U.S. GOVERNMENT PRINTING OFFICE

63–309 CC WASHINGTON : 2000

WHAT IS THE FEDERAL GOVERNMENT DOING

TO COLLECT THE BILLIONS OF DOLLARS IN

DELINQUENT DEBTS IT IS OWED?

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JUNE 15, 1999

Serial No. 106–98

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JOHN T. DOOLITTLE, California

HELEN CHENOWETH, Idaho

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman

JUDY BIGGERT, Illinois

THOMAS M. DAVIS, Virginia

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. RUSSELL GEORGE, Staff Director and Chief Counsel

RANDY KAPLAN, Counsel

MATT RYAN, Senior Policy Advisor

GRANT NEWMAN, Staff Assistant

FAITH WEISS, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on June 15, 1999 ............................................................................... 1

Statement of:

Hammond, Donald, Fiscal Assistant Secretary, U.S. Department of the

Treasury; and Richard Gregg, Commissioner of Financial Management

Services, U.S. Department of the Treasury ................................................ 10

Pestka, Thomas J., Director, Debt Collection Service, U.S. Department

of Education; Sally Thompson, Chief Financial Officer, U.S. Department of Agriculture; Richard M. Guyer, Director, Fiscal Policy Division;

Saul Ramirez, Deputy Secretary, U.S. Department of Housing and

Urban Development; David Gibbons, Director, Office of Budget; and

Victoria L. Bateman, Comptroller, Federal Housing Administration ...... 47

Letters, statements, et cetera, submitted for the record by:

Gregg, Richard, Commissioner of Financial Management Services, U.S.

Department of the Treasury:

Information concerning referrals ............................................................. 45

Prepared statement of ............................................................................... 23

Hammond, Donald, Fiscal Assistant Secretary, U.S. Department of the

Treasury, prepared statement of ................................................................. 13

Horn, Hon. Stephen, a Representative in Congress from the State of

California, prepared statement of ................................................................ 4

Pestka, Thomas J., Director, Debt Collection Service, U.S. Department

of Education, prepared statement of ........................................................... 50

Ramirez, Saul, Deputy Secretary, U.S. Department of Housing and Urban

Development, prepared statement of .......................................................... 67

Thompson, Sally, Chief Financial Officer, U.S. Department of Agriculture,

prepared statement of ................................................................................... 61

Turner, Hon. Jim, a Representative in Congress from the State of Texas,

prepared statement of ................................................................................... 7

Walden, Hon. Greg, a Representative in Congress from the State of

Oregon, prepared statement of .................................................................... 8

(1)

WHAT IS THE FEDERAL GOVERNMENT DOING

TO COLLECT THE BILLIONS OF DOLLARS IN

DELINQUENT DEBTS IT IS OWED?

TUESDAY, JUNE 15, 1999

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2247, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding.

Present: Representatives Horn, Biggert, Walden, Ose, Turner

and Owens.

Staff present: J. Russell George, staff director and chief counsel;

Randy Kaplan, counsel; Matt Ryan, senior policy advisor; Matthew

Ebert, policy advisor; Bonnie Heald, director of communications;

Grant Newman, staff assistant; Paul Wicker, Justin Schleuter, and

John A. Phillips, interns; Faith Weiss, minority counsel; and Earley

Green, minority staff assistant.

Mr. HORN. The Subcommittee on Government Management, Information, and Technology will come to order. Today we will examine the Federal Government’s attempts to collect delinquent debts.

The amount of delinquent nontax-related debt owed to the Federal Government is staggering. At the end of fiscal year 1998, the

government was owed $60 billion in bad debt. As the chart illustrates, that’s chart 1, more than $46 billion of this amount had

been delinquent for over 180 days.

Today’s hearing is about financial responsibility. In many instances the Federal Government is the lender of last resort. However, this does not discharge a loan recipient’s obligation to repay

the debt to the taxpayers. The fact that there is a large amount of

bad debt suggests that many Federal loan recipients are not taking

this responsibility seriously. The fact that the majority of this debt

is more than 180 days overdue suggests that too many agencies

and departments in the executive branch of our government are

not acting as quickly as they should to collect these debts.

The majority of this outstanding debt is unpaid student loans

from programs administered by the Department of Education. The

total value of the student loan portfolio is $153 billion, all invested

for a good cause, but there’s a commitment there to return what

was loaned. Of this amount, $27 billion is in default, $18.2 billion

of which is more than 180 days overdue.

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There are a variety of other programs with large amounts of unpaid debts. The Department of Agriculture, for example, administers credit programs that have given rise to more than $6 billion

in delinquent debts. The Department of Housing and Urban Development and the Small Business Administration are each owed

more than $2 billion in overdue loans.

To combat this problem, the Debt Collection Improvement Act

was signed into law in 1996. This law authorized a number of programs and created a variety of tools designed to improve the Federal Government’s dismal record in collecting delinquent debts. The

act centralized responsibility for debt collection in the Department

of the Treasury. Under the act, Federal departments and agencies

are required to refer debt that is more than 180 days delinquent

to the Department of the Treasury for collection.

The Treasury Department’s Financial Management Service operates two programs aimed at collecting this delinquent, nontax-related debt. Under the offset program, Federal payments are intercepted to satisfy delinquent debts owed to the government. For example, if an individual defaults on a loan from the Federal Government, portions of other Federal payments made to that individual,

including salary and benefit payments, can be withheld to repay

the debt.

As the next chart, chart 2, shows, as of September 30, 1998,

$31.2 billion of bad debts were eligible for referral to the Treasury

Department for collection. Of that amount, that $31.2 billion, of

that, only $22.2 billion were actually referred for collection. This

leaves $9 billion of eligible delinquent debt that is not being referred.

The Treasury Department also operates a program, called crossservicing, in which the Department can collect delinquent debts directly by contacting the debtor and by referring the debts to private

collection agencies.

As you can see from the next chart, chart 3, Federal departments

have done a very poor job referring eligible debts to this Treasury

program. Of the $8.1 billion in debts that were eligible for crossservicing, only $2.4 billion were referred to that program. Delinquent loans totaling nearly $6 billion are not being referred for

cross-servicing, as was mandated by the Debt Collection Improvement Act of 1996.

Two of today’s witnesses represent departments that are the

poorest performers in referring debts for cross-servicing. Chart 4,

the Department of Housing and Urban Development has sent

Treasury only $222 million of the $1 billion eligible for that collection program. Chart 5, the Department of Agriculture has sent

Treasury a measly $5 million of the $1.3 billion eligible for that collection program. Today we will ask why the departments are not

using these collection processes to reclaim the billions of dollars

owed to the taxpayers.

Over the past two Congresses, this subcommittee has held a series of hearings focusing on debt collection and the implementation

and compliance with the Debt Collection Improvement Act. At a

June 5, 1998, subcommittee hearing, we learned that despite the

tens of millions of dollars allocated to operate the debt collection

program, total collections amounted to little more than $2 million,

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which is disgraceful, frankly. At that hearing we also learned that

the Treasury Department was struggling to implement a computer

system that would increase the types of Federal payments that

could be intercepted to satisfy delinquent debts. The Treasury Department ultimately scrapped a $5 million system that failed to

meet expectations.

In January 1999, the Financial Management Service successfully

merged its Treasury offset program with the tax refund offset program, which was previously administered by the Internal Revenue

Service. By adding tax refunds to the types of Federal payments

that can be intercepted, the Financial Management Service has

been able to increase the amount of delinquent debt collected.

Chart 6, total collections to date, however, remain only a fraction

of the total amount of overdue debt owed to the Federal Government. We must ensure that all eligible Federal payments, including

salary and benefit payments, are incorporated into the offset system. Federal departments and agencies must also make every effort to see that eligible delinquent debt is referred to the Treasury

Department in a timely manner.

We welcome witnesses from several Federal agencies to discuss

debt collection and the implementation of the Debt Collection Improvement Act.

And before we lead to the witnesses, I would ask the gentleman

from Texas, the ranking member, Mr. Turner, for his opening

statement.

[The prepared statement of Hon. Stephen Horn follows:]

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Mr. TURNER. Thank you, Mr. Chairman.

First, I want to commend you for your leadership in the area of

Federal debt collection. Your persistence in trying to recover for the

taxpayer sums rightfully owed to the government and to the taxpayers of this country is commendable.

I want to also mention the hard work that Congresswoman Carolyn Maloney has put in on this issue since the time that she held

the position that I now hold as ranking member of this subcommittee.

As a result of your collective efforts and the efforts of many people who are gathered here in this room today, the Federal Government is beginning to reap the benefits of a more centralized debt

collection system. Within the last 2 years, the Federal Government

centralized debt collection activities at the Financial Management

Service have begun to work more efficiently. For example, the centralized Financial Management Service has grown—collections

have grown from $1.7 million in fiscal year 1997 to $2.5 billion in

fiscal year 1999 after the tax refund offset system merged with the

Treasury administrative offset system.

Clearly, there have been significant improvement in our debt collection efforts. As we know, however, there are many challenges

still facing us and many agencies still have debt that can be referred to the Financial Management Service for collection.

With that, I want to reserve the balance of my time, Mr. Chairman, so that Mrs. Maloney, when she arrives, will have the opportunity to make a statement on this issue.

Mr. HORN. Fine. We’re delighted.

[The prepared statements of Hon. Jim Turner and Hon. Greg

Walden follow:]

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Mr. HORN. Let us begin then with the first panel of witnesses.

We have on panel one, Donald Hammond, the Fiscal Assistant Secretary, U.S. Department of the Treasury; and Richard Gregg, the

Commissioner of Financial Management Services of the U.S. Department of the Treasury.

The routine here, for those that are not familiar with it, including the future witnesses sitting in the audience, are that we swear

in all witnesses as they assume their chairs. Their full statement

is automatically put into the record when we call on them, and we

will then prefer that they will sort of look us in the eye and summarize their statement, and then we can have more opportunities

for dialog on both sides of the aisle here in asking questions.

So, Mr. Hammond, Mr. Gregg, if you will stand, raise your right

hands.

[Witnesses sworn.]

Mr. HORN. The clerk will note that the two witnesses have affirmed the oath.

We will start with Donald Hammond, the Fiscal Assistant Secretary of the Treasury.

STATEMENTS OF DONALD HAMMOND, FISCAL ASSISTANT SECRETARY, U.S. DEPARTMENT OF THE TREASURY; AND RICHARD GREGG, COMMISSIONER OF FINANCIAL MANAGEMENT

SERVICES, U.S. DEPARTMENT OF THE TREASURY

Mr. HAMMOND. Thank you, Mr. Chairman.

Mr. Chairman and Ranking Member Turner, thank you for the

opportunity to discuss the Department of the Treasury’s progress

in implementing the Debt Collection Improvement Act of 1996.

Chairman Horn, your continued support and strong interest in

our efforts to carry out this important program has been of great

value to us, and I would like to reiterate our firm commitment to

the successful implementation of the DCIA, along with its continued support from the highest levels within the Treasury Department.

Today I will discuss some of the program’s more significant recent accomplishments and a few challenges that lie ahead. To collect the debts referred by the program agencies, Treasury’s Financial Management Service applies a variety of debt collection tools,

including administrative offset, tax refund offset, cross-servicing,

private collection agencies, credit bureau reporting, and referrals to

the Department of Justice.

Collectively, administrative offset and tax refund offset comprise

the offset program. Offset is a program whereby Federal payments

are reduced or ‘‘offset’’ to satisfy a payment recipient’s overdue Federal debt.

Cross-servicing is a program consisting of a variety of collection

tools which include Treasury demand letters, telephone calls to

debtors and the use of 1 or more of the 12 private collection agencies on governmentwide contract.

In close consultation with Federal agencies over the last several

months, FMS has updated its evaluation of the Federal Government’s debt portfolio eligible for referral to Treasury for offset and

cross-servicing. This analysis is a followup to the Price Waterhouse

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study completed last year which revealed that over 47 percent of

the government’s delinquent debt was more than 4 years old.

Based on industry standards and private sector benchmarking,

Price Waterhouse determined that once the debt collection program

is fully implemented, FMS could expect to collect between $864

million and $1 billion annually.

Although much work remains to complete the full implementation of the program, FMS has made significant progress in increasing collections above the highest Price Waterhouse estimates, in

large measure due to the increased collections that we’ve experienced from the tax refund offset program.

This year’s analysis revealed that as of the end of fiscal year

1998, $60 billion in nontax delinquent debt was held by the respective agencies and owed to the Federal Government, compared to

$51.9 billion for fiscal year 1997; and $46.4 billion of that total is

more than 180 days delinquent, compared to the comparable figure

of $47.2 billion for fiscal year 1997. As a result of exemptions and

other requirements of the DCIA, of the $46.4 billion of debt that

is more than 180 days delinquent, $31.2 billion is eligible for referral to Treasury for offset, and $8.1 billion is eligible for referral to

Treasury for cross-servicing. To date, $22.5 billion, or 72 percent,

has been referred for offset and $2.3 billion, or 28 percent, has been

referred for cross-servicing.

