a

GAO

United States General Accounting Office

Testimony

Before the Subcommittee on Government Efficiency, 

Financial Management and Intergovernmental Relations, 

Committee on Government Reform, House of 

Representatives

For Release on Delivery 

Expected at 10 a.m. 

Wednesday, October 10, 2001

DEBT COLLECTION 

IMPROVEMENT ACT OF 

1996

Agencies Face Challenges 

Implementing Certain Key 

Provisions

Statement of Gary T. Engel 

Director, Financial Management and Assurance

GAO-02-61T

Page 1 GAO-02-61T 

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss our work on selected agencies’ 

implementation of certain key provisions of the Debt Collection 

Improvement Act of 1996 (DCIA). Agencies have long had problems in 

managing credit programs and collecting non-tax debts. As such, it is 

essential that the government not only make and guarantee creditworthy 

loans, but also put effective practices in place to collect amounts that are 

owed. In this light, the DCIA, which was developed under the leadership of 

this Subcommittee, was intended, among other things, to maximize 

collection of billions of dollars of non-tax delinquent debt owed to the 

government by requiring agencies to (1) notify Treasury of debts delinquent 

over 180 days for purposes of administrative offset and (2) refer such debts 

to Treasury for centralized collection action known as cross-servicing. 

Moreover, to facilitate debt collection, the act also authorizes agencies to 

administratively garnish the wages of delinquent debtors and bars 

delinquent debtors from receiving federal financial assistance in the form 

of certain loans, loan insurance, or loan guarantees until they resolve their 

delinquencies.

My testimony today will cover selected agencies and focus on 

(1) difficulties they have experienced identifying and referring eligible 

debts to Treasury’s Financial Management Service (FMS) or a Treasury 

designated debt collection center, (2) obstacles that have hampered 

prompt referral of eligible debts, and (3) whether exclusions from referral 

requirements were consistent with established criteria. Based on 

information reported to Treasury on debt referrals, exclusions, and other 

data, we focused our review on major programs at the Department of 

Agriculture’s (USDA) Rural Housing Service (RHS) and Farm Service 

Agency (FSA) and the Department of Health and Human Service’s (HHS) 

Centers for Medicare & Medicaid Services (CMS).1

 In addition, our review 

covered the extent to which nine large Chief Financial Officers (CFO) Act 

agencies use or plan to use administrative wage garnishment (AWG) to 

1

On June 14, 2001, the Secretary of HHS changed the name of the Health Care Financing 

Administration to the Centers for Medicare & Medicaid Services.
Page 2 GAO-02-61T 

collect delinquent federal non-tax debt.2 It also covered the advantages and 

disadvantages of using national credit reporting agencies, the Treasury 

Offset Program’s (TOP) database, and HUD’s Credit Alert Interactive Voice 

Response System (CAIVRS) to promptly identify delinquent federal debtors 

for the purpose of denying them federal financial assistance.

Let me first make a few overall comments about implementation of the 

DCIA. We testified before this Subcommittee in June 2000 that, although 

the DCIA was enacted in April 1996, FMS was still the only 

governmentwide debt collection center, and that it had not yet fully 

implemented the act’s cross-servicing provision.3

 We emphasized that on a 

governmentwide basis, the vast majority of reported debt delinquent over 

180 days was being excluded by agencies from referral requirements under 

exclusions allowed by the DCIA or Treasury. However, we cautioned that 

the reliability of the amounts reported as excluded was not being 

independently verified. We also stressed that agencies were not promptly 

referring all eligible debts to FMS. The picture left with your 

Subcommittee was that agency implementation would have to improve 

vastly if the debt collection benefits of the DCIA were to be more fully 

realized.

I am pleased to report that FMS is making progress in collecting delinquent 

federal non-tax debt through TOP. As you know, TOP is a mandatory 

governmentwide debt collection program that compares delinquent debtor 

data to certain federal payment data. When a delinquent debtor record 

matches a payment record, TOP recovers all or a portion of the delinquent 

debt by offsetting some or all of the federal payment scheduled to be issued 

to the debtor. During each of the last 3 years, FMS has reported collecting 

over $1 billion of such debt with TOP by offsetting tax refund payments. 

Tax refund offsets have been FMS’ most effective means of debt collection 

and collections have increased, in part, as a result of systems changes the 

agency implemented. For example, the TOP system can offset against both 

2

 The nine CFO Act agencies we included in our review are USDA, the Department of 

Education, the Department of Energy, the Environmental Protection Agency (EPA), HHS, 

the Department of Housing and Urban Development (HUD), the Small Business 

Administration (SBA), the Social Security Administration (SSA), and the Department of 

Veterans Affairs (VA). These agencies reported holding over 90 percent of the total 

delinquent debt amounts reported by the 24 CFO Act agencies on their respective Treasury 

Report on Receivables Due From the Public (TROR) as of September 30, 2000. 

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

Initiative (GAO/T-AIMD-00-213, June 8, 2000).
Page 3 GAO-02-61T 

the primary and secondary taxpayer, where the previous tax refund system 

could only offset against the primary taxpayer. In addition, the TOP system 

can accept new debts or increased debt balances all during the year, 

whereas the previous tax refund system could only accept them at the 

beginning of the tax season. 

While there has been important progress, our follow-up work at selected 

agencies over the past several months has not allayed our concerns about 

the priority agencies have placed on implementing the DCIA. As I will 

highlight today, the agencies we reviewed have not taken effective actions 

to ensure that all eligible delinquent debt is promptly referred to FMS or a 

Treasury designated debt collection center for collection action. For 

example, 

• As of September 30, 2000, RHS had reported that it referred to TOP 

$201 million of direct single family housing loans but had not referred 

any amounts to FMS for cross-servicing primarily due to systems 

limitations. Also, RHS’ reported delinquent direct single family housing 

loans eligible for TOP may have been understated by about $348 million 

because it did not report all amounts that were due and payable. 

• FSA did not have an adequate process or sufficient controls to 

adequately identify and report direct farm loans eligible for referral to 

FMS as of September 30, 2000. In addition, a large portion of the 

approximately $400 million of delinquent direct farm loans that became 

eligible for TOP during calendar year 2000 was not likely promptly 

referred because the agency refers debts to TOP only once annually 

during December. Further, FSA did not refer co-debtors for the 

$934 million of delinquent farm loans previously referred to TOP 

because of systems limitations that had existed for years. Moreover, the 

agency had referred only $38 million to FMS for cross-servicing because 

it suspended cross-servicing referrals pending development and 

implementation of its new cross-servicing policy.

• RHS and FSA have not referred to FMS for collection action any losses 

on their guaranteed single family housing and farm loans, respectively, 

even though they have experienced losses of about $132 million and 

about $293 million, respectively, on such loans since the enactment of 

the DCIA. 

• CMS reported $4.3 billion of Medicare debt eligible for referral for 

collection action as of September 30, 2000, that had not been referred. 

Although CMS referred about $1.5 billion of this debt for collection 

action through August 2001, the agency made the vast majority of the 

referrals late in the year due to debt referral system problems, delays in 
Page 4 GAO-02-61T 

issuing referral guidance to its contractors, and a lack of monitoring of 

contractor referrals.

Moreover, agencies still have not utilized AWG as authorized by the DCIA 

to collect delinquent non-tax debt even though experts have testified 

before this Subcommittee that AWG can potentially be an extremely 

powerful debt collection tool.4

 Finally, at the present time, neither credit 

bureau reports, the TOP database, nor CAIVRS provides a comprehensive 

information source for federal credit agencies to use to identify all 

delinquent debtors for the purpose of denying federal financial assistance. 

Therefore, the effectiveness of the DCIA debtor bar provision is limited. 

Simply stated, if the government is going to make significant progress in 

collecting the billions of dollars of delinquent non-tax debt and preventing 

delinquent debtors from obtaining additional federal financial assistance, 

the debt collection provisions of the DCIA must be given a high priority by 

agencies. This has not been the case at the agencies we reviewed as in 

many cases the agencies are showing needed corrective actions years in 

the future even though substantial amounts of eligible delinquent debt have 

not been referred. 

We performed our work primarily at RHS, FSA, and CMS. We conducted 

interviews with agency officials responsible for the identification and 

referral of eligible delinquent debts to FMS or a Treasury designated debt 

collection center and reviewed pertinent policies, procedures, and reports 

related to such debt referrals. We statistically selected and determined 

whether loans that FSA had excluded from referral to FMS for collection 

action as of September 30, 2000, were consistent with established criteria 

dealing with bankruptcy, forbearance/appeals, foreclosure, and referral to 

the Department of Justice (DOJ) for litigation. RHS was not able to provide 

supporting documentation for certain loans it excluded from referral to 

FMS for collection action as of September 30, 2000. This scope limitation 

prevented us from determining whether such exclusions were consistent 

with established criteria. As agreed to with staff of this Subcommittee, we 

did not perform detailed testing on debts that had been excluded by CMS 

from referral for collection action because of ongoing work in this area 

being performed by HHS’ Office of Inspector General. We did not 

4

 Education has been garnishing wages of certain delinquent debtors since 1993 under 

separate authority from that granted by the DCIA (Section 488A of the Higher Education Act 

of 1965, as amended, 20 U.S.C. 1095a).
Page 5 GAO-02-61T 

independently verify the reliability of certain information provided to us by 

RHS, FSA, and CMS (e.g., debts reported as over 180 days delinquent). 

