For Release on Delivery

Expected at

10 a.m.

Thursday,

June 8, 2000

GAO/T-AIMD-00-213

DEBT COLLECTION

Treasury Faces Challenges

in Implementing Its CrossServicing Initiative

Statement of Gary T. Engel

Associate Director, Governmentwide Accounting and

Financial Management Issues

Accounting and Information Management Division

Testimony

Before the Subcommittee on Government Management,

Information and Technology, Committee on Government

Reform, House of Representatives

United States General Accounting Office

GAO
Page 1 GAO/T-AIMD-00-213

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to appear before your subcommittee today

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

the cross-servicing provision of the Debt Collection Improvement Act

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

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

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

Priority Management Objectives in the government’s efforts to modernize

and improve federal financial management.

DCIA includes several tools to facilitate collection of defaulted obligations

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

nontax delinquent debt. Among the options available for recovering these

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

which the Financial Management Service (FMS) reported collected over

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

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

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

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

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

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

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

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

significantly depends on federal agencies accurately and completely

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

program and promptly referring such debt.

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

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

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

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

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

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

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

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

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

tax refunds.

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

3In this testimony, “agencies” refers to federal agencies.
Page 2 GAO/T-AIMD-00-213

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

cross-servicing provisions of DCIA.

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

accurate, and the accuracy and completeness of significant amounts

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

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

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

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

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

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

• DCIA authorized Treasury to designate other government agencies as debt

collection centers based on their performance in collecting delinquent

claims owed to the government. Treasury established standards for

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

Education and Health and Human Services were granted waivers by

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

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

Three agencies have applied to be governmentwide debt collection

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

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

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

showed that its staff did not always follow them or properly use certain
Page 3 GAO/T-AIMD-00-213

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

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

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

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

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

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

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

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

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

discussions with FMS officials indicate that FMS is placing increased

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

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

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

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

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

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

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

recoup from the debtor.

• FMS developed a methodology for distributing debts to PCAs for

collection that FMS intended to be performance based. For each

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

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

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

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

delinquency). This factor contributed to the distribution results

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

PCAs from February 1998 through February 2000 showed that one PCA

had received a significantly higher percentage of the debts with smaller

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

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

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

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

the smallest average debt balances and had received a significant

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

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

experience to date have shown that collection rates are generally higher

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

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

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

offices, and directory assistance to locate delinquent debtors.
Page 4 GAO/T-AIMD-00-213

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

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

general consensus among them when asked how the debts should be

distributed was that the distribution should take into consideration the

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

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

that stratifying the available debts by agreed-upon characteristics would

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

foster a more competitive environment.

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

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

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

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

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

cost-recovery basis.

We performed our work primarily at FMS and its Birmingham Debt

Management Operations Center (BDMOC). We conducted interviews with

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

Collectors Association and reviewed pertinent policies, procedures,

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

selected and performed detailed testing on certain debts that had been

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

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

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

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

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

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

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

generally accepted government auditing standards from April 1999

through May 2000.

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

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

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

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

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

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

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

referral and percent of debt excluded amounts are not significantly

Referral of Federal

Debts for CrossServicing
Page 5 GAO/T-AIMD-00-213

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

review the details supporting these data and much of our testimony

regarding identifying debts eligible for cross-servicing and debts excluded

from cross-servicing requirements is based on delinquent debt information

reported for fiscal year 1998.

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

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

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

days delinquent. Based on information obtained from the 24 agencies

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

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

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

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

as foreclosures and bankruptcies.

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

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

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

identified problems with FMS reports on the status of delinquent debts

governmentwide.

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

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

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

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

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

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

for cross-servicing.

These reporting problems, coupled with the lack of independent

verification of the completeness and accuracy of debt exclusion amounts,

make the reliability of these reported amounts questionable. Lack of

reliable identification and prompt referrals of eligible debts by the

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

to recover amounts owed.

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

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

expenditures.
Page 6 GAO/T-AIMD-00-213

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

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

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

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

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

to FMS for cross-servicing.

Figure 1: Dollar Amount of Debt by Age of Delinquency

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

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

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

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

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

likelihood of recovering amounts owed decreases dramatically with the

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

very relevant for this effort.