During the past year, one of the most important accomplishments was the merger of the tax refund offset program with the

Treasury offset program. The merger, which was implemented in

January 1999, streamlined and improved overall operations.

As a result of the tremendous teamwork between FMS, IRS, and

the Federal Reserve system, the new system is showing dramatic

results. Calendar year tax refund offset collections as of May 26,

1999, totaled more than $2.4 billion, an increase of $643 million

over last year’s figures. The increase reflects collections of nontax

Federal debt over—increased over $414 million, and an increase in

child support collections of an additional $230 million over where

we were last year.

Treasury also plays an important role in collecting delinquent

child support obligations owed to or being enforced by States and

territories. Delinquent child support obligations currently are

matched against tax refund payments and at the State’s option

against vendor payments and OPM retirement payments.

As of the end of May, more than $1.2 billion in tax refund offsets

have been collected for child support this calendar year, exceeding

total collections for all of 1998. Our challenge over the next year

is to increase the number of States that fully participate in the administrative offset program.

We have also made tremendous headway in putting in place the

regulatory framework necessary to facilitate implementation of the

DCIA. This past year, FMS has published 10 regulations, including

all regulations necessary to fully implement the offset program.

Finally, I would like to briefly mention the great strides made to

strengthen the relationships with the various Federal agencies.

This has been a significant point of emphasis at FMS. As of April

30, 1999, agencies have referred approximately 63 percent of the

debt that is eligible for offset in cross-servicing. To increase referVerDate 11-MAY-2000 08:20 Jul 25, 2000 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 C:\DOCS\63309.TXT HGOVREF1 PsN: HGOVREF1
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rals and further strengthen agency compliance, FMS has implemented an outreach effort designed to assist more than 50 agencies

in analyzing their debt eligible for transfer for offset and/or crossservicing.

This past year, we focused our attention on the successful merger

of the Treasury offset program with the tax refund offset program

and making the needed improvements to the tax refund offset process due to the importance of this program for overall collections.

With this effort complete, we are now channeling our efforts to the

expansion of the administrative offset program, to include State income tax debt, Federal tax levy and additional payment streams.

Although we clearly have much left to do, we have made significant, measurable progress in fulfilling our responsibilities under

the DCIA, including a comprehensive regulatory framework, a common tax refund offset and Treasury offset system, increased child

support referrals and collections and successful establishment of

the cross-servicing program, including implementation of the private collection agencies.

In light of future system enhancements, new program developments and agency outreach efforts, which Commissioner Gregg will

discuss in greater detail in his testimony, we fully expect this upward trend in collections and referrals to continue leading to a vibrant debt collection program at FMS which will serve all Federal

agencies.

[The prepared statement of Mr. Hammond follows:]

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Mr. HORN. Mr. Gregg.

Mr. GREGG. Mr. Chairman and distinguished members of the

subcommittee, good morning. I am pleased to report the progress

made by the Financial Management Service in implementing the

Debt Collection Improvement Act of 1996.

First, I would like to thank the chairman and Ranking Member

Turner for your continued support and encouragement; and I welcome this opportunity to provide an update on our progress in implementing the DCIA.

Our most significant accomplishment and certainly our most

challenging task was the successful merger of the tax refund offset

and the Treasury offset programs.

Mr. Chairman, in April 1996, in your remarks on the House floor

in support of the DCIA, you described the intent of Congress that

‘‘FMS should perform both the tax refund offset and the administrative offset programs and that by merging these two programs

the Department of Treasury would streamline and improve its operations.’’ Based on this guidance and the anticipated benefits of

the merger, this undertaking was given top priority by Treasury.

Originally, FMS and IRS planned to merge the two programs in

January 1998 in time for the 1998 tax filing season. Instead of a

full merger in 1998, IRS and FMS jointly developed a 1-year transition plan with a revised merger date of January 1999.

Following an incredible display of teamwork among IRS, the Federal Reserve, and FMS, and much hard work, the merger was successfully completed and the first offsets began on January 18, 1999.

Although that was only 5 months ago, the fruits of our labor are

already evident. Total tax refund offset collections for calendar year

1999 through May 26th of this year are almost $2.5 billion already

$643 million more than the amount collected in the same period in

1998 and already far exceeding the $2.028 billion collected for all

of 1998.

Tax refund offsets have two components, Federal nontax and

child support collections. As of May 26th, child support collections

from tax refund offsets totaled more than $1.2 billion, an increase

of more than $230 million over the same period in 1998; and Federal nontax collections also totaled over $1.2 billion, an increase of

more than $414 million over the same period in the previous year.

Notable progress has been made in the area of cross-servicing. As

of April 30, 1999, cross-servicing collections, fiscal year to date, totaled $11.6 million, an increase of $8.3 million over the same period last year. When debts are referred for cross-servicing, FMS

sends a demand letter on Treasury letterhead, followed by a phone

call to the debtor. Since its inception, FMS has brought in $13.3

million in collections and $55.6 million in repayment agreements.

If these collection efforts are unsuccessful, then at 30 days the

debt is referred to 1 of the 12 private collection agencies [PCAs].

To insure that an appropriate balance is maintained between the

aggressive pursuant of collections and the fair and equitable treatment of debtors, FMS monitors each PCA. Although the PCA contract has only been in place for a little more than a year, there

have been no substantiated debtor complaints and collections have

been steadily increasing.

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In February 1999, PCA collections exceeded $1 million in 1

month for the first time. Collections for March and April 1999, increased to $1.3 million and $1.7 million respectively. As of April 30,

1999, PCAs were responsible for $6.9 million of the $11.6 million

collected through cross-servicing so far in fiscal 1999. In addition,

repayment agreements totaling more than $23 million have been

established through the collection efforts of the PCAs.

Now, I would like to discuss some of the enhancements that FMS

is making to strengthen the use of current collection tools and increase future collections.

Administrative offset is one of the areas where FMS has placed

considerable emphasis. We have successfully expanded the TOP

system to be able to handle the increased volume of debts and payments as the administrative offset program continues to grow.

Significant groundwork has been laid in 1999 to increase the

number of payments and the debt types that are included in the

offset program. In 2000, FMS will implement SSA benefit offset

and expanded Federal salary offset. Implementation of these initiatives will significantly increase the volume of payments eligible for

offset.

FMS also remains firmly committed to increasing debt referrals

to TOP and continues to work with the Federal creditor agencies

to assist them in fully complying with the DCIA.

FMS is also working in conjunction with State governments to

make the tax refund offset program available to the States to collect delinquent State income tax debt as required by the Internal

Revenue Service Restructuring and Reform Act of 1998. Changes

will be made to the Treasury offset program so that the State income tax debt program will be available in January 2000.

In addition, FMS is working with the IRS to implement the continuous tax levy program. This was authorized by the Taxpayer Relief Act of 1997. Under this authority, delinquent tax debts are

matched against eligible Federal payments and the levy of 15 percent is assessed until the debt is collected. Initially, IRS will refer

approximately 5 million delinquent tax debts to FMS for collection.

Tax levy is targeted for implementation in the summer of 2000.

In order to improve the government’s debt portfolio and encourage Federal agencies to refer their debt to Treasury, FMS is working with creditor agencies to help them analyze their debt and better manage their debt portfolios. As part of this effort, we are identifying and resolving any barriers to refer eligible debts to Treasury, establishing agency referral schedules, developing a compliance plan and tracking mechanism, and working with the agencies

to assess the value and collectability of delinquent nontax debt.

As evidenced by the numbers, FMS has come a long way since

the enactment of the DCIA. While much remains to be done, we

are pleased with what has been accomplished so far.

Mr. Chairman and Ranking Member Turner, this concludes my

remarks. I would be happy to answer any questions that you may

have. Thank you.

Mr. HORN. Well, thank you very much, Commissioner.

[The prepared statement of Mr. Gregg follows:]

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Mr. HORN. We are going to have questions 10 minutes per individual. There’s Mr. Turner and myself. We will have one or two

show up. This is a very complicated issue, and it’s going to take

us each 10 minutes to get involved with some of the questions.

We appreciate very much what the Treasury is trying to do in

terms of the various departments, but I would like to see where we

are and where we might be because we had, at the time the Debt

Collection Improvement Act became law, which Mrs. Maloney and

I worked on together, only $2 billion of approximately $8 billion of

debt eligible for cross-servicing referral for collection.

Now, in light of the referral record, what efforts are being undertaken by your particular agency, to Mr. Gregg, to encourage agencies to refer their debts? Give me a feel for who the most reluctant

agencies are to turn it over and what do you think the reason for

not turning it over is.

Mr. GREGG. One of the things that we’ve been doing for the last

year, and we put a lot of emphasis on this, is to make sure we understand if there are any hurdles in having more cross-servicing

debt referred to us. Another thing we’ve done is to work to simplify

the automated systems.

Initially, I think there were some hurdles. We had a different

system for the offset program and a different system for cross-servicing and that made it somewhat difficult for some of the agencies

to come in. It wasn’t a really streamlined process. We have worked

to simplify and improve those systems. I think that has helped. I

don’t think we have barriers there any more.

The other thing we’ve done is work hard with each of the agencies. Recently we’ve had commitments from many of the agencies

on how they plan to improve over the next year, and that’s something that we have certainly been encouraging. I think it has the

attention of the agencies, and we’re making some progress.

Mr. HORN. Have you ever had the situation where the Secretary

of the Treasury picked up the telephone and called one of the recalcitrant Cabinet secretaries in this area, who probably doesn’t even

know what’s going on in some of these areas. Has anybody in

Treasury, either the Secretary, Under Secretary, said, ‘‘hey, what’s

going on over there fellows? You know, we’ve got a program here.

We would like to look good.’’

Mr. HAMMOND. There certainly have been instances where the

Under Secretary, especially when Under Secretary Hawke was in

that position, has made personal phone calls to key agency officials

to discuss compliance with the debt collection program. The Secretary has shown a very keen interest in the overall management

of this program.

But I think what we have tried to do is establish very strong

working relationships with the agencies and involve very high-level

political support where necessary.

I might add that Deputy Secretary Summers is particularly interested in the debt collection program and has a special focus on

child support.

Mr. HORN. I’m delighted to hear that. I know Secretary Rubin

was one of the few secretaries that cared a lot about the administration of these programs.

Now, Under Secretary Hawke is still in this role?

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Mr. HAMMOND. No, Under Secretary Hawke has moved on to be

the Comptroller of the Currency at Treasury, and the new Under

Secretary, Gary Gensler, is very committed as well to the debt collection program.

Mr. HORN. Well, I’m glad to hear it, and we look forward to

working with both of the new appointees.

I guess I need to know some of the reasons, in your judgment—

we will ask the agencies, obviously—as to why they’re not referring

it. What do you think is the reason for that?

Mr. GREGG. As I said before, I think partly it had been systems

in the cross-servicing area, and I think we’ve worked through that.

I think in other cases it’s just trying to sit back and figure out

what’s best for a particular program. Some of these are very complicated. And unlike the offset program where it runs through and

is matched against payments, cross-servicing is turning it over to

FMS for collection.

I think in some cases there have been some complications with

the debt and trying to figure out whether or not that’s the best

thing for the program.

I think a third thing is that agencies have been in some cases

reluctant to say that they can’t do it as well as FMS can do it. And

that’s something that I think that we’ve largely overcome, but it’s

been a bit slower than I would have liked.

Mr. HORN. If I were an agency head, I would be so delighted that

you’re collecting the debts I couldn’t tell you how delighted I’d be.

Now, if I were an agency head I would try not to be the heavy,

and you know if you’re in agriculture, you want to help farmers.

I understand that. I’ve been a farmer. It’s a tough existence.

No. 2, if you’re over in HUD, you want to not sit down on somebody and squash them. You would like somebody else to face up to

getting the debt collected.

Now is that a motive here or what? Or are you just too charitable

to your fellow agencies?

Mr. GREGG. I think if you look at the increase that we’ve had in

the offset program, that would tend to suggest that certainly

there’s a wish to protect constituents because those debts are also

being collected.

I think on the cross-servicing, again, in some cases there is concern that it is done right, and we’ve certainly found this past year

in the tax refund offset program that it is heavy lifting to deal with

all of the phone calls that we have received over this past year—

in handling the calls and doing a good job.

I think in some cases agencies want to make sure that we do

that right, and that’s fair. We’ve received over 1.5 million telephone

calls through our Birmingham debt collection center since the beginning of this fiscal year primarily as a result of tax refund offset.

