59

1998 calendar year. Our plan for integrating GTOP will provide projected dates
for incorporating salary payments, benefit payments, and payments made by non-
Treasury disbursing officials such as those in the Postal Service and the

Department of Defense.

As of September, FMS had entered into 24 Letters of Agreement with agencies to
collect delinquent debt through cross-servicing. To date more than 29,000 cases
having a dollar value in excess of $460 million have been referred to DMS for
cross-servicing. Of these referrals, the cross-servicing program has collected more
than $1.1 million and has established repayment plans for the collection of an
additional $2 million. The Department of Education has referred over 24,000

debts with a dollar value in excess of $430 million.

FMS has made two key changes to their collection methods to facilitate more
efficient debt collection. First, due to inéreased volumes of debts and collections,
FMS is now using the automated lockbox process to post collections of debts to

FMS’ cross-servicing debt collection system. This allows payments to be posted


123

point. But we will want to work with you as we have been, as we
are able to do that.

I want to thank you for the opportunity to share with you the
progress we have made in improving debt collection in the Depart-
ment and our plans for the future. As requested, we have also in-
cluded in our testimony the debt performance indicators that you
requested.

Thanks again for the opportunity to be here.

Mr. Horn. We thank you for your testimony and we thank you
for the very good written statement you have presented us with.

[The prepared statement of Mr. Longanecker follows:]


25

TABLE THREE
Asency/Program Debt Referred to Treasury for:
‘Tax Refund Offset Admin Offset Cross-Ser,
Agriculture 788 0 0
Farm Serv 561.9 0 0
Com Cred Corp 338 0 0
Food Con Serv 136.5 0 0
Forest Service 0 0 0
Risk Manage 54 0 0
Rur Util Serv 0 0
Rur Housi 474 0 0
Rur Bus Coop na na na
Commerce 8.0 0 0
Defense 0 0 0
Education 9648.1 9648.1 27
Student Loads 9626.4 9626.4 0
fo ional Debt 21.7 217 217
ergy : 0 037
HHS 38,134.2' 93.9 009
BUD 121.4 in progress 0
Interior 142 bailar) BA
OSM 128 0 ‘61
MMS 0 ° 0
BIA 654 0 120
BOR 0 °
Other 705 0) 0
Justice 34 0 0
Labor 4a 0 2
BLS 0 0 °
ESA/Black o 0 0
ESA/Fed Emp 23 0 0
ETA ) 0 o
MSHA 1 ° 0
OASAM ° 0 0
OSHA 3 0 121
PBWA 14 na na
State 24 0 0
T 12 rY 492
Veteran Affairs 306 0 0
Department Totals 49,003.24 9742.00 23.09
Agency/Program Debt Referred to Treasury for:
‘Tax Refund Offset Admin Offset Cross-Ser,
aD O15 0 0
EPA t) 0 0
FEMA 60 16.3 ry
GSA 0 r r)
NASA o 0 o
NSF 022 0 022
NRC o 0 96
OPM 41 0 ry
SBA 31.2 0 0
SSA 223.1 0 0
CFTA 0 r) r)
Exim Bank ° 0 0
FDIC na na ma
FTC 0 0 0
PBGC 005 0 0
RRB a7 0 0
SEC 3 0 0
‘Small Agency Totals 297.44 16.30 0.98
Grand Total All Agencies 49,300.68 9,758.30 24.07

'38,007.2 was referred to the IRS Tax Refund Offset Program on behalf of States under
the Child Support Enforcement Program.


154

We are working with Treasury to ensure effective data exchange
between agencies so that we are able to respond to inquiries that
result from such offset.

Another provision of the Debt Collection Improvement Act calls
for referral of debts to the Treasury Department for cross-servicing;
that is, the Treasury Department acts as a debt collector for the
agency. Debts are exempt from this provision if the debts have
been referred to a debt collection center. We have submitted an ap-
plication to the Secretary of the Treasury to be designated as a
debt collection center for the purpose of collecting our own debts.
We base this application on the existing debt collection centers that
we have had in place since 1984 for recouping the debt that cannot
be recovered through benefit offset. These centers use all of the
techniques available to us. Therefore, at this point, we have not re-
ferred any debts for cross-servicing.

In conclusion, I would like to restate SSA’s commitment to debt
management and the implementation of the Debt Collection Im-
provement Act of 1996. The success of our debt management pro-
gram is critical to the Social Security Administration’s mission and
to our goal to make SSA’s program management the best in the
business.

I would be happy to answer any questions you have.

Mr. Horn. Thank you very much, Commissioner. We appreciate
your coming. We have a high regard here for the administration of
the Social Security Administration that’s 35 years standing.

[The prepared statement of Mr. Sopper follows:]


149

In conclusion, let me emphasize:

¢ HUD is in substantial compliance with the
provisions of DCIA;

* HUD has used its asset sales program as our
primary method of disposing of FHA debt that
resulted from defaulted loan guarantees in our
multifamily and single family programs; and

* HUD will pursue the formal move of the Seattle ARC

to Treasury.

I would welcome any questions at this time.

10


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California

J. DENNIS HASTERT, Illinois TOM LANTOS, California

CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, JR, West Virginia

CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York

STEVEN SCHIFF, New Mexico EDOLPHUS TOWNS, New York

CHRISTOPHER COX, California PAUL E. KANJORSKI, Pennsylvania

ILEANA ROS-LEHTINEN, Florida GARY A. CONDIT, California

JOHN M. McHUGH, New York CAROLYN B. MALONEY, New York

STEPHEN HORN, California THOMAS M. BARRETT, Wisconsin

JOHN L. MICA, Florida ELEANOR HOLMES NORTON, Washington,

THOMAS M. DAVIS, Virginia DC

DAVID M. McINTOSH, Indiana CHAKA FATTAH, Pennsylvania

MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland

JOE SCARBOROUGH, Florida DENNIS J. KUCINICH, Ohio

JOHN B. SHADEGG, Arizona ROD R. BLAGOJEVICH, Illinois

STEVEN C. LaTOURETTE, Ohio DANNY K. DAVIS, Illinois

MARSHALL “MARK” SANFORD, South JOHN F. TIERNEY, Massachusetts
Carolina JIM TURNER, Texas

JOHN E. SUNUNU, New Hampshire THOMAS H. ALLEN, Maine

PETE SESSIONS, Texas HAROLD E. FORD, Jr., Tennessee

MICHAEL PAPPAS, New Jersey —

VINCE SNOWBARGER, Kansas BERNARD SANDERS, Vermont

BOB BARR, Georgia (Independent)

Kevin BINGER, Staff Director
Daniet R. MOLL, Deputy Staff Director
WILLIAM MOSCHELLA, Deputy Counsel and Parliamentarian
JuprtH McCoy, Chief Clerk
Putt. ScHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY
STEPHEN HORN, California, Chairman

PETE SESSIONS, Texas CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
JOE SCARBOROUGH, Florida MAJOR R. OWENS, New York
‘MARSHALL “MARK” SANFORD, South ROD R. BLAGOJEVICH, Mlinois
Carolina DANNY K. DAVIS, Ilinois

JOHN E. SUNUNU, New Hampshire
ROB PORTMAN, Ohio

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California
J. RUSSELL GEORGE, Staff Director and Chief Counsel
JouN Hynes, Professional Staff Member
ANDREA MILLER, Clerk
‘MARK STEPHENSON, Minority Professional Staff Member

ap


9

IRS Tax Refund Offset SBA has participated in tax refund offset for over a
decade, starting with consumer accounts and then expanding to commercial
loans. Systems modifications were completed several years ago to allow for
the referral of guarantors and other personal obligors on business accounts.
These individuals account for almost all recovery on commercial loans since the
businesses themselves are either defunct or have operated at a loss for lengthy
periods of time (thereby obviating payment of taxes).

Treasury Offset Program (TOP) SBA was one of the participants in Treasury's
administrative offset pilot, and is now completing systems modifications needed
to fully implement the program. The Agency has made excellent progress
recently in collecting the Taxpayer Identification Number (TIN) on loans for its
administrative accounting, and has a task group working to complete collecting
TINs for all loans, SBA anticipates starting referrals under TOP in fiscal year
1998.

Federal Salary Offset in accordance with the provisions of the Computer
Matching and Privacy Protection Act of 1988, SBA matches its delinquent loan
obligors on an annual basis with the Postal Service and the Department of
Defense.

1099-C Reporting After completing all collection activity, SBA reports to IRS
the balance owing on designated accounts. This reporting program is being
expanded to conform to recent regulatory changes by the IRS.

's Reporting Capability on Debt Coll ion Activi

The SBA has an excellent information system and a communications infrastructure to
link with FMS and systems of other agencies. Currently, SBA can report the following
data:

Information on the Status of Delinquent Portfolios

» gross receivables

» principal and interest that has been written off but is still being pursued

» accrued interest on delinquent debt, presumed uncollectible, but is still being
pursued

» debt owed by debtors who cannot be located

» delinquent debts currently being repaid

Agency Collection Activities

» number of cases to which each debt collection was applied

> dollar amount of delinquent debts these cases represent

» number of cases for which the Agency was successful in applying debt
collection tools

» amounts collected through each debt collection tool


68

ize about that. But of that $51 billion in outstanding debt, there
may be as much as $45 billion that is over a year outstanding. And
if 7 percent of that was collectible, that means we are only talking
about $3 or $4 billion of that amount over a year delinquent that
is really collectible.

Mr. Horn. Well, I agree on the student’s ability to pay, but the
fact is, when you don’t follow up, and this is what I told the Com-
missioner that was in office 3 or 4 years ago, you are not organized
to collect the debts. They don’t make the phone calls on time and
pretty soon everybody thinks in IRS that, oh, this is a grant. What
debt? What do you mean? What do I owe? And students feel the
same way. They need good counseling.

I must say, starting with President Carter, we finally got people
in the Department of Education that started saying, “what are you
doing in universities, what are you doing in the banks to really
counsel students that this is a loan, this is not a grant; it is not
the Pell grant?” That is what concerns me.

For the $51.3 billion delinquent nontax debt, of which we have
$513 million in the Treasury, you could almost start overnight if
Secretary Rubin issued an Executive order and said, get it over to
the Financial Management Service.

Now, one of the things that we pointed out to the then-Commis-
sioner, and I will point out to the new Commissioner but I am sure
he knows the obvious, and the obvious is, there are private debt
collectors in this United States that collect debt. And why are we
fussing around not collecting it? And why don’t we auction those
packages off and see what people can do?

Mr. HawKE. Well, we have, as I stated in my testimony, com-
leted a procurement and have engaged 10 private debt collecting
firms with nationwide capacity.

Mr. Horn. Is this one of these with the 5-year-old debt in the
package? That bothered me. If this comes out of the appropriation
language, which three of us urged, why this is separate from that,
I take it, Mr. Brasher tells me.

What has been referred, in essence, in terms of debt?

Mr. Murpuy. It was just awarded September 30. And as I men-
tioned, the contractors have 60 days to demonstrate that they can
connect with us to exchange the debt electronically and then an-
other 30 days for a test. That should be up and—they should be
operational February 1—yes; February 1. The old GSA debt collec-
tion contract, I think, expires January 31.

Mr. Horn. I notice, Secretary Murphy, on page 2 of your testi-
mony, you say, “we discussed the agreement between the Financial
Management Service and the Internal Revenue Service to merge
the tax refund offset program into your Treasury offset program,
and your work with Health and Human Services to develop proce-
dures to include past-due child support debts in the offset process.”

Now, past-due child support debts, I think, should be a fairly
easy thing to get ahead of. Commissioner Adams, the commissioner
of revenue in Massachusetts, told me that the day the law took ef-
fect that that gave him the power to raise millions of dollars in un-
paid child support that had been specified by the courts of Massa-
chusetts. When people go over the State line, he could access now
the tapes on where people were working and all the rest of it. I just


152

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15

Appendix A

Federal Agency Report Card Grade
Department of Education

Department of Health and Human Services
Office of Personnel Management
Department of Interior

‘Nuclear Regulatory Commission
Department of Energy

Department of Transportation

Department of Labor

Federal Communications Commission
Department of Veterans Affairs

General Services Administration
Department of Agriculture

Department of Housing and Urban Development
Agency for International Development
Federal Emergency Management Agency
‘National Science Foundation.

Peace Corps

Social Security Administration

Railroad Retirement Board

United States Information Agency
Department of Commerce

Department of Defense

Department of State

Environmental Protection Agency
‘National Aeronautics and Space Administration
Commodity Futures Trading Commission
Export/Import Bank

Federal Deposit Insurance Corporation
Securities and Exchange Commission
Railroad Retirement Board.

Pension Benefit Guaranty Corporation
Federal Trade Commission

‘Small Business Administration
Department of Treasury

ABDI AA AIM IH TIMI MOOD OOKODOEAAAAAAAAAAD

This report card measures Federal agency compliance with the Debt Collection Improvement Act
of 1996,

‘The Department of Treasury gets an F for failed leadership. Without the Department of
Treasury’s support, the effort to collect delinquent non-tax debt will not succeed.

Agencies receiving a C have some debts referred both for administrative offset and cross-
servicing. The agencies receiving a D have referred some debts for either administrative offset or
cross-servicing but not both.


128

$10.6 billion, which the Treasury Department also uses to offset other Federal payments to
defaulters, We also provided Treasury with 1,123 accounts on past due institutional receivables
(mostly from postsecondary institutions) valued at about $380 million. The Department has
referred more accounts to Treasury than any other Federal agency.

Using private collection agencies has been one of our most successful strategies. We have been.
contracting with private debt collection agencies since 1979. We currently have 15 debt
collection contracts. Our contracts with collection agencies are performance-based, as measured
by the percentage of defnulted loans on which the agencies collect. Over the past six years,
private collection agencies have generated $766 million in collections. Moreover, the contracts
we have awarded to collection agencies have been used as a model by at least one other federal

agency.

