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, November 13, 2002

DEBT COLLECTION

Agriculture Making 

Progress in Addressing Key 

Challenges

Statement of Gary T. Engel

Director, Financial Management and Assurance

GAO-03-202T
Recent actions taken by Agriculture demonstrate increased commitment to

DCIA implementation. However, it will take sustained commitment and

priority by top management to fully address the problems we identified.

GAO’s findings include the following:

• RHS has worked to address systems limitations that hampered it from

promptly referring debts to Treasury for cross-servicing and is now,

according to Treasury, referring all reported eligible debt. The agency

will begin reporting certain loans’ entire unpaid principal balances on

accelerated debt as delinquent, beginning with its report for the fourth

quarter of fiscal year 2002. RHS is working on making regulatory

changes needed for it to refer losses on guaranteed loans to Treasury’s

offset program, but the changes are not expected to be completed until

about August 2003.

• FSA has developed an action plan to improve its process and controls

for identifying and referring eligible debts to Treasury. GAO’s review of

documents related to the plan indicates that FSA has made progress

toward implementing the improvements. In addition, by December

2002, the agency expects to be able to begin reporting information for

some codebtors when referring delinquent debts for collection action;

to begin referring debts quarterly, rather than annually; and to be able to

refer eligible losses on guaranteed loans.

• Agriculture has taken steps toward departmentwide implementation of

AWG. Agriculture has completed its AWG implementation plan but still

needs to carry out certain elements of the plan, including obtaining

from its component agencies specific information on the types of debt

subject to AWG and finalizing an agreement with the Department of

Veterans Affairs to conduct AWG hearings on Agriculture’s behalf.

Agriculture has also drafted regulations necessary for implementing

AWG, which may not be published until May 2003.

Treasury has established a debt collection improvement account but, to

date, it has not been activated because no amounts have been made

available in Treasury’s appropriations to fund the account. Agencies would

be allowed to contribute a portion of their debt collections into the account,

and amounts could be used to reimburse agencies for certain expenses

related to credit management and debt collection and recovery. Because the

account has not been activated, it is difficult to assess how effective it might

be in improving federal debt collection beyond the debt collection

improvements that have resulted directly from DCIA’s major debt collection

requirements for federal agencies.

DEBT COLLECTION

Agriculture Making Progress in

Addressing Key Challenges

www.gao.gov/cgi-bin/getrpt?GAO-03-202T.

To view the full report, including the scope

and methodology, click on the link above.

For more information, contact Gary T. Engel

at (202) 512-3406 or engelg@gao.gov.

Highlights of GAO-03-202T, testimony

before the Subcommittee on Government

Efficiency, Financial Management and

Intergovernmental Relations, Committee

on Government Reform, House of

Representatives

November 13, 2002

In December 2001, GAO testified at

a hearing before the Subcommittee

that the Department of Agriculture,

primarily the Rural Housing Service

(RHS) and the Farm Service Agency

(FSA), faced challenges in

implementing key provisions of the

Debt Collection Improvement Act

of 1996 (DCIA). The testimony

focused on RHS’s and FSA’s

progress in referring delinquent

debt for administrative offset and

cross-servicing and Agriculture’s

implementation of administrative

wage garnishment (AWG).

During the hearing, Agriculture

pledged to place a higher priority

on delinquent debt collection and to

substantially improve the

department’s implementation of

DCIA by December 31, 2002. After

the hearing, GAO made

recommendations to Agriculture to

help the department address the

implementation problems GAO had

identified.

It is with this backdrop that the

Subcommittee requested GAO to

review and provide an update on

actions Agriculture has taken to

resolve these problems. In

addition, the Subcommittee

requested GAO to report on the

status of Treasury’s implementation

of a debt collection improvement

account, a vehicle authorized by

DCIA to give agencies financial

incentives to improve their debt

collection efforts.
Page 1 GAO-03-202T 

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the Department of Agriculture’s 

(Agriculture’s) actions and plans to resolve certain implementation 

problems involving the Debt Collection Improvement Act of 1996 (DCIA), 

and the status of the Department of the Treasury’s (Treasury’s) use of a 

special financial incentive provision of the act to encourage federal 

agencies to improve their delinquent debt collection efforts. During a 

hearing on Agriculture’s implementation of DCIA, which was held before 

this Subcommittee on December 5, 2001, we stressed that the department’s 

implementation of DCIA requirements would have to improve vastly if the 

debt collection benefits of DCIA were to be more fully realized. Also during 

that hearing, Agriculture officials pledged to give debt collection higher 

priority and to substantially improve the department’s implementation of 

the act by December 31, 2002. Subsequent to the hearing, we made a 

number of recommendations to Agriculture to help it address specific 

DCIA implementation problems that we identified and discussed at the 

hearing.1

 It is with this backdrop that you asked us to review actions taken 

by Agriculture to resolve the specific DCIA implementation problems that 

we identified and discussed. In addition, given the fact that in recent 

hearings on DCIA implementation, little if any mention has been made of 

the act’s financial incentive provision’s merits, you wanted to know 

whether Treasury has established a fund or account to implement this 

provision, and if so, which federal agencies have received payments from 

the account and for what activities. 