And we have to be prepared, and I think we are, to handle those

calls and everything else that goes along with the program and do

a good job.

Mr. HORN. Well, that’s commendable.

Mr. Secretary, how many of those debt programs depend upon recapturing the debts so they can then give further loans? Is there

any situation where the more you can bring back in loans you’ve

already put out and get them to pay it off, you could then recycle

35

them? Certainly with some of the student aid funds and universities where you have had that experiment, it depends on collection

to help the next wave through.

Mr. HAMMOND. Right. There are some programs, in essence, that

work like a resolving fund where, in essence, the payment activity

is necessary to fund it, but I think primarily what you find is that

the impact of delinquencies and nonrepayment affects the subsidy

rate under credit reform. And, therefore, it becomes a factor in the

size of next year’s program as you look at the amount of appropriation necessary to support the program.

Obviously, the higher level of delinquencies that you have and

lack of repayment, the higher the subsidy amount and more appropriation is needed. In today’s environment that is a very real issue

as far as managing the program as appropriations become more

and more difficult to obtain.

Mr. HORN. Well, just thinking along that line, it would seem to

me that unless there’s an incentive to get that debt so the next

group of people can be eligible and have money available that

maybe we ought to just tighten up at this end.

Now, I realize a lot of these subject matter authorization committees are really parts of the department, not necessarily the oversight agency, to be charitable about it. I would think maybe that’s

an incentive if we can get somebody to face up to that. If you don’t

collect the debt, you don’t get more money, but collect the debt, you

will have the money.

Mr. HAMMOND. Yes, I think it’s obviously a very difficult and also

a very complicated issue as you look at guaranteed programs versus direct funding type of situations where there may be no upfront

outlay of Federal funds but there certainly is a commitment of Federal credit. I think as people walk through the framework of Federal credit reform, it gives a real opportunity to take a hard look

at the costs of these programs and reflect delinquencies and repayment within the overall appropriation.

But I really think every program certainly has unique characteristics that you would want to look at before you put some sort of

overall rule in place in that regard.

Mr. HORN. Let me ask you, Commissioner Gregg. Have we established performance goals for the rate of collection of referred debt

within FMS?

Mr. GREGG. Yes, we have, Mr. Chairman. As Don alluded to earlier, actually we have exceeded it as a result of the increase that

we’ve had in the tax refund offset collections this year, and that’s

good. On the other hand, we need to continue to make sure that

program works properly, given the huge amounts. But that doesn’t

mean that we’re pausing because of the need to deal with more

cross-servicing activity and to have more debt referred so that they

can go get into our collection stream and then to the PCAs and also

to do more with the administrative offset program, and we’re certainly focused on doing just that.

Mr. HORN. Do you feel that your performance goals are being

achieved? And, if not, what else do you need to do?

Mr. GREGG. Overall, what we did is set a dollar performance

goal; and we have, in fact, exceeded that this year and even next

year’s goal. But we need to get down to doing more with bringing

36

in the administrative offset program. And to do that what we envisioned for the next year is to bring in some additional major payment streams like additional salary payments. We are doing some

of that now, but we need to expand that, and we also need to include benefit payments as part of the offset program.

On the other hand, we will also be working to increase the

amount of the debts that are eligible. We have two major additions

that will be coming in next year, the State tax debt that will begin

with five States, beginning in January of next year; and we have

the tax levy, which is a very large program, and working with IRS

we’re planning to implement that in the summer of 2000.

Mr. HORN. Thank you.

Eleven minutes for the ranking member to ask questions, Mr.

Turner of Texas.

Mr. TURNER. Thank you, Mr. Chairman.

Just to followup, Commissioner, regarding the tax levy debt program. You mentioned earlier that the way that works is you had

a 15 percent—describe how that program will work.

Mr. GREGG. It’s been around for a long time, and it wasn’t part

of the Debt Collection Improvement Act. But what we will do is to

work with the IRS, and they will certify to us that these tax debts

are due and that the taxpayer has received notice that they are delinquent. They will then refer those debts to us.

And I think the original plan is to begin with consumer debt totaling roughly 5 million debts and refer that to us for collection. We

will then match that against the payments that we make, whether

it’s salary or benefit payments, and impose a 15 percent levy, on

the payments until the amount that’s due is collected.

Mr. TURNER. It’s a one-time 15 percent?

Mr. GREGG. Yes.

Mr. TURNER. One area I wanted to spend a little bit of time on,

I don’t know which one to ask you, but I wanted to get a full description of your experience with the private collection agencies.

And perhaps it would be helpful for you first just to describe what

that—your relationship is with the private collection agencies,

what kind of contract you have, what kind of reimbursement does

it provide for the private agency.

And then in your earlier comments, Commissioner, you made

some reference to a referral time to the private collection agency

after 30 days, and I was a little unclear on how that worked. That

seemed like a pretty short period of time before you turned it over

to a private collection agency. But if you would, describe your experience, how that works and whether you think it’s a good thing or

not.

Mr. GREGG. The use of private collection agencies was strongly

encouraged by this subcommittee, and we have made a very effective use of them. The contract is a 1-year contract with three 1-

year options for renewal. The way that it works is in the crossservicing areas, what we wanted to do is, looking at debt collection

as a whole, make the best use and best return for the American

taxpayer.

If debts are referred to us from the creditor agencies, we, within

FMS, work that debt for 30 days. That isn’t very long but sometimes, as Congresswoman Maloney pointed out on numerous occaVerDate 11-MAY-2000 08:20 Jul 25, 2000 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 C:\DOCS\63309.TXT HGOVREF1 PsN: HGOVREF1
37

sions, just getting a letter on Treasury letterhead helped, and, in

fact, it has helped.

We work that debt. We basically contact the debtor and try to

give them a call. We also send the letter out. And if we’re unsuccessful within the 30-day time period, then we pass that on to the

private collection agencies; and in many cases we have been successful.

We’ve collected, since we started this a little over a year ago,

about $13.3 million within our Birmingham office where we have

an office that handles this for us and another $56 million in repayment agreements. Again that’s within FMS. At that point, it goes

to the PCAs.

Mr. TURNER. Tell me why the 30 days. It does seem like that’s

an awful—you write a letter, you make a phone call, and if the

payment hasn’t shown up in your office in 30 days from what, from

the date you initially began the effort?

Mr. GREGG. Yes.

Mr. TURNER. Which is the issuance of the letter?

Mr. GREGG. I think the reason is that we wanted to make maximum use of private sector organizations that do this for a living

and have a lot of expertise. So we have a contract with 12 PCAs

who are in fact expert at this and so we wanted to have an opportunity to make one more effort from the government to collect. But

if we’re unsuccessful, we turn it over to them fairly quickly, and

30 days is quick.

Mr. TURNER. So if you send the letter on day 1, you made a

phone call on day 7, and you don’t receive any payment on day 30,

you turn it over to the private collection agency. And what if on

day 32 you get a check in the mail from the debtor? Who gets credit for the receipt of the payment?

Mr. GREGG. My attorneys may correct me on this, but I think in

that case it would come back to FMS, and we would, ‘‘take credit

for it.’’ The contract with the PCAs is a performance-based contract. They receive 23 percent of what they collect.

And, also, there’s a provision in there for a 2 percent bonus depending on how well they do, and all the debts are referred to the

PCAs based on a calculation that distributes the debt randomly to

the PCAs, so that no one gets any favoritism on what’s referred to

them. It’s based on a formula.

The debt is then worked by the PCAs, and to accept that collections are made, then it goes into the government.

Mr. TURNER. So the standard fee is 23 percent, plus a 2 percent

bonus?

Mr. GREGG. Yes, and not all the PCAs get the bonus. It again

is based on performance.

Mr. TURNER. Is there a standard measure of performance that

makes the PCAs eligible for the 2 percent or is that a negotiated

thing with each of the PCAs?

Mr. GREGG. It’s standard, and it’s based on a combination of criteria. And they’re all aware of what the standard is, and I think

they get monthly reports on how well they’re doing.

Mr. TURNER. And do you have enough experience with the PCAs

now to be able to distinguish the ones that seem to be doing a good

job from those that are not?

38

Mr. GREGG. There are certainly some that have done quite a bit

better than others. And I’m not sure exactly why that is, but it has

been noticeable.

Mr. TURNER. And do you have discretion to then shift the referrals to the more successful PCAs, or are you doing that?

Mr. GREGG. Under the contract, we continue referring with the

exception of the bonus, based on what the contract provides and

the criteria for that. I think at the time when we extend the contracts, that will have to be something that we look at, to see what

approach we want to take going forward.

I might add one other comment, Mr. Turner. At FMS, we’ve

spent a considerable amount of resources and time making sure

that the right levels of performance are provided by the PCAs in

terms of how they treat the individuals, and I must say that

they’ve done very well. We have the ability to monitor phone calls,

and we track that very carefully. We did that from the very beginning of the program. And at least from my perspective, the handling of the debt is being done very well by the PCAs, and I’m certainly satisfied with the use of them.

Mr. HAMMOND. If I might just add to that, just from a departmental standpoint, we certainly would become aware of high volumes of complaint activity, and I can’t remember the last time I

saw a congressional or a constituent letter reflecting on a complaint dealing with a private collection agency in their approach

under the debt collection program. I think it’s gone as smoothly as

one could certainly have imagined.

Mr. TURNER. How long a contract does the PCA have with you?

Mr. GREGG. I believe it is a 1-year contract with three 1-year options for renewal.

Mr. HAMMOND. Yes, three 1-year renewal options at the end.

Mr. TURNER. And so your agreement with all of them that you

contract with is that your referrals of the debt will be random so

that no agency gets any preference over what referral they get?

Mr. HAMMOND. The mix of the debt is random. The percentage

of the amount of debt that you get after the initial period starts

to be based on performance. So what you find is that there’s no

preference given for one type of debt over another. That is always

a random assignment. But as you become better at collecting debt,

you get a higher percentage of the overall referral.

Mr. TURNER. So if your performance is good, you will get more

referrals. If your performance is not, you may drop off the map in

terms of business?

Mr. HAMMOND. They all continue to get referrals but top performers get more.

Mr. TURNER. How do you become eligible for the 2 percent

bonus?

Mr. GREGG. Again, there are criteria that are based strictly on

performance. I think there are four or five elements of that and

that’s known to the PCAs and we provide them information. So

there should be no surprises.

Mr. HAMMOND. My understanding, it’s mathematical—as Dick

had mentioned. It’s an actual computation based on performance

and a weighting of factors.

Mr. TURNER. OK. Thank you, Mr. Chairman.

39

Mr. HORN. Well, thank you very much. That’s a very good line

of questioning.

I now, without objection, will yield to the gentleman from Oregon, Mr. Walden. We always try to accommodate Members’ situations. He’s got to be in three places over the next 20 minutes. So

go ahead.

Mr. WALDEN. Thank you, Mr. Chairman.

Mr. HORN. And his statement will be after Mr. Turner’s opening

statement in the record.

Mr. WALDEN. Thank you very much, Mr. Chairman. And thank

you to members of the subcommittee as well for that.

This is an issue that I have developed some interest in since

coming to Congress. Having been a small business owner for 13

years, I have watched on that arena of the issue as well.

Mr. Chairman, I want to thank you for your ongoing leadership

in Federal debt collection issues. I think I can speak for all Americans in placing my appreciation for your pursuit of responsible debt

collection policies.

I would like to speak for a moment about the importance of insuring Federal agencies create incentives for debt collection contractors to obtain voluntary payments from the debtors before instituting involuntary collection actions such as wage garnishment or

litigation against that debtor. I understand the importance of taking those steps as well.

I say this because, under the Department of Education contract,

for example, a contractor has a greater incentive to collect a debt

through involuntary administrative wage desistement procedures

rather than through the voluntary payments from the debtor. This

is because the methodology used by the Department of Education

to evaluate the performance of its contractors, allocate accounts

among contractors and paid bonuses is weighted in favor of wage

garnishment and deemphasizes voluntary collections.

The preparation of cases for litigation is also given substantial

weight. As the gentleman from California and I have discussed, I

would like to see the Department of Education alter its approach

to give voluntary collections greater emphasis over coercive methods. In my view, the performance of the debt collection contractor

in achieving net-back collections for the government should receive

a higher percentage than 75 percent or so of the weighting and

evaluation methodology, and the preparation of cases for litigation

or wage garnishment should receive no more than 20 or 25 percent

defined.

These reforms would help the Federal Government I think do a

better job of collecting its debts in an efficient and voluntary manner. I look forward to working with the chairman and the administration, members of the minority of this committee to continue addressing these issues and making Federal debt collection more voluntary and more effective.