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

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

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

Age of Debts Referred
Page 7 GAO/T-AIMD-00-213

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

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

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

the program through May 1999.7 Our analysis showed that estimated

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

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

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

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

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

effect, this figure represents the minimum timelines for referral and

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

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

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

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

the process.

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

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

referred to FMS through May 1999.

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

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

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

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

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

not be collected by FMS collectors or PCAs.

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

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

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

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

cross-servicing defaulted.
Page 8 GAO/T-AIMD-00-213

Figure 2: Declining Recovery Rates by Age of Delinquency

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

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

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

Collector’s Association before the Subcommittee on Government Management,

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

September 8, 1995.

Agencies provide information to FMS annually on debt amounts over 180

days delinquent in their Report on Receivables Due from the Public

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

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

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

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

days delinquent, which FMS used to compile its reports.

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

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

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

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

debts excluded from cross-servicing from DPI reports submitted by

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

Exclusions From

Cross-Servicing and

Accuracy of Reporting

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

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

Estimated Recovery Rate

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

Estimated Loss Rate

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

Days delinquent

180 510

At PCA 1

180 days

At PCA 2

180 days

At FMS

30 days

With agency

180 days

PMAC debt

distribution

15 days

PMAC debt

distribution

15 days

0 225 405

Days delinquent
Page 9 GAO/T-AIMD-00-213

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

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

Summary Analysis of Delinquent Debt for the Federal Government, a

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

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

exclusions (see table 1).

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

September 30, 1998a, 12

Characteristics of debt

Amount

(in billions

of dollars)

Debt over 180 days delinquent $46.4

Exclusions:

Cross-servicing waivers 16.6

In forbearance or in appeals 5.1

At DOJ 4.9

Foreign debt 3.6

In bankruptcy 3.1

In foreclosure 2.4

Department of Defense 1.3

Eligible for internal offset 1.0

Other 0.9

At third party 0.7

Total amount excluded $39.6

Amount eligible to refer for cross-servicing $6.8

a

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

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

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

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

the agencies has not been independently verified. According to FMS

officials, agencies were not required to certify that all information

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

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

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

prepared annually.

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

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

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

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

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

for SSA and SBA are about $203 million and $88 million, respectively.
Page 10 GAO/T-AIMD-00-213

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

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

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

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

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

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

aggregate percentages by type of exclusion. FMS estimated exclusions for

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

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

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

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

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

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

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

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

waivers were overstated.

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

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

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

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

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

alone are considerably more than the $300 million bankruptcy amount

FMS estimated for all non-CFO Act agencies.

Compounding these concerns are questions concerning the accuracy of

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

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

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

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

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

agencies reviewed, 5 had inaccurate accounts receivable balances as of

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

accounts receivable.13 For example,

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

department did not produce a reliable accounts receivable aging schedule.

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

the review.
Page 11 GAO/T-AIMD-00-213

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

Consolidated Financial Statements, the VA OIG qualified its opinion on

material amounts of accounts and loans receivable due to the inadequacy

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

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

accounts relating to the Housing Credit Assistance Program, which

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

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

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

consistently follow its accounting procedures and certain of its internal

controls were ineffective.

FMS officials recognize the problems with the manner in which the

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

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

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

report includes the various exclusion categories which agencies will be

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

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

the accuracy and completeness of the amounts that they report as

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

currently independently verify such amounts. Lack of such verification,

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

inaccurate balances and aging of accounts receivable, raises concerns

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

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

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

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

following:

• Agencies focused their computer programming resources on Year 2000

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

so that debt information can be transmitted to FMS electronically.

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

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

because such information was not readily available.

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

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

Factors Affecting

Agencies’ Debt

Referrals
Page 12 GAO/T-AIMD-00-213

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

processing time ranged from 10 months to 19 months.

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

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

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

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

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

and cross-servicing and occurred because Treasury personnel did not

properly age the receivable balances.

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

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

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

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

delinquent debts from offset to cross-servicing.

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

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

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

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

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

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

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

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

deceased.

FMS encouraged agencies to promptly refer all eligible nontax debts by

assisting them in understanding the cross-servicing program and

requirements for identifying and referring eligible debts. FMS officials

stated that FMS conducted periodic workshops and conferences and met

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

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

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

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

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

population.