Agriculture’s full implementation of certain key provisions of DCIA is 

critical to overall federal nontax debt collection. As a major federal lending 

agency, Agriculture continues to hold a substantial amount of delinquent 

federal nontax debt. As of September 30, 2001, Agriculture reported 

holding about $6.2 billion of debt over 180 days delinquent. In DCIA, the 

Congress, with key leadership and support from this Subcommittee, 

provided agencies, including Agriculture, with a full array of tools to collect 

such delinquent debt. Among other things, DCIA provides (1) a requirement 

for federal agencies to notify Treasury of eligible debts delinquent over 180 

days for purposes of centralized administrative offset, (2) a requirement for 

agencies to refer such debts to Treasury for centralized collection action 

1

U.S. General Accounting Office, Debt Collection Improvement Act of 1996: Department of 

Agriculture Faces Challenges Implementing Certain Key Provisions, GAO-02-277T

(Washington, D.C.: Dec. 5, 2001).
Page 2 GAO-03-202T 

known as cross-servicing, and (3) authorization for agencies to 

administratively garnish the wages of delinquent debtors.

The primary emphasis of my testimony today is on corrective actions taken 

by two major Agriculture components—Rural Development’s Rural 

Housing Service (RHS) and the Farm Service Agency (FSA)—to resolve 

problems associated with the identification and referral of eligible 

delinquent debts to Treasury for collection action since the December 2001 

hearing. I will also provide an update of Agriculture’s departmentwide 

implementation of administrative wage garnishment (AWG). 2 As you recall, 

we discussed Agriculture’s actions and plans for implementing AWG in 

context with information dealing with the extent to which eight other large 

Chief Financial Officers (CFO) Act agencies and Treasury’s Financial 

Management Service (FMS) used or planned to use AWG to collect 

delinquent federal nontax debt.

Summary Today, I am pleased to report that recent actions taken by Agriculture 

demonstrate that, overall, it now places a higher priority on DCIA 

implementation. RHS and FSA have made progress in addressing the 

problems involving identification and referral of eligible debts to Treasury 

for collection action that we identified, discussed, and for which we made 

recommendations for corrective action. In addition, Agriculture is making 

progress in departmentwide implementation of AWG. However, for 

Agriculture and its agencies to fully address all of the DCIA implementation 

problems that we identified and discussed by December 2002, or within a 

reasonable period thereafter, it will take sustained commitment and 

priority by top management.

2

DCIA authorizes both federal agencies that administer programs that give rise to delinquent 

nontax debts and federal agencies that pursue recovery of such debts, such as Treasury, to 

administratively garnish up to 15 percent of a debtor’s disposable pay until the debt is fully 

recovered. 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.
Page 3 GAO-03-202T 

Regarding the DCIA provision to offer agencies financial incentives for 

collecting delinquent debt, Treasury established a debt collection 

improvement account and has twice requested appropriations authorizing 

expenditures from the fund. Thus far, no expenditures have been 

authorized. While we support, in principle, the idea of incentives for 

effective debt collection, the overall success of DCIA has not depended, 

nor should it, upon the availability or use of a financial incentive. Debt 

collection is a fundamental aspect of administering credit programs and 

DCIA contains specific requirements for federal agencies that were 

designed to improve the collection of the government’s delinquent nontax 

debt. As you know, debt collection has historically not been a high priority 

at some credit agencies. However, largely due to this Subcommittee’s 

oversight of agencies’ DCIA implementation, the envisioned benefit of 

these requirements has begun to materialize. For example, between fiscal 

years 1998 and 2001, Treasury’s offset program collected over $10 billion, 

about 45 percent of which was federal nontax debt.3

 In addition, according 

to recent Treasury reports, federal agencies governmentwide referred 

about 93 percent of their reported eligible debt as of fiscal year 2001 for 

cross-servicing compared to 71 percent for fiscal year 2000, which should 

bode well for future collections as Treasury has begun to incorporate AWG 

into its cross-servicing program.

Scope and 

Methodology

To respond to your request, we performed work primarily at RHS, FSA, and 

Agriculture’s Office of the Chief Financial Officer. We also performed work 

at Treasury and conducted interviews with agency officials at RHS and FSA 

who are responsible for taking corrective actions to ensure that all eligible 

delinquent debt is promptly referred to Treasury for collection action. We 

conducted interviews with Agriculture’s CFO and members of his staff 

regarding Agriculture’s implementation of AWG. To corroborate 

information we obtained from interviews, we obtained and reviewed 

pertinent agency documents including action plans and implementation 

schedules. We did not verify the reliability of certain information that was 

provided to us by agencies such as delinquent debt referred to Treasury. We 

also did not assess the technical adequacy of the specific systems 

enhancements that have been deemed by the agencies as necessary for 

addressing the DCIA implementation problems that we identified and 

3

In addition to delinquent nontax federal debt, Treasury’s offset program collects child 

support obligations and state income tax debt on behalf of states and tax levies for the 

Internal Revenue Service (IRS).
Page 4 GAO-03-202T 

discussed. We conducted interviews with Treasury officials who were 

knowledgeable about the debt collection improvement account provision 

of DCIA and the status of the account at Treasury. We performed our work 

from July through September 2002 in accordance with U.S. generally 

accepted government auditing standards. 

RHS Using Its 

Automated Systems to 

Make Cross-Servicing 

Referrals

In December 2001, we testified that, as of September 30, 2000, RHS 

reported it had referred to Treasury’s offset program $201 million of direct 

Single Family Housing (SFH) loans but had not referred any amounts to 

Treasury for cross-servicing, primarily due to RHS’s systems limitations. 

