,

significantly depends on federal agencies accurately and completely

identifying their nontax delinquent debt that is eligible for referral to the

program and promptly referring such debt.

As you requested, I will discuss (1) the status of nontax delinquent debts2

that agencies3 have referred to Treasury for cross-servicing and Treasury’s

actions to encourage these referrals, (2) Treasury’s cross-servicing process

for collecting referred debts, (3) Treasury’s method for allocating debts to

private collection agencies (PCA) for collection, and (4) Treasury’s

estimated cross-servicing costs and related fees earned on collections.

1The Treasury Offset Program (TOP) offsets federal payments such as tax refunds, vendor and

miscellaneous payments, and federal retirement payments against federal non-tax debts, states’ child

support debts, and certain states’ tax debts. For fiscal year 1999, most of the TOP offsets were from

tax refunds.

2In this testimony, “debts” refers to nontax debts over 180 days delinquent.

3In this testimony, “agencies” refers to federal agencies.
Appendix II

GAO’s June 8, 2000, Testimony

Page 17 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 2 GAO/T-AIMD-00-213

FMS has taken several steps to encourage agencies to refer eligible debt

and increase collections. However, the results thus far have been limited

partly due to much of the eligible debt not being promptly referred and the

age of the debts referred generally being significantly older than 180 days

delinquent. For example, our analysis of debts referred since the inception

of the program though May 1999 showed that almost one half of the dollar

value of the debts referred were over 4 years delinquent at the time of

referral. FMS reported that approximately $46.4 billion of debts were

delinquent over 180 days as of September 30, 1998. However, primarily due

to a significant amount of these debts being reported by the agencies as

excluded from cross-servicing requirements, through April 2000, FMS

reported only about $3.7 billion has been cumulatively referred to it since

the cross-servicing program began in September 1996. From the inception

of the program through April 2000, FMS reported that about $54 million

has been collected by its collectors and the PCAs on these referred debts.

We identified the following key issues related to the implementation of the

cross-servicing provisions of DCIA.

• Several agencies’ reporting of debt balances and related aging was not

accurate, and the accuracy and completeness of significant amounts

reported as exclusions from cross-servicing were not required to be and

were not independently verified. For various reasons, many debts eligible

for referral by certain agencies were delayed in being referred or simply

not referred even through FMS took steps to encourage agencies to refer

such debt. In addition, even when agencies referred debts, the debts were

not always valid and legally enforceable and thus not eligible for crossservicing.

• DCIA authorized Treasury to designate other government agencies as debt

collection centers based on their performance in collecting delinquent

claims owed to the government. Treasury established standards for

agencies that wanted to be a debt collection center. The Departments of

Education and Health and Human Services were granted waivers by

Treasury to the cross-servicing provision of DCIA, which allows these

agencies to take collection action on certain classes of their own debts.

Three agencies have applied to be governmentwide debt collection

centers, but were not found by Treasury to have the needed capabilities.

Today, only FMS is operating a governmentwide cross-servicing debt

collection center. In operating its center, we found that FMS had welldeveloped standard operating procedures (SOP), however our testing

showed that its staff did not always follow them or properly use certain
Appendix II

GAO’s June 8, 2000, Testimony

Page 18 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 3 GAO/T-AIMD-00-213

collection tools, such as skiptracing4 activities to locate the debtor. For

example, for 96 of 200 debts we statistically selected and reviewed, other

than the initial issuance of demand letters, we found no evidence that

FMS’ collectors tried to contact the debtors, as required by the SOP.

FMS recently changed many of the SOP’s earlier requirements to perform

various collection techniques from “will” be performed to “may” or

“should” be performed. In addition, in 1999 FMS changed its SOP to

reduce the 50-day holding period to 30 days for performing cross-servicing

procedures before referring the debts to a PCA. These actions and our

discussions with FMS officials indicate that FMS is placing increased

reliance on PCAs. However, FMS has not performed an analysis to

determine the potential effect such reliance may have on net collections to

the federal government. Such an analysis may be warranted given that

(1) as debts are not actively worked by FMS and are awaiting referral to

PCAs, they continue to age and thus typically become more difficult to

collect and (2) the federal government pays a 25 percent fee on debt

amounts collected by the PCA that the government is not always able to

recoup from the debtor.

• FMS developed a methodology for distributing debts to PCAs for

collection that FMS intended to be performance based. For each

distribution, FMS placed all the debts available into a pool and applied a

systematic process to distribute the debts to the PCAs. Our analysis of the

debts found that the debts within each distribution’s pool were generally

not of the same composition (i.e., not of the same debt balance or age of

delinquency). This factor contributed to the distribution results

experienced by FMS. Our analysis of FMS’ distribution of debt accounts to

PCAs from February 1998 through February 2000 showed that one PCA

had received a significantly higher percentage of the debts with smaller

balances. Specifically, debts distributed to this PCA had average balances

of $11,436, while the overall average balances of debt accounts distributed

to PCAs were $20,845. In addition, in many of the age of delinquency

categories (i.e., less than 180 days, 180 days to 1 year, etc.) this PCA had

the smallest average debt balances and had received a significant

percentage of the total number of debts distributed that were less than 1

year delinquent. Collection industry statistics as well as FMS’ collection

experience to date have shown that collection rates are generally higher

on debts with smaller dollar balances and that are less delinquent.

4Skiptracing involves the use of information sources including credit bureau reports, Internet

resources, utility companies, motor vehicle departments, spouses or relatives, voter registration

offices, and directory assistance to locate delinquent debtors.
Appendix II

GAO’s June 8, 2000, Testimony

Page 19 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 4 GAO/T-AIMD-00-213

Concerns relating to FMS’ distribution method have been raised by some

of the PCAs. During our interviews with the 11 PCAs, we found that the

general consensus among them when asked how the debts should be

distributed was that the distribution should take into consideration the

characteristics of the debts, such as age of delinquency, type of debt,

agency referring the debt, and debt balance. Many of the PCAs indicated

that stratifying the available debts by agreed-upon characteristics would

result in each of the PCAs receiving a proportionate mix of the debts and

foster a more competitive environment.

• FMS has not covered its cross-servicing costs through related fees

collected and is not likely to in the near future. Based on FMS’ own

estimated cross-servicing costs and using the current fee structure and

FMS’ fiscal year 1999 collection experience, we determined that collection

volume would need to rise over sevenfold to put this operation on a full

cost-recovery basis.

We performed our work primarily at FMS and its Birmingham Debt

Management Operations Center (BDMOC). We conducted interviews with

FMS officials and representatives of FMS’ eleven PCAs and the American

Collectors Association and reviewed pertinent policies, procedures,

databases, and reports related to cross-servicing. We also statistically

selected and performed detailed testing on certain debts that had been

referred for cross-servicing from April 1, 1998 through May 31, 1999. In

addition, we analyzed FMS’ methodology for distributing debts to PCAs

and reviewed certain FMS cross-servicing fee and estimated cost data for

fiscal year 1999. We did not independently verify the reliability of certain

information provided to us by FMS (e.g., estimated costs, debts eligible for

cross-servicing, total debts referred for cross-servicing, and information in

FMS’ debt referral databases). We performed our work in accordance with

generally accepted government auditing standards from April 1999

through May 2000.

In the rest of my statement today, I will discuss the results of our work and

highlight challenges that FMS faces in implementing a viable crossservicing operation.

According to FMS officials, the amount of debts over 180 days delinquent

totaled about $59.2 billion as of September 30, 1999. Of this amount, about

$52.8 billion or about 89 percent was excluded from cross-servicing,

resulting in $6.4 billion eligible for referral to FMS for cross-servicing. This

information was provided to us on June 2, 2000, and the eligible for

referral and percent of debt excluded amounts are not significantly

Referral of Federal

Debts for CrossServicing
Appendix II

GAO’s June 8, 2000, Testimony

Page 20 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 5 GAO/T-AIMD-00-213

different from the prior year. As such, we did not have sufficient time to

review the details supporting these data and much of our testimony

regarding identifying debts eligible for cross-servicing and debts excluded

from cross-servicing requirements is based on delinquent debt information

reported for fiscal year 1998.

DCIA requires agencies to refer all eligible nontax debt that is over 180

days delinquent to FMS for cross-servicing. FMS reported that at

September 30, 1998, federal agencies held $46.4 billion of debt over 180

days delinquent. Based on information obtained from the 24 agencies

covered by the Chief Financial Officers Act of 1990 (CFO)5 and FMS’ own

estimates for non-CFO Act agencies, FMS reported that about 85 percent,

or $39.6 billion, of the debt as of September 30, 1998, was not eligible for

referral to the cross-servicing program because of various exclusions, such

as foreclosures and bankruptcies.