In addition, we surveyed nine large CFO Act agencies on their use and 

planned use of AWG and their debt reporting practices. Although we 

discussed with agency officials certain responses provided on the surveys, 

we did not independently verify the reliability of all the information that 

was provided. In addition, we conducted interviews with officials from 

several national credit reporting agencies and HUD regarding credit bureau 

reports and CAIVRS, respectively.

We also conducted interviews with FMS officials and officials of Treasury’s 

designated debt collection center at HHS and reviewed pertinent 

documents provided by these officials regarding agency debt referral 

practices. We performed our work in accordance with generally accepted 

government auditing standards from November 2000 to September 2001.

RHS’ Direct Single 

Family Housing Loan 

Program

RHS administers a Direct Single Family Housing (SFH) Loan Program to 

help low-income individuals or households purchase homes in rural areas. 

As of September 30, 2000, RHS reported having about $17 billion 

outstanding in direct SFH loans. As shown in table 1, RHS reported

$383 million of direct SFH loans over 180 days delinquent including debts 

classified as Currently Not Collectible (CNC) on its TROR as of 

September 30, 2000. 5

5

 CNC debts are debts the agency has written off for accounting purposes but has not 

discharged. Collection action can still be taken on such debts.
Page 6 GAO-02-61T 

Table 1: RHS’ Direct Single Family Housing Loans 

a

 Exclusions were for bankruptcy, forbearance/appeals, and foreclosure.

Source: TROR fourth quarter 2000 (September 30, 2000).

RHS excluded $182 million of this delinquent debt from referral to FMS for 

TOP and cross-servicing. In addition, RHS had not referred any debts to 

FMS for cross-servicing as of September 30, 2000, based, in part, on an 

exemption proposal which RHS stated, in its TROR as of the same date, had 

been approved by Treasury. However, Treasury officials told us that 

Treasury never approved a proposal to exempt RHS loans from crossservicing. Accordingly, opportunities to collect these loans through 

Treasury’s cross-servicing program are being missed.

Support for Not Referring a 

Significant Amount of 

Delinquent Direct SFH 

Loans Not Maintained 

The DCIA requires federal agencies to refer all legally enforceable and 

eligible non-tax debts that are more than 180 days delinquent to Treasury 

for collection through administrative offset and cross-servicing.6

 We found 

that RHS did not maintain supporting documentation for direct SFH loans 

it excluded from such referral as of September 30, 2000. Consequently, we 

were not able to determine whether the agency’s exclusion of $182 million 

of delinquent debt was based on relevant legislative and regulatory criteria. 

FMS officials told us that it is their expectation that agencies would retain 

the applicable data needed to justify not referring delinquent debt for 

collection action. Furthermore, the Comptroller General’s Standards for 

Internal Controls in the Federal Government states that all transactions 

Debt amounts (in

millions of dollars)

Debts over 180 days delinquent including debts in CNC $383

Less: exclusions allowed by DCIAa 182

Debt eligible for Treasury offset 201

Debt referred for offset 201

Debt referred for cross-servicing 0

6

 Federal agencies may, at their discretion, refer valid, legally enforceable debts for 

administrative offset and cross-servicing that are less than 180 days delinquent.
Page 7 GAO-02-61T 

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

documentation should be readily available for examination.

 7

Systems Limitations 

Hampered Referral Activity 

According to RHS officials, since implementing a new automated 

centralized loan servicing system in fiscal year 1997, RHS has been unable 

to readily identify direct SFH loans that are eligible for referral to FMS for 

cross-servicing. Essentially, the system does not contain sufficient data to 

differentiate loans eligible for cross-servicing from those that are not. 

Although RHS plans system enhancements for the third quarter of fiscal 

year 2002, which the agency believes will facilitate loan identification for 

cross-servicing, RHS officials advised us that relatively few referrals to 

FMS will likely be made in the near term. While we were performing our 

fieldwork, RHS began an interim process to manually identify such loans 

eligible for cross-servicing. According to RHS’ debt referral plan, because 

the interim process is tedious and labor intensive, only about 100-200 loans 

will be referred per month to Treasury beginning in May 2001. RHS 

officials said that all direct SFH loans eligible for TOP will have to be 

reviewed for cross-servicing eligibility. RHS reported 23,032 direct SFH 

loans eligible for TOP as of September 30, 2000. The agency intends to 

refer about 30 percent of eligible direct SFH loans to cross-servicing in 

fiscal year 2002. 

Exemption Request Denied According to RHS officials, nothing had been done prior to our review to 

manually identify delinquent direct SFH loans for referral to FMS for crossservicing because the agency had requested a Treasury exemption from 

cross-servicing for direct loans made under the SFH Loan Program. RHS 

had requested that it be allowed to continue to internally service the loans 

for up to 1 year after liquidation of the collateral, which, in some cases, 

could be years after the loans became delinquent. Treasury officials told us 

that Treasury had not approved the request, either formally or informally, 

and stated that Treasury discouraged RHS from making the request, which 

was not submitted to Treasury until November 2000. Treasury formally 

denied RHS’ exemption request for the direct SFH Loan Program on May 

14, 2001. The declination was based, in part, on the fact that similar loans 

were being referred for cross-servicing by other agencies and RHS had not 

7 Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, Nov. 

1999).
Page 8 GAO-02-61T 

identified any new or unique collection tools applicable to direct SFH 

loans.

RHS May Have Significantly 

Understated Direct SFH 

Loans Eligible for Referral

When a debtor becomes delinquent 91 days on an installment payment for a 

direct SFH loan, RHS notifies the debtor via certified mail that the entire 

debt balance is accelerated and is due and payable. As shown in table 1, 

RHS reported $201 million of direct SFH loans as eligible for TOP as of 

September 30, 2000. However, this amount may have been understated by 

about $348 million because it only included the delinquent installment 

portion of the loans. According to FMS, the entire accelerated balance of 

the debt should be reported as delinquent and, absent any exclusions 

allowed by the DCIA or Treasury, should be reported as eligible for referral 

to FMS for collection as well. 

FSA’ s Direct Farm 

Loan Program

FSA provides, among other things, temporary credit to farmers and 

ranchers who are high-risk borrowers and are unable to obtain commercial 

credit at reasonable rates and terms. FSA reported having about 

$8.7 billion in direct farm loans as of September 30, 2000, and as shown in 

table 2, the agency reported about $1.7 billion of direct farm loans over 180 

days delinquent including debts in CNC as of September 30, 2000. 

Table 2: FSA’s Direct Farm Loans 

a The vast majority of the reported exclusions were for bankruptcy, forbearance/appeals, foreclosure, 

and DOJ/litigation. 

b

In addition, other exclusions from referrals to FMS for cross-servicing, including internal offset, were 

reported by FSA as of September 30, 2000.

Source: TROR fourth quarter 2000 (September 30, 2000).

Debt amounts (in

millions of

dollars)

Debts over 180 days delinquent including debts in CNC $1,666

Less: exclusions allowed by DCIAa 732

Debt eligible for Treasury offsetb 934

Debt referred for offset 934

Debt referred for cross-servicing 38
Page 9 GAO-02-61T 

FSA excluded substantial amounts of this debt from referral to FMS for 

TOP and cross-servicing. In addition, FSA officials told us that only 

$38 million was referred to FMS for cross-servicing as of September 30, 

2000, because FSA suspended all cross-servicing referrals in April 2000 

pending development and implementation of new cross-servicing 

guidelines for the agency. 

Effective Process and 

Controls Lacking for 

Determining Eligibility for 

Referral of Direct Farm 

Loans 

FSA did not have a process or sufficient controls in place to adequately 

identify direct farm loans eligible for referral to FMS. Certain types of 

debts were automatically excluded from referral without any review for 

eligibility. In other cases, FSA’s Program Loan Accounting System did not 

contain information from the detailed loan files located at the FSA field 

offices that would be key to determining eligibility for referral. In addition, 

FSA did not have any monitoring or review procedures in place to help 

ensure that FSA personnel routinely updated the detailed debt files. 

Consequently, amounts of direct farm loans FSA reported to Treasury as 

eligible for referral were not accurate.

Excluded amounts for bankruptcy, forbearance/appeals, foreclosure, and 

DOJ/litigation totaled about $694 million, or about 95 percent of the 

$732 million that was excluded from referral to FMS for TOP and crossservicing. Of this amount, $295 million was for DOJ/litigation and was 

comprised of judgment debts. According to FSA officials, deficiency 

judgments--court judgments requiring payment of a sum certain to the 

United States--are eligible for TOP and should be referred to FMS. 

However, FSA’s Finance Office in St. Louis automatically excluded all 

judgment debts for direct farm loans from referral to FMS because 

automated system limitations precluded staff from identifying deficiency 

judgments. Our inquiries caused FSA officials to initiate a special project 

in May 2001 to identify all deficiency judgment debts for direct farm loans 

so that such debts could be referred to FMS. 