‘The Department was also the first Executive Branch agency to work with the Intemal Revenue
Service (IRS) to match defaulted student loan records with IRS addresses. The Department
began these matching activities 15 years ago. In addition, over ten years ago we implemented the
Federal Salary Offset Program, by which we began to match to defaulted and delinquent student
loan records with Federal employment records to identify and collect from Federal employees
who are in default on their loans. We have found this matching activity to be quite effective and
have collected $33 million over the past five years from Federal employees.

ive we have undertaken is reporting delinquent student loan debt to credit bureaus.


134

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178

sons. I wish you would share with us the balance that you use in
helping to make these decisions that continue the policy of invest-
ing in education but also the sensitivity of a person’s particular
personal problems or situations.

Mr. LONGANECKER. To the extent that it is policy, we try to help
people. The Student Loan Program Act of 1993 really helped us be-
cause it provided an avenue that we can provide to students now,
even if they are at this point in their life not able to accept a sub-
stantial debt burden. That is the opportunity of income contingent
repayment on their student loan program. Through that program,
we are pretty sure that that education will pay off over that per-
son’s working life. So they may not be able to pay a substantial
amount now but they can basically rehabilitate their debt, get out
of default, get into repayment, be paying a fairly modest amount
now. We know that over the life of those loans, most of them will
repay everything they owe.

Mrs. MALONEY. I will reconsider and give you a B.

Mr. Horn. Or an incomplete, as the case may be.

I have appreciated all of you taking the time to do this. I assume
you are all involved with either the chief financial officer’s oper-
ation and others that have common problems, because I would
hope that the success stories in the agencies, and each of you has
some aspect of it that is a success story, would be shared with the
other agencies, that we can get this not only from the top down in
Treasury, where we have felt they are a little slow, but from the
grass-roots coming up.

I think it is tremendously important for each agency to be in the
lead here because responsibility is key in our society. If we let peo-
ple get away with deadbeats, picking the other taxpayers’ pockets,
like 95 percent of the taxpayers get their pockets picked, you can
solve the problem.

I think it is very important that what your experiences have
been be shared with others. I assume you are doing that in some
of the working groups that exist within the administration. Am I
correct, or is nobody even paying attention to you? Well, we are.
We thank you.

I am going to thank the staff for putting this hearing together,
Russell George, chief counsel and staff director for the Subcommit-
tee on Government Management, Information, and Technology;
Mark Brasher, to my left, your right, senior policy director in
charge of this area, and he happened to nurse our little loan im-
provement debt collection bill through the Congress; John Hynes,
professional staff member; Andrea Miller, our clerk who, we regret
to say, will be leaving us to go to Pennsylvania, and we appreciated
her help that we have had over the last year or so; Matthew


14

Enclosure A

INFORMATION REQUESTED BY
THE HONORABLE STEPHEN HORN

1) Increasing the Volume of Federal Payments Subject to Offset

As you are aware, FMS is developing the Grand Treasury Offset Program (GTOP) system to
replace the current Interim Treasury Offset Progra (ITOP) system. ITOP was originally
designed as a proof-of-concept pilot prior to passage of Debt Collection Improvement Act
(DCTA), and while ITOP has been enhanced to allow offsets against multiple payment types,
capabilities in this area remain limited. ‘The GTOP system has been designed to allow
implementation of Treasury Offset Program (TOP) for all Federal payment types, including tax
refunds and ultimately those payments issued by Non-Treasury Disbursing Offices (NTDOs).
These payment types will be phased into TOP beginning in 1998, and a schedule will be
provided to your office as part of the TOP implementation plan

‘As a matter of background, the primary requirements to complete the merger of the TOP and
the tax refund offset program are technical. They consist of delivery and testing of the new
offset software (GTOP) that FMS is having developed to complete the implementation of TOP;
completing changes to the IRS system to enable merger with GTOP; testing of the interfaces
between GTOP and the IRS system; and phasing out the current software (ITOP). Since merger
plans are dependent on our schedule for implementing GTOP, we are working to develop an
implementation schedule for each of these items as part of the TOP plan referenced in this letter.

2) Increasing the Volume of Delinquent Accounts Subject to Offset

The Office of Management and Budget (OMB) and FMS are working with the agencies through
the CFO Council and the Federal Credit Policy Working Group to clearly identify which
delinquent debts are to be referred to Treasury for offset and cross-servicing. OMB, FMS and
the agencies will then set dates for the debts to be referred and OMB will monitor the
compliance.

In order to further increase the number of debts in the TOP database, FMS and IRS have agreed
to require agencies to submit all delinquent debts to FMS for participation in tax refund offset
(TRO) for calendar year 1998. This will afford FMS an opportunity to add some or all these
debt records to the TOP database over the course of next year, significantly increasing the total
number of delinquent debts against which FMS can take offsets. This should substantially
increase the number of debts in the TOP database. Currently, FMS has more than 2.4 million
debts covering $17 billion in delinquent receivables. Of these, nearly two million cases represent
debts owed to Federal agencies and another half million are child support debts.


32

delinquent debt to the
Treasury
Department’s
Financial
Management Service.
The DCIA is
important for several
reasons, first, it
strengthens the
governments ability
to collect delinquent,


103

sources to implement the legislation. We are working with Treas-
ury and others to ensure that it is put into effect in a manner that
makes sense and is in the best interest of small businesses that we
serve.

Thank you for the opportunity to testify. I will be happy to an-
swer any questions that you have.

[The prepared statement of Mr. Gray follows:]


39

Mr. Horn. Gentlemen, Mr. Secretary Hawke, Mr. Secretary Mur-
phy, you know the routine here. We swear all witnesses. r we
introduce you, your full statement is automatically entered in the
record. We would sort of like you to look us in the eye and speak
off the cuff, but we will in deference to your position and leadership
role, we will give you all the time you need to get your statement
out. So if you will stand, raise your right hands.

[Witnesses sworn.]

Mr. Horn. The clerk will note both witnesses have affirmed the
oath.

Mr. Under Secretary Hawke, it is always a pleasure to have you
back here. We know you are trying the best you can in some of
these areas, and we would appreciate your opening statement.

STATEMENTS OF JOHN HAWKE, UNDER SECRETARY, DEPART-
MENT OF THE TREASURY; AND GERALD MURPHY, FISCAL
ASSISTANT SECRETARY, DEPARTMENT OF THE TREASURY

Mr. HAwKE. Mr. Chairman and distinguished members of the
committee, let me say that I think that the opening statements of
the members of the committee have focused on exactly the right
issues. This program is one that is of tremendous importance.

We are disappointed with the progress to date in implementing
the program. We think that there are some reasonable expla-
nations for that. We are continuing to make a strong effort to get
the program up and running, and we share all the objectives that
the committee and the Congress have had in passing this legisla-
tion and conducting these oversight hearings.

In April of this year, Assistant Secretary Murphy and I testified
before this subcommittee about the status of Treasury’s effort to
implement the act, and we continue to make progress in most
areas, but the progress has not been what it should be or what it
could be. And I think we should be very frank and forthright about
that.

The number of delinquent debts that has been referred to us for
the offset program has increased. It still, again, is not what it
should be. We have entered into agreements with agencies for
cross-servicing of debt and that needs to be increased. So far, the
amount of debt that’s been put into the cross-servicing program is
very, very modest. We have awarded contracts to 10 private collec-
tion agencies for the collection of delinquent debts, and we plan to
move ahead vigorously with that part of the program.

Let me just address three or four of the key issues that the com-
mittee has expressed an interest in. First, one of the significant
shortfalls, I think, up to date has been our inability to get the tax
refund offset program merged into the Treasury offset program.
That has turned out to be far more complicated than we had
thought.

The need to integrate the systems at IRS and FMS has been a
challenge. Rather than move ahead with that on a basis where we
might be creating implementation problems”—and one must have in
mind here the kind of experience that IRS has had with taxpayers’
stories, which have been so prominent in recent months—a decision
was made to delay that for 1 year. I think, all things considered,
that was a reasonable decision to make under the circumstances,


164

Mr. KEEVEY. No, sir.

Mr. Horn. Why not?

Mr. KeEvey. I think this is the most effective way of dealing
with the debt. We have an ongoing, viable program, where this
debt can be sold; and we think this is the way to do it, Mr. Chair-
man.

Mr. Horn. What has been the history in terms of the percent of
your debt that you have actually collected, and what’s the mark-
down, in essence, once you get through with the process?

Mr. KEEveY. With the FHA?

Mr. Horn. Yes.

Mr. KEEVEY. I think the numbers that we had were, $9.5 billion
was written down to $7.5 billion through the sale process.

Mr. Horn. I notice on, I guess it would be page 10 of your 11-
page statement, that you say we have completed the preparation
of statements of work to engage outside financial and technical ad-
visors, including—now, you just sort of referred to that. How man}
advisors are we talking about and is that a real block in your col-
lection efforts?

Mr. KEEVEY. Where are you reading, Mr. Chairman?

Mr. Horn. Well, maybe I have got the wrong one; that might be
SBA. I am sorry, because I thought I marked the same thing for
you. That’s the next one.

How about it, Mr. Gray, in looking at your selection or desire to
get program financial advisors, transactional financial advisors,

ue diligence advisors, legal services advisors and all that; are they
not in lace at SBA?

Mr. Gray. They are not in place.

Mr. Horn. So, this would be a new effort?

Mr. Gray. That’s correct.

Mr. Horn. OK. How difficult is it to get these? Are you simply
going out on the private market and hiring them or what?

Mr. Gray. Well, we have two efforts undergoing right now. One
is an internal SBA procurement through the traditional—and I be-
lieve very well run—procurement system at the SBA. We are work-
ing on the other with both Treasury and HUD on a GSA schedule,
and we hope to have that in place the next 12 months or so.

Mr. Horn. OK. On Social Security, I notice on page 5, you note
that another provision of our legislation called for referral of debts
to the Treasury Department for cross-servicing, and the Treasury
acts as the debt collector for the agency.

I am curious. You say you have submitted an application to the
Secretary of the Treasury to be designated a debt collection center
for the purpose of collecting your own debts. I guess I am curious
as to whether you are doing as well as you should, because, in a
sense, from the Social Security Administration’s standpoint of good
public relations, again, we make the point, why not just let Finan-
cial Management Service and Treasury collect it? Why do you
worry about collecting it? Why don’t you just turn it over to them?

Mr. Sopper. Well, Mr. Chairman, let me say that since 1981 So-
cial Security, in response to OMB direction, has been concerned
about the recovery of debts owed by either Old Age, Survivors and
Disability Insurance recipients or supplemental security income re-
cipients.


64

4. are referred to a Debt Collection Center with Treasury consent; or
5. will be collected via internal ofiset within three years.
This analysis will be critical to determining what percentage of delinquent Non-

tax debt can actually be referred to FMS for cross servicing.

Progress has been made since we last testified before this Subcommittee, and we
take pride in our accomplishments to date, however we have not made nearly as
much headway as we had hoped. Our goals for the future are to complete
implementation of the DCIA at the earliest possible time and establishment of
definitive targets for agencies to achieve compliance with these DCIA

requirements.

As Under Secretary Hawke mentioned in his testimony, Assistant Commissioner
Virginia Harter recently retired after 39 years of distinguished service to the
Federal Government. Ms. Nancy Fleetwood has been designated interim Assistant
Commissioner for Debt Management Services within FMS. Ms. Fleetwood brings
several years of experience as Comptroller at FMS and has had significant
experience in implementing financial management programs and systems. I am
confident that she will provide the strong leadership necessary to insure continued

11


148

SAIVRS

The DCIA states that "delinquent Federal debtors will be
barred from obtaining Federal loans or loan insurance
guarantees." HUD has addressed this provision of DCIA
through its use of the Credit Alert Interactive Voice
Response System (CAIVRS). CAIVRS is a Federal government
interagency shared database, whose participants are users
from HUD, USDA, VA, SBA, FDIC and the Department of
Education. The purpose of the system is to alert
participating Federal lending agencies when an applicant for
benefits/loans has a Federal loan which is currently in
default or foreclosure, or has had a claim paid by the
xeporting agency. CAIVRS was initially developed by FHA in
1987 to screen loan applicants for the Single Family
Mortgage Insurance Program. It was later expanded to
support the Title I Property Improvement /Manufactured Homes
Insurance Programs and the Section 312 Rehabilitation Loan
Program. Since 1987, over 24 million borrowers have been
pre-screened through CAIVRS. Starting in 1993, the scope of
CAIVRS was expanded to include the other agencies indicated
above. As a result of this process, we understand
participating Agencies have realized cash collections of

delinquent debts.


35

loan defaults, and
foreclosures on homes
and farms are
seriously on the rise.
In fact, over the last
decade delinquent
debt has increased
from $23.9 billion in
1985 to $48.8 billion
in 1994. In 1995 and
1996 that level rose to


67

ing for them, really, to give us the authority, but maybe we can go
ahead in a lot of ways without their authority.

I guess I would ask, has the Treasury Secretary and yourself,
Mr. Hawke, and the President, ever thought of issuing an Execu-
tive order to these other agencies to say, get with it, get that debt
over to the Financial Management Service, and let’s go pick it up?
The President has full authority, I am sure, to just tell his Cabinet
officers, get going on this. Now, what is your answer to that?

Mr. Hawke. Mr. Chairman, I can’t say that the subject of an Ex-
ecutive order as such has been considered, but I can tell you that
during the time that I served on the President’s Management
Council, on at least three occasions I brought this subject up in the
context of meetings of representatives of all the agencies. Mr.
DeSeve has communicated with the agencies at our urging and we
have tried to do what we can in that regard.

I think, Mr. Chairman, that we have to have realistic expecta-
tions about this program, and I think one of the problems that we
all have to come to grips with is the understandable concern about
program agencies not wanting to interfere with their programs by

eing overly vigorous in the collection of debt. I spent 7 years as
the chairman of a major law firm here in town and one of the big-
gest problems that we had in collecting delinquent fees from clients
was that the lawyers who were in charge of those clients didn’t
want to offend their clients by engaging in vigorous debt collection
activity. That’s kind of a natural human failing.

I think the important thing is to separate debt collection from
program responsibilities and to have an independent authority.
That is the wisdom that’s reflected in the Debt Collection Improve-
ment Act. In order to realize that objective, it is important for the
agencies to cut the cord and to refer those debts and to break the
linkage between program responsibilities and debt collection re-
sponsibilities.