Thank you, Mr. Chairman. And if either of the witnesses would

like to address those issues or not.

Mr. HORN. Would you want to respond to that?

Mr. HAMMOND. I would be happy to begin.

First, well, we do have—under the private collection agency contract is value awarded for voluntary payment agreements, and our

40

experience to date has shown that they’ve been used quite extensively. In fact, at this point we have two to one voluntary repayment agreements from the PCA side to actual collections through

the collection actions themselves.

But perhaps even more significantly, during that 30-day period

before debts are referred to the private collection agencies, we

found that we’ve entered into, as Dick mentioned, $56 million

worth of voluntary repayment agreements, taking the debt completely off the table and then eliminating it from referral to the

PCA at this point.

So while we’ve collected about $23 million both between our own

center and through the PCAs in actual debt collection actions, we

have an additional $80 million in voluntary repayment agreements.

It’s obviously a very important part of our program.

One of the features we offer as part of that is the capability for

them to enter into what we call a debit relationship where, in essence, the payment is paid out of their checking account on a recurring basis every month. Once they set up the agreement, then they

really don’t have to worry about it anymore. And we’ve had some

good success with that as well.

Mr. WALDEN. Mr. Gregg.

Mr. GREGG. The only other comment I would make, and this varies from creditor agencies to creditor agencies, but in some cases

they actually give us some discretion to settle at less than 100

cents on the dollar. Depending on the circumstances, such as the

age of debts. So we have some discretion there again with the view

toward trying to get what makes most sense to the government

done as opposed to saying, well, this is what you owe and this is

what you’ve got to pay.

Mr. WALDEN. Thanks, Mr. Chairman. That’s the point I would

make, is that the extent that—voluntary agreements—sometimes I

found in my own business in 13 years, you can go a long way if

you can sit down and sometimes settle these things without going

through the formalized collection process, and sometimes even if

you get the judgment, it’s worthless, frankly.

Now, the Treasury Department has a little more power than the

average small business in making those judgments work out, but

clearly it seems to me that if we can incent companies to do those

voluntary approaches through how their contracts work, as opposed

to just rewarding litigation more, I think we would all benefit

more. That’s the point I wanted to make.

Thank you, Mr. Chairman.

Mr. HORN. Thank you very much.

I now yield 11 minutes to the gentlewoman from Illinois, Mrs.

Biggert, the vice chairman of the subcommittee.

Mrs. BIGGERT. Thank you, Mr. Chairman.

Both of you in your testimony talked about child support, and I

would like to go into that a little bit more.

I think that having served in the Illinois Legislature and havng

seen the problems that we had with trying to collect, it seems like

you made great strides in this past year in debt collection, and I

wondered how it worked in combination with the States. If you

could just go over the process a little bit?

41

Mr. HAMMOND. Let me give you a quick overview. I would be

happy to walk through how we interact.

The States deal with the Health and Human Services Department’s Office of Child Support Enforcement and through that

mechanism refer debts to HHS which, in turn, refers them to us,

noting what programs they want to participate in. By HHS regulation, all States are required to submit their child support delinquencies for tax refund offset and States have the option but are

not required to send their child support debts in for other administrative offset collection through the offset program.

So our system actually differentiates by the type of payment

going through, whether or not an eligible child support debt can be

offset, for example, from a tax refund or alternatively from a Federal salary payment. And that type of differentiation goes on within the system itself.

We currently obviously have all 50 States participating in the tax

refund offset program, and that’s been a very active program for

a number of years, but just with the enhancements this year alone,

we’ve collected an additional $230 million over what we did the last

year.

Mrs. BIGGERT. What do you mean by—what enhancements have

been possible?

Mr. HAMMOND. For example, we now match both Social Security

numbers on a joint tax return, whereas previously the system only

looked for the primary Social Security number. So, in essence, by—

people had the opportunity, I think, to avoid the tax refund offset

by switching the order or sequencing on the return. That no longer

is the circumstance.

In addition, we allow for more active debt management of the

file. It used to be for tax refund offset you had to submit one file

by a certain date, and that was the file you were left with for the

season. You’re now allowed to weekly update that file and bring in

additional debts, and we found that that flexibility has allowed us

to bring in more information as well.

Mrs. BIGGERT. In your statement, you said that the challenge

over the next year is to increase the number of States that fully

participate in the administrative offset——

Mr. HAMMOND. Right.

Mrs. BIGGERT [continuing]. Components. About how many States

really do fully participate right now?

Mr. HAMMOND. Right now we have 22 States that are participating in the administrative offset program. It’s a very difficult program for us to bring up, and so it has gone a little slower than we

would have liked.

Primarily, the complexity comes from the fact that child support

has been a very active debt collection field for some time. So, for

example, when we bring a Federal retiree’s Federal retirement payment into the offset program, that retirement payment already

may be garnished at the State level. We have to make sure that

for those obligations that where there’s already an existing garnishment that we don’t come in and offset again, in essence collecting the same debt twice. We’ve had to go through and redesign our

systems to be able to accommodate that.

42

We’re now in a position to do that. And as we get more and more

payment streams brought into the Federal offset system, then what

we will have is more and more additional State interests in participating.

Mrs. BIGGERT. It seems that so much of the problem is that

States have not been able to find somebody. But if you can find

them through the tax return, then the next year does the State

then—do they notify where this person is so that they can pursue

them, so you might get that double payment?

Mr. HAMMOND. I would have to defer to HHS. But I believe that

HHS does a very active job of both checking residences off the tax

files, as well as they now have the data base of new hires that

they’ve been developing which allows them to basically—allows

them to track people based on changes in employment.

And from that circumstance, if someone were to frequently

change jobs to avoid paying child support obligations, the new hire

data base in essence facilitates that capability for HHS to find

them.

Mrs. BIGGERT. So there really is interaction between the States—

I know we pass bills that we could go into the State and have the

ability to send the letters in to collect theirs. So really that might

not even be so necessary now that there seems to be the

national——

Mr. HAMMOND. Well, I think this is a program where the more

effort that you can bring to bear on the collection of the child support, the more success you have. It’s very complicated because of

the interstate aspects of it and people with a high level of mobility.

I think the more cooperation you have and the more resources

available to deal with this—because it certainly is a very large national issue.

Mrs. BIGGERT. When a debt is collected, is there a deduction or

a fee? Since it’s not a private agency doing that, is there a fee for

that?

Mr. HAMMOND. There is a—what we call an offset fee or a transaction fee, which is deducted from the amount collected and then,

depending upon the nature of the debt, can either be added on to

the debt that’s outstanding or can be paid, you know, just from the

collection that—before it’s passed through.

It’s a flat dollar fee for the offset program, and I believe it’s currently about $6 an offset—I’m sorry, about $7.50.

Mrs. BIGGERT. So that would be monthly?

Mr. HAMMOND. If someone were a retiree and, for example, you

were offsetting, let’s say, $100 a month out of someone’s retirement

payment, then each month there would be a $7.50 charge.

One of the things that we’ve been looking at is how to deal with

recurring payments for something like that, a child support debt,

where the debt may be large and you’re going to see an ongoing

series of offsets.

Mrs. BIGGERT. How would that compare to a private agency?

Mr. HAMMOND. I would suspect it’s dramatically cheaper, but it’s

not really a fair comparison, because I’m not sure any private agency really has the same type of offset capability given the stream of

payments that we have available to us.

43

Mrs. BIGGERT. OK. Then according to the Treasury’s fiscal year

1998 accountability report, the Department of Education and the

HHS were granted waivers from a Debt Collection Improvement

Act cross-servicing provision.

Mr. HAMMOND. Right.

Mrs. BIGGERT. And, in addition, the December 1996, Federal

Debt Collection Center Designation Policy Procedures and Standards states that, after 1 year, Treasury will review the agency’s

debt collection operations to determine whether the continuation of

the waiver is warranted.

When will the review take place for education and HHS?

Mr. GREGG. I’m not sure exactly. Both of those were authorized

fairly recently, I believe. But we are committed to review those.

I must also say that in the approach that we’ve taken in granting

those authorizations for debt collections status we’ve been pretty

careful with them. And I think in the case of HHS, it was for a

specific category of debts; and for Education, it was based on their

overall performance.

But we’ve had requests from other agencies, and we’ve looked at

those pretty hard with the view of whether or not in our view it

made sense to authorize them as debt collection centers, even for

their own debts, because of the opportunities for some of the programs that we have. So we’ve taken a fairly stringent view on authorizing those.

Mrs. BIGGERT. But HHS was granted a waiver for servicing their

own debts and yet denied a governmentwide debt collection center

designation?

Mr. GREGG. Yes, that’s correct.

Mrs. BIGGERT. Why was that?

Mr. GREGG. I think it was not for all of their debts either, I don’t

believe. But it was for some category. And it was based on our view

of their knowledge of the program and we thought it would be better for debt collection as a whole, rather than sending that to us.

But we didn’t feel that they necessarily had the expertise governmentwide to do that and so we denied them for a broader crossservicing.

Mrs. BIGGERT. Thank you. I yield back the balance of my time.

Mr. HORN. Thank you very much.

The gentleman from Texas, Mr. Turner, 10 minutes.

Mr. TURNER. Thank you, Mr. Chairman.

Can a private child support collection agency that operates, many

of them, in our States, can they access your offset program after

they’ve gotten a judgment or some kind of court order?

Mr. HAMMOND. The short answer would be no. I assume when

you say private you’re talking about the situations where they’ve

contracted with the State in essence to collect or take more aggressive action within the State for the State-administered child support obligations.

The offset program, those same debts, depending upon how the

State allocates them, could in fact be in the offset program, but

they would not be to the credit of the subcontractor or the contractor for the State. It would simply be collected on behalf of the State

through the offset program. But you can have concurrent debt collection activities taking place. That’s why it’s very important to

44

have systems that are robust enough to update the status of the

debt on a regular basis, because people do pay or, in addition, there

may be additional judgments in making the debt even larger. But

you want to have that information as current as possible in the

system.

Mr. TURNER. So the State operating a child support collection activity has access to the offset program, but a private agency does

not?

Mr. HAMMOND. Well, the private agency—I guess I’m a little bit

confused. If the State were, for example, to have sold its delinquent

child support obligations, I’m not sure if any States are in a position to do that, then they would not—in that circumstance, they

would not have access to the offset program, because they would

be privately held.

If, on the other hand, those debts were still considered debts administered by the State, whether the State had contracted out the

work to, you know, similar to our contract with private collection

agencies, then referral into the offset program through HHS would

still be available.

Mr. TURNER. I guess what I need to have you comment on,

what’s the public policy reason for making the distinction—obviously, you have a lot of leverage with the offset program in collecting child support. Would it be advisable from a public policy vantage point to allow further collections of child support through the

offset program?

Mr. HAMMOND. It actually raises some very difficult policy issues,

surprisingly, having to do with access to confidential tax information. There are some very strict requirements on the IRS, in addition to, anyone else who handles taxpayer information. And since

the primary source of child support collections through the offset

program are tax refund offsets, there are some very difficult issues

related to sharing information related to—in essence, someone’s tax

status at the same time that collection action is being taken by a

private debt collector.

IRS works very diligently with HHS on trying to deal with these

issues, but as more and more States contract out their child support activity, the issues get more and more complicated.

Mr. TURNER. If a private child support collection agency gets an

order for garnishment of wages, they obviously can collect somebody’s who is earning a salary. Is there any way under current law

that they can get the income tax refund that may be due to the

debtor?

Mr. HAMMOND. If the private collection agency is acting on behalf

of the State, I believe that they can participate through the offset

program fully. If—and I realize this is a distinction I’m having a

little trouble with this morning, to be honest with you, is knowing

who actually owns that debt, and I think there’s a fact pattern here

as to whether, if the debt is owned by the private collection agency,

they do not have the same rights as coming in and participating

at the Federal law as if the debt is still owned by the State, even

though it may be being serviced by a private collection agency.

So I think there’s a level of legal distinctions here that I would

have to understand more fully before I could probably answer the

45

question. We could certainly get more information and provide you

a followup answer after the hearing.

Mr. TURNER. Commissioner, do you have any thoughts on this

subject?

Mr. GREGG. I think Don covered it about as well as I could. Really, when debts are referred to us for child support, we deal really

with HHS. And I don’t fully understand how much of that is coming in through State agencies and how much is coming in from private collection agencies. We will have to look into that and get back

to you.

Mr. HORN. Without objection, your answer will be inserted at

this point in the record.

[The information referred to follows:]

According to the Office of Child Support Enforcement (OCSE), it does not receive

information from its state agencies as to whether referrals are processed through

the state or a private collection agency. All referrals are received by OCSE through

a single point of entry and are not distinguished by the criteria requested.

Mr. HORN. If I might ask one question following on this.