Determinations as to whether direct farm loans are in bankruptcy, 

forbearance/appeals, or foreclosure and, therefore, excluded from referral 

to FMS, are made by FSA personnel in numerous FSA field offices across 

the country. Personnel in the FSA field offices we visited did not routinely 

update the eligibility status of farm loans in FSA’s Program Loan 

Accounting System as was evident by the selected excluded loans we 

reviewed. Using statistical sampling, we selected and reviewed supporting 

documents to determine whether farm loans that selected FSA field offices 

located in California, Louisiana, Oklahoma, and Texas had excluded from 
Page 10 GAO-02-61T 

referral to FMS were consistent with established criteria dealing with 

bankruptcy, forbearance/appeals, foreclosure, and DOJ/litigation.8

 Based 

on the results of our sample, we estimate that about 575, or approximately 

one-half of the excluded loans in the 4 selected states, had been 

inappropriately placed in exclusion categories by FSA as of September 30, 

2000.9

 Because of these numerous errors, we did not test other reported 

exclusions from referral to FMS for cross-servicing, such as loans being 

internally offset.

One of the most frequently identified inappropriate exclusions pertained to 

amounts discharged in bankruptcy, which should not have been included in 

delinquent debt. Fifty-two bankruptcies that we reviewed as part of our 

sample had been discharged in bankruptcy court prior to September 30, 

2000. In fact, many had been discharged several years prior to that date. 

For example, one loan with a balance due of about $325,000 was reported 

as a delinquent debt over 180 days and excluded from referral requirements 

because of bankruptcy. However, a review of the loan file at the FSA field 

office showed that a bankruptcy court discharged the debt in 1986 and, 

therefore, the debt should not have been included in either the delinquent 

debt or exclusion amounts reported to Treasury as of September 30, 2000. 

According to Farm Loan Managers in some of the FSA field offices we 

visited, they have not written off many direct farm loans discharged in 

bankruptcy because making new loans has been a higher priority use of 

their resources. In addition, FSA did not provide sufficient oversight to 

help ensure that field office personnel adequately tracked the status of 

discharged bankruptcies and updated the loan files and debt records in the 

Program Loan Accounting System. Also, it is important to note that delays 

in promptly writing off discharged bankruptcies not only distort the TROR 

for debt management and credit policy purposes, but also distort key 

financial indicators such as receivables, total delinquencies, and loan loss 

data. This makes the information misleading for budget and management 

decisions and oversight. Aside from erroneously inflating reported loans 

8

Field offices in these four states serviced about $272 million, or about 39 percent, of the 

total debts excluded from referral to FMS as of September 30, 2000, for bankruptcy, 

forbearance/appeals, foreclosure, or DOJ/litigation.

9 We estimate that 48.5 percent plus or minus 15.7 percent of the population were 

inappropriately reported as exclusions from referral to TOP. When projecting these errors 

to the population of 1,187 loans, we are 95-percent confident that the errors in the 

population are between 389 and 761 loans. 
Page 11 GAO-02-61T 

receivables and delinquent loans, failure to process loan write-offs delays 

reporting closed-out debt amounts to the Internal Revenue Service (IRS) as 

income to the debtor.10

Referrals of Direct Farm 

Loans for Cross-Servicing 

Suspended 

As previously mentioned, only $38 million of direct farm loans were 

reported by FSA as having been referred for cross-servicing because the 

agency suspended such referrals in April 2000 pending development and 

implementation of a new policy to refer to FMS for cross-servicing only 

debts where the 6-year statute of limitations has not expired. FSA issued 

revised guidelines in July 2001 to incorporate the 6-year statute of 

limitations and the agency is now in the process of reviewing loans at over 

1,000 FSA field offices to determine eligibility for referral to Treasury under 

the new policy. FSA plans to resume referrals to FMS for cross-servicing 

by the end of calendar year 2001.

According to FSA officials, FSA decided to adopt the new policy because 

they believed that FMS informed them that accounts for which the 6-year 

statute of limitations had expired should not be referred for crossservicing. However, FMS officials told us that FMS had not provided such 

guidance to FSA. FMS officials emphasized that FMS will accept debts that 

are older than 6 years because, although the debts cannot be referred to the 

DOJ for litigation, collection can still be attempted through other debt 

collection tools such as referral to private collection agencies. 

Co-Debtors Not Referred for 

TOP

Even though FSA reported having referred $934 million of direct farm loans 

to FMS for TOP as of September 30, 2000, the agency has lost and continues 

to lose opportunities for maximizing collections on this debt because it 

does not refer co-debtors. According to FSA officials, the vast majority of 

direct farm loans have co-debtors, who are also liable for loan repayment. 

However, FSA’s automated loan system cannot record more than one 

debtor because the system modifications necessary to accept Taxpayer 

Identification Numbers (TINs) for multiple debtors have not been made. 

According to a FSA official, the need to have co-debtor information in the 

system to facilitate debt collection was initially determined in 1986. 

However, we were told that to date, higher priority systems projects have 

10 The Federal Claims Collection Standards--which were last updated in November 2000--and 

OMB in its Circular A-129 both require agencies, in most cases, to report closed-out debt 

amounts to the IRS as income to the debtor. 
Page 12 GAO-02-61T 

precluded FSA from completing the necessary systems enhancements to 

allow the system to accept more than one TIN per debt. In other words, 

although FSA recognized years ago the need to take action, the agency has 

not considered this to be a high enough priority. According to FSA 

officials, FSA has now incorporated this requirement in the new Farm Loan 

Program Information Delivery System scheduled for implementation in 

fiscal year 2005.

Eligible Debt Not Promptly 

Referred to TOP

According to data provided by FSA officials, about $400 million of new 

delinquent debt became eligible for TOP during calendar year 2000. 

Although FSA officials stated that the debts became eligible relatively 

evenly throughout the year, debts eligible for TOP are referred by FSA only 

once annually, during December. Consequently, a large portion of the 

$400 million of debt likely was not promptly referred when it became 

eligible. As we have previously testified, industry statistics have shown 

that the likelihood of recovering amounts owed decreases dramatically 

with the age of delinquency of the debt.11 Thus, the old adage that “time is 

money” is very relevant for referrals of debts to FMS for collection action. 

FSA officials told us that the agency agrees that quarterly referrals could 

enhance possible collection of delinquent debts by getting them to Treasury 

earlier and has plans to start a quarterly referral process in fiscal year 2003.

RHS and FSA Have Not 

Referred Losses on 

Guaranteed Loans to 

FMS

Since the DCIA was enacted in April 1996, RHS and FSA have also missed 

opportunities to potentially collect millions of dollars related to losses on 

guaranteed loans. As of September 30, 2000, neither RHS nor FSA treated 

such losses resulting from the SFH Program and the Farm Loan Program, 

respectively, as non-tax federal debts. Consequently, neither agency had 

policies and procedures in place to refer such losses to Treasury for 

collection through FMS’ TOP or cross-servicing programs.

Guaranteed SFH loans and farm loans, as well as related losses, have been 

significant since the inception of the guaranteed programs. The RHS 

guaranteed SFH program has been expanding in recent years. The 

outstanding principal due on the guaranteed SFH portfolio grew from 

about $3 billion in fiscal year 1996 to over $10 billion as of September 30, 

2000, and RHS has paid out losses of about $132 million on the guaranteed 

11 GAO/T-AIMD-00-213, June 8, 2000.
Page 13 GAO-02-61T 

SFH program since fiscal year 1996. The outstanding principal due on 

guaranteed farm loans was about $8 billion as of September 30, 2000, and 

FSA has paid out about $293 million in losses since fiscal year 1996.

In January 1999 and June 2000, USDA’s Office of Inspector General (OIG) 

first reported that RHS’ and FSA’s guaranteed losses, respectively, were not 

being referred to Treasury for collection. The OIG recommended that both 

agencies recognize the losses as federal debt and begin referring such debt 

to FMS for collection. 

Although RHS has recently initiated action to begin developing policies for 

referring losses on guaranteed loans to FMS for collection action in the 

future, its efforts to make necessary regulatory and policy changes have 

not been fully completed resulting in continuing missed opportunities to 

potentially collect losses on guaranteed loans. FSA, on the other hand, has 

recently initiated action to begin implementing new policies for referring 

losses on all new guaranteed loans to FMS for collection action. Because 

these guaranteed loan programs are significant to RHS and FSA, the 

agencies’ development as well as implementation of policies and 

procedures to promptly refer eligible amounts to Treasury for collection 

action is critical. 

CMS’ Medicare 

Program

Most of CMS’ debts stem from overpayments made by its 55 claims 

administration contractors to Medicare providers and beneficiaries under 2 

programs--Part A, Hospital Insurance, and Part B, Supplemental Insurance. 

Because of the ongoing business relationship with providers, the 

contractors are able to collect most Medicare debt by offsetting subsequent 

Medicare payments. However, for debts for which offset is not 

accomplished, the unpaid balances not collected within 180 days 

delinquent are subject to the debt referral requirements of the DCIA. 

As shown in table 3, CMS reported that about $6.4 billion of delinquent 

Medicare debt was eligible for referral for collection action as of 

September 30, 2000.
Page 14 GAO-02-61T 

Table 3: CMS’ Medicare Debts

a

 Certain Medicare institutional providers (MIPs) are paid interim amounts throughout the year based 

on historical service to Medicare beneficiaries. These MIPs are required to file cost reports each year 

that show actual costs incurred to provide Medicare services so that CMS can determine whether the 

MIPs have been overpaid or underpaid. MIPs that do not submit cost reports owe CMS the entire 

amount they received from the agency during the year. Because CMS does not recognize amounts 

associated with unfiled cost reports greater than 180 days delinquent as receivables for financial 

reporting purposes, it adds such amounts to the debts over 180 days delinquent that are reported on 

the TROR.

Source: Medicare Trust Fund TROR for fourth quarter 2000 (September 30, 2000).