Mr. Horn. I completely agree with you. If I were an agency head,
I would love to have the debt collection move over to Treasury; you
be the bad people and the agency can happily go on pandering to
the special interests that agencies reflect around this town.

Let me just say on that experiment we are having with IRS, one
of those packages they put out to bid had a 5-year-old debt. My
suspicious mind said, gee, are they trying to make this system fail?
What have you heard on that front?

Mr. HAWKE. I think the point that is implicit in your question,
Mr. Chairman, is exactly right. The older a debt becomes, the more
difficult it is to collect. The number that has been used as sort of
the baseline of Federal debt, $51 billion, is a number that deserves
some examination. We calculate that over 87 percent of that
amount is debt that’s been outstanding and delinquent for over a
year, and I think, as everybody involved in this business knows,
once debt is outstanding for more than a year, it becomes, in many
cases, more and more difficult to collect. A private standard may
suggest that only 7 or 8 percent of debt that is that old is really
collectible. So, I think we need to look carefully at the numbers.

Of course, in the case of student loans there may be something
of the opposite. The longer the debt is outstanding, the more able
the debtor may become to pay the debt. So we can’t overly general-


104

Good morning Mr. Chairman and members of the Subcommittee. My name is John Gray, and
Lam the Associate Deputy Administrator for Economic Development at the Small Business
Administration (SBA). 1am responsible for providing overall direction for the SBA's credit
programs, its portfolio management and surety bond programs, and business education and
training programs. I have been in this position since late July, coming from a career in the banking

industry.

I understand that this is the first time SBA has been asked to appear before this Committee, and I
am truly pleased to provide testimony on SBA’s implementation of the Debt Collection
Improvement Act of 1996, including SBA’s efforts to undertake and implement a loan asset sales

program.

In the interest of time, 1 will not attempt to address each part of the Act, but instead summarize
SBA’s implementation under six key areas: (1) the referral of delinquent debt; (2) the designation
of Federal agencies as debt collection centers, (3) the enhanced reporting of debt collection
activity; (4) the collection of Taxpayer Identification Numbers (TINs); (5) the transition of

Federal disbursements from paper checks to electronic payments; and (6) asset sales.

To start, | would like to provide this Committee with some background information on SBA’s

debt collection capabilities.

Over the Agency's 44 year history, SBA has been a recognized leader in Federal credit and cash

management. SBA has undertaken many initiatives to enhance our ability to make and service

loans. A few examples include:


167

I might mention, too, and I would just like to say, it is nice for
me, as an Assistant Secretary, to come and take the glory for some-
thing we do well at the Department; but it is really the Debt Col-
lection Service, Tom Petska and the staff that work with him, that
have done this. They really are a remarkable crew and are awfully
fine public servants.

Mrs. MALONEY. But every agency needs leadership, and certainly
the leadership coming from the Department of Education is rein-
forcing and supporting Mr. Petska in his work. So I congratulate
you on that.

I would like you to look at the two bills that I mentioned in my
testimony and get back to me, whether you support them or wheth-
er they would help you. One is the Debt Collection Wage Informa-
tion Act, and it is designed to help locate student debtors who move
out of State to avoid paying debt. It was modeled after the Massa-
chusetts model.

The second one that I have introduced would allow your agency
to verify information submitted to the Education Department on
loan applications and other applications for Federal assistance.

Mr. LONGANECKER. We will do that. We will do that in the—I
mean, we are working obviously with the Office of Management
and Budget and with Treasury in terms of trying to have a consoli-
dated effort. So, we will do that and we will do that as quickly as
possible in concert with our sister agencies.

Mrs. MALONEY. I think that student loans are critically impor-
tant. They are part of the investment that we need to make in the
future of our country, and I congratulate you for making those in-
vestments and handling them and managing them well, so that we
have money for more investments in our young people. And I thank
you for your fine record.

Now I would like to go to Mr. Keevey at HUD. HUD has $1.3
billion in delinquent debt which is over 180 days old, and in a let-
ter that I received from your Department, I was told that they
would transfer it to Treasury in 4 to 6 months, and that was over
7 months ago.

Can you tell me where these debts are?

Mr. KEEvEY. The majority of that debt would not be under our
proposal to transfer to Treasury. A large part of that debt relates
to defaulted loan guarantees of the Federal Housing Administra-
tion, and the way in which we get rid of that debt, if you will, is
through sale of assets.

Mrs. MALONEY. So, you sell assets?

Mr. KEEvEY. Yes. And that has been going on over the past 4
years.

Mrs. MALONEY. Uh-huh.

Mr. KrEvey. We have sold over 115,000 defaulted loans, about
$7.5 billion worth.

Mrs. MALONEY. How do you sell them? Do you do them by com-
petitive bid—advertise and competitive bid? How do you sell your
assets?

Mr. KEEVEY. Yes. That’s done by—and I think I alluded to it in
my testimony—a financial advisor and due diligence and all of that

rocess that is necessary for a competitive sale, the Department
fas put it on hold. There have been some irregularities related to


126

meet in order to participate in the loan programs. IPOS also ensures that borrowers receive
counseling on managing and repaying their loans before they leave school. In addition, through
the Default Management Division, IPOS has responsibility for taking actions against schools

having excessively high default rates, including terminating their eligibility.

‘The vast majority of borrowers have repaid or are currently repaying their student loans. Some
borrowers do default, however, and the Department is determined to see to it that those defaulters

fulfill their obligations to repay their loans.

Our Challenge

Our challenge is to collect as much as possible on defaulted student loans. This challenge is
considerable because student loans are inherently risky. The student loan programs were created
by the Congress to make loans available to all eligible students to ensure their access to higher

education. Credit worthiness is not a prerequisite. Because the student loans are unsecured, the
‘government and private lenders have no collateral in the event of default. In addition, borrowers

often relocate after leaving school, which can make it difficult to locate them.

When defaults do occur, despite our prevention activities, the Debt Collection Service (DCS) is
the organizational unit within the Department that bears responsibility for collecting the defaulted
student loans. DCS is also responsible for implementing most aspects of the Debt Collection
Improvement Act of 1996.


45

program into TOP until January 1, 1999. In light of the magnitude of the tax
refund offset program and the potential for serious problems and disruptions if the
transition were not completed smoothly, I consider this decision to be reasonable
on the part of both agencies. FMS and IRS have both worked hard to achieve
what may have been a very aggressive and optimistic schedule, and they are
continuing to work together closely with increased coordination between their
respective Chief Information Officers and program organizations to ensure a

successful merger by January 1, 1999.

I would like to point out that although we are now in a transition period for tax
refund offset, we are continuing to move forward on the development of GTOP
software, a comprehensive, integrated system that will allow us to increase the
number and type of payments available for offset. Because we are approaching
tax season, however, the primary focus of our effort has been to ensure that we
have a successful interim process in place for IRS tax refund offset. This interim
process represents a significant change from previous operations, involving

additional opportunities for offset by data sharing between TOP and the tax refund


87

Mr. Horn. Mr. Davis, 10 minutes.

Mr. Davis. Thank you, Mr. Chairman.

Mr. Hawke, I happen to believe that one of the biggest obstacles
to implementing the program is to get the agencies to comply with
the 180-day cross-services requirement. We have indicated that
compliance has not been as great as we would like to see it. Do you
have any suggestions or recommendations in relationship to how
we could convince the agencies to comply with this requirement in
a better way than what they have done?

Mr. HAWKE. The current amount that has been referred is $17
billion. As I said, we have tried through interagency mechanisms
and through OMB to try to accelerate the pace of referrals from the
program agencies. The chairman suggested that an Executive order

e considered. Certainly that is something that is worthy of consid-
eration. But I think the important thing here is that all of the par-
ticipants in this program have to recognize the importance of sepa-
rating the debt collection function from the program function and
centralizing that process and using the ability to match up Federal
payees with delinquent debtors. It is going to be in everybody’s in-
terest to get debts transferred. I think the agencies have to really
be the first line of defense.

Mr. Davis. Even perhaps short of an Executive order, is there
any individual, group of individuals, task group, or task force that
has been designated by the administration perhaps to really spear-
head implementation, to really shepherd this program implementa-
tion that you are aware of?

Mr. Murpuy. There are a couple of groups, the CFO Council and
the Federal Credit Policy Working Group, who have been dealing
with related issues. Treasury has the leadership responsibility. We
need to do more. OMB has also participated in trying to resolve
some of the issues that agencies have. Many of them are technical
issues. They are systems capability, resource issues, and we are
dealing with those.

As I mentioned, we have agencies that have identified problems
that they have, and we have a task group set up to address each
of these three areas. We are hoping that some of that will remove
some roadblocks and help us move forward a little faster.

Mr. Davis. Maybe as a result of the technical complexity of the
problem and what we are dealing with, I probably would be in
agreement with the chairman that perhaps we would seek the
President to issue an Executive order that would provide a dif-
ferent level of leadership and perhaps a different level of concern
across the board. This might help to speed things up and make
sure that the agencies recognize this as a priority as opposed to
something that we are kind of doing after we have done some other
things. You indicated that we had engaged 10 private contractors
to be involved in the process. Are the contracts structured in such
a way that their payment will come as a result of their effective-
ness?

Mr. Murpny. Yes, sir, that is correct.

Mr. Davis. So there are incentives and bonuses and all of those
things that sometimes you do in order to make sure that people
work as hard as they can, as effectively as they can, and as strate-
gically as they can to get the job done?


DELINQUENT NON-TAX RECEIVABLES
on. Carolyn B. Maloney

‘This report discusses the results of a survey sent out on March 13, 1997 by
Congresswoman Carolyn Maloney to all cabinet departments and certain selected independent
agencies. The survey's purpose was to assess the total amount of delinquent non-tax
receivables owed to the Government of the United States, and to gauge the effectiveness of the
‘Debt Collection Improvement Act of 1996 (P.L. 104-134). Improving Federal debt collection
has taken on renewed importance because of Congressional efforts to balance the budget and
‘streamline government.

According to Maloney's survey, individuals, businesses and organizations owe the
U.S. Government over $ 50 billion in non-tax delinquent debt.

‘These findings clearly show that the U.S. Governmeat needs to do more to collect its
money. Although collecting debt bas proven difficult due to the complexity and nature of
Federal programs, many departments and agencies can do better. They have recently received
the neccesary tool collet ther debe

On April 26, 1996, the Debt Collection Improvement Act of 1996 (DCIA) became law
as part of the Omnibus Appcoptiations Act for FY96 (PL 104-134). Rep. Maloney co-
authored that legislation.

Delinquent debt can be any debt to the Federal government that is over 30 days past
due. Debt where a modified payment schedule has been agreed to is not considered
delinquent. Before a debt is referred for collection, there is a set of due process procedures
the agency must follow, including notification in writing of the intent to seek collection
through other means, and appeals process and/or negotiation of the debt.

‘Over the last decade, delinquent debt has increased from $23.9 billion in 1985 to $48.8
billion in 1994, In 1996 that level rose slightly to $50.4 billion. The greatest increase over
this period was between 1985 and 1989 (23.9 billion to $40.4 billion)

Five agencies are responsible for the majority of non-tax debt owed to the Federal
government: Housing and Urban Development; Agriculture; Veterans Affairs; Small Business
‘Administration; and Education. Delinquent debt arises from numerous sources, At the
Department of Agriculture, debt arises from farm loans, food stamp overpayments and
commodities support programs. At Education, almost all comes from student loans. At the

1


FEDERAL DEBT COLLECTION PRACTICES

WEDNESDAY, NOVEMBER 12, 1997

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room
2154, Rayburn House Office Building, Hon. Stephen Horn (chair-
man of the subcommittee) presiding.

Present: Representatives Horn, Maloney, and Davis of Illinois.

Staff present: J. Russell George, staff director and chief counsel;
Mark Brasher, senior policy director; John Hynes, professional staff
member; Andrea Miller, clerk; Matthew Ebert, staff assistant; and
Mark Stephenson, minority professional staff member.

Mr. Horn. A quorum being present, the Subcommittee on Gov-
ernment Management, Information, and Technology will come to
order.

One and a half years ago, Congress passed and the President
signed into law the Debt Collection Improvement Act of 1996. This
law changed the rules of the game for debt collection. Currently,
the total of delinquent nontax debts is $50 billion. By providing
new collection tools to agencies and incentives to increase collec-
tions and accountability, Congress hoped to increase the dismal
performance of the Federal Government in collecting delinquent

lebts.

What results have been achieved so far? The Department of

Treasury’s Financial Management Service has spent between $20
and $30 million implementing the Debt Collection Improvement
Act. This involves coordinating with Federal agencies, conducting
awareness campaigns, drafting contracting documents and regula-
tions, and working with agencies to refer their debts to the Treas-
ury.
The Financial Management Service has only collected $2.8 mil-
lion from these efforts. While it is an improvement from the
$300,000 collected in April as of our last hearing, it is not enough.
The Department of Treasury is still not covering its costs. I hope
that as of our next hearing, 6 months from now, we have another
improvement of at least one order of magnitude, and ideally two.
That would bring us to collect about $300 million per year. We
should be collecting billions every year $50 million dollars is sig-
nificant but we ought to set our sights considerably higher.

In order to get the real money and to begin collecting more than
we spend, agencies need to implement three key provisions of the

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42

Mr. Chairman and Distinguished Members of the Subcommittee, I am pleased to
have this opportunity to discuss the Department of the Treasury’s progress in
implementing the Debt Collection Improvement Act of 1996 (DCIA). Your

continued interest in this subject has been of great importance to us.

The DCIA legislation has seven key purposes:

1. To maximize collection of delinquent debts.

2. To minimize the costs associated with debt collection.

3. To reduce losses arising from debt management activities.

4. — To ensure the public is fully informed of the Federal government’s debt
collection policies.

5. To ensure that debtors have appropriate due process rights.

6. To encourage agencies to sell delinquent debt, particularly those with
underlying collateral.

7. Torely on the private sector to provide debt collection services to Federal

agencies.