When we got into this bill in 1996, I had long discussions with

the IRS. And when I said ‘‘since you aren’t organized to collect,

why don’t you use private bill collectors?’’ Well, privacy was the answer. And I don’t see that. Because all we’re asking is that you tell

me what they owe the U.S. Government and then give them the

address and let them get the debt. And, if there’s a problem on

their taxes or anything like that, fine, you then refer them to the

experts in the IRS if it’s an income tax situation.

Now, I don’t know what is so complicated about that. There’s a

debt owed, knock on the door, try to get them into a payment plan.

And you don’t have to get into the details or the tax collector

doesn’t have to know that. All they know is the final amount owed

the Federal Government. What’s wrong with that statement?

Mr. HAMMOND. Not being an attorney, I’m sure I won’t give it all

the justice that it deserves. But the IRS has a provision in the Internal Revenue Code, section 6103, which has to do with the release and handling of confidential taxpayer information. How that

provision is interpreted and applied is something that tends to be

extremely more complicated than it might initially appear on its

face.

That is something that is administered by the attorneys over at

the Internal Revenue Service; and they have, and rightfully so,

given that it carries personal penalties attached to the release of

that information, been very conservative and judicious in how they

interpret it, that language.

Mr. HORN. Well, I just wonder, once it gets into your process, it’s

a debt of the United States. They don’t have to know whether the

taxes are paid or anything else. And they don’t really know that.

It’s a debt.

Mr. HAMMOND. And for most debt streams that works exactly

like that. Unfortunately, with child support, there are different

treatments of the collected debt. If it’s offset against a tax refund

payment, it gets a different allocation structure. So it has to actually be identified within the output as to whether or not it came

from a tax refund or say a Federal salary payment, and that adds

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another level of complexity to the actual collection of child support

obligations.

Child support may, just as an aside, may be the single most complicated program that I’ve come across in a long time as far as the

different rules and allocation structures. It even depends whether

or not the debt is owed by the delinquent parent directly or whether or not the State-administered TANF benefits in the interim in

which case then the State is titled to reclaim before the family.

And there’s a very complicated allocation and categorization process attached to it.

Mr. TURNER. I guess that’s how we first got into Federal involvement. Collecting child support was the justification offset, the welfare payments being made to the custodial parent. But it does seem

to be worthwhile at least explore the idea of giving a custodial parent access to our system of offsets for tax payments, whether they

be a welfare mother or be a nonwelfare mother.

Mr. HAMMOND. I believe most custodial parents—most States

offer custodial parents the opportunity to bring judgments into the

State system by paying a processing fee and then have it included

in the amount referred by the State to HHS.

From our standpoint, we wouldn’t necessarily see that distinction, but the State when they got the collections back would know

where to allocate the various payments back.

Mr. TURNER. Let me turn to another subject.

I notice that one of the departments that has not yet made referrals to you of delinquent debt is the Department of Defense. What

are the complexities involved with Department of Defense debts?

I’ve been told there’s about $1.4 billion in delinquent debts that is

eligible for cross-servicing and $900 million that’s eligible for offset.

What’s the explanation from your vantage point of the lack of

progress in working with the Department of Defense?

Mr. HAMMOND. I believe it’s a couplefold; and, like anything involving the Department of Defense, it’s somewhat complicated. But

I believe it can really be boiled down to an issue of primarily those

debts, as I understand it, are contract-related obligations and

therefore have to be viewed in the overall administration of the

contract. They may in many cases be, for example, contract overpayments or claims related to contract nonperformance.

And then, in addition, the capability of interfacing with the Department of Defense’s systems to allow for the effective referral of

that information is, of course, always an issue.

Mr. TURNER. Commissioner, do you have any comments on it?

Mr. GREGG. I think in the cross-servicing area, there’s a sizable

amount that we’re talking about with the Department of Defense

right now on whether or not that is actually eligible to be referred

to us for cross-servicing. We hope to have an answer to that before

too long. But it’s a significant amount; and depending on how that

is finally resolved, these figures will either look a lot better or they

will look as they are right now.

Mr. TURNER. All right. Thank you, Mr. Chairman.

Mr. HORN. Do you have any more questions? Feel free.

Mr. TURNER. No, I’m fine.

Mr. HORN. Mrs. Biggert, do you have any other questions?

Mrs. BIGGERT. No.

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Mr. HORN. I have one last question. The rest, if you don’t mind,

we will submit to you and you can answer them at your leisure.

The last question is this. Under the Debt Collection Improvement

Act of 1996, it required that there would be a report no later than

April 1999, on a one-time basis to Congress on the collection services provided by the Treasury and the other entities collecting on

behalf of the Federal agencies. When do you expect to provide the

report to Congress?

Mr. HAMMOND. That report is currently going through clearance

at the Treasury Department. I would like to say that was the most

efficient process in the world. Sometimes it can take a little longer

than we would all hope. We would expect to have it to you very

shortly.

Mr. HORN. We understand that.

Well, we thank you. You’ve been excellent witnesses. I think

we’ve learned a lot this morning as to what is happening in the

process, and we appreciate you coming.

Mr. GREGG. Thank you, Mr. Chairman.

Mr. HORN. Thank you very much.

Mr. HAMMOND. Thank you.

Mr. HORN. Now, we will ask panel two to come forward: Mr.

Thomas Pestka, the Director of Debt Collection Service, the U.S.

Department of Education; Sally Thompson, Chief Financial Officer,

U.S. Department of Agriculture; and she’s accompanied by Richard

M. Guyer, the Director of the Fiscal Policy Division. Saul Ramirez,

Deputy Secretary, U.S. Department of Health and Human Services;

accompanied by David Gibbons, Director of Office of Budget, and

Victoria L. Bateman, Comptroller, Federal Housing Administration.

So if all of the ones I named will stand and see if we can get

them around the table here or sit right behind the principals.

[Witnesses sworn.]

Mr. HORN. The clerk will note six heads have shaken positively.

OK. Thank you for coming; and we will start with Mr. Pestka,

the Director of Debt Collection Service for the U.S. Department of

Education.

Mr. Pestka.

STATEMENTS OF THOMAS J. PESTKA, DIRECTOR, DEBT COLLECTION SERVICE, U.S. DEPARTMENT OF EDUCATION;

SALLY THOMPSON, CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF AGRICULTURE; RICHARD M. GUYER, DIRECTOR, FISCAL POLICY DIVISION; SAUL RAMIREZ, DEPUTY

SECRETARY, U.S. DEPARTMENT OF HOUSING AND URBAN

DEVELOPMENT; DAVID GIBBONS, DIRECTOR, OFFICE OF

BUDGET; AND VICTORIA L. BATEMAN, COMPTROLLER, FEDERAL HOUSING ADMINISTRATION

Mr. PESTKA. Mr. Chairman and members of the subcommittee,

I’m pleased to be here today to discuss with you the implementation of the Debt Collection Improvement Act of 1996 by the Department of Education. The Department has undertaken a broad range

of activities to continually improve collection efforts in the Office of

Student Financial Assistance, Debt Collection Service.

We are committed to expanding our efforts. Last year, in recognition of our performance, the Department of the Treasury granted

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the Office of Student Financial Assistance a waiver to service its

own student loan debts—as a debt collection center.

Also last year, the Office of Student Financial Assistance was

designated the government’s first performance-based organization.

Under the performance-based organization, we expect continued refinement of our debt collection efforts and the realization of greater

operating efficiencies as new authorities are implemented.

One performance-based organization priority will be to enhance

collaborative efforts with schools, guaranty agencies and lenders to

reduce the likelihood of default by borrowers in both the guaranteed and direct student loan programs. Efforts will also be made

to emulate best in business practices by the private sector to improve our understanding of our portfolio and begin tailoring our

collection efforts, recognizing the varying needs of different portfolio segments.

The Department of Education has been the primary source of

federally funded student loans. Students have received about $300

billion in loans since the enactment of the Higher Education Act

of 1965. The vast majority of student loan borrowers have repaid

or are currently repaying their loans. However, some borrowers default on their loans.

Our challenge is to collect as much as possible on defaulted student loans. The challenge is considerable because student loans are

inherently risky. Creditworthiness is not a prerequisite for student

loan eligibility. The government and private lenders are left with

no collateral in the event of default. Student loan borrowers frequently relocate after having left school. This creates a problem

with servicing and collecting student loans.

The Department has undertaken many initiatives to improve collections on defaulted loans. From the late 1970’s through the

1990’s, the Department implemented a number of collection mechanisms that were subsequently required of all agencies by the Debt

Collection Improvement Act.

I would like to highlight some of our recent collection efforts. For

Treasury’s 1999 offset year, the Department and the student loan

guaranty agencies referred $16 billion in past-due receivables to

Treasury for offset. For the first 8 months of fiscal year 1999, the

Department’s offsets are approaching $700 million. This represents

the most successful year ever by the Department. Treasury offsets

have totaled $1.8 billion since fiscal year 1997.

Since 1979, the Debt Collection Service continued to expand its

partnerships with private collection agencies. Partnering with private collection agencies has been one of our most successful initiatives. We now have 17 private collection agencies under contract.

Our most recent contract has several performance-based evaluation

measures.

Since fiscal year 1997, private collection agencies have generated

$405 million in collections. The Debt Collection Service also recognizes significant collections from accounts that are serviced by our

regional services in partnership with our public inquiry contractors.

These collections totaled $242 million since fiscal 1997.

Administrative wage garnishment has become an effective tool in

performing our collections on student loans. We began using it 4

years ago. About 100,000 defaulted loans are now in garnishment

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status. In order to maximize the effectiveness of wage garnishment,

we want to continue to work with Congress to develop legislation

as proposed in the President’s budget that would provide access to

other Federal data bases, such as the National Directory of New

Hires for borrower employment information. We believe such access

will allow us to expand the use of wage garnishment and ultimately generate significantly greater collections for the government.

The Department of Education has analyzed defaulted student

loan sales over the past 10 years and has found that defaulted student loan sales are not in the Department’s fiscal interest.

During the past year, the Department let an advisory contract

through GSA’s new financial asset services contract. The financial

advisors spent several months evaluating our collection strategies.

The most interesting proposal involves expanding student loan collection recoveries through highly specialized servicing arrangements. The Department and the Debt Collection Service are presently evaluating this proposal.

There continues to be an interest in the Department of Education

to enable defaulted borrowers to begin making repayments through

a variety of flexibility repayment options. The consolidation and rehabilitation loan programs were instituted to meet these objectives.

The private collection agencies have been instrumental in assisting

student loan borrowers to reschedule over $1 billion in defaulted

indebtedness over the past 5 fiscal years.

This concludes my remarks. I would be glad to answer any questions.

Mr. HORN. You don’t have to conclude it just because the red

light went on. We allow—you are probably—if that’s your conclusion, you’re the most efficient witness we’ve ever had. Either that

or the clock is crazy, which is possible.

Mr. PESTKA. I timed this thing several times last night, and I

have a summary, but it’s superfluous.

Mr. HORN. OK. Fine.

[The prepared statement of Mr. Pestka follows:]

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Mr. HORN. We now have the distinguished Chief Financial Officer of the Department of Agriculture, Sally Thompson.

Thank you for appearing again.

Ms. THOMPSON. Mr. Chairman and members of the subcommittee, thank you very much for inviting me here to share with you

some of the perspective and the progress that the Department of

Agriculture have made in trying to implement the Debt Collection

Act.

Mr. Chairman, I would especially like to thank you for the attention that you have focused on helping the Federal agencies to improve their debt collection. And I assure you that Under Secretary

Dan Glickman’s leadership we are making significant progress to

improve our debt collection and trying to get a clean opinion on our

financial statements.

I would like to give you just a brief overview of our loan portfolio

and then give you some perspective on the activities that we’ve had

with the Treasury offset program with write-offs, with tools that

we’re using and end with some of the issues around cross-servicing.

As you know, our mission is to serve the underserved in rural

America through farm loans, through utility loans, through rural—

trying to find affordable housing. Our three biggest loan portfolios

are in rural housing, with about $30 billion; in rural utilities, with

about $40 billion; and then our farm loans, not only in rural America, but also with our farm credit—foreign credit to foreign countries.

In addition to that, we have about a $20 billion guaranteed loan

portfolio as well. All of that adds together for about $100 billion in

our total loan portfolio, or about 38 percent of all nontax debt for

the Federal Government.

So you can see it’s imperative that we get our house in order so

that not only that USDA gets a clean opinion, so that the Federal

Government can also get a clean opinion.