Of the $6.4 billion of debt eligible for referral, CMS reported that about 

$4.3 billion of debt had not been referred to Treasury or a Treasury 

designated debt collection center.12 Non-Medicare Secondary Payer (MSP) 

debt, which is primarily related to cost report audits, comprised about 

$2.6 billion of the debt not referred. The remainder was comprised of MSP 

debt, which occurs when Medicare pays for a service that subsequently is 

determined to be the responsibility of another payer.13 

CMS’ goal was to refer $2 billion of such debt in fiscal year 2001 and the 

remainder in fiscal year 2002. According to documents provided by HHS’

Program Support Center (PSC), a Treasury designated debt collection 

center,14 CMS has referred to the PSC about $1.5 billion in fiscal year 2001 

Debt amounts (in

millions of dollars)

Debts over 180 days delinquent including debts in CNC $6,604

Plus: other a (unfiled cost reports) 1,591

Less: bankruptcy, appeals, litigation 1,809

Debt eligible for referral for collection action 6,386

Debt referred for collection action 2,046

12 Based on our review of CMS’ TROR as of September 30, 2000, all of the $4.3 billion of 

eligible debt that had not been referred was reported as eligible for referral to TOP. In 

addition, of the $6.4 billion, CMS reported that about $3 billion was eligible for referral to 

FMS for cross-servicing and about $1.8 billion of such debt had not been referred.

13 MSP debts include certain cases in which beneficiaries (1) have other health insurance 

coverage provided by their employer or their spouse’s employer, (2) have occupational 

injuries or illnesses that would be covered by workers’ compensation, or (3) have injuries 

which are covered by liability insurance or a settlement arising from an accident.

14 In 1999, Treasury designated the PSC a debt collection center for MSP debts and unfiled 

cost report debts.
Page 15 GAO-02-61T 

through August 31, 2001. However, for reasons we will discuss, the vast 

majority of these referrals were not made until late in the fiscal year. 

In September 2000, we reported that CMS had not fully implemented the 

DCIA. CMS had implemented pilot projects to begin referring Medicare 

debts delinquent over 180 days to the PSC.15 Five contractors participated 

in the non-MSP pilot project and 15 contractors in the MSP pilot project. 

Under the pilot projects, the contractors were responsible for sending 

DCIA intent letters to debtors up to 6 years delinquent indicating that 

nonpayment would result in referral of the debt to a Treasury designated 

debt collection center. Once referred, the PSC was then responsible for 

reporting the debts to FMS for TOP and referring certain debts for crossservicing. However, we reported that under these pilot projects, 

contractors referred only large-dollar-value, aged Medicare debts while 

leaving out a large amount of debt. In addition, we reported that collection 

prospects for large-dollar-value aged debts are much less than for newer 

debts involving smaller amounts. Thus, we recommended that CMS 

immediately refer all Medicare debts to the PSC as soon as they become 

over 180 days delinquent and were determined to be eligible, and refer the 

backlog of eligible debt as quickly as possible.

Suspension of Debt Referral 

System Hampered Referrals 

of Non-MSP Debts

Although CMS experienced some success in referring non-MSP debts to the 

PSC under its non-MSP pilot project, problems with its debt referral system 

and late guidance to contractors on debt referral thwarted efforts to refer 

such debt. Almost all of the $2 billion of debt that had been referred to the 

PSC as of September 30, 2000, was comprised of such debts. However, 

about $2.6 billion in non-MSP debt had not been referred. CMS’ referrals of 

non-MSP debt were limited during the first 9 months of fiscal year 2001 

mainly because the agency suspended the debt referral system in 

November 2000. A CMS official responsible for non-MSP debt referrals 

stated that the agency suspended the debt referral system to identify and 

correct numerous discrepancies found in the system’s data (e.g., duplicate 

debts, differences in debt amounts between debt tracking systems, and 

debt referral systems) and the placement of additional edits in the system 

so that these types of errors would not occur in the future. CMS resumed 

referring non-MSP debts to the PSC through the debt referral system in 

June 2001. 

15 Medicare: HCFA Could Do More to Identify and Collect Overpayments

(GAO/HEHS/AIMD-00-304, Sept. 7, 2000).
Page 16 GAO-02-61T 

CMS’ suspension of its debt referral system operations not only limited the 

five contractors that participated in the non-MSP pilot from referring debts 

to the PSC but also significantly delayed CMS from bringing all of its 

contractors into its debt referral program. In addition, late guidance to 

contractors also contributed to delayed referrals. Initially, CMS intended to 

have all of its contractors referring non-MSP debts to the PSC by October 

2000. However, the agency did not issue program memoranda to each of its 

contractors providing them updated instructions for identifying and 

referring non-MSP debts to the PSC until April 2001. 

In its guidance, in response to our recommendation in September 2000, 

CMS expanded the criteria for referring non-MSP debts to include Part B as 

well as Part A debts and lowered the referral threshold from $600 to $25. 

Subsequent to making the debt referral system operational and expanding 

the referral requirements to all contractors, CMS referred, through 

August 31, 2001, about $1.4 billion of non-MSP debts to the PSC.

CMS officials stated that the limited amount of non-MSP debt referrals 

through the first 9 months of the fiscal year was not a significant concern to 

them because they have a goal of $2 billion of referrals for fiscal year 2001, 

and they intend to meet that goal by the end of the fiscal year. A CMS 

official recently informed us that this fiscal year goal was met. However, as 

previously mentioned, the prompt referral of delinquent debts is critical 

because the likelihood of recovering amounts owed decreases dramatically 

with the age of delinquency of the debts.

Several Factors Contributed 

to Little Progress in 

Referring MSP Debts

CMS’ eligible MSP debt totaled about $1.8 billion, which was about 40 

percent of the approximately $4.3 billion of Medicare debt that had not 

been referred for collection as of September 30, 2000. Although CMS began 

referring MSP debts to the PSC in March 2000, the PSC’s records indicate 

that CMS had referred only about $51 million, or 3 percent, as of August 31, 

2001. This is particularly troubling since CMS was taking no other active 

collection actions on these debts.16 

Limited contractor efforts, coupled with inadequate monitoring of 

contractor performance by CMS, contributed to the slow progress in 

referring MSP debts. None of the three large contractors we reviewed that 

16 For most MSP debts, contractors were only required to send initial demand letters to the 

employer and/or insurance company and follow up on any inquiries from them. 
Page 17 GAO-02-61T 

participated in the MSP pilot project promptly identified all eligible MSP 

debts and/or referred those debts to the PSC. 17 For example, one 

contractor held $255 million of Part A MSP debt over 180 days delinquent 

as of September 30, 2000. This contractor reported initiating the 

identification and referral process for only about $33 million, or about 13 

percent, of this debt. The contractor official responsible for MSP debts 

stated that the contractor was under the impression that it needed to only 

make two file queries in February 2000 covering debts incurred from March 

1997 through August 1998 to fulfill its requirements under the pilot project. 

However, CMS documentation indicated that the pilot project was to cover 

all MSP debts that were no more than 6 years old and CMS officials 

responsible for MSP debts stated that they had never instructed the 

contractor to limit its file queries. 

Another contractor held about $61 million of Part A MSP debt over 180 

days delinquent as of September 30, 2000. The contractor official 

responsible for MSP debts stated that the contractor believed that the MSP 

pilot project ended in August 2000, and as such did not perform any 

reviews of its MSP debt portfolio to identify additional MSP debts to refer 

between September 2000 and December 2000. Moreover, the contractor’s 

records indicated that about $6.2 million, or approximately 48 percent, of 

the $12.8 million of debts for which it had sent DCIA intent letters prior to 

September 2000 had not been referred to the PSC. The contractor official 

responsible for MSP debts could not readily provide an explanation for why 

these debts had not been referred for collection action. 

In addition, CMS did not develop and implement policies and procedures 

for monitoring the contractors’ referral of MSP debts. Consequently, CMS 

did not monitor the extent to which contractors referred specific MSP 

debts to the PSC and did not identify specific contractors, such as those 

mentioned above, that were not identifying and referring all eligible debts 

so that it could take prompt corrective action. The Comptroller General’s 

Standards for Internal Control in the Federal Government states that 

17 We reviewed the debt referral processes at four of the larger Medicare contractors. The 

Medicare contractors were selected based on the size of their debt portfolios and their 

participation in the pilot projects. The contractors we reviewed had $2.8 billion of debt, 

representing about 39 percent of all debts at the contractors. Three of the four contractors 

participated in the pilot project for MSP debts and two of the four contractors participated 

in the pilot project for non-MSP debts. The three contractors we reviewed that participated 

in the pilot project for MSP debts combined held about $357 million of Part A MSP debts or 

about 37 percent of the total Part A MSP debts over 180 days delinquent at CMS as of 

September 30, 2000. 
Page 18 GAO-02-61T 

internal control should be designed to assure that ongoing monitoring 

occurs in the course of normal operations. It should be performed 

continually and ingrained in the agency’s operations.18

Some Action Taken to Get 

MSP Debt Referrals Back on 

Track

In May 2001, CMS issued a Program Memorandum to each of its 

contractors that required them to identify delinquent MSP debts and refer 

the debts to the PSC. Although issued 8 months after our September 2000 

recommendation to do so, CMS expanded the criteria for selecting MSP 

debts for referral to include Medicare Part B debts, as well as Part A debts. 