Our analysis showed that the debts agencies refer to FMS are generally

well over 180 days delinquent. Further, we noted problems in the reporting

of delinquent debt balances and related aging by certain agencies. We also

identified problems with FMS reports on the status of delinquent debts

governmentwide.

FMS reported that as of April 2000, about $3.7 billion of the approximately

$6.4 billion of eligible debt had been referred for cross-servicing. Because

the eligible amount is as of a specific date and the amount reported as

referred is a cumulative amount covering about 3-1/2 years, these two

amounts are not comparable. In addition, we found that agency-referred

debts were not always valid and legally enforceable and thus not eligible

for cross-servicing.

These reporting problems, coupled with the lack of independent

verification of the completeness and accuracy of debt exclusion amounts,

make the reliability of these reported amounts questionable. Lack of

reliable identification and prompt referrals of eligible debts by the

agencies to FMS is likely to result in lost opportunities for the government

to recover amounts owed.

5The CFO Act, as expanded by the Government Management Reform Act, covers the federal

government’s 24 largest departments and agencies, which account for 99 percent of federal

expenditures.
Appendix II

GAO’s June 8, 2000, Testimony

Page 21 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 6 GAO/T-AIMD-00-213

Agencies are not promptly referring debts as soon as they are eligible for

cross-servicing. Figure 1 shows our analysis of the debts referred since the

inception of the program through May 1999. This analysis shows that

about $1.1 billion (or about 46 percent) of the $2.4 billion of debt referred

during this period was over 4 years delinquent at the time it was referred

to FMS for cross-servicing.

Figure 1: Dollar Amount of Debt by Age of Delinquency

Source: GAO’s analysis of Treasury’s cross-servicing database through May 31, 1999.6

A critical factor in FMS’ success as a debt collection center is that all debts

eligible for cross-servicing are completely and accurately identified. In

addition, once identified by the agencies, debts need to be promptly

referred for cross-servicing because, as industry statistics have shown, the

likelihood of recovering amounts owed decreases dramatically with the

age of delinquency of the debt. Thus, the old adage that “time is money” is

very relevant for this effort.

6The number of days delinquent for debts with the above time frames is given in years delinquent,

representing days within that time frame. For example, 1-2 years delinquent represents 366–730 days, 2

–4 years delinquent starts the next period, 731–1460 days and so on.

Age of Debts Referred
Appendix II

GAO’s June 8, 2000, Testimony

Page 22 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 7 GAO/T-AIMD-00-213

Using cross-servicing collection rates for delinquent debt obtained from a

1998 study conducted by a FMS contractor, we estimated collections on

debts totaling about $1.8 billion that were referred from the inception of

the program through May 1999.7 Our analysis showed that estimated

collections on these debts ranged from about $40 million to $75 million. 8

Based on our review of FMS’ collections database, we determined that

FMS collected about $27 million on debts that were referred for crossservicing during this same time period.9

Figure 2 represents a timeline of the standard process involved in the

referral of debts to FMS and subsequently, as applicable, to PCAs. In

effect, this figure represents the minimum timelines for referral and

collection efforts. Accordingly, it reflects the optimum scenario for crossserviced debt, not what is actually taking place, as reflected in part by

figure 1. For example, as noted in figure 1, many debts are much older

than 180 days delinquent when they are referred to FMS. Also, as

discussed later in this testimony, we identified delays throughout much of

the process.

7We obtained FMS’ cross-servicing collection data from inception of the program through March 2000.

To allow sufficient time for collection action by FMS collectors and PCAs, we analyzed those debts

referred to FMS through May 1999.

8Because of database limitations, we made conservative assumptions in estimating expected

collections on debts referred through May 1999. Specifically, we excluded about $3.7 million of TOP

offset collection amounts because FMS collectors or PCAs cannot collect on debts that have already

been collected. Also, we excluded debt amounts for most debts returned to the agency. We assumed

that these debts totaling about $547 million were invalid at the time of referral; thus, these debts could

not be collected by FMS collectors or PCAs.

9An FMS official stated that FMS has identified about $15 million of active repayment agreements for

debts referred from inception of the cross-servicing program through May 1999. However, collection of

the full amount under repayment agreements may not be realized because we found that many of the

repayment agreements we reviewed during our detailed testing of selected debts referred to FMS for

cross-servicing defaulted.
Appendix II

GAO’s June 8, 2000, Testimony

Page 23 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 8 GAO/T-AIMD-00-213

Figure 2: Declining Recovery Rates by Age of Delinquency

Note: FMS uses the PCA Monitoring and Control (PMAC) system to distribute the debt

accounts to the PCAs. These distributions are generally made bi-weekly.

Source: GAO’s analysis of FMS’ collection processes and testimony of the American

Collector’s Association before the Subcommittee on Government Management,

Information and Technology of the Committee on Government Reform and Oversight,

September 8, 1995.

Agencies provide information to FMS annually on debt amounts over 180

days delinquent in their Report on Receivables Due from the Public

(hereafter referred to as the Report on Receivables).10At September 30,

1998, FMS reported that, governmentwide, agencies held $46.4 billion of

debt over 180 days delinquent. However, problems were found with the

accuracy and completeness of some agencies’ reports of debts over 180

days delinquent, which FMS used to compile its reports.

To help monitor the extent to which agencies are referring eligible debts

to FMS for cross-servicing, FMS developed and implemented the Debt

Performance Indicator (DPI) report for each CFO Act agency. According

to an FMS official, for fiscal year 1998, FMS obtained the information on

debts excluded from cross-servicing from DPI reports submitted by

10Certain agencies are also required to prepare this report quarterly.

Exclusions From

Cross-Servicing and

Accuracy of Reporting

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

30 60 90 120 150 180 210 240 270 300 330 360 390 420 450 480 510

Estimated Recovery Rate

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

Estimated Loss Rate

30 60 90 120 150 210 270 240 300 330 360 420 390 450 480

Days delinquent

180 510

At PCA 1

180 days

At PCA 2

180 days

At FMS

30 days

With agency

180 days

PMAC debt

distribution

15 days

PMAC debt

distribution

15 days

0 225 405

Days delinquent
Appendix II

GAO’s June 8, 2000, Testimony

Page 24 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 9 GAO/T-AIMD-00-213

agencies and discussions with agency officials. FMS used the agencies’

Report on Receivables, DPI reports, and FMS estimates to compile the

Summary Analysis of Delinquent Debt for the Federal Government, a

government-wide report.11 FMS reported that about 85 percent of the debt

or $39.6 billion was not eligible for referral to FMS because of various

exclusions (see table 1).

Table 1: Nontax Debt Eligible for Referral for Cross-Servicing as of

September 30, 1998a, 12

Characteristics of debt

Amount

(in billions

of dollars)

Debt over 180 days delinquent $46.4

Exclusions:

Cross-servicing waivers 16.6

In forbearance or in appeals 5.1

At DOJ 4.9

Foreign debt 3.6

In bankruptcy 3.1

In foreclosure 2.4

Department of Defense 1.3

Eligible for internal offset 1.0

Other 0.9

At third party 0.7

Total amount excluded $39.6

Amount eligible to refer for cross-servicing $6.8

a

An explanation of the terms used in this table appears in appendix I.

Source: Summary Analysis of Delinquent Debt for the Federal Government, Debt Portfolio

Analysis for the 24 CFO Agencies, June 1999, and other FMS reports.

The reliability of amounts reported as excluded from cross-servicing by

the agencies has not been independently verified. According to FMS

officials, agencies were not required to certify that all information

provided to FMS was complete and accurate. Further, these agencies’

11The Summary Analysis of Delinquent Debt for the Federal Government (hereafter referred to as the

Summary Analysis) is included in the Debt Portfolio Analysis for the 24 CFO Agencies, which is

prepared annually.

12In November 1999, Treasury granted an exemption from cross-servicing to the Social Security

Administration (SSA) for Supplemental Security Income program debt and debts owed by former child

beneficiaries in the Old-Age, Survivors, and Disability Insurance Program. In January 2000, Treasury

also granted an exemption to the Small Business Administration (SBA) for disaster loans and regular

business loans over 180 days delinquent that are in active workout. The dollar amount of exemptions

for SSA and SBA are about $203 million and $88 million, respectively.
Appendix II

GAO’s June 8, 2000, Testimony

Page 25 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 10 GAO/T-AIMD-00-213

respective Office of Inspector General (OIG) were not required to and did

not audit most of the information, including the exclusion amounts.