However, as I look at the Federal debt and the delinquency, the

Federal Government has about a 22 percent delinquency rate,

where the Department of Agriculture has about 6 percent. But that

6 percent, as you mentioned in your opening comments, represents

about $6 billion of delinquent debt. However, $4.4 billion of that is

not eligible for either offset or for cross-servicing, because they’re

either foreign debt, in foreclosure, in bankruptcy, in litigation, or

at Treasury. However, that does leave $1.6 billion in delinquent

debt that is available for the offset program.

Of that, I’m pleased to be able to tell you that we have referred

that offset program, $1.3 billion of it, but that does leave $300 million, and while on a $100 billion loan portfolio, that’s a very small

percentage, to the average taxpayer, that’s a lot of money. And

we’re working very hard. We improved what we were turning over

for offset in fiscal year 1998 by 65 percent, and then so far for fiscal year 1999 we’ve improved that another 22 percent. So, as I

said, the Secretary and certainly all of the people involved with the

loan portfolios in the Department of Agriculture are working very

hard; and we will continue to work hard for the rest of this fiscal

year and for fiscal year 2000 to get to as close to 100 percent as

we can.

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In addition to that, of course, we’re using many of the tools that

the Treasury mentioned in their testimony. We’re at a 99 percent

compliance with taxpayer identification numbers, which, when the

loan is made, which means if it does go delinquent, it does become

part of that 6 percent, it’s much easier to track.

We’re also turning them all over, all of the debt, to the credit bureaus, so that also there’s a record of those. We’re using civil monetary penalties, and we are also using the private collection agencies

now that some of the barriers, the legislative barriers, have been

lifted for us.

We are in the process of implementing in the next few months

the salary offset and wage garnishments as well for tools.

Another tool that we have used since 1996 is in reporting all

write-offs to the IRS we have reported $2.5 billion; and what this

does, as you know, is to create what’s called a 1099(c), which is in

effect income to the borrower for forgiven debt. This is very important because the borrower cannot get additional credit until this

debt has been satisfied, and some of the effect that we have seen

on that is that they are paying off some of the debts so they can

get some of the new loans that have been available.

And then, of course, we’re also using the borrowing of—borrowing of delinquent debt, which means we will not give a loan to a

debtor that has an outstanding delinquent debt unless it’s in the

case of food stamps or emergencies.

I will close by just very quickly talking about the cross-servicing.

We have $1.3 billion that was eligible for cross-servicing. However,

over 50 percent of that represents food stamps, and the detail of

that belongs at the State.

However, the changes in the systems that Treasury has made

just recently that they mentioned to you will allow the computers

to talk to each other, which means we’re hoping to be 80 percent

compliant with cross-servicing in fiscal year 2000.

Hopefully, we’re through the year 2000 glitch, the Y2K, getting

our computers up to date, Treasury’s computers up to date. The

States are working on that, and so we’re looking forward to fiscal

year 2000 when we can become at least 80 percent compliant with

cross-servicing.

So you can see we’ve been working very hard at this. We are

making progress. There’s still work to be done. But, again, I can

assure you that USDA is providing a very high priority to this and

that Secretary Glickman is behind this 100 percent.

Thank you very much, Mr. Chairman.

Mr. HORN. Give him my best. One of my favorite presiders over

the House when he was here.

[The prepared statement of Ms. Thompson follows:]

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Mr. HORN. Mr. Ramirez, glad to have you here, Mr. Secretary.

Mr. RAMIREZ. It’s good to be here, sir. Thank you very much.

Mr. HORN. Remember you’re under oath when you say it’s good

to be here.

Mr. RAMIREZ. Absolutely.

Good morning, to you, sir, and Ranking Member Turner and the

rest of the distinguished members of the subcommittee.

On behalf of Secretary Cuomo and the Department, I appreciate

the opportunity to come before you and report on HUD’s implementation of the Debt Collection Improvement Act.

In order to give you a better perspective of the Department’s debt

collection initiatives and its implementation of the DCIA, I would

like to first present a description of the Department’s overall debt

portfolio as of September 30, 1998. I’m proud to say that was the

first year that we’ve got an unqualified opinion on our financial

statements for the Department of Housing and Urban Development.

Our total receivables due the Department as of September 30th,

totaled $13.9 billion. The largest portion of total receivables related

to old debts from our elderly and disabled section 202 direct loan

program. However, it is primarily our FHA single family, multifamily and title I debt that comprises the bulk of our delinquent debt.

I would like to draw your attention to exhibit A which has a couple of charts, as the next few comments I make will be referring

to said chart. In fact, it will show the total amount of debt which

was eligible for referral to the Treasury for administrative offset

and for cross-servicing.

This exhibit shows a total debt eligible for referral to the Treasury for offset amounting to $300 million as of September 30, 1998,

and that $240 million of this amount, or 80 percent of what was

eligible, was actually referred.

The $300 million reported as eligible for offset excludes $645 million, which represents accelerated FHA multifamily debt delinquent over 180 days. This accelerated debt should not have been

included in the information reported to Treasury as of September

1998, as we erroneously reported the total unpaid balance instead

of just the amount that was delinquent over 180 days.

Second, we added another column to this chart, the intergovernmental and nonprofit debt, to reflect debt that should be excluded

from what was eligible for Treasury offset and cross-servicing.

About $314 million or, 88 percent of the $358 million amount in

this category, related to defaults in portfolios of issuers by Ginnie

Mae and backed securities; and the entire defaulted portfolio, consisting of mortgages issued or guaranteed by FHA or VA, is collectible from these agencies and therefore not referred to Treasury for

offset and cross-servicing.

Regarding the FHA multifamily in foreclosure figure of $255 million, and this is the top chart on exhibit A, we refer to $123.5 million as actually in foreclosure, and the remaining $131 million will

either go to foreclosure or will be sold. We excluded the latter $131

million from referral eligibility because of the unique ‘‘non-recourse’’ feature of FHA’s multifamily mortgage loans. The government may not go after personal assets of the borrowers for these

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multifamily mortgage loans, and therefore it would be a zero sum

gain to refer them to Treasury.

Finally, exhibit A’s bottom chart shows $123 million, or 45 percent, of the $274 million eligible was referred to Treasury for crossservicing. I might add that of the $151 million not referred, $109

was referred as of March 31st, thus bringing it up to 85 percent

as a proportion of eligible debt that was referred to them. As a result, as mentioned by our colleagues at Treasury, of the automated

system enhancements that have allowed us now to communicate

with each other more effectively, our cross-servicing referral backlog for title I notes have been cleared substantially.

Now I would like to focus my comments on what we have done

to substantially comply with the major provisions of the DCIA.

FHA manages credit risk using a variety of means. One is to require that all borrowers have acceptable credit history, sufficient

assets to close the mortgage loan and sufficient income to repay the

mortgage, all per traditional underwriting methods. In addition,

FHA has approved an automated underwriting system that now assigns an approval rating based on the borrower’s characteristics,

such as credit score, debt-to-income ratio, loan-to-value ratio; and,

as a result, this method has been demonstrated to prove much

more effective in controlling credit risk and enhancing traditional

underwriting methods.

HUD has developed a new consumer protection measure to reduce the number of families who default on FHA-insured mortgages and to remove poorly performing lenders from the FHA program. Under this initiative, which we call our Credit Watch, we

identify lenders with an above-average number of defaults and

foreclosures involving FHA-insured mortgages.

We’ve also addressed the administrative offset and cross-servicing provisions of the act by referring debt to Treasury for offset and

cross-servicing when appropriate. We refer all new cases that meet

this criteria by having a constant dialog with Treasury to refer said

eligible delinquent debts.

In the past, we have successfully used the asset sales program

that has made us the leader in the Federal Government in this

area. And we’re in the process of designing and implementing and

enhancing a new asset disposition program to comply with the new

statutory requirements.

We’ve also pioneered the use of the Credit Alert Interactive Voice

Response System, a prescreening tool to bar individuals who owe

the government money from obtaining new government loans or

guarantees.

The Taxpayer Identification Number Implementation Report and

Certification for fiscal year 1998 shows that HUD has included the

taxpayer ID numbers on certified payment vouchers for 99.8 percent of all payees. We expect 100 percent compliance by the end of

December 1999.

I am pleased to close my report to the subcommittee by saying

that the work that we’ve done, in conjunction with Treasury, has

truly met the spirit and the intent of the Debt Collection Improvement Act.

HUD considers this efficient management of debt collection and

its process an important part of executing our public trust function.

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We look forward to enhancing that function with Treasury and

with the guidance of this subcommittee and continuing to work in

these efforts.

I would be glad to answer any questions that you may have or

other committee members may have. Thank you very much.

Mr. HORN. Thank you, Mr. Secretary.

[The prepared statement of Mr. Ramirez follows:]

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Mr. HORN. We will begin with Mrs. Biggert. I yield 10 minutes

to the gentlewoman from Illinois.

Mrs. BIGGERT. Thank you, Mr. Chairman.

Most of my questions probably go to Mr. Pestka. One of my involvements during this Congress is in the Bipartisan Results Caucus, and the Results Caucus is dedicated to improving government

by working with the Federal departments and agencies to eliminate waste, fraud, and mismanagement. The caucus works with

agencies and departments that have been deemed at high risk by

the General Accounting Office.

One of the programs that has been listed is the Student Financial Aid Program. So as part of my work with this caucus, I will

be focusing on this Department, and I look forward to working with

you and your staff to remove this program from the high-risk list.

So I do have a few questions to ask.

And, again, in my role in the Illinois General Assembly, I did

deal with the Student Assistance Commission, and I can remember

when there was a changeover from the banks actually doing the

loan program to the Federal Government. As I recall, it must have

been, what, 199——

Mr. PESTKA. 1995.

Mrs. BIGGERT. 1995. And there was some consternation there

that the government was taking over something that the banks

had been quite successful doing. I don’t know—I assume that you

were here then.

Mr. PESTKA. I was here then. I’ve been here for a while.

Mr. HORN. Sitting there before this committee.

Mrs. BIGGERT. Yes. Since I wasn’t here, I don’t know the background of that. But have you found that to be effective?

Mr. PESTKA. The new program has actually made the bank program more efficient, I think. What we see now is a great deal of

competition in the form of good customer service to the students by

the banks and by the Department. So I think it has worked out in

favor of the students.

Mrs. BIGGERT. Has there been less default on the loans?

Mr. PESTKA. I don’t think so. We projected that the direct loan

program would be—since the terms and conditions to the student

are the same as in the guaranteed program, we projected that defaults would be about the same, and our projections have turned

out to be true.

Mrs. BIGGERT. Has there been an increase in the number of

loans?

Mr. PESTKA. Loan volume has increased dramatically in the

1990’s. We’re lending in the neighborhood in both programs combined in excess of $40 billion per year.

Mrs. BIGGERT. Are there—how many students are turned down

for a loan program?

Mr. PESTKA. Turned down? None. Students aren’t turned down.

Student loans are virtually an entitlement. As long as you’re attending an eligible institution and go through the process, you receive your loans.

Mrs. BIGGERT. That hasn’t changed?

Mr. PESTKA. No.

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Mrs. BIGGERT. OK. But you are using the private collection agencies then to be an effective debt tool, a collection tool?

Mr. PESTKA. Yes. We do at the Department, and you will find

that the guarantee agencies in the Federal Family Education Loan

Program also use private collection agencies.

Mrs. BIGGERT. So you have—what—18 private collection agencies

right now?

Mr. PESTKA. Right now, we have 17 under contract.

Mrs. BIGGERT. And what performance measures does the Department use to evaluate the effectiveness of these contractors?

Mr. PESTKA. We look at dollars collected, No. 1. We give 50 percent weight to dollars collected that could be—for the most part

voluntary payments. Then we look at litigation, we look at wage

garnishment, and we also look at administrative resolutions, since

some of these debts should be forgiven and not collected. There are

provisions in the Higher Education Act for loan forgiveness, and we

pay the contractors to administer the closeout of those loans. So we

strike a balance.

We also look at customer service, and we close accounts based on

all of these measures. We do a triennial placement to collection

agencies. And the best way to describe our program is, we run a

horse race between the collection agencies, and a new race starts

every 4 months, so the collection agency on the bottom can bring

themselves up and get up on top if they work hard enough.

Mrs. BIGGERT. Within the contract, is a fee set that might differ

from contractor to contractor?

Mr. PESTKA. They bid their fees, and they are slightly different,

but roughly they average about 23 percent.

Mrs. BIGGERT. Do you have any evaluation from the student who

might have been contacted by the collection agency? Is there a followup in how they were approached to collect the debt?

Mr. PESTKA. We collect complaints, and we’re one of the rating

factors, and we do take accounts away from collection agencies if

there are complaints, and that weighting factor is in their evaluation process. So we do look at customer complaints very carefully.

Mrs. BIGGERT. Would there be any suggestions that you would

have for changing the way that this is done?