161

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73

Page 2 - The Honorable Stephen Horn

¢ Description of cross-agency systems issues that have complicated the TRO-TOP
merger and time lines for their resolution (Enclosure A).

+ Status of DCIA regulations and anticipated effective dates (Enclosure D).

4 Explanation of how DCIA authority to pay finder’s fees to any person
discovering unclaimed Federal property will be applied (Enclosures A & E).

The enclosed narrative and supporting documentation should fully address each of these issues.
Thank you again for your continued interest and support in our efforts to implement DCIA.

Sincerely,

Dat.)

D. Hawke, Jr.
‘Under Secretary for Domestic Finance

Enclosures


82

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FEDERAL DEBT COLLECTION PRACTICES

HEARING

BEFORE THE
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON
GOVERNMENT REFORM
AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS
FIRST SESSION

NOVEMBER 12, 1997

Serial No. 105-121

Printed for the use of the Committee on Government Reform and Oversight

ae

U.S. GOVERNMENT PRINTING OFFICE
48-780 WASHINGTON : 1998

For sale by the U.S. Govemment Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-057299-1
-
D



108

regulatory changes to participate in TOP. Publication should be completed this month.
Accounts which will be initially included in TOP are 22,000 accounts with indebtedness
totaling $570 million. Holders of these accounts were notified in mid-October that their loans
are candidates for offset. We anticipate that these accounts will be referred in December 1997
or early January 1998. As indicated, SBA intends to promptly refer to Treasury for cross
servicing and administrative offset all accounts which are not targeted for foreclosure or

litigation.

Designation of Federal Debt Collection Centers
The DCIA envisions that a number of Federal agencies should be designated as collection centers
for their own debt as well as debt of other agencies. SBA firmly believes that it should be
designated as a debt collection center because of its well-established expertise in loan collection
activities. In fact, in the legislative history of the DCIA, SBA was specifically mentioned as one

of the Agencies envisioned as a Federal debt collection center.

On October 30, 1997, SBA sent 2 proposal to Treasury requesting designation as a debt
collection center. A copy of that letter is attached. While we would be initially concentrating on
our own debt, we would welcome the future opportunity to service the debt of other Federal
agencies. We believe that leaving the servicing of SBA’s loan portfolio with SBA makes the most
sense both for our small business customers and also for the nation’s taxpayers, particularly in
light of SBA’s extensive debt collection experience and the resources recently devoted to enhance

the Agency's collection capabilities through our Liquidation Improvement Project.


181

the Act also includes another tool which the Department has used to improve the efficiency of our
“operations, namely the use of electronic funds transfer. The Department is proud to report that
91 percent of its payments are now being made electronically. Recipients of those payments

include institutions, businesses, and individuals.

Although we are proud of our accomplishments in increasing collections on defaulted student
loans, we are always seeking methods to improve the effectiveness of our efforts. The
Department is now considering initiatives to create some new collection tools. We will be
including some of these new initiatives as part of our proposals to reauthorize the HEA, although
the Administration is not ready to discuss the details. We will also be working in concert with
other agencies with similar needs to develop improved collection tools that will be mutually

beneficial.

I want to thank you for the opportunity to discuss the significant progress we have made in
improving debt collection within the Department and our plans for further improvement. I also
would like to mention that we have developed and are now using performance indicators, as
required by the Government Performance and Results Act of 1993, for managing our programs.
We have several indicators addressing default prevention and loan collections which are further
helping us focus our efforts on preventing defaults and increasing collections. I am also now

submitting the debt performance indicator table you requested and would be happy to answer any


159

along with the definition of unrecoverable debt as required by statute. We will
also issue revised regulations for the OASDI tax refund offset program that
address the conversion of the program from the IRS to the Financial Management
Service.

Specific provisions of the Debt Collection Improvement Act of 1996 allow for the
offset of OASDI payments to recover debts owed to other Federal agencies. We
are working with the Treasury Department to implement this provision and are in
the process of reviewing the draft regulations that will put this provision into
effect. We are working with Treasury to ensure effective data exchange between
agencies so that we are able to respond to inquiries that result from offset.

r Cross Servicii

Another provision of DCIA calls for referral of debts to the Treasury Department
for cross servicing; that is, the Treasury Department acts as a debt collector for the
agency. Debts are exempt from this provision if the debts have been referred to a
debt collection center. We have submitted an application to the Secretary of the
Treasury to be designated as a debt collection center for the purpose of collecting
our own debts. We based this application on the existing debt collection centers
that we have in place for recouping the debt that cannot be recovered through
benefit offset. These centers use all of the techniques available to us. Therefore,
at this point we have not referred any debts for cross servicing.

Pendi .

In your letter of invitation you asked that we comment on legislation pending
before the subcommittee, specifically H.R. 2063, the "Debt Collection Wage
Information Act of 1997" and H.R. 2347, the "Federal Benefit Verification and
Integrity Act."

The Administration is studying the merits of these bills but is not prepared to take
a formal position at this time. The Administration is willing to work with this
committee on legislation for the purpose of creating management tools needed to
ensure program integrity, effective debt collection and the protection of individual
privacy rights.




109

Enhanced Reporting of Debt Collection Activity

SBA has regularly reported to Treasury, OMB and others on the status of its portfolio on such
documents as SF-220, Schedules 8 and 9, and other more ad-hoc reporting methods employed
over the years to enhance loan monitoring by the Central agencies. Some reporting is
accomplished electronically with Treasury and OMB, and other reporting is in paper form. The
recent “Debt Performance Indicators” worksheet handed out at the Federal Credit Policy Working
Group (FCPWG) meeting and attached to the invitation to testify letter has been completed by
SBA and forwarded to OMB. We are continually working to convert these reports to an

electronic format wherever possible and tie the amounts to our official accounting records.

Collection of Taxpayer Identification Numbers (TINS)
SBA has been diligently working to build its databases of TINs for the many individuals and
businesses with which it conducts business, We are on track to have these in place in ample time

to ensure compliance with the Act.

Electronic Payments
SBA has been a leader in the Federal government in the use of Electronic Data Interchange (EDI)
and Electronic Commerce (EC). SBA was one of the first pilot agencies to use the Electronic
Certification System (ECS) with Treasury to transmit Treasury payment schedules electronically.
We have worked closely with Treasury in modifying their accounting systems, such as the Federal
Financial System (FFS) to support electronic payments. In addition, we have been actively
involved in the development and implementation of standards and instructions for the Automated
Clearing House system, Fedwire transfer systems and other similar programs. We are on schedule
for meeting the January 1, 1998 DCIA target for all electronic payments

6


(danny ch Qanid

STATEMENT OF DANNY K. DAVIS (IL)

“The Government Reform and Oversight Subcommittee on Government
Management Information, and Technology”

Thank you Mr.
Chairman for
convening this
hearing regarding
“Federal Debt
Collection Practices.”
I also want to thank
our distinguished
witnesses for taking


89

NEWS
RELEASE rm ag

Washington, D.C. 20227
FOR IMMEDIATE RELEASE 202/876-6750
December 2, 1997

DEBT COLLECTION CONTRACTS AWARDED

The U.S. Department of the Treasury’s Financial Management Service (FMS) recently awarded
three more debt collection contracts, in addition to the ten contracts previously awarded to
private sector companies in Inte September. Utilizing the talents of private debt collectors is a
key component of Treasury's program to implement the Debt Collection Improvement Act of
1996.

Treasury will refer delinquent Federal obligations to the private firms for collection. Currently,
the Federal government's non-tax delinquent debt portfolio totals over $50 billion. This portfolio
includes unpaid obligations such as Federal education, housing, and business Joans, and fines,

The debt collection contractors will be paid based on a percentage of monies recovered from the
debts referred by FMS. The performance period for each of the contracts is one year, with three,
one year options.
‘The thirteen companies awarded contracts by FMS are:

+ Aman Collection Services, Inc.; Aberdeen, South Dakota

‘* Diversified Collection Services, Inc.; San Leandro, California

+ Education Credit Services, L.L.C.; Fredericksburg, Virginia

+ Financial Collection Agencies, Wayne, Pennsylvania’

«Financial Management Control; Hollywood, Florida

* GC Services Limited Partnership; Houston, Texas

Heard, Goggan, Bisir & Williams; Houston, Texas

© National Credit Management Corporations; Hunt Valley, Maryland

© Nationwide Credit, Inc.; Marietta, Georgia

* NCO Financial Systems, Inc.; Fort Washington, Pennsylvania

© Payco-General American Credits, Inc.; Brookfield, Wisconsin

* Unger and Associates, Inc.; Dallas, Texas

¢ Van Ru Credit Corporation, Skokie, Illinois*

(Note: * devotes newly awarded contracts)

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12

DEPARTMENT OF HEALTH AND HUMAN SERVICES

‘The Department of Health and Human Services (HHS) consists primarily of the Public
Health Service, the Health Care Financing Administration, and the Administration for
Children and Family. The total delinquent receivables owed to HHS through agency programs
is $4.1 billion of which over $3 billion is owed to HCFA. The Department has begun to utilize
the Department of Treasury to collect money on behalf of the States under the Child Support
Enforcement Program. As of the end of 1996, more than 5 million cases totaling over $38
billion were referred to Treasury for tax refund offset. This total does not include any debt
owed directly to HHS, however the Department has begun to refer that debt as well.

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

‘The Department of Housing and Urban Development (HUD) reported $2.3 billion in
delinquent receivables. The largest sources of delinquent receivables are direct loans,
defaulted guaranteed loans, and non credit loans. All of these relate to Federal housing and
community development programs. HUD has written-off $4.2 billion in delinquent debt over
the last 5 years, HUD's delinquency rates bave increased from 13.03 percent in FY 1990 to
14.85 percent in FY 1994, and it considers 26 percent of outstanding receivables uncollectible.

DEPARTMENT OF THE INTERIOR

‘The Department of Interior's delinquent non-iax receivables total $438.4 million and
primarily stem from audit findings, enforcement of laws and regulations and loans. Much of
this debt is derived from the audits of rents and royalties due for oil, gas, coal, and other
minerals extracted from Federally owned lands. It has written-off over $120 million in debt
over the last 5 years and considers $175.5 million non-collectible. The Department has
referred $14.3 million to Treasury for tax refund offset.

DEPARTMENT OF TRANSPORTATION

‘The Department of Transportation (DOT) reported $159.3 million in delinquent
receivables. The specific sources of debt are defaulted direct and guaranteed loans, grantec
audit disallowances, oil pollution cost recovery and civil penalty assessments, overpayments,
Freedom of Information requests, user fees and charges, fines and foreign governments. DOT
considers $108.7 million uncollectible. DOT has not referred significant amounts of its
cefinquent debt to Treasury for collection. Only $1.2 million has been referred for tax refund

set.


54

Mr. Chairman and Distinguished Members of the Subcommittee:

Good morning. J am pleased to be here to report the progress the Department of
the Treasury has made in implementing the debt collection provisions of the Debt

Collection Improvement Act of 1996 (DCIA).

First, I would like to thank the Chairman, the Ranking Minority Member and the
other members of this Subcommittee for the opportunity to provide an update on

our progress in implementing the DCIA.

As you are aware, Mr. Chairman, Treasury has a major interest in the successful
implementation of the debt collection provisions of the DCIA. In 1995, Treasury
initiated the proposal as part of Treasury’s reinvention initiatives which became
the Administration’s version of the DCIA, and Treasury forwarded the original
bill to Congress on June 23, 1995 for cotisideration. Treasury officials testified in

favor of the legislation’s passage before this Subcommittee in September 1995.


171

Now, the obvious: Should the collection functions of the Depart-
ment of Education and Financial Management Service be combined
in any way? What is your thinking on that?

Mr. LONGANECKER. Well, if that’s the best way to collect student
loans, we would be amenable to that and that’s why we are doing
the pilot to see how that goes.

I actually do believe that in priority three, that’s where we gen-
erally try to include the Debt Collection Service, it is where we are
trying to provide the best service possible to students and to pro-
vide educational opportunity. Within that rubric is where we in-
clude the Debt Collection Service.

But more specifically to your point, our effort here is simply to
assure the maximum return on this debt that is outstanding. And
we would like to be a partner in that, or if we are not the most
effective component, we have no aversion to basically providing
that to another entity or finding the right partnership. Whatever
works best is what we are interested in. We have no—

Mr. Horn. OK.

Mr. LONGANECKER [continuing]. Interest in collecting other agen-
cies debt. We do have a lot of interest in collecting the debt on stu-

ents.

Mr. Horn. Well, as you know, Agriculture, with some of the fi-
nancial services, prides itself on running a pretty good operation.

Mr. LONGANECKER. Yes.

Mr. Horn. And a number of other agencies have used theirs.

Mr. LONGANECKER. Yes. I get my paycheck from Agriculture, ac-
tually.

Mr. Horn. OK, there’s an example. Ever been late?

Mr. LONGKNECKER. No, sir.

Mr. Horn. You get it on time, right?

Mr. LONGANECKER. Usually, that’s right.

Mr. Horn. Usually. OK. That’s a hedge there.

They don’t increase the amount every month; is that it?

Mr. LONGANECKER. No, they don’t do that, no.

Mr. Horn. In a May briefing, your staff demonstrated that using
relatively conservative assumptions, widespread use of wage gar-
nishment from deadbeats who are delinquent on student loans, but
gainfully employed, would be extremely effective.

What ‘would the challenges be in a widespread program of wage
garnishment? Mr. Petska.

a Mr. LONGANECKER. That’s a tough question. I will ask Tom to ad-
ress it.

Mr. PEtskKa. Yes. I really think that we need to be very mindful
of the privacy data that we are exchanging when we get into an
effort like that. Everything we do is dependent on the correct Social
Security number. Everything we do is dependent on—and I don’t
want to incur the wrath of Mrs. Maloney, but I think systems are
a key element to what we do.

I was really pleased to hear Treasury emphasize that systems
are key to what we do.

So we need—with such a program, we need to get the systems
right so we are protecting the rights of those individuals, not only
the ones who we were garnishing their wages, but the others whose
records are part of those data systems we are matching.