FMS’ Outreach Efforts
Page 13 GAO/T-AIMD-00-213

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

encourage federal agencies to refer eligible nontax debts promptly.

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

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

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

agencies had properly identified all nontax debts that were eligible for

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

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

monitor actual agency referrals.

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

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

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

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

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

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

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

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

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

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

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

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

reported as eligible as of September 30, 1998.

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

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

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

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

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

other formal actions against agencies that did not promptly refer their

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

agencies17 requesting debt referral milestones for fiscal years 2000 and

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

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

performance measures for credit programs.

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

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

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

bureaus within Treasury to encourage debt referrals.

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

2000.
Page 14 GAO/T-AIMD-00-213

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

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

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

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

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

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

agencies regarding such plans.

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

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

agencies as debt collection centers based on their performance in

collecting delinquent claims owed to the government.

Since then, FMS has established the Birmingham Debt Management

Operations Center (BDMOC) as its primary facility for handling

governmentwide cross-servicing operations. This facility was a former

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

consolidation of payment operations. Except for efforts to collect on

erroneous payments under the former payment center operations, the staff

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

FMS trained BDMOC employees before they assumed their debt-collection

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

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

debts.

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

ongoing and experienced debt collection operations to assist in

governmentwide cross-servicing debt collection efforts. In December 1996

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

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

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

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

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

Agriculture’s National Finance Center – submitted applications for

designation as governmentwide debt collection centers. Treasury denied

approval of these agencies primarily because it determined that these

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

have not received any additional applications for designation as

governmentwide debt collection centers.

FMS’ Cross-Servicing

Operations

Management
Page 15 GAO/T-AIMD-00-213

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

Implementation Guide, Standard Operating Procedures (SOP), and

contracts with PCAs. These documents indicate that when nontax debts

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

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

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

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

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

will be referred to PCAs within stipulated time frames.

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

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

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

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

the PCAs.

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

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

FMS collectors

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

debtors who did not respond to demand letters,

• negotiated two repayment agreements that significantly exceeded

authorized pay back time frames, and

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

One of the most critical steps in collecting delinquent debt is

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

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

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

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

establish a formal repayment agreement with the debtor.

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

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

telephone number was not available or the demand letter had been

returned as undeliverable, the collector was then required to start

skiptracing activities to locate the debtor.

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

Oversight of FMS

Debt Collectors and

PCAs

Contacting Debtors
Page 16 GAO/T-AIMD-00-213

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

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

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

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

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

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

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

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

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

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

documentation suggests that these efforts were limited. Specifically, the

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

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

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

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

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

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

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

was between 25,727 (or about 42 percent) and 33,116 (or about 54 percent).
Page 17 GAO/T-AIMD-00-213

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

Issuance of Demand Letter

(Statistical sample of 200 delinquent debts referred

to FMS from April 1998 through May 1999)

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

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

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

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

the required skiptracing to locate the debtor.

FMS officials stated that its collectors might not have documented all

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

collectors to record all debtor conversations and collection activity in the

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

Internal Controls in the Federal Government20 states that all transactions

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

No evidence of

attempt to contact

(96 debts)

48%

Contact attempted

but not made

(72 debts)

36%

Contact made and

initiated by debtor

(22 debts)

11%

Contact made and

initiated by collector

(2 debts)

1%

Contact made;

source of initiation

undetermined

(8 debts)

4%
Page 18 GAO/T-AIMD-00-213

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

documentation should be readily available for examination.

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

perform all the collection activities for each debt within the stipulated

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

efforts were negatively affected when FMS received large batches of

referred debts from the Department of Housing and Urban Development

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

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

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

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

also increased.

FMS did not establish any written guidance to help its collectors

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

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

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

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

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

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

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

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

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

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

be taken.

When entering into a repayment agreement with debtors who are unable

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

repayment period time limitations. The recommended period for

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

referring agencies in their Agency Profile Form.21

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

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

month preauthorized limit established by the referring agency. We found

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

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

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

maximum repayment periods and limits on compromise and repayment amounts.

Repayment Agreements
Page 19 GAO/T-AIMD-00-213

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

made by FMS collectors.