Mr. PESTKA. The overall approach to collections or the use of private collection agencies?

Mrs. BIGGERT. Well, first of all, overall use and then by the private collection agencies.

Mr. PESTKA. Yeah—the overall approach to collections—we’re

trying to collect the most dollars at the lowest costs. So we’re always looking for new ways to do the work. Some of the collection

agencies in this room might—representatives in this room might

understand that we’re always try to drive those collection agency

commissions down.

And student lending, the students are responsible for paying the

collection agency’s fee, so the benefit is to the student borrower.

But, overall, we’re looking for an approach where we could combine a lot of our efforts and achieve the same revenue stream or

achieve a greater revenue stream at lower costs. And that’s one of

the things that the GSA contractor that I spoke of that was looking

at for us on our behalf and will be exploring new and different

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ways to do collections. We might try a pilot program in the future

to explore some of these alternatives.

Mrs. BIGGERT. About how long does it take a student to pay off

a loan—10 years, 15 years?

Mr. PESTKA. The standard repayment term is 10 years, but we

have—with greater student debt now, we have extended repayment

plans that could go as long as 30 years.

Mrs. BIGGERT. Thank you.

Then for Mr. Ramirez, if I might.

Mr. RAMIREZ. Yes, ma’am.

Mrs. BIGGERT. In 1994 through September 1997, the Department

had sales of multifamily loans and sales of single family loans, and

I guess it amounted to 13 sales and you sold 1,093 multifamily and

98,640 single family loans, which resulted in quite a good saving

of $2.2 billion budget. Why did you choose to discontinue these

sales?

Mr. RAMIREZ. There was a period in which we evaluated the entire portfolio of our multifamily operation. In fact, we’re in the

process of, for the first time in the history of the Department and

as a result of our 1996 HUD 2020 reform effort brought to bear by

Secretary Cuomo, going out and inspecting the physical condition

all of these properties, as well as for financial soundness to get a

better handle on our investments and/or subsidies in these properties.

There was a period in which they were discontinued. We are

working to reinstate the loan sale program for our multifamily

mortgage loan operation, now that we’ve got—and already referring

to our Enforcement Center—those projects that are deficient. And,

they work either to reinstate them, because many times these

loans are better to be reinstated and less costly to us then going

through the whole foreclosure process and sale—but in instances

where the property is in poor condition or it has been abandoned

or is in accelerated delinquency, we do institute foreclosure process.

We have a couple of hundred already that are being worked on

around the country by our Enforcement Center. We see that growing as we continue through our reform and actual execution of our

efforts.

Mrs. BIGGERT. Would that be true of the single family loans?

Mr. RAMIREZ. The single family loans, what we have done there

is, we have now gone to a single contractor form of disposition in

our sales. We just put our contracts into effect around the country;

and, as a result, we anticipate creating greater efficiencies in that

regard and creating a higher return when we do have to go to foreclosure, recognizing that we are helping some of the most low and

moderate income families that have moved into homeownership.

So, we make every effort first to try to remedy their delinquency,

but if that does not work, we do move into foreclosure.

Mrs. BIGGERT. Thank you.

Thank you, Mr. Chairman.

Mr. HORN. Thank you. And I now yield 10 minutes to the gentleman from New York, Mr. Owens.

Mr. OWENS. Thank you, Mr. Chairman.

I do recall a hearing we had a few years ago that certainly

aroused my interests in the whole debt collection process. I was

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particularly concerned at that time about the Farmers Home Loan

Mortgages.

I understand that the name of that has been changed. Is that

still under—is it included in your figures here?

Ms. THOMPSON. Yes, it is, sir.

Mr. OWENS. What is it called now?

Ms. THOMPSON. FSA, Farmers Service Agency. And it’s about $7

billion of farm loans, and that includes also some foreign debt as

well.

Mr. OWENS. At this point it’s $7 billion, the total outstanding

loans for that thing?

Ms. THOMPSON. Yes.

Mr. OWENS. I recall the figure $14 billion in delinquencies at the

hearing previously. Were the figures wrong at that time or has

there been a drastic change in the new methods of collection?

Ms. THOMPSON. We did write off, you know, everything that was

over the 18—2 years.

Mr. OWENS. Can you explain the term write-off? What is a writeoff?

Ms. THOMPSON. OK. A write-off means that—while we’re still

carrying it on the books, it’s no longer collectable. We then have

turned it over to the IRS who has create what had they call a

1099(c), which means that it’s income to the borrower which must

be paid back before they can get an additional loan with the Federal Government.

Mr. OWENS. Can you give me the amount of the write-offs in the

last few years?

Ms. THOMPSON. Since 1996, about $2.5 billion.

Mr. OWENS. $2.5 billion was written off?

Ms. THOMPSON. Yes.

Mr. OWENS. How about in the last 5 years?

Ms. THOMPSON. I don’t have the number. I can give it to you.

Mr. OWENS. The figure $14 was very—really, it’s not something

that sticks out in my mind.

Ms. THOMPSON. I don’t know where the number $14 billion has

come from. I don’t know what year you are talking about. I can get

that you.

Mr. OWENS. Do you have any idea how much has been outstanding in Farmers Home Loan Mortgages at given moment in the last

20 years?

Ms. THOMPSON. In the last 20 years? No, but I would be glad to

get you a complete reconciliation and go back as far as you would

like.

Mr. HORN. Without objection. It would be put in the record at

this point.

Ms. THOMPSON. In how much? Are you just interested in the

farm loans? I can get you the whole portfolio.

Mr. OWENS. At that time we had a big chart, much more detailed

information than we have here. I suppose in my files it is somewhere, but it just struck me that there was a tremendous amount

of outstanding loans and delinquent loans in the Farmer Home

Loan Mortgages, and overall the amount of outstanding delinquencies for the Department of Agriculture was much higher than

it is here.

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So what else—you had write-offs in other areas in addition to the

Farmers Home Loan Mortgages? These other categories have writeoffs, too, in addition to Farmer Home Loan Mortgages? These other

catagories have write-offs, too?

Ms. THOMPSON. No. I think what probably is also in that $14 billion number, but I will certainly reconcile it, was what is now in

the rural housing area. We split that out. And in the rural housing,

we have about a $30 billion loan portfolio. Now, when you take——

Mr. OWENS. How much of that has been written off recently?

Ms. THOMPSON. That $2.5 billion is a total since 1996 for all of

our loans in all of our portfolios.

Now, I can get you the breakdown of that in a schedule to reconcile that. And I will go back before the Department was reorganized to reconcile that $14 billion number to show you how it got

split between housing and farm loans.

Right now, if you look at the net, that’s a gross number, but

when you put the interest rate and the subsidy rate in that in

terms of the housing, it’s about $20 billion. You know, in other

words, it goes from 30 to 20, when you look at the net. If I look

at what we have loaned since 1991 when the Debt Collection Act

came in, in housing it’s been about $7.4 billion.

So I would have to go back, as I said, to pull out those numbers

and reconcile it before the reorganization. I would be more than

happy to do that.

Mr. HORN. And that would be by Department internal unit,

right?

Ms. THOMPSON. Yes.

Mr. HORN. OK. So the rural utility service would be one of those

units?

Ms. THOMPSON. Yes, they would be.

Mr. HORN. OK.

Ms. THOMPSON. And they’re together. If you take the water and

the waste and telephone, electric, all combined together, it is about

a $30 billion portfolio.

Mr. OWENS. In this $40 billion portfolio, are there limits in what

an individual entity can borrow? Are there large entities there?

You say rural housing, you think of families. Are we talking about

corporations and large industries who borrow large amounts of

money?

Ms. THOMPSON. No, most of that is in individual families. We do

have some multifamily in there.

But, oh, yes, as I started out by conversation, we serve the underserved; and we’re only there where the private sector isn’t. And

most of our borrowers, in fact, all of them, are low to moderate income. The interest rate on them is determined by their actual tax

returns that they have filed with us, and they file those every year

with us as well as the IRS.

Mr. OWENS. Hasn’t your outstanding loan portfolio increased a

great deal in the last 5 years?

Ms. THOMPSON. In some of the emergency loan area, yes, where

we’ve had floods.

Mr. OWENS. Not the rural housing though?

Ms. THOMPSON. Not in the rural housing. Some of the guarantee

has increased in the rural housing, and that’s probably——

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Mr. OWENS. Guaranteed?

Ms. THOMPSON. Guaranteed loans, which says we aren’t making

the direct loan. The lender makes the direct loan like the bank.

But, like FHA, we guarantee a portion of it.

Mr. OWENS. How many delinquencies and what percentage of delinquencies would you have with the guaranteed program?

Ms. THOMPSON. Well, since in that guaranteed loan portfolio

we’ve only made $3 billion since 1991, our delinquency is less than

6 percent.

Mr. OWENS. Now, at the hearing previously, there was a description of the process by which loans are handled, and there were

credit committees consisting of nonstaff people in various parts of

the country. A credit committee had to pass on a loan. Is that still

the process where you have these credit committees consisting of

lay people, locally appointed people who do that?

Ms. THOMPSON. In some types of loans, yes.

Mr. OWENS. Do those credit committees determine when a loan

is delinquent? Can you—when is a loan delinquent? What is delinquency?

Ms. THOMPSON. Delinquency is when you miss 30 days and

you——

Mr. OWENS. Only 30 days.

Ms. THOMPSON [continuing]. And miss a payment. Now, in some

of the farm loans—yes, sir, on the housing loans that is the case.

Some of the way the loan documents are written, like on the farm

loans, payments are only due once a year.

Mr. OWENS. They’re not delinquent unless you miss—your yearly

payment comes due and you miss it, that’s a whole year?

Ms. THOMPSON. If you think about a farm loan where the income

comes in when you sell your crop——

Mr. OWENS. Sure.

Ms. THOMPSON [continuing]. So the loans are set up that that’s

when the payment is due.

Mr. OWENS. Who passes on information that a loan is delinquent? Are there lay committees followed in that, too? Does a committee determine when somebody is delinquent or is that strictly

a staff automatic process?

Ms. THOMPSON. Actually, we have a very sophisticated computer

center out in St. Louis and all of that information is in that computer system. And we have a large loan servicing staff out there,

and every payment is entered into the system, and we have a

history——

Mr. OWENS. Local lay committees cannot intervene in the system

and hold back——

Ms. THOMPSON. No, they cannot.

Mr. OWENS [continuing]. And hold back the level of delinquency

on any loan?

Ms. THOMPSON. No, I won’t say that doesn’t ever happen, but

that isn’t the process in place. There’s always a case that sometimes that may happen, but the loan payments go into a central

place now.

Mr. OWENS. One of the revelations that I’m remembering is that

there are a number of millionaires, people who had considerable

amounts of money who were delinquent and large amounts of

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money, and they also sat on committees that made decisions. And

some of those people who were delinquent was getting additional

loans. What is the practice now? If you’re declared delinquent or

if you’re written off, is there any way you can continue to get any

kind of loan from the Department of Agriculture?

Ms. THOMPSON. No, sir. The only time that you would be eligible

for a loan once your loan is either written off or it’s been turned

over to Treasury, which means that it’s 180 days delinquent, would

be in an emergency situation. With that emergency package that

was just passed in the last session of Congress where we had some

floods and some national disasters and some of the freezing weathers in the Dakotas and then, of course, some of the farm prices, we

have waived some—because the legislation put it that way, we

have waived some of those stands where we said we would not give

a delinquent borrower additional funds.

We also waived that in the case of food stamps. A large part of

our portfolio also includes food stamps.

Mr. OWENS. So the credit loan committees, are they changed

with every political administration? Are they appointed by a process that sheers them from politics?

Ms. THOMPSON. The whole process obviously has been changed,

both with the Debt Collection Act—that puts some things pretty

black and white out there. Also, under Secretary Glickman’s leadership, we have certainly tightened up the loopholes. We’ve—and

certainly improved our computer systems. We have a ways to go.

I would certainly tell you that.

Mr. OWENS. Are the committees appointed by county, State or

what jurisdiction?

Ms. THOMPSON. Well, again, it depends upon the type of the loan

that you’re talking about. Farm loans are with the county. If you

remember, we have a large group that are not Federal employees,

but they’re actually county employees in the county offices that are

taking the loan applications and processing them.

Mr. OWENS. Just one last question. I just wanted to make certain

that these committees have minimum influence now——

Ms. THOMPSON. Yes.

Mr. OWENS [continuing]. On the debt collection process and the

delinquency process and that is——

Ms. THOMPSON. That’s right.

Mr. OWENS. That’s what I was trying to establish.

Ms. THOMPSON. The bank collection process is severely limited.

Mr. HORN. Thank you. Those are good questions, and we look forward to your entry into this point. And, without objection, it’s in.