96

Mrs. MALONEY. We agree. Why don’t you just call up the agen-
cies and say, send it over? It is easy. You are Treasury.

Mr. Murpuy. I could make the call. I can’t promise you it will
turn around overnight.

Mrs. MALONEY. We intend to bring in all the agencies and ask
them why they are not sending it over, but we are told that you
are not even asking for it. You are asking for other things. at
is your computer system like? You are asking for everything except,
send me the debt. I am trying to make you look like the heroes and
heroins of Government. You have a wonderful program in front of
you. You are not going to tax anybody, you are not going to hurt
anybody. You -are only going to bring additional money into the
Treasury that is owed the taxpayers, that is owed the citizens of
this country so that we can help more students, so that we can
help more farmers.

It is a wonderful, exciting program. I do not understand why you
are not making it a top priority. I would like to respectfully ask a
listing of who is working on it, how much personnel, how much
from the Reserve, how much from the central control board and
Treasury, which is usually the star in Government. You are usually
the ones who are the best and the brightest. You get things done
faster. I just do not understand why this simple project—I truly do
believe, Mr. Hawke, if I went over and ran this program for you,
you would see billions coming in. It is not that hard. It is not that
hard if you look at it and focus on it.

Anyway, I was told that you did have a program in place that
included radio, TV spots, print media, to publicize the Debt Collec-
tion Improvement Act. Then I found that someone pulled the plug.
I think some of these successful doctors that are not paying Back
their student loans, they would pay up immediately if they felt
there was going to be pressure. I mean people who can afford to
pay back their loans. I am not talking about people who are still
struggling.

Why did you pull the plug on advertising and making people
aware of this program that is going to help citizens?

Mr. Murpuy. I do not believe we pulled the plug. We did reas-
sess the timing to get the biggest payback on——

Mrs. MALONEY. Reassessed the timing? That is pulling the plug.
I am asking for a minor payback, something more than $2.5 mi
lion. Are you taking the bet now with me on our lunch in the res-
taurant of your choice on the continent of your choice?

Mr. HAWKE. If we could get you detailed over to Treasury for a
couple of months, I would be willing to take that bet.

Mrs. MALONEY. OK. Now, so you are going to move forward with
this advertising campaign, Mr. Murphy? ‘When?

Mr. Murpuy. We are deferring the advertising campaign to coin-
cide with when we will have the more robust capability to show
that we are actually offsetting more payments. To do it pre-
maturely and not really have the full capability seemed to be prob-
ably not a wise use of those resources. So, it has been deferred and
will be reassessed as to the timing.

Mr. HAWKE. Let me add to that. We have not pulled the plug on
this at all. I want to stress again that we understand and are tre-
mendously sympathetic with the sense of frustration that the mem-


170

of the Treasury—been able to help them out with their—a private
collection agency contract.

Mr. Davis of Illinois. Thank you very much. And I, too, would
like to congratulate the Department of Education. It seems to me
that not only have you taken an area where loans are risky in
terms of individuals who need them and acquire them, but it seems
to me that you have developed an approach to try to recoup those
resources, and you are doing a good job at it.

Mr. LONGANECKER. Thank you.

Mr. Davis of Illinois. Mr. Keevey, I know that HUD sells its as-
sets in delinquent loans and foreclosures. It has seemed to me that
it has been a system that always took a long period of time to do
that. Has there been any streamlining or expediting of that process
lately?

Mr. KeErEvey. I don’t know the history, although I can tell you
that when the active pursuit of this process was really initiated in
1994, there was a large amount of receivables on HUD’s books re-
lated to these defaulted loans, and over the course of 3 years, we
did 115,000 defaulted loans.

So I think my looking at it tells me it has been pretty stream-
lined and we have a very active program under way to do that.

So there may have been in the past, but I am not aware person-
ally that the process of slowness has been an impediment to the
program.

Mr. Davis of Illinois. So you are satisfied that it is moving right
along?

Mr. KEEVEY. Yes.

Mr. Davis of Illinois. At a pace that is good?

Mr. KEEVEY. As I mentioned in my testimony, that it is in abey-
ance at the moment, pending some internal reviews, but once that
is concluded, we will continue to execute the remaining portfolio
that’s out there.

Mr. Davis of Illinois. Thank you very much.

Mr. KEEVEY. You are welcome.

Mr. Davis of Illinois. I have no further questions, Mr. Chairman.

Mr. Horn. I thank the gentleman. I have a few windup questions
here. Let me ask a few specifics and then we will get to the wind-
up.

Let me ask education, as I recall here, you, without question,
have the most effective debt collection program currently being op-
erated in the Federal Government, and I know that took a long
time to achieve, as I think all of you who have worked on it know.
It probably took improvements over 20 years.

I mentioned earlier when there was an Assistant Secretary in
the Carter administration, he was the first one I knew that really
took this seriously in terms of student loans, student advice and so
forth. So there has been a building on that since the late 1970's.

And as I look at that operation, you obviously have a potential
for being real model. Yet, in terms of a core agency function, I
note with interest, it is not listed in the U.S. Department of Edu-
cation’s seven priorities in their strategic plan. On the other hand,
debt collection is a core Treasury mission, with one bureau, the Fi-
nancial Management Service, devoted to that function.


uty

3) Taxpayer Identification Numbers (TIN)

On September 2, 1997, FMS published a notice of proposed rule making which proposed to
enforce the DCIA requirement to include TINs in payment certifications. A number of agencies
have expressed concerns over timing,

On September 30, 1997, the Office of Management and Budget hosted a meeting of CFOs,
Deputy CFOs, and senior debt collection officials to discuss agency concerns regarding the
implementation of the DCIA. Prior to the meeting, agencies were requested to provide their
questions, concems, issues, and comments on the DCIA implementation process. A key area
where agencies expressed concern was implementation of TINs. Issues raised included policies
for waivers and exceptions, timing of the requirement, consistency with Prompt Pay guidelines
and automated methods for looking up TIN information. It was agreed that the following
strategies for implementation would be followed:

4 Issue operating procedures and technical guidelines for including TINs on payment
vouchers.

¢ Forma TIN work group to resolve issues and provide assistance to Federal agencies
in implementing the requirements of DCIA.

Through the Administrative Procedures Act process, address agencies’ concerns on
waivers and exceptions, and timing for implementation.

Establish a liaison with the FAR Council and the Prompt Pay Work Group to ensure
TIN requirements are consistent with the FAR and Prompt Payment guidelines

# Work with the CFO Council Systems Committee and Electronic Processes Initiatives
Committee (EPIC) Buying and Paying Task Force to identify an automated process
for agencies to obtain TINs on customer accounts.

Agencies have been asked to comment on the status of their compliance with the DCIA
requirement that payees’ TINs be included with each certified payment voucher. FMS has begun
monitoring this compliance and the percentage of compliance varies substantially by agency.
The enclosed agency TOP implementation schedule and status report gives our best estimate of
which agencies are providing TINs on vendor payments. The compliance ratio is provided as a
function of annual payment volumes since this figure best illustrates agency responsiveness to
the TIN provision of DCIA


36

approximately $51
billion.

It is my hope that this
hearing will address
the issue of why the
DCIA has been little
used to date. In
addition, I look
forward to hearing
why only 3 of the 16


48

contemplates a process by which program agencies might seek to be designated as
debt collection centers, I believe that there should be a very heavy burden on an
applicant agency to demonstrate that it qualifies. We have published high
standards for approval, and we believe that the number of such centers should be

kept to a minimum.

I would like to conclude this status report by emphasizing once more that Treasury
is committed to provide a mechanism for effective administrative offset and to
take a lead role, seeing that debts to the Federal government are collected in a
timely and efficient manner. We clearly need to accelerate the pace of our
implementation, but I am confident that we will get this task accomplished

effectively.

Before closing, Mr. Chairman, let me say that, as you and some of the members of
the subcommittee know, Virginia Harter has retired from FMS after more than 39
years of distinguished service to the Federal Government. I want to thank you for
your kind remarks in the Congressional Record on her contributions to DCIA

implementation.


117

supporting loan collection processes. The Agency is already beginning to see
improved recoveries as a result of the LIP initiative, and expects further improvements
in FY 1998. Through the first 10 months of FY 1997, cash collections on seriously
delinquent accounts have gone up almost 50% nationwide on an annualized basis
compared with average collections over the prior three years.

Use of Debt Collection Tools to Collect D t Loan:
As indicated above, SBA aggressively pursues delinquent accounts through vigorous
use of all available collection tools. The types of procedures used depend on the
circumstances of the individual cases, the degree of delinquency and extent of
cooperation from the borrower.

Payment Reminders Automated notices are generated and mailed to borrowers
15 days before each loan installment due date. These notices show how the
borrower's ast payment was applied (principal and interest) along with the
current balance on the account. If a payment is not made within 10 days of the
due date, a follow-up notice is automatically generated.

Automated Collection Calis SBA‘s immediate recourse on past due loans is to
make frequent and timely telephone contacts with borrowers regarding the
delinquency. In this regard, the Agency's Delinquent Loan Collection System
(DLCS) loads accounts which are 10 days delinquent into a “queue” identified
with a particular collector for follow-up. SBA’s newly installed auto-dial
systems then order and prioritize calling "campaigns" according to parameters
established by local managers. When the auto-dialer reaches a borrower, it
immediately transfers the call to a collector, and through the collector's
computer screens, accounting information pertaining to the borrower's loan is
displayed. The collector records in the on-line DLCS system the results of the
call, and automatically arranges a follow-up contact through the OLCS
scheduler if necessary.

Automated Message System (AMS) Using DLCS, SBA’s collectors can also
designate for mailing to the borrower any of a wide variety of letters in English
or Spanish to document payment promises or other representations made by
the borrower. These letters may be customized through the DLCS system and
are mailed the next day from SBA’s Denver Finance Center.

Computerized Records All significant account activity is stored in SBA's
computer systems from the start of collection procedures through final
resolution of the debt. This constitutes an electronic "file" of information about
the debtor that is immediately retrievable for review and action, both by
collectors and their supervisors. The systems operated at the servicing centers
contain automated credit action formats for expedited account resolution.
Account monitoring is done through a series of management reports including
a weekly summary of loans past due, a weekly production report for collectors


53

And my office will continue to take an active oversight role to as-
sure that things remain on track. And to that end, I have detailed
Mr. Dave Lebryk, who was recently selected as assistant fiscal as-
sistant secretary, to assist FMS in the timely implementation of

With those efforts, Mr. Chairman, I will conclude my summary
and would be happy to respond to any questions.

Mr. Horn. Well, we thank you very much for that testimony.

[The prepared statement of Mr. Murphy follows:]


138

Mr. Horn. Richard Keevey is the Chief Financial Officer at the
Department of Housing and Urban Development.

Welcome, Mr. Keevey.

Mr. KEEvey. Thank you, Mr. Chairman, Mrs. Maloney, and Mr.
Davis. I thought what I would do is just summarize for you what
I think are the six major points that are covered in my rather
lengthy testimony.

First, the current outstanding delinquent debt for HUD is $2.2
billion as of September 30, 1996. That’s a decrease of $443 million
from the prior year. Of that amount, $1.7 billion relates to FHA de-
faulted loans, and I will talk to you a little bit about that in a sec-
ond.

Mr. Horn. That’s the Federal Housing Administration?

Mr. KEEVEY. Yes.

Mr. Horn. Not the Farm Home Administration?

Mr. KEEVEY. That’s right, Mr. Chairman.

Second, we do fully use the offset program, and we have referred
about $135 million worth of debt to the Treasury, and that rep-
resents the majority of the debt that can be referred to the Depart-
ment of Treasury.

Third, we are interested in cross-servicing as you mentioned ear-
lier; we do have a proposal that we are airing out with Treasury
Department that would transfer one of our centers, which is pres-
ently located in Seattle, over to the Department of Treasury. The
staff there are experts, particularly in the title I recovery area. Al-
most all of our other debt we have consolidated and will move to
the Albany site. The remaining debt, directly relevant to the provi-
sions of the DCIA, that is there at Seattle, we are proposing that
we would transfer, first, on a pilot basis, all of the remaining debt,
plus the staff, to Treasury; and at the end of that year, evaluate

ow effective it would be. Treasury is reviewing this at the mo-
ment.

Fourth, I want to make the point that of the $2.2 billion of re-
maining debt, $300 million relates to mortgage-backed securities by
the GNMA operation, and that will be recovered through FHA-in-
sured or VA guarantees. So that will be an internal offset proce-
dure that we are currently executing.

Fifth, we do have a very active sale of assets program, particu-
larly as it has to do with the FHA. Over the past few years, we
have sold over 115,000 defaulted loans with gross proceeds of $9
billion; and the remaining amount, yet to be done, will be part of
a fature sale that we hope to execute within a reasonable period
of time.

The final point I would like to make is that HUD does fully use
the Credit Alert Interactive Voice Response System, and that is a
prescreening tool, to bar individuals who owe the Government
money from getting new loans. It is a system that was pioneered
by HUD several years ago, and it is available to all Federal agen-
cies.

So, in summary, I would like to say that we are, I believe, in sub-
stantial compliance with the act and we have several very active
programs under way, particularly the sale of assets, which has to
do with FHA and the active pursuit of cross-servicing with Treas-
ury.


49

Mr. Chairman, that concludes my testimony. I would now like to turn to Gerald
Murphy, our Fiscal Assistant Secretary, who will discuss FMS’s implementation

of the DCIA in greater detail.


78

Enclosure B

DEPARTMENT OF THE TREASURY
FINANCIAL MANAGEMENT SERVICE
WASHINGTON, D.C. 20227

eo UPDATE***
‘TREASURY OFFSET PROGRAM
MERGER WITH TAX REFUND OFFSET PROGRAM

We wish te inform your agency of the curent status ofthe planned merger of the Tax Refund Offset
Program (TRO) into the Treasury Offset Program (TOP) under the Debt Collection Improvement Act

ries are requited (o submit thet Gost fles tothe Financial Management Service
(Eas) forte purpose of Freasury effet of Federal payments to calles delinquent debt, including
the offset of tax refunds. Agencies may, at their option, transmit and receive data for this purpose
in either the tax refund offset or current treasury offset program formats through 1998. We will work
‘with your agency to respond to any format question you may have.