We identified problems with FMS’ estimates of exclusions for non-CFO

Act agencies. In preparing the fiscal year 1998 Summary Analysis report,

FMS generally estimated the amount of debts that would be excluded from

cross-servicing for non-CFO agencies using the CFO Act agencies’

aggregate percentages by type of exclusion. FMS estimated exclusions for

the non-CFO Act agencies because these agencies were not required to

report such information. FMS estimated that of the $39.6 billion of

excluded debt in table 1, about $3.6 billion (approximately 9 percent) was

attributed to the non-CFO Act agencies. We found that FMS’ estimation of

exclusion amounts was not reliable. For example, FMS estimated the

amount of cross-servicing waivers for non-CFO Act agencies to be about

$1.5 billion. Since we found that none of these agencies had applied to

FMS for a waiver, the amounts reported as exclusions for cross-servicing

waivers were overstated.

On the other hand, FMS’ exclusion estimate for bankruptcies for non-CFO

Act agencies is understated. Our review of the Report on Receivables from

the Federal Communications Commission (FCC), a non-CFO Act agency,

found that FCC had $2.3 billion in bankruptcies for debts delinquent over

180 days as of September 30, 1998. As such, FCC’s bankruptcy amounts

alone are considerably more than the $300 million bankruptcy amount

FMS estimated for all non-CFO Act agencies.

Compounding these concerns are questions concerning the accuracy of

the underlying agency reports that FMS uses as the basis for its reports. In

December 1999, the President’s Council on Integrity and Efficiency

(PCIE), the Executive Council on Integrity and Efficiency (ECIE), and

Treasury’s OIG issued a report titled, PCIE/ECIE Review of Non-Tax

Delinquent Debt. Among other findings, the report stated that of the 16

agencies reviewed, 5 had inaccurate accounts receivable balances as of

the end of fiscal year 1998, and 3 agencies did not accurately age their

accounts receivable.13 For example,

• The Department of State OIG found that the accounting system at the

department did not produce a reliable accounts receivable aging schedule.

13Eleven of the 16 agencies included in the PCIE/ECIE review are CFO-Act agencies. Two large CFOAct agencies, the Departments of Health and Human Services and Agriculture, did not participate in

the review.
Appendix II

GAO’s June 8, 2000, Testimony

Page 26 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 11 GAO/T-AIMD-00-213

• In reporting on its audit of the fiscal year 1998 Veterans Affairs (VA)

Consolidated Financial Statements, the VA OIG qualified its opinion on

material amounts of accounts and loans receivable due to the inadequacy

of supporting accounting records. Specifically, of the total net debt and

foreclosed property of $4.7 billion, the OIG qualified its opinion on the

accounts relating to the Housing Credit Assistance Program, which

comprised $3 billion of the total balance. Further, the Veterans Health

Administration’s receivable balance of $440 million was overstated by

$65 million. These inaccurate balances resulted because VA did not

consistently follow its accounting procedures and certain of its internal

controls were ineffective.

FMS officials recognize the problems with the manner in which the

exclusions and eligible debt amounts for cross-servicing were identified.

For example, FMS officials stated that for fiscal year 1999 FMS is using the

Revised Report on Receivables to determine debts eligible for crossservicing for all agencies, including non-CFO Act agencies. The revised

report includes the various exclusion categories which agencies will be

required to use to report debt amounts excluded from cross-servicing.

According to these officials, FMS plans to require agencies to certify as to

the accuracy and completeness of the amounts that they report as

excluded from cross-servicing, however, agencies’ respective OIGs do not

currently independently verify such amounts. Lack of such verification,

along with the problems noted in the PCIE/ECIE report regarding

inaccurate balances and aging of accounts receivable, raises concerns

about the extent to which FMS can rely on agencies’ reporting of 180-day

delinquent debt and exclusions of debts from the cross-servicing program.

According to FMS officials and/or the PCIE/ECIE report, certain agencies

have not promptly referred eligible debts for several reasons, including the

following:

• Agencies focused their computer programming resources on Year 2000

problems – a decision with which we agree – rather than on crossservicing systems requirements, such as computer systems’ compatibility,

so that debt information can be transmitted to FMS electronically.

• Certain agencies had to perform detailed and time-consuming due

diligence reviews of the files to identify debts eligible for cross-servicing

because such information was not readily available.

• Some agencies delayed referring debts while waiting for FMS to decide

whether the agency’s request to be designated a debt collection center was

Factors Affecting

Agencies’ Debt

Referrals
Appendix II

GAO’s June 8, 2000, Testimony

Page 27 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 12 GAO/T-AIMD-00-213

approved. Such decisions were to be rendered within 120 days, but

processing time ranged from 10 months to 19 months.

Some specific cases cited in the PCIE/ECIE report are as follows.

• Treasury’s OIG selected and reviewed 10 debt case files at Treasury’s

departmental offices for timeliness of the referral. The average time frame

that lapsed after debts were eligible to be sent to FMS was 197 days.

According to a Treasury OIG official, this delay involved referrals to TOP

and cross-servicing and occurred because Treasury personnel did not

properly age the receivable balances.

• The Department of State did not have a routine process to certify and send

its debts for cross-servicing after they became eligible. This department

was sending debts to FMS for TOP collection actions only once a year, and

its officials mistakenly thought that FMS would transfer the department’s

delinquent debts from offset to cross-servicing.

We also found that even when the agencies referred debts, the debts were

not always valid and legally enforceable and thus not eligible for crossservicing. Based on our analysis of a statistical sample of 200 delinquent

debts referred to FMS, 22 delinquent debts were likely invalid or legally

unenforceable.14 Specifically, we found 14 debts that were subsequently

returned by FMS to the referring agency because the debts were invalid or

involved debtors in bankruptcy. At the completion of our detailed testing,

another eight debts had not yet been returned to the agency. Five of these

debts involved debtors in bankruptcy, and the other three debtors were

deceased.

FMS encouraged agencies to promptly refer all eligible nontax debts by

assisting them in understanding the cross-servicing program and

requirements for identifying and referring eligible debts. FMS officials

stated that FMS conducted periodic workshops and conferences and met

with agency officials. In addition, FMS stated that they took an active role

14The population of delinquent debts from which our sample was drawn totaled 61,269 debts. Based

on our test results, we estimate that 6,740 (or about 11 percent) of the debts were likely invalid or

legally unenforceable. We are 95-percent confident that the number of debts that were likely invalid or

legally unenforceable was between 4,638 (or about 8 percent) and 9,393 (or about 15 percent) of the

population.

FMS’ Outreach Efforts
Appendix II

GAO’s June 8, 2000, Testimony

Page 28 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 13 GAO/T-AIMD-00-213

in the Federal Credit Policy Working Group15 to help determine ways to

encourage federal agencies to refer eligible nontax debts promptly.

In an effort to encourage debt referrals, in the spring of 1999, FMS

requested written debt referral plans from 22 of the 24 CFO Act agencies.16

The plans were of limited use because (1) FMS had no assurance that

agencies had properly identified all nontax debts that were eligible for

cross-servicing, (2) many of the plans did not include debt amounts or

timeframes for referral, and (3) FMS did not use the plans to closely

monitor actual agency referrals.

According to FMS officials, as of the completion of our fieldwork, 21 of

the 22 CFO Act agencies had submitted debt referral plans. The Social

Security Administration (SSA) did not submit a plan and has not referred

any debts to FMS even though information provided by FMS indicates that

SSA had about $444 million of eligible debt for cross-servicing as of

September 30, 1998. Five of the 21 agencies reported that all eligible debts

had been referred. Ten of the remaining 16 agency referral plans did not

contain details on the specific debt amounts to be referred and/or time

frames for cross-servicing referrals. For example, one agency submitted a

plan stating that all of its components would refer debts for crossservicing in July and August 1999, but did not mention any specific dollar

amounts. Information prepared by FMS as of February 2000 indicated that

this agency had referred only $109,000 of the $11 million of debt that it had

reported as eligible as of September 30, 1998.

According to an FMS official, because some of the agency plans were

incomplete, FMS did not closely monitor agencies’ adherence to their

referral plans. In addition, as long as agencies were referring some debts,

FMS generally did not contact agencies about their plans. FMS officials

also stated that FMS did not have the authority to assess penalties or take

other formal actions against agencies that did not promptly refer their

eligible debts. In May 2000, FMS sent letters to 23 of the 24 CFO Act

agencies17 requesting debt referral milestones for fiscal years 2000 and

15The Federal Credit Policy Working Group provides an interagency forum for resolving DCIA

implementation issues such as the debt referrals to Treasury for offset and cross-servicing and

performance measures for credit programs.

16According to FMS officials, no referral plan request was made to the Department of Education

because it was deemed to be in substantial compliance with DCIA. In addition, no written request was

made to the Department of Treasury. According to FMS officials, FMS actively worked with the

bureaus within Treasury to encourage debt referrals.