The required dollar threshold for referral will be reduced in phases from 

$5000 to $25 so that the contractors will eliminate the backlog of higher 

dollar debt as well as refer the current debts so that another backlog is not 

created. The CMS Branch Manager stated that the memorandum was not 

issued sooner, in part, because CMS had to respond to contractor concerns 

about needing additional funding to automate their respective debt referral 

processes. However, the manager stated that after much consideration, 

CMS concluded that referrals could be done manually and that seeking 

additional funding for such referrals would likely cause further delays in 

referring MSP debts to the PSC. 

In response to our work, CMS officials stated that they began to review 

MSP debt referrals at selected contractors. In addition, the CMS Branch 

Manager for MSP stated that the 10 CMS regional offices would in the 

future assume a more active role in ensuring that the contractors promptly 

refer eligible MSP debts to the PSC. However, CMS has not yet formalized 

a written strategy that includes precisely how contractor monitoring will be 

performed.

CMS Missed Opportunities 

to Collect Certain MSP 

Debts Through TOP 

Missing information has also slowed collection efforts. According to a PSC 

official, a recent evaluation on PSC’s performance in collecting certain 

types of debt found that only $13.9 million, or less than 40 percent, of the 

$36 million of MSP debt CMS contractors referred to the PSC in fiscal year 

2000 could be sent to TOP. Other debts could not be sent to TOP for 

collection because they lacked TINS. TINS are necessary for FMS to match 

delinquent debts with federal payments to be offset. 

18 GAO/AIMD-00-21.3.1.
Page 19 GAO-02-61T 

According to PSC and CMS officials responsible for debt collection, no 

written requirements were in place to help ensure that the Medicare 

contractors, the PSC, or the PSC’s private collection agency obtained TINs 

for all MSP debts referred for collection. The PSC official stated that the 

PSC began to send letters to the debtors in August 2001 requesting TINs so 

that the debts can be referred to TOP and are also discussing with CMS 

officials how to effectively obtain TINs for MSP debts in the future. 

Lack of Complete and 

Accurate Debt Information 

Hampers CMS’ Debt 

Referral Monitoring 

CMS will need to effectively monitor the debt referral practices of its 55 

contractors to help ensure that all eligible Medicare debts are promptly 

identified and referred for collection, but it lacks a centralized database for 

all MSP debts at its various contractors. Therefore, the agency cannot 

effectively monitor the extent to which its various contractors promptly 

identify and refer the debts to the PSC for collection. Although CMS is in 

the process of developing a system that is to include a database of all MSP 

debts, CMS plans to phase the system in at the contractors, and the system 

is not scheduled to be fully implemented until fiscal year 2007.

In addition, CMS has identified problems with its contractors maintaining 

accurate debt information in its non-MSP debt tracking system, which is 

critical for monitoring contractor debt referral practices. CMS performed 

Contractor Performance Evaluations (CPEs) on 25 contractors and found 

that 19 of the contractors were not adequately updating information in the 

agency’s debt tracking system for non-MSP debt. For five of these 

contractors, CMS considered the problems to be significant enough to 

require a written performance improvement plan. 

Our work at the two selected contractors involved in the non-MSP pilot 

project corroborated CMS’ own findings. During the non-MSP pilot project, 

CMS periodically sent the two pilot contractors we reviewed a listing of 

eligible debts from the agency’s debt tracking system for possible referral 

to the PSC. Of the $1.3 billion of debt CMS selected in its debt listings for 

the two non-MSP pilot project contractors we reviewed, the contractors’

personnel determined that $289 million, or about 23 percent, was actually 

ineligible for referral due to bankruptcy, appeals, or fraud. In addition, at 

one of the two non-MSP pilot project contractors we reviewed, we 

identified $21 million of debt misclassified as bankruptcy on the debt 

tracking system and therefore excluded from the referral requirements. 
Page 20 GAO-02-61T 

Because these debts were actually dismissed from the bankruptcy 

proceedings, they should have been reported as debt eligible for referral.19 

It is also important to note that CMS’ systems for debt tracking do not 

currently have the capability to provide information as to whether its 

contractors are promptly entering non-MSP debts into the debt referral 

system after they mail intent letters. We noted at one of the two non-MSP 

pilot project contractors we reviewed that CMS did not identify $5.2 million 

of debts that were pending referral for at least 9 months. In response to our 

work, CMS officials stated that they are in the process of modifying the 

debt tracking system so such monitoring will be done in the future.

Moreover, because CMS’ Medicare debt comprises a significant portion of 

delinquent debt governmentwide, such debt must be reported accurately if 

the governmentwide debt information is to be useful to the President, the 

Congress, and OMB in determining the direction of federal debt 

management and credit policy. The eligible debt amounts reported by CMS 

to Treasury as of September 30, 2000, were not reliable. As previously 

discussed, certain contractors did not update their debt tracking systems 

for non-MSP debts. These tracking systems are the same ones used by 

CMS in determining the exclusion amounts for bankruptcy and appeals. In 

addition, CMS inappropriately excluded $149 million of non-MSP debts that 

had been referred to CMS regional offices for collection.20 Also, CMS 

officials stated that CMS did not report any exclusion amounts for MSP 

debts. We noted that certain MSP debts were involved in litigation but no 

exclusions for litigation were included for such debts in the report to 

Treasury. In response to our work, CMS officials stated that CMS no longer 

reports the debts referred to regional offices as exclusions and is in the 

process of identifying and reporting exclusion amounts for MSP debts.

Problems Noted In CMS’

Debt Referral Strategy

Finally, although CMS has issued Program Memoranda to each of its 

contractors instructing them to refer non-MSP and MSP debts, we 

19 The contractor did not update its internal systems for $8 million of these debts and thus 

was not pursuing any collection action on these debts after the dismissal. For the remaining 

$13 million, the contractor was pursuing collection action but did not properly update the 

tracking system.

20 Prior to the DCIA referral process, contractors were required to transfer receivables to the 

regional offices for collection.
Page 21 GAO-02-61T 

identified the following issues relating to the agency’s current debt referral 

strategy.

• CMS chose as its first priority the referral of about $500 million of 

eligible non-MSP debts stemming from unfiled cost reports. CMS’

Technical Advisor for debt collection stated that CMS focused on these 

debts because they involved high dollar amounts. However, the priority 

placed on referring such debts does not appear to coincide with 

prospects for collecting the debts, as the historical collection rate 

associated with such debt has been almost nonexistent. For example, of 

the $547 million of unfiled cost report debt that was referred through 

fiscal year 2000, the PSC collected only about $9,000. This low 

collection rate is due, in part, to the fact that such debt is often adjusted 

downward significantly, or even eliminated, upon submission of a cost 

report by the provider. 21

• In February 2001, CMS issued guidance to its contractors to 

methodically terminate collection action or close out MSP debts 

delinquent more than 6 years and 3 months.22 Because CMS will close 

out these debts, they will not be reported to FMS for TOP, which is FMS’

most effective debt collection tool. 23 The CMS branch manager for MSP 

stated that she was not aware of any assessment performed to 

determine the expected dollar amount of the closed-out debts. CMS had 

already approved about $86 million of MSP debts for close-out at the 

contractors we reviewed. About $85 million of these debts were less 

than 10 years delinquent, and thus could still be referred to PSC for

21 Although unfiled cost report debts are referred to TOP, the main goal of the PSC and its 

private collection agency for these types of debts is to resolve them by getting the providers 

to submit cost reports. If the PSC or its private collection agency is successful, the cost 

report is sent to CMS to determine if a Medicare overpayment actually exists.

22 CMS officials stated that the 6-year, 3-month criterion was chosen because debts could not 

be litigated by DOJ for collection action beyond 6 years. 

23 According to documents provided by Treasury, it has collected over $1 billion of federal 

non-tax debt during each of the last 3 calendar years through TOP by offsetting tax refund 

payments. This by far is more than that collected by any other of FMS’ debt collection tools. 

In addition, Treasury has found that the collection rate for the small amount of MSP debt 

that has been reported to TOP is about 10.5 percent, which is higher than the average rate of 

TOP collections.
Page 22 GAO-02-61T 

reporting to TOP.24 The CMS branch manager for MSP stated that 

collection efforts on older debts are not cost effective. However, CMS 

officials could not provide any documentation to support the assertion 

that it was not cost effective to attempt to collect older MSP debts with 

TOP. 

• The Federal Claims Collection Standards--which were last updated in 

November 2000--and OMB in its Circular No. A-129 require agencies, in 

most cases, to report closed-out debt amounts to the IRS as income to 

the debtor. CMS has not yet established a process, including providing 

authorization to the PSC, to report closed-out MSP debt amounts to the 

IRS. CMS officials stated that CMS and its Office of General Counsel are 

currently discussing the reporting of closed-out MSP debts to the IRS.

In addition, while the recently issued Program Memoranda cover referral 

requirements for most of CMS’ Medicare debts, the memoranda did not 

cover all Medicare debts including the following types. 

• MSP Liability: MSP liability debts cover accidents, malpractice, and 

other non-Group Health Plan debts where Medicare is not the primary 

payer. 

• Part A Claims Adjustments: Part A claims receivables are created by an 

adjustment of a previously paid claim. Some reasons for claims 

adjustments are duplicate processing of charges and/or claims, payment 

of noncovered items and services, or incorrect billing. These debts are 

not tracked on the CMS debt tracking system. These debts are generally 

offset from subsequent Medicare payments, and thus no further 

collection action is needed. However, there are no requirements for 

Medicare contractors to perform any other collection action on these 

debts, such as the issuance of a demand letter, should subsequent 

Medicare payments not be available for offset.