‘Agencies have been advised by FMS to release their 60 day TRO and TOP offset notices in time to
refer debt by January 1, 1998.

‘The offset of tax refunds payable after January 1, 1998 is govemed by the newly published tax
refund offset regulations (62 FR 34175, June 25, 1997), as well as applicable agency-specific
regulations. A copy of the new rule is available for downloading from the FMS web site at
hittp:/mwww. fms. treas. gov/regs. ht.

The IRS Acting Commissioner and the FMS Commissioner, at the recommendation of iS and FMS
Chief Information Officers, decided to delay transfer of the TRO from IRS to FMS for one year.
Therefore, in 1998, the following processing elements will be put in place:

Agencies will submit agency address changes to FMS for TOP and TRO.

Agencies wil transmit their debt files to FMS for TOP and TRO offset.

FMS will forward agency debt records to the IRS.

‘The IRS will match the debt records submitted fo FMS with taxpayer records and initiate
related offsets.

If a debtor is owed a tax refund, the IRS (rather than FMS) will reduce the tax refund by the
amount of the debt and generaie offset notices to the debtor.

TRO collection and offset information will be retumed by FMS to the creditor agency, as well
‘as TOP collection and offset information

IRS and FMS will conduct separate OPAC transmissions directly with the creditor agency for
their respective offsets and reversals.

¥ Agencies will transmit their update files to FMS for TOP and TRO offset

SSS NKR

As of January 1999, itis expected that the process for offsetting tax refunds will be fully
incorporated into the TOP. FMS will then handle the entice offset process for tax refunds as it does
foral other eligible Federal payments under the full merged system,

‘A workshop on tax refund offset for 1998 is scheduled for November 4, 1997, at IRS facilities in
New Carrollton from 9 a.m. to 4 p.m. An announcement of the details of this workshop will be
forthcoming shortly.

Released by the intemal Revenue Service and the Financial Management Service
September 10, 1997


88

Mr. Murpny. Yes, sir. Strictly an incentive basis.

Mr. Davis. Could we get a list of those for the record in terms
of who those companies are?

Mr. Murpny. Certainly. Would be happy to provide it.

[The information referred to follows:]


43

We at the Treasury Department are committed to these goals, and we are working
hard to get this new program running effectively. We are also working closely
with program agencies to make certain that DCIA implementation takes into

account their concerns and operational difficulties.

On April 18th of this year, Fiscal Assistant Secretary Jerry Murphy and I testified
before this Subcommittee about the status of Treasury’s effort to implement the
DCIA. While we continue to make progress in most areas, I want to say frankly
that we are not satisfied with the extent or pace of our progress. The principal
reason for this has been delay in the merger of the tax refund offset program with
the broader Treasury Offset Program (TOP). This delay has complicated program
roll-out in several areas, which I will discuss shortly. While overall progress has
not been what it should be, our implementation efforts have been effective in

several areas:

+ The volume of delinquent debts submitted to TOP has increased. Currently
there are 2.4 million referred debts totaling in excess of $17 billion in
delinquent receivables. This represents an increase since our last hearing of
half a million referrals and an additional $8.3 billion in receivables.

2


129

The Department first undertook this activity over fourteen years ago. We believe credit reporting
has been a contributing factor in both the reduction in the default rate on student loans and the

increased amounts we have collected on defaulted student loans in recent years.

For the last fifteen years, the Department, under the authority of the Higher Education Act of
1965, has also required all student loan borrowers to provide taxpayer identification numbers.
Without this step, our success in collecting on delinquent and defaulted student loans would have

been significantly reduced.

Administrative wage gamishment, which we began using five years ago, has been another
effective tool in improving our collections on student loans, Over 53,000 defaulted loans are now
in garnishment status, and we have collected almost $34 million since 1992. The Department is
conducting this activity under the authority of the Higher Education Act of 1965 (HEA). In order
to improve the effectiveness of wage garnishment, we want to work with the Congress to develop
legislation that would provide access to other Federal databases for employment information. We

believe such access would allow us to expand the use of this tool.

We have also used our records of student aid recipients to deny additional aid under Title IV of
the HEA to those borrowers with unresolved defaulted student loans. Over the period between
the beginning of 1995 and the middle of 1996, the Department identified more than 125,000
student aid applicants as prior defaulters, helping to prevent these ineligible students from

receiving about $300 million in loans. We are currently having discussions within the Department


113

< U.S. SMALL BUSINESS ADMINISTRATION
WASHINGTON, D.C, 20416

4,

Ao
bat

7

October 30, 1997

Virginia B. Harter
Assistant Commissioner, Debt Management Services
Financial Management Service

401 14th Street, SW, Room 446

Washington, DC 20227

Dear Ms. Harter:

Enclosed is a statement of capabilities summarizing the U.S. Small Business
Administration’s proficiency in debt collection activities. As you may be aware, SBA
has performed the full range of loan servicing and collection activities on consumer
and business debt for over 40 years.

We believe our proven experience amply demonstrates that this Agency should be
designated a federal collection center as contemplated by the Debt Collection
Improvement Act of 1996 (DCIA). Indeed, as quoted in the attached statement of
capabilities, the legislative history of the DCIA anticipated such a designation for
SBA. Consequently, we request that SBA be immediately designated as a collection
center for its own debt. In the future, we will request that the Agency be considered
for collection of the debts of other federal agencies. Although collection on bebalf
of other agencies would require additional resources and nominal systems
modifications, SBA is uniquely positioned to undertake this responsibility.

If you would like to discuss any of these matters, please call me at 205-6657 or
Arnold Rosenthal at 205-6484, Thank you for your consideration.

Sincerely,

a

‘Associate Deputy Administrator
for Economic Development


122

is our Debt Collection Service, which Tom Petska heads, that works
to collect on those defaults, and we work very hard at that. Indeed,
we have implemented many of the debt collection mechanisms that
the Debt Collection Improvement Act calls for, and indeed, it
works.

Over the past 6 years, the Department has collected almost $4.5
billion in defaulted loans, $3.2 billion of which has come through
our partnership with the IRS, through the IRS offset of tax re-
funds, including one-half billion dollars this past year, 1997. We
understand, I think, we are—we have referred more accounts to
Treasury than any other agency.

We have also been quite successful in using private collection
agencies which have been part of our history since 1979. Over the
past 6 years, our private vendors have collected $766 million and
our private/public partnership is recognized as a model for others
to follow.

Through the Federal salary offset program, we have collected $33
million over the past 5 years from Federal employees who are in
default on their student loans. And though we can’t really docu-
ment the dollar amounts, there are some other things that we have
done which have also helped.

We believe that our reporting of delinquent student loan debt to
credit bureaus helps; the use of electronic payments—91 percent of
our payments are done electronically—helps. And our requirements
that student loan borrowers provide their taxpayer identification
numbers when applying for a loan, which we have had for some
time, also helps to reduce defaults.

Five years ago we began administrative wage garnishment, and
today we are garnishing the wages of over 53,000 borrowers. We
have collected $34 million via wage garnishment since 1992, and
we expect that amount to grow as we develop better tools for wage
garnishment in the future. And indeed, with reauthorization of the
Higher Education Act coming up, we might be back to talk to you
about how you can help a little more in that regard.

We have also reduced defaults by preventing loans to prior de-
faulters. With the development of the National Student Loan Data
Base, we have identified potentially $850 million worth of loans,
potential loans, to students who are in default, who are requesting
another loan. So we have been able to prevent them from borrow-
ing, clearly reducing the logical default on those.

We are also working with Treasury in various ways, including a
new joint venture which we began in July, with Treasury’s FMS,
to examine whether FMS would be an effective partner in the col-
lection of defaulted student loans. In fact, we would like to expand
our work with FMS through the use of the new enhanced Treasury
offset program.

So we bring pretty good news to you here today on the collection
of the default of student loans, but we are not satisfied with what
we have done. We are considering initiatives to create some new
collection tools, and we will be including these new ideas as part
of our reauthorization of the Higher Education Act proposals. But
these haven’t been vetted throughout the administration, so it
would be inappropriate to share them in detail with you at this


127

Our Response

Over the past 20 years and more, the Department has undertaken a series of initiatives to reduce
defaults and increase collections on student loans. Those actions have gone a long way toward
improving the effectiveness of our collection efforts. In fact, over the period from the 1970's
through the early 1990's, the Department implemented a number of the debt collection
mechanisms that the Debt Collection Improvement Act calls for on a governmentwide basis. The
Department’s use of private collection agencies, tax refund offsets, wage garnishment, and several
matching agreements with other federal agencies were all in place prior to enactment of the Debt
Collection Improvement Act. The Department of Education is “living proof” that the
requirements in the Act can yield measureable debt collection improvements when they are
implemented by federal agencies. As an incentive to further develop and use cutting edge tools to
improve collections, the Department is in the process of applying to become a Debt Collection
Center. Let me highlight some of our accomplishments conforming with the major provisions of

this usefull legislation.

Over the past six years, the Department has collected almost $4.5 billion on defaulted loans (see
chart 2). Working with the Treasury Department, the Department has realized substantial savings
for taxpayers over the last decade or so. In 1986, the Department began referring to the IRS
eligible debts that we had tried unsuccessfully to collect using other available tools. Using our

data, the IRS has been offsetting federal income tax refunds and has collected about $3.2 billion

cover the past six years, including about $500 million in FY 1997 (see chart 3). In FY 1997, the

‘Department provided Treasury with information on past-due student loan accounts valued at over


151

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155

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to come here today to discuss the Social Security
Administration’s (SSA) ongoing efforts to improve its debt management program.
We have a long-standing commitment to debt management and are continually
engaged in projects that improve our performance.

The success of our debt management program is critical to SSA’s mission and to
our goal to make SSA's program management the best in business. Our debt
management program consists of three interrelated pieces: prevention, detection,
and resolution. We limit the amount of overpaid benefits through our debt
prevention initiatives; we pursue the debts that do occur; and we maximize the
return <o the trust funds and the U.S. Treasury.

In 1997 alone we collected more than $2 billion, returning $1.5 billion to the Old
Age, Survivors, and Disability Insurance (OASDI) trust funds, $437 million to
Treasury’s general revenues representing Supplemental Security Income (SSI)
recoveries, and $74 million to the states representing recoveries of the state
supplement to SSI payments.

The Current Debt Recovery Process

Before I discuss our strategies for implementing new debt collection authorities, I
would like to describe our current general process for debt recovery under which
we collect debt owed to us.

When an overpayment is detected in either the OASDI program or the SSI
program, a notice is sent to the individual describing the reason for the
overpayment, indicating how the overpayment can be repaid, and advising the
indivi-val of his or her due process rights.

If the individual is on the benefit rolls, tie letter indicates that if the overpayment
is not paid, recovery will be carried out through the offset of ongoing OASDI or
SSI benefit payments, although only within the same program, i.e., we cannot
enforce offset of an SSI debt by withholding an OASDI payment or vice versa.
Because of the effectiveness of the benefit offset process, we can readily collect
debts owed SSA when the debtor continues to be a beneficiary. In the OASDI
program the rate of offset against benefits is 100 percent until recovery is
completed. In the SSI program the rate of recovery against current benefits is
limited to an amount equal to ten percent of the individual’s monthly countable
income, including the SSI benefit (the 10 percent rate that is established by


CONTENTS

Hearing held on November 12, 1997 ...
Statement of:
Gray, John, Deputy Administrator, Small Business Administration; David
Longanecker, Assistant Sec for Postsecondary Education, Depart-
ment of Education, accompanied by Tom Petska, Director of Debt Col-
lection Service, Department of Education; Richard Keevey, Chief Finan-
cial Officer, Department of Housing and Urban Development; and Dale
Sopper, Acting Deputy Commissioner, Social Security Administration .. 100
Hawke, John, Under Secretary, Department of the Treasury; and Gerald

Murphy, Fiscal Assistant Secretary, Department of the Treasury ... 39
Letters, statements, etc., submitted for the record
Davis, Hon. Danny K., a Representative © “Congress from the State
of Illinois, prepared statement of 30
Gray, John, Deputy Administrator, Small Business Administratio
Information concerning private collection agencies 169
Information concerning write-offs .. 117
Number of FTE’s directed at debt collection 174

Prepared statement of ..
Hawke, John, Under Secretary, Department of the ‘Treasury, prepared

statement of .. 42
Horn, Hon. Step!
California, prepared statement of 3
Keevey, Richard, Chief Financial
Urban Development:
Information concerning notices 175
Information concerning write-offs 177
Number of FTE’s directed at debt col 173
Prepared statement of 140

Longanecker, David, Assistant
Department of Education:
lumber of FTE’s directed at debt collection
Prepared statement of ..
Maloney, Hon. Carolyn B., a Representative in Congress from the State
of New York:

Grading schedule on Federal agencies 7
Prepared statement of . 27
Murphy by, Gerald, Fiscal Assistant Secretary, Department of the Treasury:
pet +t Collection contracts ¢ awarded .. ik 89
formation concerning the Treasury Offset Program
Prepared statement of .. 54

Petska, Tom, Director of Debt Collection Service, Department of Edu-
cation, information concerning written notice .
Sopper, Dale, Acting Deputy Commissioner, Social Security Administra-
tion:
Information concerning benefit offset rates .
Prepared statement of.

176

db


145

some technical guidance from Treasury (file formats,
particular indicators or values to be used in a given
situation) concerning Treasury's proposed rule on mandatory
tax identification numbers. However, our understanding is
that Treasury will address the concerns of all agencies

after receiving all comments to this proposed rule.

Legislative Proposals pending before the subcommittee.
HUD and the Administration is studying the merits of these
bills but is not prepared to take a formal position at this
time. As always, the Administration is willing to work with
the Committee on legislation for the purpose of creating
management tools needed to ensure program integrity,
effective debt collection, and the protection of individual

privacy issues.

I would like to use this opportunity to further discuss
areas of debt collection where we believe the Department has

an innovative and positive story to tell.