17In April 2000, the Department of State provided FMS with an update to its referral plan for fiscal year

2000.
Appendix II

GAO’s June 8, 2000, Testimony

Page 29 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 14 GAO/T-AIMD-00-213

2001. In the letter, FMS enclosed a debt referral schedule for agencies to

complete detailing the specific debt amounts to be referred and the related

time frames. In addition, FMS has recently been meeting with CFO Act

agencies to determine debt amounts eligible for cross-servicing. Further, a

FMS official stated that FMS plans to request written referral plans from

non-CFO Act agencies and meet with officials from the larger non-CFO Act

agencies regarding such plans.

In passing DCIA, the Congress intended, in part, to establish an efficient

and effective governmentwide debt collection operation, known as crossservicing. DCIA authorized Treasury to designate other government

agencies as debt collection centers based on their performance in

collecting delinquent claims owed to the government.

Since then, FMS has established the Birmingham Debt Management

Operations Center (BDMOC) as its primary facility for handling

governmentwide cross-servicing operations. This facility was a former

FMS payment center that was being phased out as part of Treasury’s

consolidation of payment operations. Except for efforts to collect on

erroneous payments under the former payment center operations, the staff

had little prior experience in debt collections. According to FMS officials,

FMS trained BDMOC employees before they assumed their debt-collection

duties and periodically updated their debt collection training, as needed,

on topics such as debt collection techniques and the servicing of particular

debts.

Thus far, FMS has not engaged the services of federal agencies with

ongoing and experienced debt collection operations to assist in

governmentwide cross-servicing debt collection efforts. In December 1996

and October 1999, FMS issued standards allowing agencies to apply to be

part of a collection network. The Departments of Education and Health

and Human Services were granted waivers by Treasury to the crossservicing provision of DCIA, which allows these agencies to take

collection action on certain classes of their own debts. Three agencies –

VA, the Department of Health and Human Services, and the Department of

Agriculture’s National Finance Center – submitted applications for

designation as governmentwide debt collection centers. Treasury denied

approval of these agencies primarily because it determined that these

entities did not have the needed capabilities. FMS officials stated that they

have not received any additional applications for designation as

governmentwide debt collection centers.

FMS’ Cross-Servicing

Operations

Management
Appendix II

GAO’s June 8, 2000, Testimony

Page 30 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 15 GAO/T-AIMD-00-213

FMS’ strategy for debt collection is reflected in its Cross-Servicing

Implementation Guide, Standard Operating Procedures (SOP), and

contracts with PCAs. These documents indicate that when nontax debts

are referred to FMS, BDMOC collects debts using tools such as demand

letters, phone calls, and payment offset through TOP. Debts were to be

referred to PCAs for collection if FMS could not secure an acceptable

agreement with the debtor or locate the debtor. To expedite debt

collection, the procedures stated that debts may be referred to TOP and

will be referred to PCAs within stipulated time frames.

We statistically selected a sample of 200 debts from a population of 61,269

debts with balances greater than $100 referred to FMS from April 1998

through May 1999. We identified FMS’ collection activity for these 200

debts, as well as by PCAs for the debts that were subsequently referred to

the PCAs.

Our tests of these 200 selected debts found that FMS collectors18 did not

always adhere to the cross-servicing SOP. For example, we found that

FMS collectors

• did not always attempt to contact debtors or perform skiptracing to locate

debtors who did not respond to demand letters,

• negotiated two repayment agreements that significantly exceeded

authorized pay back time frames, and

• did not always promptly refer all debts to TOP or PCAs.

One of the most critical steps in collecting delinquent debt is

communicating with the debtor after the required demand letter is sent.

This is necessary because the collector must (1) determine whether the

debtor acknowledges the debt is owed, (2) determine the debtor’s

willingness to fully pay or pay a portion of the debt, and (3) attempt to

establish a formal repayment agreement with the debtor.

When the debtor fails to respond within 10 days after the demand letter is

sent, collectors were required to contact the debtor by telephone. If a valid

telephone number was not available or the demand letter had been

returned as undeliverable, the collector was then required to start

skiptracing activities to locate the debtor.

18“FMS collectors” refers to FMS’ collectors at BDMOC.

Oversight of FMS

Debt Collectors and

PCAs

Contacting Debtors
Appendix II

GAO’s June 8, 2000, Testimony

Page 31 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 16 GAO/T-AIMD-00-213

The debt history files indicated that FMS issued demand letters for all 200

debts we statistically selected and reviewed. However, for 168 of these 200

debts, there was no subsequent contact between the debtor and the

collector, and, as shown in figure 3, we found no evidence that FMS’

collectors subsequently tried to contact 96 (48 percent) of these debtors.19

For the remaining 72 of the 168 debts, information in the debt history files

indicated that FMS collectors had no success in their attempts to contact

the debtor by telephone or locate the debtor by other collection activities,

such as skiptracing. FMS collectors attempted to phone the debtor for 31

of the 72 debts. However, for certain of these debts, available

documentation suggests that these efforts were limited. Specifically, the

debt history files showed that for 18 of these 31 debts, the collector placed

only one phone call to the debtor with no subsequent follow-up. For the

remaining 41 of the 72 debts, FMS collectors performed skiptracing.

19The population of delinquent debts from which our sample was drawn totaled 61,269 debts. Based

on our test results, we estimate that for 29,409 (or about 48 percent) of the delinquent debts, there was

no evidence that FMS collectors attempted to telephone or make any other contact with the debtor.

We are 95-percent confident that the number of debts with no evidence of telephone or other contact

was between 25,727 (or about 42 percent) and 33,116 (or about 54 percent).
Appendix II

GAO’s June 8, 2000, Testimony

Page 32 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 17 GAO/T-AIMD-00-213

Figure 3: Most Debtors Not Contacted by FMS Collectors Subsequent to

Issuance of Demand Letter

(Statistical sample of 200 delinquent debts referred

to FMS from April 1998 through May 1999)

Source: GAO’s analysis of selected FMS debt history files.

In our sample of 200 delinquent debts, the debt history files indicated that

demand letters for 46 of the debts were returned as undeliverable. For 29

of these 46 debts, we found no evidence that FMS collectors performed

the required skiptracing to locate the debtor.

FMS officials stated that its collectors might not have documented all

discussions they had with debtors. However, FMS’ procedures required

collectors to record all debtor conversations and collection activity in the

debt history files. Moreover, the Comptroller General’s Standards for

Internal Controls in the Federal Government20 states that all transactions

20Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, November 1999).

No evidence of

attempt to contact

(96 debts)

48%

Contact attempted

but not made

(72 debts)

36%

Contact made and

initiated by debtor

(22 debts)

11%

Contact made and

initiated by collector

(2 debts)

1%

Contact made;

source of initiation

undetermined

(8 debts)

4%
Appendix II

GAO’s June 8, 2000, Testimony

Page 33 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 18 GAO/T-AIMD-00-213

and other significant events need to be clearly documented and that the

documentation should be readily available for examination.

FMS officials also stated that its collectors might not have been able to

perform all the collection activities for each debt within the stipulated

time frames. In particular, according to these officials, FMS’ collection

efforts were negatively affected when FMS received large batches of

referred debts from the Department of Housing and Urban Development

(HUD) and the Small Business Administration during our detailed testing

period. Our review of referred debts by month for the 14-month testing

period showed that, generally, as referrals increased, the percentage of

debts in our sample with no evidence of attempts to contact the debtor

also increased.

FMS did not establish any written guidance to help its collectors

determine which debts to cross-service first during peak referral periods.

In addition, FMS did not perform any analysis to determine if it would be

more cost effective, especially during peak referral periods, to send all or

certain types of debts immediately to the PCAs. For example, FMS did not

review its history of debt collections to determine if its collectors have had

more success in collecting debts with certain characteristics (e.g., age of

delinquency, dollar value of debt, referring agency, commercial versus

consumer). During peak referral periods, FMS collectors could then focus

on such types of debts while forwarding the rest to the PCAs, thereby

avoiding further aging of debts for which no collection efforts are likely to

be taken.

When entering into a repayment agreement with debtors who are unable

to pay the full debt immediately, collectors were required to adhere to

repayment period time limitations. The recommended period for

repayment agreements is up to 36 months or the period established by the

referring agencies in their Agency Profile Form.21

For 13 debts in our sample of 200 that involved repayment agreements, 2

had terms of 75 months and 96 months, significantly exceeding the 36-

month preauthorized limit established by the referring agency. We found

no evidence in the debt history files that FMS collectors obtained approval

to exceed these limits from the referring agency or FMS management.

21Agency Profile Forms are used by the referring agency to report its collection parameters, such as

maximum repayment periods and limits on compromise and repayment amounts.

Repayment Agreements
Appendix II

GAO’s June 8, 2000, Testimony

Page 34 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 19 GAO/T-AIMD-00-213

According to FMS officials, this lack of evidence was likely due to errors

made by FMS collectors.