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

owed in satisfaction of the entire debt. In accordance with the crossservicing SOP, a debt may be compromised if there is legitimate doubt

about the debtor’s ability to pay, the government’s ability to collect, or if

the cost of collecting exceeds the benefit. If a compromise is accepted and

the agreed amounts are paid, the debt is closed and returned to the client

agency.

According to FMS’ cross-servicing SOP,

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

a compromise,

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

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

amounts could be reported to IRS,

• collectors were required to obtain current financial statements from the

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

proposed compromise, and

• collectors were authorized to enter into a written compromise repayment

agreement not to exceed 3 months.22

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

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

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

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

compromised debt history files, we found that

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

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

compromising,

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

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

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

Compromised Debts
Page 20 GAO/T-AIMD-00-213

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

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

compromising the debt, and

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

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

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

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

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

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

authorization from the agency or other support for compromising about

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

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

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

ability to pay.

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

• Thirty-two debts involved written or oral compromise repayment

agreements. Of these 32,

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

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

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

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

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

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

per month for 159 months.

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

compromise repayment agreement and (2) evidence that the FMS

collector attempted to follow up to obtain a signed written agreement

from the debtor.

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

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

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

months.
Page 21 GAO/T-AIMD-00-213

contacted the debtor to determine whether the debt collection strategy

could be modified.

• Four of the 16 debts with defaulted compromise repayment agreements

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

default.

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

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

IRS reporting and needed for referral to TOP.

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

requires FMS collectors to pursue the debtor with more aggressive

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

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

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

20 days has expired.

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

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

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

TOP promptly at 20 days because of interface problems between internal

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

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

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

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

likely due to errors made by FMS collectors.

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

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

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

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

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

was 50 days).

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

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

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

TOP Referrals

Referral to PCAs
Page 22 GAO/T-AIMD-00-213

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

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

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

We also identified instances where there were significant delays between

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

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

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

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

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

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

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

explanation for the longer time frame.

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

that several PCAs did not perform or document certain debt collection

procedures required by FMS’ contract.

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

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

attempt to locate debtors through skiptracing, including obtaining credit

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

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

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

debts in their respective debt collection systems. PCA contract monitors

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

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

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

and evaluate payment schedules.

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

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

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

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

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

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

files in a timely manner.

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

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

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

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

percent) of the population.

PCA Collection Activities
Page 23 GAO/T-AIMD-00-213

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

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

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

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

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

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

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

technical bulletin to PCAs to remind them of the contractual requirement

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

with balances of $500 or more.25

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

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

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

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

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

collection system did not indicate that the collector requested financial

statements or other documents reflecting the debtor’s financial condition

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

us by FMS.

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

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

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

discretion over which debt collection procedures they choose to perform

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

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

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

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

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

days before referring them to PCAs.

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

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

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

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

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

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

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

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

Revised SOP
Page 24 GAO/T-AIMD-00-213

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

to recoup from the debtor.

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

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

system to distribute debt accounts to PCAs, track PCA collection

performance, and monitor PCA collection activities. For the first

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

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

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

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

dollar percentage of a distribution that each PCA would receive typically

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

below, to distribute the debts to the PCAs.

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

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

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

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

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

remaining PCAs in descending order. The system then began sequentially

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

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

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

sequentially assign debts and reorder the PCAs after each debt was

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

description of this process is included in appendix II.

We obtained copies of pertinent data from the PMAC system and

performed various analyses of the debt account information, including

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

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

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

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

received a significantly higher percentage of the debts with smaller

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

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

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

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

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

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

largest dollar amount of debts.

Distribution of Debts

to PCAs
Page 25 GAO/T-AIMD-00-213

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

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

Table 2: Analysis of Debt Distributions

PCA Number of debts distributed as

a percent of total debts

distributed

Dollar amount of

debts distributed as

a percent of total

dollars distributed

Average debt

balance

1 4% 6% $31,034

2 6% 10% $31,944

3 6% 6% $23,041

4 29% 16% $11,436

5 8% 8% $22,275

6 7% 9% $29,620

7 9% 9% $19,722

8 11% 13% $24,922

9 7% 7% $18,603

10 7% 9% $25,025

11 6% 7% $26,217

100% 100% $20,845

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

February 1998 through February 2000.