RHS officials told us that since implementing a new automated centralized 

loan servicing system in fiscal year 1997, RHS had been unable to readily 

identify direct SFH loans that are eligible for referral to Treasury for crossservicing. Essentially, the system did not contain sufficient data to 

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

For example, the system needed to be capable of determining the status of 

any collateral, because all collateral must be liquidated prior to a loan’s 

referral to Treasury for cross-servicing. After the hearing, we 

recommended that the Secretary of Agriculture direct the Administrator of 

RHS to complete development of the software enhancements that will 

allow automated identification of loans eligible for cross-servicing and 

promptly refer all such loans to Treasury.4

 

RHS has completed and implemented the system enhancements necessary 

for automated identification of direct SFH loans eligible for cross-servicing 

and the prompt referral of such loans. In April 2002, RHS made its first 

automated referral of direct SFH loans to Treasury for cross-servicing. This 

referral involved about 10,900 loans totaling about $165.6 million. RHS is 

currently using its enhanced system to identify loans eligible for crossservicing and electronically refer them to Treasury on a monthly basis. 

According to RHS documents and Treasury officials, RHS has referred all 

of the loans that it has reported as eligible for cross-servicing. Moreover, an 

RHS document indicates and Treasury officials told us that there have been 

no significant problems regarding eligibility for cross-servicing for the 

loans that RHS has referred since April 2002. 

4

U.S. General Accounting Office, Debt Collection Improvement Act of 1996: Department of 

Agriculture’s Rural Housing Service Has Not Yet Fully Implemented Certain Key 

Provisions, GAO-02-308 (Washington, D.C.: Feb. 28, 2002).
Page 5 GAO-03-202T 

RHS Able to Provide 

Listing of Excluded 

Loans for Independent 

Verification

As we stated at the December 2001 hearing, when we attempted to 

independently verify specific debts that RHS had excluded from referral to 

Treasury’s offset program as of September 30, 2000, we were told by RHS 

officials that the supporting documentation for the $182 million of direct 

SFH loans excluded from referral had not been saved. We subsequently 

recommended that the Secretary of Agriculture direct the Administrator of 

RHS to maintain supporting documentation, in an appropriate level of 

detail that can be made readily available for independent verification, for 

all SFH debts reported and certified to Treasury as excluded from referral 

for collection action. At a minimum, the documentation should include, for 

each exclusion category, such as foreclosure, the total amount reported as 

excluded on the certified Treasury Report on Receivables Due from the 

Public (TROR) and a listing of the identities and dollar amounts of the 

specific loans excluded.5

 Such documentation would facilitate an efficient 

independent review to determine whether RHS’s exclusions meet relevant 

legislative and regulatory criteria. The Comptroller General’s Standards for 

Internal Control in the Federal Government states that all transactions 

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

documentation should be readily available for examination.6

During our follow-up review, RHS provided us a detailed listing of specific 

direct SFH loans and the loans’ corresponding dollar amounts that had 

been reported as excluded from referral to Treasury on the TROR as of 

September 30, 2001, the last period for which certified data were available. 

Although we were not requested to and did not test the specific loans 

excluded to determine whether they met relevant legislative and regulatory 

criteria, RHS’s ability to provide such listings should facilitate future 

independent verifications of the validity of its reported exclusions, and is 

critical for the oversight of the agency’s DCIA implementation. 

5

GAO-02-308.

6

See U.S. General Accounting Office, Standards for Internal Control in the Federal 

Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1999), p.15. This standard is 

critical for the oversight of agency DCIA implementation as the act permits debts to be 

excluded from referral to Treasury for offset and/or cross-servicing if they are under appeal, 

in forbearance, in litigation at the Department of Justice, in bankruptcy, or in foreclosure. In 

August 2000, we reported that agencies were excluding from referral the vast majority of 

debts reported delinquent more than 180 days under DCIA or Treasury exclusion criteria. 

We cautioned that the reliability of the amounts reported as excluded needed to be 

independently verified on a periodic basis. See U.S. General Accounting Office, Debt 

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

GAO/AIMD-00-234 (Washington, D.C: Aug. 4, 2000).
Page 6 GAO-03-202T 

Treasury Instructs 

Rural Development to 

Report Accelerated 

Balances for RHS’s 

Direct SFH Loans 

Treasury is the sole operator of a governmentwide centralized debt 

collection center. As such, it is critical that Treasury obtain accurate 

information from federal agencies on the status of their nontax debt, 

particularly the debt over 180 days delinquent, for which DCIA was 

designed in large part to help agencies collect through centralized 

collection. During the December 2001 hearing, we stressed that RHS was 

only reporting the delinquent installment portion of its direct SFH loans as 

delinquent in its TROR. It was not reporting, as required by Treasury, the 

accelerated loan balance, which is the total debt due and payable. In the 

report we issued after our testimony,7

 we stated that, as a result of such 

reporting, RHS may have underreported to Treasury direct SFH loan 

amounts delinquent over 180 days by about $849 million and direct SFH 

loan amounts eligible for Treasury’s offset program by about $348 million 

as of September 30, 2000. We recommended that the Secretary of 

Agriculture direct the Administrator of RHS to work with Treasury to 

resolve any inconsistencies between RHS’s reporting of delinquent debts 

on its TROR and Treasury’s instructions for such reporting. In addition, we 

recommended that absent any modifications to Treasury’s instructions for 

preparing the TROR, RHS report the entire accelerated balance of 

delinquent direct SFH loans to Treasury as delinquent debt and, absent any 

allowable exclusions, as debt eligible for referral to Treasury for collection 

action.8

After we made our recommendations, Agriculture and Treasury officials 

met to address the inconsistency that existed between RHS’s reporting of 

delinquent direct SFH loans on the TROR and Treasury’s instructions for 

such reporting. In a September 2002 letter, Treasury informed Rural 

Development that RHS should report the entire unpaid principal balances 

as delinquent on the TROR, and requested that such reporting begin with 

the TROR for the fourth quarter of fiscal year 2002. Treasury stated in the 

letter that once an acceleration notice is sent to the borrower, which has 

been RHS’s ongoing practice, the entire debt is due and payable and should 

be reflected as such on the TROR. Treasury also stated that its decision was 

based on consultation with its legal counsel and recent discussions with 

Agriculture officials including its CFO. According to RHS officials, the 

agency will report the entire unpaid principal balances for its direct SFH 

7

GAO-02-308.