A debt compromise involves the government agreeing to accept less than

the full amount of its claim in satisfaction of the entire debt. In accordance

with the cross-servicing SOP, a debt may be compromised if there is

legitimate doubt about the debtor’s ability to pay, the government’s ability

to collect, or if the cost of collecting exceeds the benefit. If a compromise

is accepted and the agreed amounts are paid, the debt is closed and

returned to the client agency.

According to FMS’ cross-servicing SOP,

• collectors first had to attempt to obtain payment in full before they offered

a compromise,

• before offering a compromise, the collector was required to obtain the

debtor’s Taxpayer Identification Number (TIN) so that the compromised

amounts could be reported to IRS,

• collectors were required to obtain current financial statements from the

debtor to determine the debtor’s ability to pay and assess the merits of a

proposed compromise, and

• collectors were authorized to enter into a written compromise repayment

agreement not to exceed 3 months.22

In our statistically selected sample of 78 compromised debts, our analysis

showed that the compromised amounts ranged from about $27 to $36,000

and averaged $4,863. The compromised amount as a percentage of

outstanding balance averaged 39 percent. During our review of the 78

compromised debt history files, we found that

• 75 ( 96 percent) files did not indicate why collectors compromised debts

or the basis used to determine how these debts met FMS’ criteria for

compromising,

22The Federal Claims Collection Standards state that agencies that agree to accept payment in regular

installments should obtain a legally enforceable written agreement from the debtor that specifies all

the terms of the arrangement and contains a provision for accelerating the debt if the debtor defaults.

Compromised Debts
Appendix II

GAO’s June 8, 2000, Testimony

Page 35 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 20 GAO/T-AIMD-00-213

• 72 files had no evidence that the collector attempted to obtain a lump sum

payment in full or a repayment agreement for the full amount before

compromising the debt, and

• 74 files did not have documentation, such as financial statements or any

other type of financial analysis, to support the compromise decision.

For example, one debt history file indicated that a debtor was allowed to

pay $62,000 to settle an agency’s debt with an outstanding balance of

about $98,000. This agency had authorized FMS to compromise up to 10

percent of the outstanding balance of the debt, but there was no

authorization from the agency or other support for compromising about

$36,000, approximately 37 percent, of the outstanding debt. Further, there

was no documentation to show that the FMS collector had followed the

cross-servicing SOP or had analyzed the debtor’s financial condition or

ability to pay.

Our review of the 78 compromised debts also found the following.

• Thirty-two debts involved written or oral compromise repayment

agreements. Of these 32,

• 30 agreements exceeded the established 3-month repayment limit. The

terms of these agreements ranged up to 13 years, half of which

exceeded 3 years, for an average of 57 months.23 One FMS collector

compromised $7,966, or about 50 percent, of an agency’s debt with an

outstanding balance of $15,932 and entered into a compromise

repayment agreement in which the debtor is being allowed to pay $50

per month for 159 months.

• the debt history files for 19 debts did not contain (1) a signed written

compromise repayment agreement and (2) evidence that the FMS

collector attempted to follow up to obtain a signed written agreement

from the debtor.

• the debtors defaulted on 16 of the 32 agreements. Of these 16 debts, 7

had no evidence in the debt history files that the FMS collector

23Under the revised procedures, collectors may offer compromise repayment agreements for up to 12

months.
Appendix II

GAO’s June 8, 2000, Testimony

Page 36 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 21 GAO/T-AIMD-00-213

contacted the debtor to determine whether the debt collection strategy

could be modified.

• Four of the 16 debts with defaulted compromise repayment agreements

were not requested for referral to PCAs until more than 30 days after

default.

• Eleven of the 78 debts did not have a TIN listed in the debt history files or

any evidence that the FMS collector attempted to obtain a TIN required for

IRS reporting and needed for referral to TOP.

When routine debt collection techniques fail, the cross-servicing SOP

requires FMS collectors to pursue the debtor with more aggressive

approaches, such as using TOP. According to FMS’ cross-servicing SOP,

debts may be referred to TOP for offset 20 days after the date of the

demand letter. FMS’ debt management system notifies collectors when the

20 days has expired.

We found that FMS’ collectors referred 13 of the 62 debts that were

eligible for referral to TOP within the stipulated time frames. On the other

hand, FMS did not refer 36 of the 62 debts that were eligible for referral to

TOP promptly at 20 days because of interface problems between internal

computer systems. In addition, FMS collectors referred another 7 debts to

TOP between 5 and 141 days after the 20-day period and had not referred 6

other debts as of the completion of our detailed testing. According to FMS

officials, the late referrals or lack of referrals for the latter 13 debts were

likely due to errors made by FMS collectors.

FMS’ cross-servicing SOP required FMS collectors to request debts that

are not in an active repayment status, paid in full or compromised, or

referred to the Department of Justice for litigation to be referred to a PCA.

FMS collectors were to request eligible debts be sent to the PCAs at 30

days after the date of the demand letter (before January 1999, the standard

was 50 days).

We found that FMS’ collectors did not promptly request referral of many

debts to PCAs. In our sample of 200 delinquent debts, 183 debts were

eligible for referral to PCAs at the time of our detailed testing. For 33

TOP Referrals

Referral to PCAs
Appendix II

GAO’s June 8, 2000, Testimony

Page 37 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 22 GAO/T-AIMD-00-213

(about 18 percent) of the 183 debts eligible for referral to PCAs,24 FMS

collectors requested referral of these debts to PCAs between 3 and 383

days, or an average of 62 days, after the 30-day (or 50-day) time period.

We also identified instances where there were significant delays between

the date the FMS collector requested a debt referral to a PCA and the date

FMS actually transferred the debt to a PCA. Of the selected 183 debts

eligible for referral, 178 had been referred to PCAs as of the date of our

detailed testing. Nineteen of these 178 debts were transferred from FMS to

the PCAs between 30 and 64 days after the FMS collectors’ request. As a

result, no collection activities were taking place and these debts continued

to increase in age of delinquency. FMS officials could not provide an

explanation for the longer time frame.

For the 178 debts in our sample that were referred to the PCAs, we found

that several PCAs did not perform or document certain debt collection

procedures required by FMS’ contract.

PCAs, among other things, are required by their contract with FMS to send

demand letters within 5 working days of receipt of the debt from FMS,

attempt to locate debtors through skiptracing, including obtaining credit

bureau reports for debtors with debt balances of $500 or more, and

attempt to obtain full payment before compromising any debt. In addition,

PCAs are required by contract to record all collection activity occurring on

debts in their respective debt collection systems. PCA contract monitors

employed by FMS have access to the PCA debt collection systems and are

required to regularly review debt records in these systems to verify that

demand letters are issued, ensure that collection activity is appropriate,

and evaluate payment schedules.

PCAs sent demand letters for 158 of the 178 debts (or about 90 percent) on

time. For 17 debts, PCAs sent letters between 1 and 87 days late, averaging

15 days late. As of the date of completion of our detailed testing, no

demand letters had been sent for 3 of these selected debts. According to

FMS officials, delays in sending 13 of the 17 late demand letters were

primarily caused by one PCA that did not download its electronic debt

files in a timely manner.

24The population of delinquent debts from which our sample was drawn totaled 61,269 debts. Based

on our test results, we estimate that FMS collectors did not promptly request referral to a PCA for

10,109 (about 16 percent ) debts of this population. We are 95-percent confident that the number of

debts lacking prompt referrals was between 7,554 (about 12 percent) and about 13,136 (about 21

percent) of the population.

PCA Collection Activities
Appendix II

GAO’s June 8, 2000, Testimony

Page 38 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 23 GAO/T-AIMD-00-213

In addition, PCAs did not always obtain credit bureau reports as part of

skiptracing. Of the 178 debts referred to PCAs, 152 debts had balances

over $500, and their debt history files indicated that the collector

performed or should have performed skiptracing. For 19 of these 152

debts, we did not find evidence in the PCAs’ debt collection systems that

the collector obtained the required credit bureau report. When we brought

this to the attention of FMS officials, they immediately acted by issuing a

technical bulletin to PCAs to remind them of the contractual requirement

to obtain credit bureau reports as part of skiptracing activity for debts

with balances of $500 or more.25

Of the 178 delinquent debts referred to PCAs, we identified 10 debts that

involved compromise offers by PCAs. For 4 of these 10 debts, the PCA’s

debt collection system had no indication that the PCA attempted to obtain

either a lump sum payment in full or a repayment agreement for the entire

amount before compromise. Further, for all 10 debts, the PCA’s debt

collection system did not indicate that the collector requested financial

statements or other documents reflecting the debtor’s financial condition

or ability to pay, and such documents, if they existed, were not provided to

us by FMS.