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

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

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

delinquency categories noted above, the PCA mentioned above had the

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

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

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

were less than 1 year delinquent, with an average balance of $5,593. In

addition, we found that 32 percent of the total number of debts that were

less than 1 year delinquent were distributed to the one PCA. These debts

also represented 19 percent of the total dollars of debt in this delinquency

category. The PCA to receive the next highest percentage of the debts less

than 1 year delinquent was distributed 11 percent of the total number of

debts representing 13 percent of the total dollars, with an average debt

balance of $10,694.

On the other hand, we found that for one agency’s debts for which no

collections had been made through February 2000, 35 percent of the total

number of accounts for this same agency were distributed to two PCAs,

representing 55 percent of the total amounts received by these PCAs, with

a combined average balance of $2.7 million. The one PCA mentioned

above, who is not one of these two, received 17 percent of the total
Page 26 GAO/T-AIMD-00-213

number of accounts of this same agency’s debts representing 14 percent of

the total amounts received by the PCA with an average balance of

$1.4 million. We noted that several agencies had referred debts with large

average dollar balances ranging from $54,000 to $1.7 million for which no

amounts have been collected.

Further, we analyzed collections on closed debt accounts with payments

categorized by age of delinquency. Collection industry statistics have

shown that collection rates are generally higher on debts with smaller

dollar balances and that are less delinquent. While the PCA mentioned

above had collected the most in total dollars, it ranked highest in

collections as a percentage of the total amounts referred only in the 1 to 2

years and 4 to 6 years delinquency categories. In the other five delinquency

categories, other PCAs had higher collection percentages. Our analysis

also showed that generally three out of the four PCAs with the highest

collection percentages in each delinquency category had average debt

balances that were below the overall average balances for that category.

For example, the three PCAs with the highest collection percentages in the

less than 180 days delinquent category had average account balances of

$265, $810, and $857. The overall average account balances for this

delinquency category was $2,003. Thus, FMS’ collection experience

appears to be consistent with that of the collection industry statistics

noted above.

Concerns relating to the distribution method have been raised by some of

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

asked how the debts should be distributed, the general consensus among

them was that the distribution should consider the characteristics of the

debts, such as age of delinquency, type of debt (consumer or commercial),

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

that stratifying the available debts by agreed-upon characteristics would

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

foster a more competitive environment.

An important consideration to help ensure that each PCA receives a

proportionate mix of debts is that the population of debts to be distributed

is homogeneous, i.e., of the same characteristic, such as age of

delinquency, balance, type, or originating agency. For each distribution,

FMS placed all the debts available into one pool. Our analysis of the debts

found that the debts within each distribution’s pool were generally not of

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

delinquency. This factor contributed to the distribution results

experienced by FMS which are discussed above.
Page 27 GAO/T-AIMD-00-213

FMS compiled information on the distribution and collection of the debts

referred to the PCAs in response to various congressional and other

requests. During our fieldwork, FMS had not yet analyzed these data.

Given the above noted PCAs’ feelings about the distribution method and

the results thus far of FMS’ distributions to the PCAs, it may be necessary

for FMS to periodically analyze the distribution and collection data to

determine whether adjustment is needed to the distribution model to

assure that a proportionate mix of debts is being distributed to the PCAs

and competition among the PCAs is more fully promoted.

For its services, FMS collects cross-servicing fees from referring agencies

that range from 1 percent to 18 percent of the referred debt amounts

collected (see appendix III for the details regarding the fees collected). As

stated in the SOP, effective during the period of our detailed testing, and

as allowed by DCIA, FMS intended for the fees charged for its crossservicing debt collection activities to fully cover the cost of its related

operations. However, for fiscal year 1999, cross-servicing fees totaled

$1.6 million, or about 15 percent, of FMS’ $11 million of estimated crossservicing costs.27

FMS hired a contractor to assist with the development of its estimated

costs, a model for conducting break-even analyses, and fee setting. The

FMS contractor indicated that fees for cross-servicing would have to

increase substantially over current levels for FMS to achieve full cost

recovery.