8

GAO-02-308.
Page 7 GAO-03-202T 

loans that have been accelerated beginning with the TROR for the fourth 

quarter of fiscal year 2002. 

Efforts Under Way, But 

RHS Will Not Be Able 

to Refer Guaranteed 

Losses in the 

Immediate Future 

At the December 2001 hearing, we stated that RHS had not referred losses 

on its guaranteed SFH loans to Treasury for collection action. RHS officials 

told us that the agency could not pursue recovery from the debtor or utilize 

DCIA debt collection tools because under the SFH guaranteed loan 

program, no contract existed between the debtor and RHS. Consequently, 

RHS did not recognize the losses that it paid to guaranteed lenders as 

federal debt and could not apply DCIA debt collection remedies to them. 

We were particularly concerned about DCIA debt collection remedies not 

being available for RHS’s guaranteed SFH losses because, according to 

RHS, through September 30, 2000, such losses totaled about $132 million.9

After the hearing, we recommended that the Secretary of Agriculture direct 

the Administrator of RHS to finalize and implement necessary regulatory 

changes and modifications to lender agreements so that losses on 

guaranteed SFH loans could be treated as federal debt and referred to 

Treasury for collection action.10

RHS is currently working on making the regulatory changes that are 

needed to refer losses on guaranteed SFH loans to Treasury’s offset 

program; however, the agency will not be able to refer such losses until 

regulatory action is completed and guaranteed loan applications are 

modified. According to a RHS official, to expedite the regulatory 

recognition of losses on guaranteed SFH loans as federal debt, Agriculture 

is currently incorporating the regulatory changes that are needed into the 

draft final rule for the Section 502 Guaranteed Rural Housing Program. It is 

important to note, however, that the Office of Management and Budget 

(OMB) has determined that the final rule for this program will constitute a 

“significant regulatory action.” As such, the rule will be subject to a more 

lengthy clearance process that will involve OMB review in the final

9

RHS’s guaranteed SFH losses have continued to increase to about $258 million through the 

third quarter of fiscal year 2002.

10GAO-02-308.
Page 8 GAO-03-202T 

rulemaking stages.11 According to a schedule provided by Agriculture, 

which includes internal agency review as well as OMB review, publication 

of the final rule for the Section 502 Guaranteed Rural Housing Program is 

expected by about August 2003.

Given that the aforementioned regulation is not expected to be finalized for 

a considerable time, it is important to note that, as of our fieldwork 

completion date, RHS also had not modified the guaranteed loan 

applications for the SFH guaranteed loan program that are needed to 

establish a contractual relationship between the debtor and RHS so that 

losses stemming from SFH guaranteed loans can be recognized as federal 

debt and be subject to the debt collection provisions of DCIA. Initially, an 

RHS official stated that RHS planned to make changes to the applications 

when the final rule for the guaranteed loan program is issued. However, we 

pointed out that that approach could possibly delay RHS’s ability to 

recognize guaranteed loan losses as federal debt, and we suggested that 

RHS change the guaranteed loan applications as soon as practicable so that 

once the rule goes into effect, it may be able to be applied retroactively to 

cover as many guaranteed loans as possible. As a result, according to an 

RHS official, RHS consulted with its Office of General Counsel and 

obtained approval for changing the guaranteed loan applications prior to 

the issuance of the final rule.12 Currently, RHS is in the process of revising 

its guaranteed loan application form to include an acknowledgement that 

any claim paid by RHS on a guaranteed loan would be subject to provisions 

of the DCIA. 

11Under Executive Order 12866, which was adopted during the previous Administration, 

OMB reviews all significant regulatory actions to ensure consistency with the principle of 

good regulatory analysis and policy. At both the proposed and final stages of a major 

rulemaking, OMB is provided up to 90 days to review an agency’s rulemaking package, 

including the draft rule, the cost-benefit analysis, and any other supporting materials. 

During the 90-day review period, professional analysts at OMB scrutinize the agency’s work 

and often work with an agency to improve the analysis and/or draft rule. There are 

ultimately three possible outcomes of an OMB review: (1) clearance for publication in the 

Federal Register, (2) withdrawal by the agency for further consideration, or (3) return by 

OMB to the agency for reconsideration.

12As will be discussed later, FSA modified its guaranteed loan applications for guaranteed 

farm loans to establish a contractual relationship between FSA and the debtor 

approximately 1 year prior to finalizing its regulation for recognizing losses on such loans as 

federal debt. According to FSA officials, all losses on guaranteed loans made after the 

applications were modified are considered federal loans and subject to DCIA collection 

remedies.
Page 9 GAO-03-202T 

Once the regulations are finalized and RHS makes the necessary 

modifications to the guaranteed loan application, the agency will need to 

be able to promptly refer guaranteed losses to Treasury’s offset program. 