In February 2000, after we completed our detailed testing of FMS’

collection activities and briefed FMS on the results of such testing, FMS

revised its cross-servicing SOP. The new procedures allow FMS collectors

discretion over which debt collection procedures they choose to perform

by changing many of the SOP requirements that used to be designated as

“will” be performed to “may” or “should” be performed. FMS officials have

also emphasized to us that FMS will rely heavily on PCAs to collect

referred debt under the revised procedures. However, under the revised

SOP, FMS’ collectors may continue to hold and cross-service debts for 30

days before referring them to PCAs.

Based on these actions and discussions with FMS officials, FMS is placing

increased reliance on PCAs. However, FMS has not performed an analysis

to determine the potential effect such reliance may have on net collections

to the federal government. Such an analysis may be warranted given that

(1) as the debts are not actively worked by BDMOC and are awaiting

referral to PCAs, they continue to age and thus typically become more

difficult to collect and (2) the federal government pays a 25-percent fee on

25Technical Bulletin-Number 18 (Revised) August 30, 1999.

Revised SOP
Appendix II

GAO’s June 8, 2000, Testimony

Page 39 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 24 GAO/T-AIMD-00-213

debt amounts collected by the PCA that the government is not always able

to recoup from the debtor.

You were interested in how debts were distributed to PCAs. In the fall of

1996, FMS began development of the PCA Monitoring and Control (PMAC)

system to distribute debt accounts to PCAs, track PCA collection

performance, and monitor PCA collection activities. For the first

distributions made to PCAs from February through June 1998, each PCA

received an equal percentage of the total dollar amount of debt accounts

from each distribution. After this first performance period, FMS assessed

the performance of the PCAs every 4 months thereafter to determine the

dollar percentage of a distribution that each PCA would receive typically

on a biweekly basis. FMS then adopted a systematic process, described

below, to distribute the debts to the PCAs.

In preparing for these subsequent distributions to the PCAs, the debts

were first arrayed by the earliest to the latest date the electronic data were

entered into the PMAC system and then, for each date entered, by dollar

amount from highest to lowest. The PCAs were then arrayed starting with

the PCA with the highest distribution goal amount,26 followed by the

remaining PCAs in descending order. The system then began sequentially

assigning the debts to the PCAs until each PCA had received at least one

debt. After the first round, the system reordered the PCAs from the largest

remaining goal amount to the smallest. The PMAC system continued to

sequentially assign debts and reorder the PCAs after each debt was

assigned until all eligible debts had been distributed. A more detailed

description of this process is included in appendix II.

We obtained copies of pertinent data from the PMAC system and

performed various analyses of the debt account information, including

distribution of the debt accounts to the PCAs, age of delinquencies, and

collection rates. Our analysis of FMS’ distribution of debt accounts from

the inception of the program (February 1998) through February 2000,

which is partially summarized in table 2, showed that one PCA had

received a significantly higher percentage of the debts with smaller

balances. Overall, the average balances of the debts distributed to this

particular PCA were 45 percent lower than the average balances of all

debts distributed during this time frame. Specifically, debts distributed to

26Every four months, FMS evaluated PCAs’ performance based on several performance indicators.

These results were then used to determine each PCAs percentage of debts to be received for each

distribution during the next performance period. The PCA with the top performance was to receive the

largest dollar amount of debts.

Distribution of Debts

to PCAs
Appendix II

GAO’s June 8, 2000, Testimony

Page 40 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 25 GAO/T-AIMD-00-213

this PCA had average balances of $11,436, while the overall average

balances of debt accounts distributed to PCAs were $20,845.

Table 2: Analysis of Debt Distributions

PCA Number of debts distributed as

a percent of total debts

distributed

Dollar amount of

debts distributed as

a percent of total

dollars distributed

Average debt

balance

1 4% 6% $31,034

2 6% 10% $31,944

3 6% 6% $23,041

4 29% 16% $11,436

5 8% 8% $22,275

6 7% 9% $29,620

7 9% 9% $19,722

8 11% 13% $24,922

9 7% 7% $18,603

10 7% 9% $25,025

11 6% 7% $26,217

100% 100% $20,845

Source: GAO’s analysis of the PMAC database for debts distributed to PCAs from

February 1998 through February 2000.

This trend also existed for many of the age of delinquency categories: less

than 180 days, 180 days to 1 year, 1 to 2 years, 2 to 4 years, 4 to 6 years, 6

to 11 years, and greater than 11 years. We found that in the first four

delinquency categories noted above, the PCA mentioned above had the

smallest average debt balances. This PCA also had the next to the smallest

average debt balances in the 4 to 6 years and 6 to 11 years delinquency

categories. For example, we found that 27 percent of this PCA’s debts

were less than 1 year delinquent, with an average balance of $5,593. In

addition, we found that 32 percent of the total number of debts that were

less than 1 year delinquent were distributed to the one PCA. These debts

also represented 19 percent of the total dollars of debt in this delinquency

category. The PCA to receive the next highest percentage of the debts less

than 1 year delinquent was distributed 11 percent of the total number of

debts representing 13 percent of the total dollars, with an average debt

balance of $10,694.

On the other hand, we found that for one agency’s debts for which no

collections had been made through February 2000, 35 percent of the total

number of accounts for this same agency were distributed to two PCAs,

representing 55 percent of the total amounts received by these PCAs, with

a combined average balance of $2.7 million. The one PCA mentioned

above, who is not one of these two, received 17 percent of the total
Appendix II

GAO’s June 8, 2000, Testimony

Page 41 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 26 GAO/T-AIMD-00-213

number of accounts of this same agency’s debts representing 14 percent of

the total amounts received by the PCA with an average balance of

$1.4 million. We noted that several agencies had referred debts with large

average dollar balances ranging from $54,000 to $1.7 million for which no

amounts have been collected.

Further, we analyzed collections on closed debt accounts with payments

categorized by age of delinquency. Collection industry statistics have

shown that collection rates are generally higher on debts with smaller

dollar balances and that are less delinquent. While the PCA mentioned

above had collected the most in total dollars, it ranked highest in

collections as a percentage of the total amounts referred only in the 1 to 2

years and 4 to 6 years delinquency categories. In the other five delinquency

categories, other PCAs had higher collection percentages. Our analysis

also showed that generally three out of the four PCAs with the highest

collection percentages in each delinquency category had average debt

balances that were below the overall average balances for that category.

For example, the three PCAs with the highest collection percentages in the

less than 180 days delinquent category had average account balances of

$265, $810, and $857. The overall average account balances for this

delinquency category was $2,003. Thus, FMS’ collection experience

appears to be consistent with that of the collection industry statistics

noted above.

Concerns relating to the distribution method have been raised by some of

the PCAs. During our interviews with the 11 PCAs, we found that when

asked how the debts should be distributed, the general consensus among

them was that the distribution should consider the characteristics of the

debts, such as age of delinquency, type of debt (consumer or commercial),

agency referring the debt, and debt balance. Many of the PCAs indicated

that stratifying the available debts by agreed-upon characteristics would

result in each of the PCAs receiving a proportionate mix of the debts and

foster a more competitive environment.

An important consideration to help ensure that each PCA receives a

proportionate mix of debts is that the population of debts to be distributed

is homogeneous, i.e., of the same characteristic, such as age of

delinquency, balance, type, or originating agency. For each distribution,

FMS placed all the debts available into one pool. Our analysis of the debts

found that the debts within each distribution’s pool were generally not of

the same composition, i.e., not of the same average balance or age of

delinquency. This factor contributed to the distribution results

experienced by FMS which are discussed above.
Appendix II

GAO’s June 8, 2000, Testimony

Page 42 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 27 GAO/T-AIMD-00-213

FMS compiled information on the distribution and collection of the debts

referred to the PCAs in response to various congressional and other

requests. During our fieldwork, FMS had not yet analyzed these data.

Given the above noted PCAs’ feelings about the distribution method and

the results thus far of FMS’ distributions to the PCAs, it may be necessary

for FMS to periodically analyze the distribution and collection data to

determine whether adjustment is needed to the distribution model to

assure that a proportionate mix of debts is being distributed to the PCAs

and competition among the PCAs is more fully promoted.

For its services, FMS collects cross-servicing fees from referring agencies

that range from 1 percent to 18 percent of the referred debt amounts

collected (see appendix III for the details regarding the fees collected). As

stated in the SOP, effective during the period of our detailed testing, and

as allowed by DCIA, FMS intended for the fees charged for its crossservicing debt collection activities to fully cover the cost of its related

operations. However, for fiscal year 1999, cross-servicing fees totaled

$1.6 million, or about 15 percent, of FMS’ $11 million of estimated crossservicing costs.27

FMS hired a contractor to assist with the development of its estimated

costs, a model for conducting break-even analyses, and fee setting. The

FMS contractor indicated that fees for cross-servicing would have to

increase substantially over current levels for FMS to achieve full cost

recovery.