CMS was not able to provide a dollar amount for such types of debts over 

180 days delinquent. However, as of September 30, 2000, we found that the 

four contractors we reviewed held about $9.6 million of MSP liability debts 

and $10.7 million of debt related to Part A claims adjustments. CMS 

24 Except for certain types of debts, 31 U.S.C. 3716(e)(1) provides that administrative offset 

is available for claims that have not been outstanding for more than 10 years. 31 C.F.R. 285.2 

(d)(1), provides that TOP is available to collect non-tax debts referred within 10 years after 

the agency’s right of action accrued.
Page 23 GAO-02-61T 

officials stated that CMS intends to refer MSP liability debts as well as Part 

A claims adjustments to the PSC in the future.

Most Agencies Have 

Not Used AWG to 

Collect Delinquent 

Debt

The DCIA authorizes both federal agencies that administer programs that 

give rise to delinquent non-tax debts and federal agencies that pursue 

recovery of such debts, such as FMS, to administratively garnish up to 15 

percent of a debtor’s disposable pay until the debt is fully recovered.25 

None of the nine CFO Act agencies we surveyed used AWG as authorized 

by the DCIA to collect delinquent non-tax debt as of the date of completion 

of our fieldwork, over 5 years after the DCIA went into effect. Together 

these agencies reported holding about $40 billion of delinquent non-tax 

debt as of September 30, 2000, including $23 billion in consumer debt,26

which is typically comprised of debts by individuals, many of whom are 

employed.27 This is not to imply that AWG could be used to collect all such 

consumer debt because circumstances such as bankruptcy or appeals 

could limit the application of this debt collection tool. 

Agencies identified various reasons for the delay in implementing AWG, 

including the need to focus priorities on the mandatory provisions of the 

DCIA and develop the required regulations or administrative hearing 

procedures to implement AWG. This is disappointing in light of the large 

population in the country’s labor force and the fact that debt collection 

experts testified before this Subcommittee in 1995, prior to the enactment 

of the DCIA, that AWG can be an extremely powerful debt collection tool, 

as the mere threat of AWG is often enough to motivate debtor repayment. 

Treasury’s Role in AWG Treasury issued regulations for AWG in May 1998 and agency guidance for 

issuing wage garnishment orders in November 1998 and February 1999. 

25 Disposable pay means that part of the debtor’s compensation (including, but not limited 

to, salary, bonuses, commissions, and vacation pay) from an employer remaining after the 

deduction of health insurance premiums and any amounts required by law to be withheld.

26 The agencies held over $25 billion in debts classified as CNC, which was not broken out by 

consumer and commercial debts on the agencies’ TRORs. Although CNC debts are written 

off by the agencies for accounting purposes, AWG could be applicable to significant 

amounts of such debts.

27 Consumer debt is more likely to be subject to AWG because the debtor is often an 

individual who is employed. Certain commercial debts could involve individual debtors, 

guarantors, or co-debtors and AWG may be applicable to such debtors. 
Page 24 GAO-02-61T 

The regulations are silent regarding when agencies can initiate AWG in the 

collection cycle. According to these regulations, prior to initiating AWG, an 

agency must give the debtor 30 days notice that includes, among other 

things, an opportunity to receive a hearing concerning the existence or 

amount of the debt or the terms of the proposed repayment schedule under 

the garnishment order. In addition, the regulations specify that agencies 

must issue garnishment orders to employers within specified timeframes 

that depend on whether the debtor responded to the notice in a timely 

manner.28 Of course, before garnishment orders can be sent, the debtor’s 

employer must be identified and located. 

According to FMS, it has been working with its private collection agency 

(PCA) contractors to incorporate AWG into its cross-servicing program. 

On April 26, 2001, the PCAs were provided with the AWG PCA Operations & 

Procedures Manual, and in May 2001, the PCAs received the contract 

modification, which authorizes them to begin to use AWG once they sign 

and return the modification. Under FMS’ procedures, the PCAs will be 

responsible for locating the debtor’s employer if not already identified; 

requesting FMS’ approval to send AWG notices to debtors; and obtaining 

garnishment orders, signed by FMS, to send to employers. FMS has 

requested all agencies that refer debts for cross-servicing to formally 

authorize FMS to use AWG as part of cross-servicing.

Future Implementation of 

AWG by Federal Agencies

Although none of the nine CFO Act agencies we surveyed were using AWG 

as authorized by the DCIA, all these agencies except EPA told us that they 

intend to implement this debt collection tool within the next 5 years. EPA 

stated that it is unsure whether it will implement AWG because most of its 

debts are commercial debts and the current volume of individual debts 

does not support using AWG.29 Education, HHS, SBA, and SSA indicated 

that they plan to implement AWG themselves, while USDA, Energy, HUD, 

and VA indicated that they plan to rely solely on FMS to implement AWG as 

28 According to Treasury regulations, the agency shall send a withholding order to the 

debtor’s employer within 30 days after the debtor fails to make a timely request for a hearing 

(i.e., within 15 business days after the mailing of the notice), or, if a timely request for a 

hearing is made by the debtor, within 30 days after a final decision is made by the agency to 

proceed with garnishment.

29 EPA’s commercial debts are comprised of debts issued under the Superfund program that 

provides federal clean-up authority and funds to address problems posed by abandoned or 

uncontrolled hazardous waste sites.
Page 25 GAO-02-61T 

part of cross-servicing, including identifying the debtors’ employers and 

sending notices and garnishment orders.30 

According to agency responses to our survey and follow-up discussions 

with agency officials, HHS plans to implement AWG under the DCIA 

authority by the end of the calendar year 2001, SBA after March 2002, 

Energy after April 2002, Education during fiscal year 2002, and SSA in fiscal 

year 2003. The other three agencies we surveyed that are planning to 

implement AWG had not established specific dates for implementing AWG. 

Of the nine agencies we surveyed, only HUD, SBA, and SSA had a written 

plan for implementing AWG. SSA provided a written implementation plan 

for AWG that addresses the major milestones that must be accomplished as 

well as a project scope agreement that outlines how the process will work. 

Our review of the other plans provided by HUD and SBA showed that they 

represented little more than a general timeline for AWG implementation 

rather than a clear description and strategy for how the agency will actually 

perform AWG or when AWG will be fully implemented. For example, the 

two plans do not include the types of debts that will be subject to AWG or 

the policies and procedures for administering AWG. Further, none of the 

plans identified the processes the agencies will use to conduct hearings. 

Consequently, it is not clear when these agencies will be able to fully 

incorporate AWG into their debt collection processes.

Education Has Successfully 

Used Wage Garnishment 

Under Separate Authority

Education has been garnishing wages of certain delinquent debtors since 

1993 under separate authority from that granted by the DCIA.31 Under this 

authority, Education may garnish debtors’ wages up to 10 percent of 

disposable pay to collect defaulted student loans. According to Education, 

since the agency started garnishing wages, the collection of defaulted 

student loans has increased dramatically, and the agency has reported 

using wage garnishment to collect over $306 million of principal and 

interest on defaulted student loans for fiscal year 1997 through March 2001. 

Education uses its PCAs to perform collection activities, which include 

locating debtors and their employers. However, Education directly sends 

30 Education and HHS stated that they would authorize FMS to perform AWG for certain 

debts referred for cross-servicing, while SBA and SSA stated that debts referred for crossservicing would be eligible for AWG.

31 Section 488A of the Higher Education Act of 1965, as amended, 20 U.S.C. 1095a.
Page 26 GAO-02-61T 

the official garnishment documents and orders to the employers. In 1999, 

authority to access the National Directory of New Hires (NDNH), which is 

maintained by HHS’ Office of Child Support Enforcement (OCSE), was 

expanded from delinquent child support debt to also include defaulted 

student loans.32 The NDNH includes information from state and/or federal 

agencies on employers’ new hires, quarterly wages, and unemployment 

insurance.33 Education officials stated that, going forward under the DCIA, 

no changes are planned regarding when AWG is initiated during the 

collection cycle and that Education will continue to send garnishment 

orders to employers.34 The officials also stated that prior to implementing 

AWG under the DCIA, Education must, among other things, publish a 

public notice.

Certain Factors Could Limit 

FMS’ Use of AWG

Although FMS’ incorporation of AWG into the cross-servicing program 

would undoubtedly improve its collection success and make the FMS 

collection program more comprehensive, certain factors could limit its use. 

First, all delinquent debt reported by agencies as eligible for cross-servicing 

is not currently being promptly referred to FMS. Second, as of the date of 

completion of our fieldwork, none of the nine CFO Act agencies we 

surveyed had given FMS authorization to use AWG as part of crossservicing.

Although debt referred for cross-servicing was not reported to Treasury 

separately by consumer and commercial debt, the four agencies of the nine 

CFO Act agencies we surveyed that plan to rely exclusively on FMS for 

AWG implementation (i.e., USDA, Energy, HUD, and VA) together reported 

having referred only $288 million of about $690 million of all types of debt 

that were reported as eligible for cross-servicing as of September 30, 2000.35 

32 Section 453 of the Social Security Act, as amended, 42 USC 653(j).

33 The purpose of the NDNH is to provide a national repository of employment and 

unemployment insurance information that will enable State Child Support Enforcement IVD agencies to be more effective in locating noncustodial parents; establishing child support 

orders; and enforcing child support orders, especially across state lines.