Given the fact that the SFH guaranteed loan program continues to grow 

significantly, thereby increasing the number of loss claims being processed 

each year, automated tracking of guaranteed loan losses and referring them 

to Treasury will be critically important. RHS has initiated a project to 

automate the tracking of SFH loss claims from lenders and payments made 

to lenders to cover such claims, which it plans to complete in April 2003. It 

is important to note, however, that the project does not cover the process 

for the automated referral of guaranteed losses to Treasury. According to 

RHS officials, this automated referral process will not be covered until RHS 

initiates the second phase of the current project after April 2003, and which 

is estimated to take an additional 9 to 12 months to complete. However, 

RHS currently tracks guaranteed losses, and RHS officials stated that 

referrals to Treasury could be done manually if the automated 

enhancements needed to make such referrals are not complete. 

FSA Has Initiated 

Actions to Improve Its 

Process and Controls 

for Identifying and 

Referring Debts

At the December 2001 hearing, we stated that FSA did not have a process 

or sufficient controls in place to adequately identify direct farm loans 

eligible for referral to Treasury. We emphasized that, as a result, amounts of 

direct farm loans FSA reported to Treasury as eligible for referral were not 

accurate and, for certain loans, not only distorted the TROR for debt 

management and credit policy purposes but also distorted key financial 

indicators such as receivables, total delinquencies, and loan loss data. 

Specifically, FSA automatically excluded from referral all judgment debts 

without any review to identify and refer deficiency judgments, which are 

eligible for Treasury’s offset program and should be referred.13 We 

emphasized that, as of September 30, 2000, FSA’s judgment debts totaled 

$295 million, and our inquiries prompted the agency to initiate a manual 

process to identify deficiency judgments eligible for referral.14

13A judgment may represent a judicial declaration that a debtor is personally indebted to a 

creditor for a sum of money. Judgments may include (1) judgment liens, (2) foreclosures, 

and (3) foreclosures and deficiency judgments. Deficiency judgments require payment of a 

sum certain to the United States and are intended to cover the shortfall between the amount 

owed the United States and the proceeds from the foreclosed property securing the loan.

14According to FSA, the agency manually identified 280 judgment debts totaling over $20 

million through June 2002 that were eligible for referral to Treasury’s offset program, and 

subsequently referred the debts to the program.
Page 10 GAO-03-202T 

Moreover, FSA’s Program Loan Accounting System did not contain current 

information from the detailed loan files located at the numerous FSA 

county field offices that would be key to determining a farm loan’s 

eligibility for referral to Treasury. In addition, there were no monitoring or 

review procedures in place to help ensure that FSA personnel routinely 

updated the detailed loan files that are the source of such key information. 

The severity of this problem was reflected in the results of our statistical 

sample of loans that had been excluded by FSA in four large states.15 Based 

on our review of this sample, we estimated that about one-half of the 

excluded loans in the four states had been inappropriately placed in 

exclusion categories by FSA as of September 30, 2000.16 One of the most 

frequently identified inappropriate exclusions pertained to amounts that 

had been discharged in bankruptcy. Such exclusions involved debts that 

FSA should have written off and closed out, in many instances, several 

years prior to our test date. In addition, the written-off and closed-out 

amounts for such debts should have been reported to IRS as income to the 

debtor in accordance with the Federal Claims Collection Standards and 

OMB Circular A-129.17

After the hearing, to address these problems, we recommended that the 

Secretary of Agriculture direct the Administrator of FSA to develop and 

implement (1) automated system enhancements to make the Program Loan 

Accounting System capable of identifying all judgment debts eligible for 

referral to Treasury for collection action, (2) oversight procedures to 

ensure that FSA field offices timely and routinely update the Program Loan 

Accounting System to accurately reflect the status of delinquent debts, 

including whether the debts are eligible for referral to Treasury for 

15Using statistical sampling, we selected and reviewed supporting documents to determine 

whether farm loans that selected FSA county field offices in California, Louisiana, 

Oklahoma, and Texas had excluded from referral to Treasury were consistent with 

established criteria dealing with bankruptcy, forbearance/appeals, foreclosure, and 

litigation. Field offices in these four states serviced about $272 million, or about 39 percent, 

of the total debts FSA excluded from referral to Treasury as of September 30, 2000, for 

bankruptcy, forbearance/appeals, foreclosure, or litigation.

16We estimated that 48.5 percent + 15.7 percent of the population were inappropriately 

reported as exclusions from referral to Treasury’s offset program. When projecting these 

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

population were between 389 and 761 loans.

17Federal Claims Collection Standards and OMB Circular A-129 require agencies to report 

the discharge of the debts, also known as close out, to the IRS in accordance with the 

requirements of 26 U.S.C. 6050P and 26 CFR 1.6050P-1.
Page 11 GAO-03-202T 

collection action, and (3) oversight procedures to ensure that all debts 

discharged through bankruptcy are promptly closed out and reported to 

the IRS as income to the debtor in accordance with the Federal Claims 

Collection Standards and OMB Circular A-129. We also recommended that 

FSA continue to manually identify deficiency judgments eligible for referral 

until the system enhancements for automated identification were 

completed and implemented.18

FSA has developed an action plan to improve its process and controls for 

identifying and referring eligible debts to Treasury and, based upon our 

review of documents provided by FSA, the agency has made progress 

toward implementing such improvements. As of our fieldwork completion 

date, FSA was using its Program Loan Accounting System and systemgenerated reports to better track the status of FSA’s delinquent debts, 

including judgment debts, for the purpose of meeting the DCIA referral 

requirements. Specifically, FSA was generating an enhanced debt report to 

include various types of debts under FSA’s farm loan programs, including 

judgment debts, to facilitate field office review of debts to determine 

eligibility for referral to Treasury. In September 2002, FSA provided its field 

offices the initial enhanced debt report and directed the field offices to 

review the debts for accuracy. FSA plans to routinely use the enhanced 

debt report in such field office reviews in the future.