Ms. THOMPSON. Thank you, Mr. Chairman.

Mr. HORN. The gentleman from California, Mr. Ose, 10 minutes.

Mr. OSE. Thank you, Mr. Chairman.

I think my questions are primarily related to exhibit A on Mr.

Ramirez’s documentation.

Mr. RAMIREZ. Yes, sir.

Mr. OSE. If I understand the testimony correctly, we have loans

outstanding that are directly made in some cases? We have loans

outstanding where we provide the insurance?

Mr. RAMIREZ. Guarantees.

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Mr. OSE. Guarantees. We have nonrecourse loans. We have recourse loans. We do have recourse loans.

Mr. RAMIREZ. Yes, yes, we do, yes, sir.

Mr. OSE. OK. And the single family—I always like to go where

the big numbers are——

Mr. RAMIREZ. Sure.

Mr. OSE [continuing]. Where they just have a big impact, where

there’s a big number. And the four that come to mind under this

exhibit are the single family, multifamily, title I and the Ginnie

Mae mortgage-backed securities, if I understand your acronym correctly.

Mr. RAMIREZ. That is correct, sir.

Mr. Ose. The multifamily loans—having been in the real estate

business, those are typically made to partnerships and the like

where you’re dealing with a general partner who has for a 15-year

term, for instance, consented to provide market rate or below housing for a certain percentage of the units in the project.

I’ve got to tell you, $1 billion worth of delinquent debt in that

category, with a quarter billion in foreclosure, I mean, that’s going

to get my attention. And I’m trying to figure out, again having been

in the business of real estate and understanding how you structure

partnerships and the debt that you use to create your projects, how

is it that we accelerate or reduce the duration of the delinquency

and get to the foreclosure so that we can recover the money that

we’ve got outstanding and use in the second or third or fourth

project somewhere else?

Mr. RAMIREZ. First, let me refer back to—I’m sorry.

Mr. OSE. I’m looking for a legislative remedy. Is there some tool

that we can give you that accelerates that, having the borrower

going in default and then having to mess around with it?

Mr. RAMIREZ. I would ask our FHA Commissioner to make a

more specific recommendation to you as to the type of legislative

relief that we could seek in that regard.

I did want to clarify the billion dollars number of over 180 days,

that’s $645—almost $646 million of that is total loan value. That

was shown as accelerated——

Mr. OSE. Correct.

Mr. RAMIREZ [continuing]. And not the debt itself. Recognizing

that, that all of these units are providing housing to some of the

most low and moderate income families out in our country, we

make every effort to try and reinstate by working with the property

owners.

As I mentioned in my earlier comments, some of the things that

we’ve done—borrowing led to legislative relief—is tighten up our

inspection process by inspecting our entire portfolio both for physical and financial condition, and then finding where properties

have been abandoned. If there is an accelerated deterioration of the

property or an acceleration of the delinquency, they’re now sent to

an enforcement center that can accelerate that foreclosure process

under our guidelines or work toward remedying the situation and

bringing it current, bringing in a new general partner, a voluntary

relinquishing of assets and such. In the past, that didn’t happen.

Mr. OSE. That is where I wanted to get to. From my experience

dealing with low and very low income housing, typically those

83

loans are made at a severely discounted rate from the market. And

I must admit, I find it interesting, at the least, when the borrower

comes back and then testifies or writes that at the discounted rate

they cannot make the mortgage payment and, as a consequence,

they have to have a renegotiation, blah, blah, blah.

What I would argue for is, as the lender, having made that loan

for the specific purpose of encouraging someone to enter into a contract to provide low or very low income housing, that we get a little

more ruthless relative to those borrowers and say, no, we’re going

to go ahead and move with foreclosure, because what we’re concerned about is you deferring maintenance to preserve your returns

on capital and the like or entering into some side agreements

where tenants have to pay you cash for an extra bonus to stay in

the place.

If the purpose of the housing in the program is to—excuse me,

if the purpose of the program is to create the housing and the borrowers comes back and says after the fact that the deal is unsatisfactory, that’s not my problem. And I’ve got to tell—that’s just not

my problem.

And what I’m trying to get to is a clear understanding that in

instances where it is pure business, I mean, this is a business

proposition——

Mr. RAMIREZ. Sure, absolutely.

Mr. OSE [continuing]. From the other side, from the borrower’s

standpoint, why are we granting any forbearance or relief or extensions whatsoever when, in fact, we have the ability to take those

properties and run them for the purpose that we’ve funded them?

Mr. RAMIREZ. You’re right. You’re absolutely correct and on the

mark with recognizing that, on the borrower’s side, it is a business

transaction.

There is another factor that comes into play, and that is the residence and making sure that that particular complex or project is

not lost and, as a result, reduce the availability of where there is

already a scare market for low and moderate income families.

To give you an example of what we’ve done over the last several

years, we actually were up to about 2,300 properties in the multifamily category that were Secretary—held mortgages, in essence.

We’ve reduced that to a little over 1,100 and, as a result, have reduced unpaid balances and kept units out in the market by a total

of $5 billion as a result of us being more aggressive on the business

side.

What slows that down at times is making sure that on the

ground we’re not creating a situation that will result in putting

families out of housing as a result of our aggressive tactic in trying

to deal with bad borrowers.

So I would just conclude by saying that I will be glad to refer

your initial to the FHA Commissioner question as to whether there

is any additional legislative relief that could be provided to us to

help deal more expeditiously with the unscrupulous borrowers and

property owners that are out there and property owners more expeditiously to the Commissioner and I will be glad to send you a response, sir.

84

Mr. OSE. I’m not suggesting they’re unscrupulous. I’m saying

they made a deal, and they can’t live with it, and it’s not my problem.

Mr. RAMIREZ. Somewhere, I will tell you, as a result of us coming

out and inspecting these properties, we have found the exception,

a small percentage, but some that are in there examining the operation.

Mr. OSE. Mr. Chairman, if I could, I will submit that in writing

to the committee.

Mr. RAMIREZ. I will be glad to get that to you, sir.

Mr. HORN. Since everybody has had 10 minutes except me, I will

only ask two questions of this panel, and all the rest of them will

be sent to them.

Mr. OSE. Mine’s still green.

Mr. HORN. Go ahead. We’re having a lunch with the Secretary

of the Treasury, too. So we ought to go.

Mr. OSE. Mr. Chairman, I will yield the balance of my time to

you.

Mr. HORN. We have a vote coming up. So go ahead if you would.

Mr. OSE. My second question has to do with the single family

thing, the HUD single family, either guarantees or direct loans.

I have purchased property that HUD owned by virtue of foreclosure or transfer from a borrower. I’ve paid—I mean, I’ve availed

myself of the 2 percent discount for cash and all of that sort of

stuff. The problem that I found on each of those structures is that

when I went in to actually take possession of the property—the

structures, by and large, were unoccupied for 9 to 12 months. The

heating and air conditioning had been turned off. Some of the walls

had warped. The doors had warped. The floors had warped. We had

rodent infestations. And I’ve got to tell you, I mean I guarantee

you, I flat guarantee you that the second time I bought a HUD

property, I discounted what I was willing to offer it to reflect those

flaws in the acquisition process.

And it gets me back to my point about the multifamily. Is there

some way, legislatively, we can give you the remedy to shorten the

duration between possession by virtue of transfer from a lender

under the insurance—under an insurance claim or outright default

and foreclosure? Is there some way to shorten that duration legislatively so that we get these properties back on the market?

Mr. RAMIREZ. Well, again, on the legislative piece itself, I will be

referring to the Commissioner, and then I will be responding in

writing to the committee.

One thing that we have done administratively to help accelerate

the disposition of these properties that we do take over is that

we’ve now contracted the disposition or the management and marketing of these properties. One of the problems that we had was

when we took over that the properties sat in disrepair for several

months, longer than the industry standard to turn around a sale.

And so we’ve incentivized it with a management and marketing

contract with several contractors around the country to handle

that.

We’re into, I guess, the third month of that contract that was finally executed. We’re starting to see results. We anticipate a

quicker disposition of the property, a higher rate of return as a reVerDate 11-MAY-2000 08:20 Jul 25, 2000 Jkt 000000 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 C:\DOCS\63309.TXT HGOVREF1 PsN: HGOVREF1
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sult of not creating an opportunity for additional discounting on

those properties and preserve more of our investment in those

properties as a result of the foreclosure, Congressman.

Mr. OSE. I thank the chairman.

Mr. HORN. I thank you for that helpful line of questioning. That

gets down to a lot of substance.

Let me just raise a few questions here, and then all the rest are

going downtown. And from both the Democratic and Republican

sides—and I have about 20 more I could ask. So you’re all under

oath in answering those questions, and thank you for your helpfulness if you will do that.

But, Ms. Thompson, I do want to ask you this. In your testimony

you stated that only $1.6 billion of agriculture’s $6 billion of delinquent debt is eligible to be referred to the Treasury for collection.

I guess I’m asking how much of this difference is attributable to

loans made or guaranteed under programs administered by the

rural utility service.

Ms. THOMPSON. Well, that’s a good question. I remember last

year in my testimony when I was here we were talking about 15

properties that were of particular interest to you in the rural electric ones, and so I got you a very specific update on those. And

most of those were under——

Mr. HORN. You might get that microphone a little closer.

Ms. THOMPSON. Most of those were under a lot of the nuclear

power plants, cooperative; and I’m pleased to tell you that, without

any restructuring, we have 11 of the 15 that are improving in their

payment. They aren’t quite current yet, but they are catching up.

Two of them we did restructure but without any write-off to them.

One is—we have two that we merged so that they could afford to

make payments, and then we have one in bankruptcy.

But of the 15 that you’re particularly concerned about—so those

dollars that were related to those 15 are in that 4.4. I will get you

the specific dollar amount on those.

Mr. HORN. OK. Have discussions been held within the Department on an exemption for the rural utility service from the Debt

Collection Improvement Act? Any discussions been held like that?

Ms. THOMPSON. There are some, yes, and we have a proposal at

Treasury right now. We’ve got the three entities that are involved

with these, Justice Department, the Treasury and the Department

of Agriculture, and they’re all sitting down, and there’s a proposal

on the table to exempt some of those. And they’re going to work

that out together, and then they will sign a letter, all three of

them, to you.

Mr. HORN. I guess I would ask, what’s the basis and status for

the exemption? Is Rural Utility Service covering up something?

Ms. THOMPSON. No, sir, it’s not. And we talked about some complications, Treasury did. Whether you’re talking about DOT or

child support, well, in these rural utilities and electrics out there

in rural America, there’s some real complicated issues. A lot of

them are particularly—this will be increased as the competition increases for rural—you know, you open up for utility companies, but

nobody wants to go to my little town in Colby, KS, you know, to

provide electricity. It’s just not profitable. So you’ve got some of

those.

86

Mr. HORN. I’m all for Colby, KS, just as I am for San Juan

Bautista, CA, where I grew up on a farm.

Ms. THOMPSON. Right.

Mr. HORN. But I guess I would ask, what was the predecessor

name of the rural utility service?

Ms. THOMPSON. You know, I’ve been there a year——

Mr. HORN. Was it Rural Electrification?

Ms. THOMPSON. Rural Electric, yes, yes.

Mr. HORN. I assume Rural Utilities took over what Rural Electrification was. It was a very needed program when I grew up in

the 1930’s in the Depression.

But, what got me into this whole debt collection thing was my

outrage when they had given a loan to a person I believe in

Sonoma, CA, several million dollars, he defaulted on the loan. He

moved to Santa Barbara, CA, one of my favorite cities. We would

all like to live there if we could afford it. He then goes back, they

give him another loan, I think it was a 7-story office building, and

he also had his mansion there.

Now, farmers, I want to help. I knew what it is to grow up on

a farm. And I’m not keen on people that are looking for things to

do when they’ve done all the farmers and, you know, 60 Minutes

from time to time has had loans for ski lifts and everything out of

this group, and I think we have a little problem there.

So, I hope they’re not going to be exempted from that exception,

because the whole purpose of this was to get the debts collected

and my outrage at millions lost.

With that, I’m going to have to adjourn the meeting.

I would like to thank the staff in the meantime: Russell George,

the staff director, chief counsel; to my immediate left, Randy

Kaplan, our counsel; Matt Ryan, senior policy advisor; Matthew

Ebert, policy advisor; Bonnie Heald, director of communications; in

the corner, our staff assistant, Grant Newman; and Paul Wicker,

intern; and Justin Schlueter, intern; and John Phillips, intern.

And we have for the minority, Faith Weiss, minority counsel; and

Earley Green, minority staff assistant, and Cindy Sebo as court reporter.

With that, we are adjourned; and we can vote.

[Whereupon, at 12:17 p.m., the subcommittee was adjourned.]

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