SEATTLE ASSET RECOVERY CENTER

To conform with the cross-servicing provisions of DCIA, HUD
has proposed to the Treasury Department a unique approach to
the collection of debt. Under this proposal, HUD would join
Treasury in a pilot project in which one of HUD’s debt

6


106

strengthened training for financial and legal staff,

promoted a financial and legal “team” approach to liquidation;

encouraged greater use of contractor assistance to supplement in-house resources;

conducted in-depth reviews of recovery procedures at approximately 30 of SBA’s 80 field

offices;

made significant upgrades to the automated systems supporting loan collection processes;

and

adopted “best practices” in SBA’s newly rewritten loan servicing and liquidation procedural

manuals, which we refer to as Standard Operating Procedures, or SOPs.

SBA begins aggressive collection action on accounts well before 180 days delinquency at its loan
servicing centers, specialized litigation units, 80 district and branch offices, and a regional
liquidation office located in southern California. SBA has over 130 Agency lawyers serving as
Special Assistant U.S. Attorneys who help facilitate these actions which typically include
summary and judicial forectosure on personal and real property, as well as litigation against

guarantors and other obligors. These loans are exempt from referral to Treasury under DCIA.

We aggressively use all available debt collection tools. For instance, for over a decade SBA has
consistently used the IS tax refund offset program, and has routinely employed private collection
agencies to support the Agency’s debt collection efforts. SBA also refers current and delinquent
business debt to credit reporting bureaus, and uses credit bureau information in its loan

underwriting decisions. In addition, SBA participates in Federal salary offset. Last year, SBA


66

Mr. Horn. I think you know that we have high regard for the
Financial Management Service and its competency and efficiency
on the Department of Treasury. On these rounds, because of the
complication of this subject, we will go 10 minutes, and if we aren’t
done then, we will go another 10 minutes each.

Let me open up with this, and we might as well start at home,
your home. According to a recent Office of Management and Budget
report, the nontax debts of the Department of Treasury are $513
million. Has the Treasury Department referred its own debt to
Treasury’s own offset program?

Mr. Murpuy. I believe the answer to that, Mr. Chairman, is that
some of it has and some of it has not. We do keep a record. I don’t
think I have a copy, but we have a listing by bureau within the
Department and we would be happy to furnish that for the record.

Mr. Horn. Let me just get straight the reporting relationships.
Mr. Murphy is Assistant Secretary, reports to Under Secretary
Hawke. To whom does Under Secretary Hawke report?

Mr. Hawke. To the Secretary.

Mr. Horn. Directly to the Secretary?

Mr. HAWKE. Yes.

Mr. Horn. To whom does the Commissioner of Internal Revenue
Service report?

Mr. HAWKE. To the Secretary.

Mr. Horn. Both of you report to the Secretary.

We haven’t even gotten into the tax debt, which is what started
me in this thing 3 years ago when I saw they had written off over
$100 billion in debt, and that means the rest of us who pay our
tax bills are sort of shortchanged. They told me, gee, we have $64
billion we can collect; besides the $100 billion they had written off.

It didn’t start with this administration. It started back in 1990
under the Bush administration, but it has greatly accelerated in
what we say is uncollectible in this administration, as I told the
then-Commissioner.

And speaking of the Commissioner, I think you have picked an
excellent person and the President has picked an excellent person
to come in as Commissioner. We had written him to say, please,
no more outstanding accountants, and no more outstanding econo-
mists, and no more outstanding tax lawyers. Get somebody who
has run a large organization.

There are 102,000 employees at least in the Internal Revenue
Service, and with that kind of debt that just goes unsought after,
it disturbs a lot of Members of Congress regardless of party. This
is like city management and picking up the garbage. It isn’t Demo-
cratic or Republican. Just get it off the streets. And I think that
is how Mrs. Maloney and I, Mr. Davis of Illinois and Mr. Davis
from Virginia, on our side, feel about this. We have got to really
focus in on it.

Because the average taxpayer—and as you know, I usually hold
a hearing on IRS on April 14, and the average taxpayer gets very
upset when he or she sees they pay their taxes. How come these
other people get away with not paying their taxes?

And I know we have, thanks to Mr. Kolbe and Mrs. Johnson who
heads the oversight Committee on Ways and Means, we are wait-


52

and the contractors. We have provided instructions to the Federal
agencies and will be conducting a workshop with the agencies and
the contractors to facilitate the use of the contract and answer any
questions people have on implementing that particular tool.

In the area of regulations, the short answer, I guess, is that we
have got three regs out. We have got three in clearance that we ex-
pect to be published within 30 days and we are still working on
four, as you pointed out.

For the most part, we have been able to issue the regulations
that needed to be out there in place, that would have held some-
thing up, but there are still these other areas that we definitely
want to get out.

In addition, we are also going to be trying to improve the report-
ing to the Congress on receivables. As you know, the DCIA trans-
ferred the responsibility for reporting on receivables from OMB to
Treasury, and last summer the General Accounting Office came out
and recommended some improvements in reporting.

We have convened interagency task groups with agency rep-
resentatives and they are currently looking at draft proposals. We
would hope to get some new, better data to the Congress. We are
hoping that this new reporting arrangement could be in place by
next June depending on the agency system’s capability to provide
the data.

One area that Mr. Hawke just touched upon briefly is we do have
an issue resolution plan with agencies who have been experiencing
difficulties in meeting the requirements for offset and cross-servic-
ing. A meeting was hosted by Ed DeSeve of OMB in September.
The agencies came in, including Treasury. We identified their con-
cerns and some of the difficulties that they have been experiencing
and divided them up into three general categories. We have a task
group assigned to each one of those issue areas, and I think that
process will result in a greater understanding on the part of the
agencies about the requirements and also on our part in terms of
the difficulties that the agencies face. So we will be working very
closely with them to try to resolve some of those issues.

There has been progress made in some of these areas. However,
as we noted, and you certainly noted, that we haven’t made the
headway that we had hoped. In some cases, we were perhaps over-
ly optimistic in terms of target dates and underestimating the com-
plexity of some of these issues, but we are not satisfied with the
results to date and we will be making every effort to get up the
systems that will provide more revenue to the Federal Government.

As you know, Virginia Harter recently retired after 39 years in
Government. She was the Assistant Commissioner for Debt Man-
agement Service. Mrs. Nancy Fleetwood has been appointed as the
interim acting Assistant Commissioner and she brings some experi-
ence from being comptroller of the organization for several years,
as well as a strong background in systems development. So we are
confident that she will be providing strong leadership during this
transitional period.

We also have Commissioner Morris and Deputy Commissioner
Smokovich who will be continuing to remain active in the direction
of the implementation of the program.


173

oping systems changes, and I will have to give you an estimate of
that then, Mr. Chairman.

Mr. Horn. That 239 full-time equivalent?

Mr. Sopper. Yes, those are work years, 239 work years that do
debt collection only.

Mr. Horn. OK.

How about HUD, Mr. Keevey?

Mr. KEEVEY. I don’t know the total number, Mr. Chairman. Peo-
ple dedicated toward FHA debt collection activities are 150.

Mr. Horn. Are how many?

Mr. KEEVEY. Are 150.

Mr. Horn. For FHA?

Mr. KEEVEY. Yes. But I should get you a better answer.

{The information referred to follows:]

For the rest of the Department it is 4 FTE's.

Mr. Horn. Fine.

How about you, Mr. Longanecker?

Mr. LONGANECKER. The Debt Collection Service has 235 employ-
ees. We have some dedicated staff in our Office of General Counsel
and our Office of Chief Financial Officer—I don’t know the num-
bers there——

Mr. Horn. And they are full-time?

Mr. LONGANECKER [continuing]. That are full-time working with
us, or dedicated—we have FTE. I can’t think of people who are——

Mr. Horn. Why don’t you just file them for the record.

Mr. LONGANECKER. That’s fine.

Department of Justice also provides us with a lot of assistance
in the individual litigation.

Mr. Horn. Full-time team over there?

Mr. LONGANECKER. No, no.

Mr. Horn. Just generally, what they would provide any other de-
partment?

Mr. LONGANECKER. We will try to provide some estimates of that
for you.

ithe information referred to follows:]

The Debt Collection Service has 236 full time equivalent (FTE) employees. In ad-
dition, there are 11.5 FTE's in our Office of Chief Financial Officer and 3.5 FTE’s
in our Office of General Counsel, for a total 251 FTE's dedicated to our collection
effort. Additional assistance from the Department of Justice in performing individ-
val litigations is difficult to quantify but would, perhaps, translate into a few more

's.

Mr. Horn. Mr. Gray on SBA, small business?

Mr. Gray. Throughout the Nation in all of our 69 district offices
and in central headquarters, we have in excess of 700. But remem-
ber, those were also doing workouts on all the loans and that would
also include about 125 lawyers that process foreclosures and litiga-
tion.

We will get those.

Mr. Horn. Those are 125 on your payroll?

Mr. Gray. Yes.

Mr. Horn. Or contract private lawyers?

Mr. Gray. No, they are on our payroll.

Mr. Horn. On your payroll, 125 lawyers and roughly what on
debt collection?


101

areas: referral of delinquent debt, designation of SBA as a debt col-
lection center, and asset sales.

To start with, I would like to provide this committee with some
background information on SBA’s programs and debt collection ca-
pabilities. The SBA provides assistance to America’s small busi-
nesses and entrepreneurs through a whole spectrum of technical
assistance and microlending to business and real estate loans as
well as venture capital investments.

SBA has moved from direct lending to small businesses to guar-
anteeing debt that is incurred by financial intermediaries, both reg-
ulated and nonregulated institutions. Additionally, the SBA serves
as America’s disaster bank. As of September 30, 1997, the total in-
vestment under SBA’s financial assistance program amounted to
$38 billion. Outstanding guarantees are valued at $29 billion, and
total outstanding loans serviced by the SBA exceeded $9 billion.
The SBA is moving rapidly into the 21st century both in organiza-
tional structure and in the role of oversight of our financial inter-
mediaries. Debt and investment are originated by third parties,
monitored and reviewed by the SBA, and serviced and collected by
third parties.

The only exception to this is the SBA’s origination of disaster
home and business loans, which remains direct to individuals, busi-
nesses, and communities harmed by natural disasters.

Working with our financial intermediaries, the SBA lending pro-
gram volume has increased by 65 percent between 1992 and 1997
and our staff levels have decreased by 34 percent during this same
time period. Not only is that contrast indicative of the changing en-
vironment for the SBA, but also credit quality as measured by cur-
rency rate and loan losses have improved.

In fiscal year 1997, SBA had an increase in cash collections of
50 percent over the fiscal year 1993-95 averages while having pur-
chases, which is the SBA default rate, decrease 4.38 percent in the
same time period. These results were achieved through our liquida-
tion improvement project, an intensive effort between our field of-
fices and our lending partners which is managed by SBA. Even
though I believe that the SBA has done and is doing a very, very
credible job managing its credit exposure, SBA must rely more on
programs such as asset sales, cross-servicing, and the Treasury Off-
set Program.

Specifically for cross-servicing, the DCIA provides that delin-
quent debt over 180 days be transferred to Treasury for debt collec-
tion purposes and for participation in administrative offset. The
SBA vas prepared the letter of agreement to Treasury for the pur-
pose of initiating cross-servicing.

Under this agreement, SBA will refer to Treasury all accounts on
which SBA has completed necessary foreclosure or litigation pro-
ceedings and which have a deficit balance remaining. In addition,
SBA will promptly refer all loans at 180 days delinquency or sooner
which could not be effectively collected through foreclosure on col-
lateral or litigation against obligors. SBA has identified approxi-
mately $700 million in debt that can be referred as soon as proce-
dural details and system requirements are worked out. We antici-
pate that that will happen by the middle of December.


26

Mrs. MALONEY. Last, I would want to mention two pieces of leg-
islation that will focus on curtailing waste, fraud, and abuse in
Federal benefit programs. My first bill, the Debt Collection Wage
Information Act, would help locate delinquent debtors who move
from one State to another to avoid paying their debt. I have esti-
mated that this bill would bring in an additional $1 billion per year
if fully implemented. It has been implemented in Massachusetts
and they testified earlier before the committee that it had been
very, very successful in implementing debt collection for their
State.

My second piece of legislation is the Federal Benefit Verification
and Integrity Act of 1997. This bill would allow Federal agencies
to verify and confirm the accuracy of information provided by appli-
cants of Federal benefits. Using this commonsense approach, Fed-
eral agencies can root out fraud and abuse before delivering the
benefits.

The chairman of this committee is a former professor, former
head of a school, and I think he would agree that with $50 billion
out there and a $50 billion charge to go out and collect it, to bring
in $2.5 million is embarrassing, to say the least. It is really out-
rageous. I truly believe that if I were running this program in
Treasury I could bring in at least $10 million by falling off a log
and just spending a minor amount of my attention and time focus-
ing on it.

If this was the private sector and they didn’t collect the money
that was owed to them, they would be out of business. And we need.
to run Government more like a business as we strive to balance the
budget and continue to invest in education and other important
areas, and the environment and other areas that are important to
our country.

Again, I thank the chairman for his leadership.

Mr. Horn. I thank the gentlewoman.

[The prepared statement of Hon. Carolyn B. Maloney follows:]


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105

increasing efficiency and taking advantage of economies of scale through centralization of
loan servicing in six centers across the country to manage current and early stage delinquent

loans in our portfolio,

processing and depositing 100 percent of collections on the same day they are received; and

improving customer service and debt collection through installing electronic chronological

records, automated messaging capability and autodial systems in our centers.

Our current pilot projects include establishing electronic transmission of collections and payment
information from our borrowers, and disbursing loan proceeds and miscellaneous payments to

borrowers, lenders, and vendors electronically.

SBA\s servicing centers are responsible for current and early stage delinquent loans, and
conducting rapid follow-ups by phone and letters if accounts become delinquent. Because of this
Agency's mission to help small businesses start, stay in operation and grow, SBA’s first recourse
with past due loans is to attempt to get the account back into a paying status, if possible. If this

effort fails, the loan is sent to the SBA field office nearest the borrower for foreclosure or

litigation if there is worthwhile collateral or obligors who can be pursued.