In addition, actions are being taken to improve field office oversight for 

DCIA implementation. Beginning in August 2002, county field offices must 

provide their respective state offices with documentation for loans that 

they determine are ineligible for Treasury’s offset program because of 

bankruptcy, foreclosure, or litigation.19 The state offices, in turn, are 

responsible for making the final decision regarding the loans’ eligibility for 

referral and for actually excluding the loans from referral. In addition, FSA 

has amended its National Internal Review Guide to include specific 

procedures that are designed to help ensure that state offices, among other 

things, establish monitoring systems to accurately track borrowers in 

18U.S. General Accounting Office, Debt Collection Improvement Act of 1996: Department of 

Agriculture’s Farm Service Agency Has Not Yet Fully Implemented Certain Key 

Provisions, GAO-02-463 (Washington, D.C.: March 29, 2002).

19FSA maintains a state office in each state, usually in a state capital or near a state landgrant university. State offices, among other things, provide administrative support and 

oversight to county servicing offices, which are designed to be a single location where 

customers can access the services provided by FSA.
Page 12 GAO-03-202T 

foreclosure, bankruptcy, and litigation. The procedures are intended to 

facilitate the timely and routine updating of information in the Program 

Loan Accounting System to accurately reflect the status of delinquent 

debts, including whether the debts are eligible for referral to Treasury for 

collection action, and that all debts discharged through bankruptcy are 

promptly closed out and reported to IRS. FSA’s policy is to perform its 

national internal reviews at state offices not less than every 2 years, and the 

new procedures should improve FSA’s implementation of DCIA’s delinquent 

debt referral requirements. It is important to note, however, that specific 

actions in FSA’s action plan that are needed to (1) ensure field offices are 

routinely reviewing accounts for Treasury’s offset program and crossservicing referral eligibility; (2) ensure that field offices routinely monitor 

the status of accounts and properly code them for foreclosure, bankruptcy, 

and litigation; and (3) ensure discharged bankruptcy accounts are promptly 

closed out, removed from the farm loan debt portfolio, and appropriately 

reported to the IRS as discharged debts, have target completion dates of 

September 2003. 

Efforts Under Way at 

FSA to Begin Referring 

Codebtors to Treasury 

We stated at the December 2001 hearing that even though FSA reported 

having referred $934 million of direct farm loans to Treasury’s offset 

program as of September 30, 2000, the agency has lost opportunities for 

maximizing collections on this debt because it does not refer codebtors. We 

emphasized that the vast majority of direct farm loans have codebtors and 

pointed out that FSA’s Program Loan Accounting System did not have the 

capacity to record more than one debtor and that the necessary system 

modifications to record more than one taxpayer identification number had 

not been made. After the hearing, we recommended that the Secretary of 

Agriculture direct the Administrator of FSA to monitor planned system 

enhancements to the Program Loan Accounting System to ensure that 

capacity to record and use codebtor information is available and 

implemented by December 2002.20

FSA has acknowledged the need to refer codebtors. Its action plan includes 

time frames for developing and testing the systems enhancements deemed 

necessary for recording and reviewing relevant information needed for 

referring debts to Treasury’s offset program, including the codebtor’s name, 

address, and taxpayer identification number. Based on our review of 

20GAO-02-463.
Page 13 GAO-03-202T 

documents provided by FSA, the agency has established a codebtor code 

for its system and has begun to input codebtor information. According to 

FSA, as of our fieldwork completion date, 254 loans with codebtors totaling 

about $8.3 million had been identified for initiating the due process 

required for referral to Treasury’s offset program in December 2002. Given 

that the vast majority of the agency’s direct farm loans have codebtors, FSA 

has a substantial challenge ahead to obtain the required information to 

refer all eligible debt for codebtors to Treasury’s offset program.21 

Quarterly Referrals to 

Treasury’s Offset 

Program to Begin in 

December 2002

As we noted at the December 2001 hearing, data provided by FSA officials 

showed that about $400 million of new delinquent debt became eligible for 

Treasury’s offset program during calendar year 2000. Although FSA 

officials acknowledged that debts became eligible relatively evenly 

throughout the year, debts eligible for offset were being referred to 

Treasury only once annually, during December. As a result, a large portion 

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

eligible. FSA agreed that quarterly referrals could enhance possible 

collection of delinquent debts by getting them to Treasury earlier. After the 

hearing, we recommended that the Secretary of Agriculture direct the 

Administrator of FSA to monitor effective completion of the planned 

automated system modifications to refer eligible debt to Treasury’s offset 

program on a quarterly, rather than annual, basis.22

FSA plans to make quarterly referrals to Treasury’s offset program and 

intends to make the first such referral in December 2002. In August 2002, 

FSA issued guidance to the field offices for review of eligible debts for the 

December 2002 referral.23 In September 2002, FSA informed its field offices 

that quarterly referrals are now required, and the agency has determined 

that the same due process notification and referral process that has been 

used annually will be used quarterly, except under a shorter time frame. 

21We noted during our fieldwork that FSA officials were unaware of the requirement to 

report discharged or closed-out debts to IRS as income for codebtors as required by 26 

U.S.C. 6050P and 26 CFR 1.6050P-1. According to FSA officials, FSA’s Office of General 

Counsel has agreed that reporting discharged debts for codebtors to IRS could be done, and 

FSA is currently researching its systems capability for such reporting. 