We determined, using the current fee structure and the fiscal year 1999

collection experience, that FMS would have to increase annual collections

by over sevenfold, or collect approximately $173.5 million, to cover its

fiscal year 1999 estimated costs of $11.0 million. The estimated

$173.5 million in collections would include approximately $141.6 million to

be returned to the referring agency for collected debts, $20.9 million in

fees paid to PCAs, and $11 million in cross-servicing fees paid to FMS.28

27FMS’ estimated costs do not include any agency costs, such as costs incurred by the agencies to

refer debts to FMS for cross-servicing.

28Our analysis assumes that no additional costs will be incurred to increase the collection amount.

Also, we assumed that all DOJ collections are from post judgment debts where the 18-percent fee

would apply on the initial amount. During fiscal year 1999, most of DOJ collections were from post

judgment debts.

FMS’ Cross-Servicing

Fees and Related

Costs of Operations
Page 28 GAO/T-AIMD-00-213

The amount of collections needed to reach a break-even basis varies

substantially depending on who collects the debt, FMS or the PCAs. If

FMS did all the collections at its 18 percent rate, debt collections of about

$72 million would be needed to cover the $11 million estimated costs.

Conversely, if FMS relied on the PCAs exclusively for collections, its 3

percent fee on these collections would require that the PCAs bring in

collections of about $471 million to cover these costs.

Projected higher future costs will require even more collections to break

even. FMS’ fiscal year 2000 cross-servicing cost estimate that we were

provided is about $12.9 million or about 17 percent greater than the fiscal

year 1999 estimate. According to FMS officials, FMS has not projected

cross-servicing fee revenues and costs beyond fiscal year 2000. Although

the officials stated that FMS is currently considering increasing crossservicing fees, they have acknowledged that the cross-servicing program

will not be fully reimbursable in the foreseeable future. Thus, the crossservicing program will likely have to be funded primarily through

appropriations at least in the near term.

In summary, for FMS’ cross-servicing program to become a fully

implemented and mature program, many challenges lie ahead that must be

overcome to assure success in the collection of delinquent debt. These

challenges are magnified since as delinquent debt ages further, the

likelihood of collection diminishes.

Mr. Chairman, this concludes my prepared statement. I would be pleased

to respond to any questions you or other Members of the Subcommittee

may have.

For information about this testimony, please contact Gary T. Engel at

(202) 512-3406. Major contributors to this testimony include Kenneth R.

Rupar, Paula M. Rascona, Matthew F. Valenta, Michael S. LaForge, Gladys

Toro, and Sophia Harrison.

Contacts and

Acknowledgments
Page 29 GAO/T-AIMD-00-213

Cross-servicing waivers—Treasury granted the Departments of

Education and Health and Human Services waivers from cross-servicing

for certain classes of their own debts. According to FMS officials, the

waiver, which is valid for a 3-year period, allows the agencies to perform

collection activity on those debts subject to the waivers. As of October

1999, agencies can no longer apply for waivers, but rather must apply for

exemption from cross-servicing for specific classes of debts.

Debts in forbearance or in appeals—Debts that are subject to

forbearance or that are in appeals generally are not “legally enforceable.”

Forbearance action taken by a creditor generally extends the time for

payment of a debt or postpones, for a time, the enforcement of legal action

on the debt. The government cannot pursue collection against a debtor if

the debt is not legally enforceable.

At DOJ—Debts that are referred to DOJ for litigation or collection are

excluded for referral to Treasury for cross-servicing by DCIA.

Foreign debt—Debt that is owed by foreign governments is excluded for

referral to Treasury. Treasury stated that, for the most part, collecting

these delinquent debts is infeasible primarily due to foreign diplomacy

considerations and affairs of state.

Debts in bankruptcy—The automatic stay mandated by 11 U.S.C.

Section 362 generally prevents the government from pursuing collection

action against debtors in bankruptcy.

Debts in foreclosure—Debts in foreclosure are governed by state laws.

In some states, to maintain the right to foreclose, a creditor must foreclose

the collateral securing the debt before seeking other collection remedies.

DCIA excludes debts that are in foreclosure for referral to Treasury for

collection action.