34 Certain administrative debts that total less than one-half of 1 percent of Education’s total 

delinquent debt amount will be eligible for AWG at FMS through cross-servicing.

35 According to FMS’ Performance Summary Report for July 2001, only 63 percent of debt 

reported by federal agencies as eligible for cross-servicing governmentwide as of 

September 30, 2000, had been referred to FMS.
Page 27 GAO-02-61T 

As discussed previously, the USDA agencies we reviewed, RHS and FSA, 

have not identified and promptly sent debts to FMS for cross-servicing. 

Consequently, if AWG were to have been attempted using only those 

delinquent debts reported as referred for cross-servicing for fiscal year 

2000, substantial amounts of delinquent debt would not have been subject 

to this debt collection tool. 

Moreover, agencies relying on FMS to conduct AWG must first authorize 

FMS to perform AWG as part of its cross-servicing program after 

establishing the required hearing procedures and publishing the required 

regulations. As of the date of completion of our fieldwork, according to 

FMS, only two small agencies not included in our review, the Railroad 

Retirement Board and the James Madison Foundation, have provided FMS 

the authority to use AWG as part of cross-servicing. In addition, although 

most agencies support the use of AWG, according to FMS, the agencies are 

concerned about being able to handle the hearings that debtors may 

request. It is important to note, however, that the DCIA does not require 

hearing officials to be independent of the agency and certain agencies can 

provide hearing services for a fee. For example, VA provides hearing 

services to other federal agencies on federal salary offset for about $100 

per hearing and, according to a VA official, the agency anticipates a similar 

fee to provide AWG hearings. Moreover, Education’s experience for 

defaulted student loan debt is that relatively few debtors request a hearing 

compared to the number of AWG notices sent.36

36 In fiscal year 2000, Education issued 90,658 Notices of Intent and only 8,921 debtors, or 

about 9.8 percent, requested a hearing.
Page 28 GAO-02-61T 

Comprehensive 

Information Source 

For Denying Federal 

Financial Assistance Is 

Lacking

Current law bars certain delinquent federal non-tax debtors from obtaining 

federal financial assistance in the form of federal loans, loan insurance, or 

loan guarantees until the debtor resolves the delinquency.37 This debtor bar 

provision does not expire as the debt ages, and it applies even if the 

creditor agency has suspended or terminated collection activity on the 

debt.38 Thus, it can be used to bar such assistance for indefinite periods. 

For purposes of denying federal financial assistance, a debt is in delinquent 

status if it has not been paid within 90 days of the payment due date.39

During the hearing on DCIA implementation held by this Subcommittee in 

June 2000, concerns were raised that there were federal non-tax debtors 

who were delinquent on more than one federal debt. To help ensure that 

federal financial assistance is denied to delinquent debtors as required by 

the DCIA, federal credit agencies must have access to delinquent debtor 

information that (1) includes all debtors delinquent 90 days or more on 

federal non-tax debts, and (2) is maintained and updated until the 

delinquency is resolved under Treasury regulations. Although credit 

37 Section 3720B of title 31, United States Code, as amended by Section 845(a) of the 

Agriculture Appropriations Act, FY 2001, Public Law No. 106-387 (2000), bars delinquent 

federal non-tax debtors from obtaining federal financial assistance in the form of federal 

loans, loan insurance, or loan guarantees, except for disaster loans or a marketing loan or a 

loan deficiency payment under subtitle C of the Agricultural Market Transition Act. 

According to Treasury regulations, for the purpose of denying federal financial assistance, a 

person’s delinquent debt is resolved only if the person (1) pays or otherwise satisfies the 

delinquent debt in full; (2) pays the delinquent debt in part if the creditor agency accepts 

such part payment as a compromise in lieu of payment in full; (3) cures the delinquency 

under terms acceptable to the creditor agency in that the person pays any overdue 

payments, plus all interest, penalties, late charges, and administrative charges assessed by 

the creditor agency as a result of the delinquency; or (4) enters into a written repayment 

agreement with the creditor agency to pay the debt, in whole or in part, under terms and 

conditions acceptable to the creditor agency.

38 According to Treasury regulations, for the purpose of denying federal financial assistance, 

a debt is not in delinquent status if (1) the person seeking federal financial assistance has 

been released by the creditor agency from any obligation to pay the debt, or there has been 

a determination that such person does not owe or does not have to pay the debt; (2) the 

debtor is the subject of, or has been discharged in, a bankruptcy proceeding, and if 

applicable, the person is current on any court authorized repayment plan; or (3) the 

existence of the debt or the delinquency of the debt is being challenged under an ongoing 

administrative appeal and the appeal was filed by the debtor in a timely manner. 

39 Treasury has established 90 days delinquent as the trigger for denying federal financial 

assistance because it (1) allows sufficient time for debts to be referred to credit bureaus, 

and (2) is consistent with standard lending practices which classify a loan as nonperforming at 90 days past due.
Page 29 GAO-02-61T 

bureau reports, FMS’ TOP database, and CAIVRS each contains certain 

information on delinquent federal non-tax debtors, for reasons we will 

discuss, none of them currently provides such all-inclusive and permanent 

data that could serve as an adequate data source for successfully barring 

future financial assistance to those currently delinquent or who did not 

meet their obligations in the past. In general, the constraints relate to 

scope of reporting, adequacy of the data for this purpose, and the fact that 

data are subject to being routinely purged from these data sources after a 

specified number of years. In view of these constraints, we continue to be 

concerned about delinquent federal non-tax debtors obtaining federal 

financial assistance. 

Credit Bureau Reports The DCIA requires federal agencies to report consumer and commercial 

non-tax debts to credit bureaus.40 Related Treasury guidance states that 

federal agencies should report consumer debts monthly and commercial 

debts quarterly. Credit bureau reports include critical information for the 

debtor bar provision, including the number of days a debt is delinquent and 

whether the debtor is involved in bankruptcy.41 As such, credit bureau 

reports are a relatively good information source for identifying certain 

delinquent federal non-tax debtors. However, the information that credit 

bureaus are currently able to provide is limited for the purpose of denying 

federal financial assistance because (1) certain agencies do not report all 

non-tax debt that is 90 days delinquent, which is the trigger associated with 

the bar provision; and (2) by law, certain adverse credit information can be 

retained and reported by credit bureaus for only 7 years.

In response to our survey of nine CFO Act agencies, which together 

reported holding about $40 billion of delinquent non-tax debt as of 

September 30, 2000, eight of the nine agencies indicated that they did not 

report to credit bureaus about $9.8 billion of their delinquent debt. Over 

$5.2 billion of the debt was not reported to credit bureaus because it is 

exempted from the credit bureau reporting requirement by statute; 

however, this is Medicare debt, and it is subject to the delinquent debtor

40 31 U.S.C. 3711(e).

41 As previously mentioned, according to Treasury regulations, a debt is not delinquent for 

purposes of denying federal financial assistance if the debtor is the subject of, or has been 

discharged in, a bankruptcy proceeding.
Page 30 GAO-02-61T 

bar provision.42 In addition, about $3.4 billion is not reported because the 

debts are guaranteed loans made by USDA’s Commodity Credit 

Corporation to foreign governments. Agency officials stated that reporting 

foreign debt to credit bureaus would serve no useful purpose and, 

therefore, would not be cost effective. Other reasons cited by the agencies 

for not reporting delinquent debt included (1) lack of automated capability 

or system limitations to report to credit bureaus and (2) the validity of the 

debt could not be firmly established.

Seven of the nine CFO Act agencies we surveyed indicated that they rely on 

FMS to actually report certain debts to credit bureaus as part of crossservicing.43 However, we noted that, as of September 30, 2000, these seven 

agencies together reported about $1.4 billion of debt eligible for crossservicing but had referred only about $330 million to FMS. Consequently, a 

significant amount of delinquent debt is not likely being captured by credit 

bureaus, which limits federal credit agencies’ use of credit bureau reports 

to identify delinquent federal non-tax debtors for the purpose of denying 

federal financial assistance.

The problem with relying on FMS to report delinquent debts to credit 

bureaus as part of cross-servicing is that the debts would typically not be 

reported until well beyond the 90-day delinquency trigger for denying 

federal financial assistance. Agencies are not required to refer eligible 

debts to FMS for cross-servicing until they are delinquent over 180 days. 

Once FMS receives the debts, in order to give debtors notice of credit 

bureau reporting and an additional opportunity to repay their debts, FMS 

waits at least 30 days for commercial debts and 60 days for consumer debts 

before reporting these debts to credit bureaus. Based on the reported debt 

referral practices of the seven agencies we surveyed that indicated they 

rely on FMS to report certain debts to credit bureaus, debts would seldom, 

if ever, be referred to FMS for cross-servicing in sufficient time for FMS to 

report the debts to credit bureaus at 90 days delinquent. Moreover, as 

discussed previously, we have testified before this Subcommittee that 

many debts at FMS for cross-servicing were delinquent over 4 years when 

they were initially referred by federal agencies.

42 Medicare debt is exempted by 31 U.S.C. 3701(d) from the credit bureau reporting 

requirements imposed by 31 U.S.C. 3711(e). However, Section 3701(d) does not exclude 

Medicare debt from the debtor bar provision in 31 U.S.C. 3720B.