22GAO-02-463.

23As of the completion date of our fieldwork, FSA documents indicated that the initial 

quarterly referral in December 2002 could potentially bring the total direct farm loans in 

Treasury’s offset program to over 35,000 loans totaling about $1.5 billion. 
Page 14 GAO-03-202T 

Significant Actions 

Taken by FSA to Be 

Able to Refer 

Guaranteed Losses to 

Treasury’s Offset 

Program

At the December 2001 hearing, we pointed out that FSA had paid out about 

$293 million in losses for guaranteed farm loans since fiscal year 1996, but 

like RHS, FSA had missed opportunities to potentially collect millions of 

dollars related to guaranteed loan losses because they were not treated as 

federal debt. We also noted while performing work at FSA that the agency 

had revised its guaranteed loan application applicable to guaranteed loans 

made after July 20, 2001, to include a section specifying that amounts FSA 

pays to a lender as a result of a loss on a guaranteed loan constitute a 

federal debt. After the hearing, because FSA needed to make revisions to 

its Guaranteed Loan Accounting System to classify guaranteed farm loan 

losses as federal debt, we recommended that the Secretary of Agriculture 

direct the Administrator of FSA to monitor planned system enhancements 

to the Guaranteed Loan Accounting System to ensure that the software 

needed to implement the revisions to the lender agreement to establish 

guaranteed loan losses as federal debt is completed. In addition, we 

recommended that once FSA establishes guaranteed loan losses as federal 

debt and deems them to be eligible for referral to Treasury, FSA timely 

refer such debt to Treasury for collection action in accordance with DCIA.24

FSA has issued the final regulations for recognizing claims paid on 

guaranteed farm loans as federal debt and is currently making needed 

systems modifications to refer such losses to Treasury’s offset program. 

According to FSA officials, the July 2002 regulations apply to guaranteed 

farm loans made after July 20, 2001, the date of the revised guaranteed loan 

application. FSA has established December 2002 as the milestone date for 

completing the automated systems capability to refer eligible losses to 

Treasury’s offset program and, according to FSA officials, the agency is on 

schedule. According to FSA officials, as of our fieldwork completion date, 

the agency has not paid any loss claims associated with guaranteed farm 

loans made under the July 20, 2001, revision of the guaranteed loan 

application, and does not expect to experience such losses in the near 

future because the loans are relatively new.25 However, it is important to 

note that if FSA experiences such losses, it has procedures for the manual 

referral of guaranteed loan loss debt to Treasury’s offset program. 

24GAO-02-463.

25According to FSA, as of July 24, 2002, $2.3 billion of guaranteed farm loans had been made 

under the revised guaranteed loan application.
Page 15 GAO-03-202T 

Agriculture Is Working 

toward 

Departmentwide 

Implementation of 

AWG

At the December 2001 hearing, we stated that Agriculture and eight other 

agencies we surveyed still had not utilized AWG as authorized by DCIA to 

collect delinquent nontax debt even though experts had previously testified 

before this Subcommittee that AWG could potentially be an extremely 

powerful debt collection tool. We noted that the agencies, including 

Agriculture, needed to develop the required regulations to implement AWG. 

In addition, we emphasized that Agriculture had not established specific 

dates for implementing AWG and was among five surveyed agencies that 

said they intended to implement AWG in the future but had no written 

implementation plan for doing so. After the hearing, we recommended, 

among other things, that the Secretary of Agriculture direct the CFO to 

complete and finalize regulations for conducting AWG and prepare a 

comprehensive written implementation plan that clearly defines, at a 

minimum, the types of debt that will be subject to AWG, the policies and 

procedures for administering AWG, and the process for conducting 

hearings, which are required by Treasury. We also recommended that, when 

practicable, (1) AWG be used in conjunction with other debt collection 

tools and (2) debts be referred to Treasury prior to 180 days delinquent 

when relying on Treasury to perform AWG.26

Agriculture agrees that AWG has the potential to be a powerful tool for 

collecting delinquent federal debts and has taken actions to develop 

needed regulations and has completed a departmentwide AWG 

implementation plan. As of our fieldwork completion date, Agriculture had 

drafted AWG regulations and incorporated them into the overall debt 

collection regulations for the department, which are currently being 

revised.27 Agriculture also plans to work with OMB to determine whether 

Agriculture’s regulatory revisions for debt collection should be considered 

a “significant regulatory action.” According to Agriculture’s implementation 

plan, if the regulatory revisions are determined to be a “significant 

regulatory action,” they will require a more lengthy review process 

resulting in a target date of May 2003 for final publication.

26U.S. General Accounting Office, Debt Collection Improvement Act of 1996: Status of 

Selected Agencies’ Implementation of Administrative Wage Garnishment, GAO-02-313

(Washington D.C.: Feb. 28, 2002).

27Agriculture is currently revising its debt collection regulations, which are contained in 7 

CFR part 3, in order to ensure that they reflect implementation of all aspects of DCIA, 

including AWG, and are consistent with the Federal Claims Collection Standards, issued by 

Treasury and the Department of Justice in November 2000.
Page 16 GAO-03-202T 

In addition, Agriculture’s implementation plan contains other milestone 

dates that need to be met and key elements that are needed to implement 

AWG. In accordance with the implementation plan, the CFO’s office has 

obtained from component agencies their best estimates of the number of 

AWG cases they are likely to have each year for loans and administrative 

debt along with a corresponding estimate for the number of requests for 

hearings. Agriculture plans to have the Department of Veterans Affairs 

conduct AWG hearings on Agriculture’s behalf and has had discussions 

with Veterans Affairs regarding such services. 