Department of Defense—According to an FMS official, certain

contractor debt held by the Department of Defense (DOD) and reported as

debt over 180 days delinquent as of September 30, 1998, was subsequently

reclassified from eligible to ineligible debt. Specifically, in August 1999

FMS and DOD agreed to reclassify $1.3 billion of such debt to ineligible

debt due to ongoing litigation.

Debts eligible for internal offset—Debts that will be collected under

agency-initiated offset, if such offset is sufficient to collect the claim

within 3 years after the date the debt or claim is first delinquent, are

excluded for referral for cross-servicing by DCIA.

Appendix I

Explanation of Terms/Data in Table 1
Appendix I

Explanation of Terms/Data in Table 1

Page 30 GAO/T-AIMD-00-213

Debts at third party—Debts being serviced and/or collected in

accordance with applicable statutes and/or regulations by third parties,

such as private lenders or guaranty agencies, are exempt from crossservicing by Treasury regulations.
Page 31 GAO/T-AIMD-00-213

The PMAC system begins the distribution process by creating a list of debt

accounts for distribution that are ordered first by the earliest to latest date

the debt account was entered into the PMAC system. Then, for each date

entered, by dollar amount from highest to lowest. The PMAC system then

performs a series of calculations to determine a dollar-limiting amount

that represents the highest dollar amount of an individual debt account

included in the distribution list. All individual debts that exceed the dollarlimiting amount are excluded from that distribution. According to FMS

officials and its contractor, the dollar-limiting amount was established to

help ensure that no debt accounts would be assigned that are larger than

every PCA’s distribution goal amount. According to FMS, the list of debt

accounts are ordered by date entered into the PMAC system to help ensure

that no debt account will remain unassigned for an extended period of

time.

Next, the PMAC system calculates the goal distribution percentages for

each PCA. The goal distribution percentages are based on the performance

evaluation results of the prior 4 month performance period and are used to

determine the dollar amount of debts each PCA will be allocated. The

PMAC system then orders the PCAs by listing the PCA with the largest

distribution goal first followed by the remaining PCAs in descending order

according to goal distribution amounts. The PMAC system assigns the debt

accounts sequentially from the debt account listing to PCAs so that the

PCA with the largest remaining distribution goal amount will receive the

debt with the largest balance and so forth. A debt can be assigned to a

PCA if the debt amount will not cause the PCA to exceed its remaining

distribution goal amount within a preestablished tolerance amount and the

debt account has not been previously assigned to the PCA in a prior

distribution. If the debt account cannot be assigned to the first PCA on the

list, the system proceeds to the next PCA. This process continues until

each PCA has been assigned at least one debt account.

After each PCA has been assigned at least one debt account, the PCAs are

reordered from the largest remaining distribution goal amount to the least.

The PMAC system continues to sequentially assign the debt accounts and

reorder the PCAs after each debt account is assigned until all eligible

debts that can be assigned have been assigned. Debt accounts that are not

assigned during the distribution process are included with the next

distribution.

Appendix II

FMS Distribution Methodology
Page 32 GAO/T-AIMD-00-213

In its standard written agreement with all referring agencies, FMS requires

agencies to pay FMS cross-servicing fees for nontax debt collections on

debts referred to FMS. The agreement states that FMS is entitled to a

cross-servicing fee for all nontax debt collections received after it initiates

collection action, which is defined as the issuance of a demand letter

and/or an attempt to contact the debtor. FMS fees are based on a

percentage of the initial referred debt amount that is collected. FMS’ crossservicing fees effective during the period of our fieldwork are listed below

in table 3.

Table 3: Cross-Servicing Fee Rates

Type of cross-servicing collection Fee rates

(%)

Debts referred to FMS for cross-servicing and collected by FMS

collectors

18

Post-judgement debts referred to FMS and subsequently

collected by the Department of Justice (DOJ)

18

Debts referred to FMS for cross-servicing and subsequently

collected by PCAs

3

Debts referred to FMS for cross-servicing and subsequently

collected by TOP

3

Debts referred to FMS for cross-servicing and subsequently

collected by DOJ (excluding post-judgement enforcement)

3

Debts referred to FMS and sent directly to and collected by

PCAs with no collection activity performed by FMS, referred to

as “pass-throughs”

1

(901803)

Appendix III

FMS’ Cross-Servicing Fee Rates
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