We determined, using the current fee structure and the fiscal year 1999

collection experience, that FMS would have to increase annual collections

by over sevenfold, or collect approximately $173.5 million, to cover its

fiscal year 1999 estimated costs of $11.0 million. The estimated

$173.5 million in collections would include approximately $141.6 million to

be returned to the referring agency for collected debts, $20.9 million in

fees paid to PCAs, and $11 million in cross-servicing fees paid to FMS.28

27FMS’ estimated costs do not include any agency costs, such as costs incurred by the agencies to

refer debts to FMS for cross-servicing.

28Our analysis assumes that no additional costs will be incurred to increase the collection amount.

Also, we assumed that all DOJ collections are from post judgment debts where the 18-percent fee

would apply on the initial amount. During fiscal year 1999, most of DOJ collections were from post

judgment debts.

FMS’ Cross-Servicing

Fees and Related

Costs of Operations
Appendix II

GAO’s June 8, 2000, Testimony

Page 43 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 28 GAO/T-AIMD-00-213

The amount of collections needed to reach a break-even basis varies

substantially depending on who collects the debt, FMS or the PCAs. If

FMS did all the collections at its 18 percent rate, debt collections of about

$72 million would be needed to cover the $11 million estimated costs.

Conversely, if FMS relied on the PCAs exclusively for collections, its 3

percent fee on these collections would require that the PCAs bring in

collections of about $471 million to cover these costs.

Projected higher future costs will require even more collections to break

even. FMS’ fiscal year 2000 cross-servicing cost estimate that we were

provided is about $12.9 million or about 17 percent greater than the fiscal

year 1999 estimate. According to FMS officials, FMS has not projected

cross-servicing fee revenues and costs beyond fiscal year 2000. Although

the officials stated that FMS is currently considering increasing crossservicing fees, they have acknowledged that the cross-servicing program

will not be fully reimbursable in the foreseeable future. Thus, the crossservicing program will likely have to be funded primarily through

appropriations at least in the near term.

In summary, for FMS’ cross-servicing program to become a fully

implemented and mature program, many challenges lie ahead that must be

overcome to assure success in the collection of delinquent debt. These

challenges are magnified since as delinquent debt ages further, the

likelihood of collection diminishes.

Mr. Chairman, this concludes my prepared statement. I would be pleased

to respond to any questions you or other Members of the Subcommittee

may have.

For information about this testimony, please contact Gary T. Engel at

(202) 512-3406. Major contributors to this testimony include Kenneth R.

Rupar, Paula M. Rascona, Matthew F. Valenta, Michael S. LaForge, Gladys

Toro, and Sophia Harrison.

Contacts and

Acknowledgments
Appendix II

GAO’s June 8, 2000, Testimony

Page 44 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 29 GAO/T-AIMD-00-213

Cross-servicing waivers—Treasury granted the Departments of

Education and Health and Human Services waivers from cross-servicing

for certain classes of their own debts. According to FMS officials, the

waiver, which is valid for a 3-year period, allows the agencies to perform

collection activity on those debts subject to the waivers. As of October

1999, agencies can no longer apply for waivers, but rather must apply for

exemption from cross-servicing for specific classes of debts.

Debts in forbearance or in appeals—Debts that are subject to

forbearance or that are in appeals generally are not “legally enforceable.”

Forbearance action taken by a creditor generally extends the time for

payment of a debt or postpones, for a time, the enforcement of legal action

on the debt. The government cannot pursue collection against a debtor if

the debt is not legally enforceable.

At DOJ—Debts that are referred to DOJ for litigation or collection are

excluded for referral to Treasury for cross-servicing by DCIA.

Foreign debt—Debt that is owed by foreign governments is excluded for

referral to Treasury. Treasury stated that, for the most part, collecting

these delinquent debts is infeasible primarily due to foreign diplomacy

considerations and affairs of state.

Debts in bankruptcy—The automatic stay mandated by 11 U.S.C.

Section 362 generally prevents the government from pursuing collection

action against debtors in bankruptcy.

Debts in foreclosure—Debts in foreclosure are governed by state laws.

In some states, to maintain the right to foreclose, a creditor must foreclose

the collateral securing the debt before seeking other collection remedies.

DCIA excludes debts that are in foreclosure for referral to Treasury for

collection action.

Department of Defense—According to an FMS official, certain

contractor debt held by the Department of Defense (DOD) and reported as

debt over 180 days delinquent as of September 30, 1998, was subsequently

reclassified from eligible to ineligible debt. Specifically, in August 1999

FMS and DOD agreed to reclassify $1.3 billion of such debt to ineligible

debt due to ongoing litigation.

Debts eligible for internal offset—Debts that will be collected under

agency-initiated offset, if such offset is sufficient to collect the claim

within 3 years after the date the debt or claim is first delinquent, are

excluded for referral for cross-servicing by DCIA.

Appendix I

Explanation of Terms/Data in Table 1
Appendix II

GAO’s June 8, 2000, Testimony

Page 45 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Appendix I

Explanation of Terms/Data in Table 1

Page 30 GAO/T-AIMD-00-213

Debts at third party—Debts being serviced and/or collected in

accordance with applicable statutes and/or regulations by third parties,

such as private lenders or guaranty agencies, are exempt from crossservicing by Treasury regulations.
Appendix II

GAO’s June 8, 2000, Testimony

Page 46 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 31 GAO/T-AIMD-00-213

The PMAC system begins the distribution process by creating a list of debt

accounts for distribution that are ordered first by the earliest to latest date

the debt account was entered into the PMAC system. Then, for each date

entered, by dollar amount from highest to lowest. The PMAC system then

performs a series of calculations to determine a dollar-limiting amount

that represents the highest dollar amount of an individual debt account

included in the distribution list. All individual debts that exceed the dollarlimiting amount are excluded from that distribution. According to FMS

officials and its contractor, the dollar-limiting amount was established to

help ensure that no debt accounts would be assigned that are larger than

every PCA’s distribution goal amount. According to FMS, the list of debt

accounts are ordered by date entered into the PMAC system to help ensure

that no debt account will remain unassigned for an extended period of

time.

Next, the PMAC system calculates the goal distribution percentages for

each PCA. The goal distribution percentages are based on the performance

evaluation results of the prior 4 month performance period and are used to

determine the dollar amount of debts each PCA will be allocated. The

PMAC system then orders the PCAs by listing the PCA with the largest

distribution goal first followed by the remaining PCAs in descending order

according to goal distribution amounts. The PMAC system assigns the debt

accounts sequentially from the debt account listing to PCAs so that the

PCA with the largest remaining distribution goal amount will receive the

debt with the largest balance and so forth. A debt can be assigned to a

PCA if the debt amount will not cause the PCA to exceed its remaining

distribution goal amount within a preestablished tolerance amount and the

debt account has not been previously assigned to the PCA in a prior

distribution. If the debt account cannot be assigned to the first PCA on the

list, the system proceeds to the next PCA. This process continues until

each PCA has been assigned at least one debt account.

After each PCA has been assigned at least one debt account, the PCAs are

reordered from the largest remaining distribution goal amount to the least.

The PMAC system continues to sequentially assign the debt accounts and

reorder the PCAs after each debt account is assigned until all eligible

debts that can be assigned have been assigned. Debt accounts that are not

assigned during the distribution process are included with the next

distribution.

Appendix II

FMS Distribution Methodology
Appendix II

GAO’s June 8, 2000, Testimony

Page 47 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Page 32 GAO/T-AIMD-00-213

In its standard written agreement with all referring agencies, FMS requires

agencies to pay FMS cross-servicing fees for nontax debt collections on

debts referred to FMS. The agreement states that FMS is entitled to a

cross-servicing fee for all nontax debt collections received after it initiates

collection action, which is defined as the issuance of a demand letter

and/or an attempt to contact the debtor. FMS fees are based on a

percentage of the initial referred debt amount that is collected. FMS’ crossservicing fees effective during the period of our fieldwork are listed below

in table 3.

Table 3: Cross-Servicing Fee Rates

Type of cross-servicing collection Fee rates

(%)

Debts referred to FMS for cross-servicing and collected by FMS

collectors

18

Post-judgement debts referred to FMS and subsequently

collected by the Department of Justice (DOJ)

18

Debts referred to FMS for cross-servicing and subsequently

collected by PCAs

3

Debts referred to FMS for cross-servicing and subsequently

collected by TOP

3

Debts referred to FMS for cross-servicing and subsequently

collected by DOJ (excluding post-judgement enforcement)

3

Debts referred to FMS and sent directly to and collected by

PCAs with no collection activity performed by FMS, referred to

as “pass-throughs”

1

(901803)

Appendix III

FMS’ Cross-Servicing Fee Rates
Page 48 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

Appendix III

Comments From the Financial Management 

Service ApendxiI

See comment 1.
Appendix III

Comments From the Financial Management 

Service

Page 49 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

See comment 2.