43 Two of the nine agencies we surveyed responded that they do not rely on Treasury’s crossservicing for reporting any of their debts to credit bureaus.
Page 31 GAO-02-61T 

Aside from the fact that not all delinquent federal non-tax debts are 

reported to credit bureaus, it is important to note that, under the Fair 

Credit Reporting Act, adverse credit information for consumer debts can 

generally only be reported by credit bureaus for up to 7 years. Therefore, 

credit agencies cannot rely on such reports to identify debtors with older 

delinquent consumer debts for the purpose of denying federal financial 

assistance. Further, we noted that one of the nine agencies we surveyed 

indicated that it requests the removal of certain debtors from credit 

bureaus when the agency discharges debts, even though discharged debts 

do not meet Treasury’s criteria for debt resolution for the purpose of 

denying federal financial assistance.

FMS’ TOP Database FMS’ TOP database is currently not available to agencies to identify 

delinquent debtors for the purpose of denying federal financial assistance. 

FMS is designing a new Internet-based program, known as the Barring 

Delinquent Debtors Program, to assist agencies in identifying delinquent 

debtors. The program will allow agencies to initiate a search of the TOP 

database to determine whether applicants for direct or guaranteed loans 

owe delinquent federal non-tax debt. Currently, FMS anticipates that the 

new program will be implemented during fiscal year 2002. Various legal 

and technical issues may influence implementation of the Barring 

Delinquent Debtors Program, including making the data available to 

(1) appropriate agency personnel and (2) authorized private lending 

institutions involved in federal lending activities, while maintaining 

systems and data security.

Ostensibly, the TOP database could provide federal credit agencies with 

pertinent information about delinquent debtors for the purpose of denying 

federal financial assistance. The TOP database includes the date 

delinquency began for each debt; therefore, the number of days a debt is 

delinquent can be readily determined. In addition, FMS allows agencies to 

continually update their debt information in the TOP database. 

The TOP database’s downside as an information source for identifying all 

delinquent federal non-tax debtors for the purpose of denying federal 

financial assistance is that a significant amount of delinquent debt eligible 

for TOP is not promptly reported to FMS. Specifically, as of September 30, 

2000, the nine agencies we surveyed reported referring to FMS only about 

$24 billion of about $28 billion of debt eligible for TOP as of September 30, 

2000. It is also important to note that debts that meet the criteria for at 

least one exclusion from referral to TOP, debts in foreclosure, are 
Page 32 GAO-02-61T 

nevertheless considered to be delinquent debts for the purpose of denying 

federal financial assistance. Therefore, debts in foreclosure, although 

delinquent debts for the debtor bar provision, would not be eligible for 

referral to TOP. Six of the nine agencies we surveyed reported having 

collectively about $1 billion of debts in foreclosure as of September 30, 

2000. Such debts were excluded from TOP eligibility. 

In addition, agencies are not required by the DCIA to report eligible debts 

for administrative offset until they are over 180 days delinquent. This is 

well beyond the 90-day trigger for the purpose of denying federal financial 

assistance. 

Moreover, debt information in the TOP database lacks permanence for the 

purpose of denying federal financial assistance. Generally, debt 

information can be maintained in the TOP database for only up to 10 

years.44 In addition, TOP does not maintain debt information on debts that 

agencies discharge because agencies are prohibited from taking further 

collection action on them when they are reported to the IRS as income. 

Further, we noted that four of the nine agencies we surveyed indicated that 

they request the removal of certain debts from TOP when the debts are 

written off. Therefore, given the lack of permanence of the non-tax debt 

information in the TOP database, agencies could not rely solely on such 

information to identify all debtors with certain older delinquent non-tax 

debts for the purpose of denying federal financial assistance. According to 

Treasury officials, Treasury does not plan to alter the type of information 

currently maintained in the TOP database to include discharged debts or 

debts over 10 years delinquent.

CAIVRS Currently, CAIVRS has limitations as an information source for identifying 

delinquent non-tax debtors for the purpose of denying federal financial 

assistance. First, agencies are not required to report delinquent debts to 

CAIVRS. Only five of the nine agencies we surveyed indicated that they 

report certain of their delinquent debts to CAIVRS. Specifically, these five 

agencies indicated that they report to CAIVRS about $23 billion, or about 58 

percent, of the $40 billion of total delinquent debt the nine agencies 

reported holding as of September 30, 2000. Second, CAIVRS contains 

limited information on delinquent debts. For example, CAIVRS does not 

44 The statute of limitations for administrative offset is 10 years for most federal non-tax 

debt.
Page 33 GAO-02-61T 

include the date of delinquency or the number of days the debt is 

delinquent, which is critical for denying federal financial assistance under 

the authority of the DCIA. Also, each agency that reports debts to CAIVRS 

can use its own discretion as to how long debts stay in the system. For 

example, three of the five agencies that we surveyed which report debts to 

CAIVRS indicated that they remove certain debts from CAIVRS at the time 

they are written off, and all five of these agencies indicated that they 

remove certain debts at the time they are discharged.

Delinquent Child 

Support Obligors 

Another issue that may eventually have to be considered in implementing 

the debtor bar provision involves delinquent child support obligors. We are 

not aware of any governmentwide legal authority that expressly authorizes 

agencies to deny federal financial assistance in the form of loans, loan 

insurance, or loan guarantees to individuals owing past-due child support.45 

However, proposed legislation, H.R.866, the Subsidy Termination for 

Overdue Payments Act of 2001, would, if enacted, generally preclude 

agencies from providing federal financial assistance to an applicant 

without first obtaining a self-certification that the applicant is not more 

than 60 days delinquent in the payment of any child support obligation, or if 

so, is in compliance with an approved repayment plan. 

Going forward, if an additional means beyond self-certification is 

contemplated to identify delinquent child support obligors for the purpose 

of denying federal financial assistance, it is important to note that only two 

of the three aforementioned information sources we reviewed--credit 

bureau reports and FMS’ TOP database--contain information on delinquent 

child support obligors. In addition, a single credit bureau may not have 

information for all delinquent child support obligors and, as previously 

discussed, information in the TOP database is not currently available to 

agencies for the purpose of denying federal financial assistance. 

45 Section 4(f) of the Small Business Act, as amended, 15 U.S.C. 633(f), requires applicants 

for financial assistance under the act to certify that they are not more than 60 days 

delinquent in child support payments. In addition, Executive Order No. 13019 advises 

federal agencies that federal financial assistance to child support obligors subject to 

administrative offset should be denied to the extent permitted by law.
Page 34 GAO-02-61T 

All states are required to report certain delinquent child support obligations 

to credit bureaus.46 An official from HHS’ OCSE told us that none of the 

states have requested a waiver from this requirement. However, OCSE has 

not audited the states’ credit bureau reporting activities and does not know 

if the states report to the large national credit bureaus, as there is no 

requirement for them to do so. Based on our review of information 

provided by three national consumer credit bureaus, all states are not 

reporting child support obligors to all of these credit bureaus.47 Therefore, 

the accessibility of complete information on persons with delinquent child 

support obligations could be limited for federal credit agencies.

Also, all states are required to participate in tax refund offset as a means of 

collecting delinquent child support. On behalf of the states, OCSE sends 

delinquent child support information to FMS for inclusion in the TOP 

database each week.48 According to FMS, the TOP database includes child 

support debt from all 50 states. According to FMS officials, once the 

Barring Delinquent Debtors Program is available to federal credit agencies 

for the purpose of identifying delinquent federal non-tax debtors, 

information on delinquent child support obligors in the TOP database will 

also be available.

In summary, as we have discussed, agencies have not demonstrated a sense 

of urgency in integrating certain provisions of the DCIA into their debt 

collection processes. Many challenges lie ahead for agencies to 

successfully implement such provisions of the act. As a result, until these 

provisions are fully implemented, agencies will continue to miss 

opportunities to collect billions of dollars of delinquent federal non-tax 

46 Section 466(a)(7) of the Social Security Act, as amended, 42 U.S.C. 666(a) (7) requires 

states to report periodically to consumer credit bureaus the name of any noncustodial 

parent who is delinquent in the payment of support and the amount of overdue support 

owed. According to OCSE officials, each state sets its own criteria for reporting thresholds.

47 We included Equifax, Experian, and Trans Union in our review of consumer credit 

bureaus, and Dun & Bradstreet and Experian in our review of commercial credit bureaus. 

Treasury recommends these credit bureaus in its Memorandum of Understanding with 

federal agencies regarding reporting delinquent debt for collection action.

48 According to Treasury regulations, states include delinquent child support obligations for 

tax refund offset that are over $150 and delinquent for 3 months or longer for Temporary Aid 

to Needy Families (TANF) and over $500 for non-TANF. According to OCSE officials, 

although states are required to update their delinquent child support information monthly, 

most update more frequently because updated information enables them to potentially 

collect more through offset.
Page 35 GAO-02-61T 

debt and the risk of delinquent federal debtors obtaining additional federal 

financial assistance is increased. To assist in addressing such challenges, 

we will be separately providing recommended actions to the respective 

agencies.

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.

Contacts and 

Acknowledgments 

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

(202) 512-3406. Major contributors to this testimony include Arthur W. 

Brouk, Richard T. Cambosos, Michael D. Hansen, Michael S. LaForge, 

Kenneth R. Rupar, Linda K. Sanders, Tanisha D. Stewart, Gladys E. Toro, 

and Matthew F. Valenta.

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