To actually perform AWG, Agriculture plans to rely upon Treasury’s crossservicing program for the vast majority of its debt types for specific debts 

of $100 or more.28 Agriculture believes that Treasury’s private collection 

agency contractors already have the knowledge, expertise, and resources 

to seek out debtors, verify employment sources, and pursue debt collection 

through AWG. Because of Agriculture’s reliance upon Treasury to perform 

AWG as part of cross-servicing, the CFO’s office plans to incorporate into 

Agriculture’s due process notifications to delinquent debtors, which are 

mailed prior to debt referrals to Treasury, the potential use of AWG as part 

of cross-servicing. In addition, the CFO’s office plans to work with 

Agriculture’s component agencies to refer debts for cross-servicing prior to 

the 180-day threshold, when practicable. These steps could serve to 

accelerate collections of delinquent debt.

Although Agriculture has completed its departmentwide AWG 

implementation plan, components of the plan still need to be carried out. 

For example, the CFO plans to obtain individual AWG implementation 

plans from Agriculture’s agencies that include each agency’s timetable for 

implementation, written policies and procedures, and types of debt subject 

to AWG. In addition, Agriculture still needs to work with its agencies to 

provide Treasury with authorization to use AWG as part of cross-servicing 

and to complete the agreement with Veterans Affairs to conduct AWG 

hearings on Agriculture’s behalf. 

28According to Agriculture, certain agency debts are exempt from cross-servicing. For 

example, Food Stamp Program debts are held by the states, which Agriculture considers to 

be third parties. These debts are serviced and/or collected by third parties, and thus are 

exempt from the requirement to transfer to Treasury for cross-servicing by 31 CFR 285.12. 

Agriculture plans to analyze these debts to see if the AWG process is doable and feasible 

economically as many such debts involve very low dollar amounts. Agriculture intends to 

determine the feasibility of using AWG to collect Food Stamp Program debt by December 

2002. Currently, Agriculture is surveying its component agencies to identify other types of 

debt that may be exempt from cross-servicing.
Page 17 GAO-03-202T 

Treasury’s Debt 

Collection 

Improvement Account 

Has Not Been 

Activated

DCIA includes a voluntary “gainsharing” provision that allows agencies to 

deposit a limited and defined portion of their debt collections into a special 

fund account maintained and managed by Treasury. The law provides that 

deposits into the special fund are available to the Secretary of the Treasury 

for gainsharing purposes only in amounts provided in advance in 

appropriations acts. 29 The Secretary may make payments from amounts 

appropriated to agencies for purposes related to credit management, debt 

collection, and debt recovery.30 However, because collections are routinely 

deposited into the general fund of the Treasury, appropriations would be 

required in order to implement this incentive provision. 

Treasury has established a debt collection improvement account that can 

be activated if its appropriations authorize the expenditure. 31 To date, only 

the Small Business Administration (SBA) has requested funding for 

gainsharing through Treasury’s debt collection improvement account. 

Based on SBA’s requests, Treasury’s appropriation requests for fiscal years 

1998 and 1999 included language for funding the debt collection 

improvement account for up to $384,000 and $3 million, respectively. 

However, the Congress made no amounts available in Treasury’s 

appropriations to fund the account. 

According to Treasury, because the debt collection improvement account 

has never been utilized, it is difficult to assess how effective the account 

29Agencies may contribute amounts equal to 5 percent of their collections in a fiscal year 

less their baselines, which are generally 5 percent of their collections in the previous year or 

5 percent of their average annual amounts collected in the previous 4 years, whichever is 

greater. OMB in consultation with Treasury may adjust an agency’s contribution amount to 

reflect the level of effort in credit management by the agency. An indicator of this effort is 

based on two factors: (1) the number of days between a debt being delinquent and referral 

to Treasury for collection (or an exemption from referral obtained) and (2) the ratio of 

delinquent debts to total receivables for a given program and the change in the ratio over a 

period of time. The amounts agencies transfer to Treasury’s debt collection improvement 

account would be available to reimburse the agencies only to the extent and in amounts 

provided in advance by Treasury’s appropriations.

30Credit management, debt collection, and debt recovery expenses cover activities such as 

account servicing, data processing equipment, delinquent debt collection, measures to 

minimize delinquent debt, sales of delinquent debt, asset disposition, and training of 

personnel involved in credit and debt management. 

31The account is the Gainsharing Receipts Debt Collection Improvement Account, which is a 

receipt account that has been established by Treasury in accordance with OMB procedures. 

Treasury’s FMS would monitor and manage the account for administrative purposes and 

record the gainsharing funds for each agency.
Page 18 GAO-03-202T 

could be in enhancing federal agencies’ debt collection or what changes, if 

any, should be made in the financial incentive area to improve debt 

collection governmentwide. 

Although the effectiveness of DCIA’s gainsharing provision cannot be fairly 

assessed at this time, it is important that the provision be kept in proper 

perspective relative to the overall effectiveness of DCIA in improving the 

federal government’s debt collection efforts. DCIA contains specific 

requirements for federal agencies to improve collection of their nontax 

debts, namely referral of certain delinquent debts to Treasury for 

centralized collection. While the pace of implementation has been slow, 

and collection opportunities have been lost, progress is being made.

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.

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