See comment 3.
Appendix III

Comments From the Financial Management 

Service

Page 50 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

See comment 4.

See comment 5.

See comment 6.

See comment 7.
Appendix III

Comments From the Financial Management 

Service

Page 51 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

See comment 8.

See comment 9.

See comment 10.
Appendix III

Comments From the Financial Management 

Service

Page 52 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

See comment 11.

See comment 12.

See comment 13.
Appendix III

Comments From the Financial Management 

Service

Page 53 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

The following are GAO’s comments on the Financial Management Service’s 

letter dated July 12, 2000.

GAO’s Comments 1. As we reported, no formal process currently exists for independent 

verification and reporting on the accuracy, completeness, and validity 

of debts reported by agencies as eligible and excluded from the DCIA 

cross-servicing provisions. As stated in our report, FMS stated that as 

of September 30, 1999, about $52.8 billion or approximately 89 percent 

of the $59.2 billion of debt over 180 days delinquent was excluded from 

cross-servicing. Because of the magnitude of the amounts reported as 

excluded, FMS needs to develop a definitive plan to obtain independent 

verification of this information. The intent of our recommendation was 

not for FMS to help verify the accuracy of these reported amounts on 

an as-needed basis. Rather, our intent was that FMS, as the sole 

governmentwide debt collection center, would lead and coordinate 

efforts among FMS, OMB, and each of the respective agency OIGs in 

the development and implementation of a formal process for obtaining 

independent verifications of agency reported amounts.

2. Assisting agencies by clearing debts that never should have been 

referred has been one aspect of FMS’ many functions. However, our 

intention was that our recommendation would be read in a broader 

context and that analyzing the eligible debts referred and the 

associated collections on those debts is just one of the steps that 

should be performed when conducting a comprehensive review of 

FMS’ cross-servicing process and strategy to determine what types of 

debts and the level and mix of debt collection efforts that should be 

performed by the FMS collectors. See our discussion in the “Agency 

Comments and Our Evaluation” section.

3. FMS’ discussion of its process in its comments reflects the procedures 

called for by its revised SOP. However, one of the reasons that we 

recommended that FMS perform a comprehensive review of its crossservicing processes was that our testing found that FMS staff did not 

always follow the FMS SOP before it was revised or properly use 

certain debt collection tools. As we stated in our report, we found that 

the written SOP at the time of our testing was well developed. For 

example, the SOP required that “the collector will try to reach the 

debtor by telephone, if there was no initial response from the demand 

letter.” However, during the course of our work and as stated in our 

report, FMS revised many of its SOP requirements to perform various 
Appendix III

Comments From the Financial Management 

Service

Page 54 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

collection techniques from “will” be performed to “may” or “should” be 

performed. Our recommendation that a comprehensive review of FMS’ 

cross-servicing process be conducted was made out of concern that 

FMS has not fully evaluated the impact that such changes to the SOP 

could have on the level and type of collection efforts performed by FMS 

collectors and the ability of FMS management to maintain proper 

accountability and controls over FMS collector activities under the 

revised SOP. 

Similarly, an FMS collector waiting for debtors to respond to a demand 

letter does not indicate that the debt is being actively worked and is not 

an effective debt collection technique. As stated in our report, our tests 

of the sample of 200 delinquent debts found that only 22 of the debt 

history files indicated that the debtors initiated contact with FMS. 

Further, in our sample of 200 delinquent debts, the debt history files 

indicated that demand letters for 46 or about 23 percent of the 

delinquent debts tested were returned as undeliverable. As we stated in 

our report, one of the most critical steps in collecting delinquent debt is 

communicating with the debtor after the required demand letter is sent. 

Our recommendation that a comprehensive review of FMS’ crossservicing process be conducted was based in part on the results of our 

testing, which found that FMS collectors did not always attempt to 

contact debtors or perform skiptracing to locate debtors who did not 

respond to demand letters.

FMS should make full and appropriate use of the PCAs. Our 

recommendation does not contemplate the duplication of PCA 

collection activities or competition with the PCAs. Rather our point 

was that FMS perform a comprehensive review of its cross-servicing 

processes and strategy to make informed decisions about the most 

effective and efficient way to collect the delinquent debts. With the 

results of such a review, FMS will be in a position to (1) quantify the 

number and type of debts for which FMS could reasonably perform 

collection activities, (2) determine the types of procedures that should 

be performed, and (3) establish reasonable time frames for FMS 

collectors to perform the collection activities. See our discussion in the 

“Agency Comments and Our Evaluation” section.

4. See comment 3 and our discussion in the “Agency Comments and Our 

Evaluation” section.
Appendix III

Comments From the Financial Management 

Service

Page 55 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

5. See our discussion in the “Agency Comments and Our Evaluation” 

section.

6. During the course of our work, FMS did not provide us with any 

evidence that management had identified any of the same types of 

problems with FMS collector activities as were identified in our report. 

One of the objectives of our recommendation that management 

perform a comprehensive review of the cross-servicing process was for 

FMS management to determine whether there are instances of 

noncompliance with established policies and procedures and, if so, that 

it make needed changes to strengthen controls over FMS collector 

activities. See comment 3 and our discussion in the “Agency Comments 

and Our Evaluation” section.

7. During the course of our work, FMS did not provide us with any 

evidence that management had identified any of the same types of 

problems with PCA collection activities as were identified in our report. 

For example, only when we notified FMS that certain PCAs were not 

obtaining credit bureau reports for debts with balances over $500 as 

part of required skiptracing did FMS issue a technical bulletin to PCAs 

reminding them of this contractual requirement. One of the objectives 

of our recommendation that management perform a comprehensive 

review of the cross-servicing process was for FMS management to 

determine whether there are instances of noncompliance with 

established policies and procedures and, if so, that it make needed 

changes to strengthen controls over PCA collector activities. See 

comment 3 and our discussion in the “Agency Comments and Our 

Evaluation” section.

8. Although FMS states that it reviews cross-servicing costs and fee 

structures annually, the intention of our recommendation was that FMS 

should analyze its costs and related fee structure in conjunction with its 

overall assessment of FMS’ debt collection strategy. As stated in our 

report, our analysis of FMS cross-servicing fees and related operating 

costs found that collection volume would need to rise more than 

sevenfold above its fiscal year 1999 collections to put FMS crossservicing operations on a full cost-recovery basis. In conducting this 

assessment, FMS should consider the costs of its operations and the 

revenues collected and make any necessary adjustments to help ensure 

that its collection efforts are providing the optimal return to the federal 

government. See our discussion in the “Agency Comments and Our 

Evaluation” section.
Appendix III

Comments From the Financial Management 

Service

Page 56 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

9. The establishment and implementation now of a periodic process to 

analyze the distribution and collection data should help to place FMS in 

a position to introduce the kinds of changes needed to address the 

issues identified by our analysis of the FMS distribution model. These 

analyses may help FMS management identify changes needed in the 

distribution model to further competition among the PCAs. These 

analyses should also provide FMS management with useful information 

to make more informed decisions on the amount of flexibility that will 

be needed in its future contracts and systems to institute distribution 

model changes as the need arises. To the extent that the analyses 

identify systems and legal issues, FMS should take whatever steps 

necessary to address those issues.

10. The information in our report about the results of our testing is correct 

as written. See our comment 3 and our discussion in the “Agency 

Comments and Our Evaluation” section.

11. We have revised our report to clarify that the written SOP was changed 

in 1999.

12. The information about the results of our testing in our report is correct 

as written. See comment 3 and our discussion in the “Agency 

Comments and Our Evaluation” section.

13. The information in our report regarding the fees that the federal 

government pays to PCAs for collection services and its ability to 

recoup such fees is correct as written. As FMS stated, if the debtor pays 

the full amount of the debt recorded in FMS’ systems which includes 

any related fees, the debtor is paying the PCA fee. However, FMS has 

not provided us with any evidence or analysis showing that the 

government’s inability to recoup the 25 percent fee is limited to those 

situations that involve compromise agreements. In any scenario where 

a collection fee is paid, failure by the debtor to pay the entire amount 

due results in the federal proceeds being reduced by the associated 

collection fees.

We recognize that a centralized debt collection operation also involves 

certain management activities that are performed in addition to its 

collection activities. Therefore, it is even more important that FMS 

perform a comprehensive review of its operation so that its processes 

optimize collections in a more efficient and cost-effective manner. See 
Appendix III

Comments From the Financial Management 

Service

Page 57 GAO/AIMD-00-234 FMS Cross-Servicing Implementation

comment 3 and our discussion in the “Agency Comments and Our 

Evaluation” section.

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