We have established debt collection goals for each of the Agency’s field offices as part of a
nationwide Liquidation Improvement Project which began early last year. The field office goals
are aimed at increasing cash collections from recovery actions and promoting the timely
completion of loan liquidations, including disposing of acquired assets. SBA has also taken a
number of other management actions designed to strengthen the Agency’s liquidation efforts. We

have:


162

Mr. Horn. Let me start just down the line with the Associate
Deputy Administrator of SBA, the Small Business Administration.

Based on the latest information we have from the Financial Man-
agement Service and the Treasury, SBA has not referred any delin-
quent debt for administrative offset, but SBA’s chart, provided to
the committee with your testimony, lists $218 million as being re-
ferred.

Could you explain to me what the gap is between FMS? Is the
check in the mail or the debts in the mail? What have we got here?

Mr. Gray. It is the IRS offset, I was just informed.

Mr. Horn. The IRS offset?

Mr. Gray. Offset.

Mr. Horn. Not the FMS then?

Mr. Gray. Correct.

Mr. Horn. OK. Well, that untangles some of it.

Your testimony noted that SBA will refer $700 million for collec-
tion action to Treasury at the end of the year, and in May your Ad-
ministrator Alvarez sent Mrs. Maloney and me a letter promising
to begin referrals in June 1997.

Now, obviously that didn’t occur. Or did it?

Mr, Gray. It did not occur.

Mr. Horn. Yes. And I realize you weren’t around in June. You
are new at the job. Are you now responsible for ensuring that the
referrals do operate on schedule? Is that part of your portfolio?

Mr. Gray. Yes, it is, and I am comfortable making that commit-
ment today.

Mr. Horn. OK. Let me ask you: Would authority to administra-
tively offset Federal payments and garnish wages increase the
marketability of your Federal loan portfolio? Your testimony says
you are a recovering banker, so, I assume you might have a few
opinions on that.

Mr. Gray. Yes, I believe it will. One of the issues that we are
trying to address internally is to make sure that the information
provided to Treasury is adequate and thorough, and that would
stand as well to provide to anybody who would be purchasing these
loans from us. Coming from the private sector, it is really the infor-
mation that creates the value for those assets; and we are working
very diligently on that.

Mr. Horn. Do you feel then that bankers who purchase those
loans would want such tools and be willing to pay a premium for
them?

Mr. Gray. If there were a history where you could show that
there really was a return, the answer is absolutely “yes.”

Mr. Horn. Do we have that history anywhere?

Mr. Gray. Not yet.

Mr. Horn. You are going to provide it.

How about your neighbor next door here, Education?

Mr. Gray. I will defer to my neighbor.

Mr. Horn. That it works?

Mr. LONGANECKER. Well, we have had pretty substantial success
in collection on defaulted student loans, but we still found much re-
luctance in studies we have done in the past about whether we
could actually market those as an asset.


165

We currently, Mr. Chairman, for individuals in benefit status,
collect over 90 percent of the outstanding debt, whether that’s for
the Old Age, Survivors, and Disability program or the supple-
mental security income program. The only reason we don’t get 100
percent is because in some cases, Mr. Chairman, the collection is
not accomplished before the recipient dies or the individual re-
quests a waiver of the debt. But we have an excellent record, I
think, in that regard.

We began, as I said, in 1981, to set up our own debt collection
program before some of the statutory authorities that your commit-
tee and the Congress has made available to us were even in exist-
ence. And we recognized the problem that Under Secretary Hawke
noted, that is, the conflict between the program agency and the
debt collection responsibility. And for that reason, when we set up
our own debt collection centers in 1984, we placed those separate
and apart from the program people who are in our field offices
dealing, day to day, with the beneficiaries.

Through those debt collection centers, we have approximately
260 people that do that work. We use all of the tools that debt col-
lection organizations make use of in terms of skip-tracing tech-
niques, phone calls, et cetera and we think we do a pretty good job
of this, and that’s why we have petitioned Secretary Rubin to be
exempt from this overall Government debt collection activity.

Mr. Horn. Thank you. I now yield 10 minutes to Mrs. Maloney
for questioning.

Mrs. Matoney. Thank you, Mr. Chairman.

Mr. Gray, I see from your testimony that you plan to refer $700
million to Treasury for cross-servicing and $570 million for the ad-
ministrative offset program by January 1998. That’s great news.
Do you still intend to do that?

Mr. Gray. Yes, we do.

Mrs. MaLoney. OK. And how have you determined what debt to
refer to Treasury and what debt not to refer to Treasury of your
$1.5 billion that is over 180 days past due?

Mr. Gray. The majority of that debt is either in litigation, fore-
closure, or deferral, where there is a public purpose to work with
either the small business or the individual affected. And so, we
have adequately addressed that debt or it is in litigation and we
need to resolve the litigation.

The remaining dollars that have been proposed to be referred to
Treasury, and will be referred to Treasury, are those where no
greater collection efforts can be made either in litigation or in fore-
closure or resolving the collateral.

Mrs. MALONEY. As Mr. Gray pointed out, debt that is involved
in litigation is exempt, yet debt that is planning to go into litiga-
tion is not exempt. Do any of those dollars have debt that you are
planning to go into litigation on?

Mr. Gray. Clearly, there would be. What would happen is, if you
were trying to do a workout on a real estate loan before you file
foreclosure, you try to make it work.

Mrs. MALONEY. Make it work.

Mr. Gray. So for that period of time, clearly, it would be in the
best judgment of the lending officer, or in many cases, the banks


169

[The information referred to follows:]

On commercial accounts, we have recovered an additional one-half of one percent
of the debt referred from the actions of the collection agencies. On consumer ac-
counts referred, the collection agencies have recovered just over 6 percent of the
amount referred. From the amounts recovered, the collection agencies retain a fee
ranging from approximately 18 percent to 32 percent.

Mr. Davis of Illinois. As one agency, what are some of the prob-
lems that you have encountered, or that SBA has encountered try-
ing to implement the act?

Mr. Gray. It has really been a systems problem, to make sure
that the information that we are able to transfer to Treasury is
adequate and pure, so that mistakes aren’t made when they go into
collection activity. It is the same problem we had in referring to
our own outside debt collection agencies.

Mr. Davis of Illinois. And so once a system’s problems are cor-
rected or come online, then you think that there will be substantial
improvement in the ability to actually collect?

Mr. Gray. I am not convinced that by referring them to a dif-
ferent set of collection agencies that the performance will be im-
proved. It certainly is another way to do that, and I think we are
going to monitor it and measure ourselves and measure the effort
at Treasury.

One of the difficulties that all the Federal agencies have is un-
derstanding the true value of their debt and what really is collect-
ible. And that’s a real effort that we are trying to undertake, along
with Treasury.

Mr. Davis of Illinois. Thank you.

Mr. Longanecker, it seems that the Department of Education has
had Teasonable and good success using all of the methods that you
employ.

What has been the experience with the private agencies?

Mr. LONGANECKER. Tom Petska asked, if that question were
asked, if he could respond to it, so I would like to ask him to do
that.

Mr. Petska. Thank you. We have had excellent experience with
our collection agencies, and if I heard your question earlier, Mr.
Davis, you were concerned about collection agencies being perhaps
overzealous in collecting debt. I have employed a couple of tools to
guard against that.

First, in our contracts we have a requirement that collection
agencies comply with the Fair Debt Collection Practices Act. When
we review their performance, we note any violations of the Fair
Debt Collection Practices Act. And all the debt collection agencies
know me personally—the managers of those agencies know me per-
sonally and know that I have given my personal fax number to the
Legal Services Corp., and if persons are having problems and they
have a complaint about a collection agency, they bring it to Legal
Services Corp. Those complaints come directly to me.

Mr. Davis of Illinois. Have you had any inquiries from any of the
other agencies seeking information or assistance or just simply say-
ing, well, you seem to be doing it pretty well; can you share with
us your techniques?

Mr. PETSKA. We share through the Federal Credit Policy Work-
ing Group, and we have had direct relations with the Department


34

Interestingly, we
examine debt
collection processes
at a time when our
economy is robust,
and many in our
nation are letting the
good times roll in
terms of spending.
However, personal
bankruptcies, student


175

Mr. Horn. Well, I remember, having run a university, that the
financial aid offices mushroomed over the last 30 years——

Mr. LONGANECKER. Yes.

Mr. Horn [continuing]. When you have 25, 30 million to admin-
ister, and that there was—a lot of it was the financial counseling
that was made to the students. So they knew, hey, this is a loan,
not a grant.

Mr. LONGANECKER. Absolutely. Right.

Mr. Horn. But, is there a different range of due diligence across
the education programs, or could you say that you certainly contact
them within 60 days of the delinquency?

Mr. LONGANECKER. Oh, yes.

Mr. Horn. Or default?

Mr. LONGANECKER. Do you remember the requirement?

Mr. Petska. Yes. I am trying to recall the due diligence require-
ments in our Federal Family Education Loan Program regulations,
but I believe the requirement is within the first 10 days, if not
sooner.

Mr. Horn. OK. Why don’t you just file the rest for the record?
I am just curious what the range is here.

[The information referred to follows:]

Lenders must send at least one written notice to the borrower within 10 days of
delinquency, (i.e. within 10 days of the due date of the first missed payment) fter
this initial contact, there may be no more than a 45 day gap in collection activity.

Mr. Horn. Mr. Keevey, in terms of HUD, how many days does
it take to get a notice out?

Mr. KEEVEY. I don’t know, Mr. Chairman. The majority of the
debt, as we talked about, is the FHA defaulted loans, and there is
a whole process that they go through working up to the ultimate
sale of the assets. So I would not be able to give you an accurate
answer here. I will have to get that for you.

Mr. Horn. OK. Do the best you can.

Mr. KEEVEY. Yes.

(The information referred to follows:]

For Title I claims and other generic FHA debt that is in a billing status, an initial
delinquency letter is generated by the computer system and mailed to debtors whose
payments are four days overdue. If the payment remains delinquent, the case is
Eabject to autocall action at 10 days. The computer system also provides 9 discre-
tionary collection letters that servicers can Send out based on the particulars of the
case.

For Single Family cases the computer system produces a delinquency tracking re-
port after the 16th day grace period for payments on a FHA mortgage. HUD staff
receive this report on the 17th day and use it to prepare 30-day delinquency letters
or to take other mortgage action. This policy applies to servicing or mortgages that
have been assigned to HUD and have not been sold in an asset sale.

For newly paid claims or assigned debts, an initial demand letter is mailed on
the day that the case is loaded into the computer system.

Mr. Horn. And Social Security?

Mr. Sopper. Mr. Chairman, we notify individuals immediately
upon the detection of the debt, and then we give them 60 days due
process, which is required by statute, under which they can either
contest the debt or request waiver.

Assuming they do not, we begin to exercise collection efforts.
Moreover, if we have established a repayment arrangement with
someone, after the 31st day on which there has been no activity on
that, we consider that debt also delinquent.


115

locations and in six centralized loan servicing centers, two specialized litigation units
and a regional liquidation office. SBA has over 130 SBA lawyers serving as Special
Assistant U.S. Attorneys who facilitate these actions. Such actions may include
summary and judicial foreclosure on personal and real property, as well as litigation
against guarantors and other obligors (these procedures are exemptions from referral
of accounts to Treasury under the DCIA).

IL_SBA Debt Collection Structure

SBA is presently completing centralization of routine loan collection activities in seven
large-scale servicing centers located strategically across the continental United States
and in the Virgin Islands. Four centers handle a total of almost 190,000 consumer
loans (SBA‘s disaster home loan portfolio). These loans may be unsecured or they
may have collateral consisting of real estate and/or personal property. The Virgin
Islands office is overseen by the Birmingham servicing center and handles
approximately 5,000 disaster home and business loans.

The Santa Ana servicing center is co-located with a regional liquidation center that
handles enforced collections on both consumer and business accounts. In addition,
there is an SBA litigation unit at the Santa Ana servicing center location to handle
judicial foreclosures, bankruptcies and other court proceedings. An additional litigation
unit located in Philadelphia, with branches in Florida, handles debt collection and
litigation throughout the eastern half of the country in conjunction with SBA‘s district
offices and servicing centers.

Two additional servicing centers handle approximately 150,000 of SBA’s commercial
loans, representing about two-thirds of the Agency's loan portfolio originating from
its disaster and major business loan programs. These are current or early stage
delinquent loans, almost all of which are secured by real and/or personal property
collateral and personal guaranties. SBA is presently completing the centralization into
these two centers of all remaining current and early stage delinquent business loans
now serviced by approximately 30 of its 80 district and branch offices. This
centralization is targeted for completion by May 1998.

The loan servicing centers handle all account collection activity on loans directly
serviced by SBA as well as coordination with SBA’s participating lenders where a
participant has a financial or other interest in a loan, and is servicing the account.
Direct loan servicing activities include scheduled collection calls on past due accounts,
issuance of a wide variety of letters, subordinations, collateral releases or
substitutions, guarantor actions, reamortizations or similar restructurings, deferments,
and assumptions or other loan transfers. On the approximately 100,000 lender
serviced loans in the centers, SBA coordinates the above and other actions with
several thousand participant lenders across the country.

When loans become severely delinquent and cannot be restructured to allow for
continued payments by the borrower, the servicing centers generally take one of two


136

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177

Mr. Gray. The principal balance is written off. When we actually
put it in a file and don’t look at it again, I don’t know. I will have
to get back to you on that.

Mrs. MALONEY. OK.

[The information referred to follows:]

Write-off and charge-off are two terms which differ in meaning under Treasury
guidelines and SBA procedures, but they are sometimes used interchangeably there-

y creating confusion. The SBA charges off loans after all cost-effective foreclosure
and litigation activity has been completed. For unsecured loans of small dollar
value, such as disaster home loans, we emphasize that charge-off be done rapidly
after 180 days delinquency for transfer of the account to Treasury for inclusion in
all offset programs for a period of up to 10 years. On other loans with worthwile
collateral, recovery procedures are accomplished as expeditiously as possible by SBA
and then the accounts are charged-off for transfer to Treasury.

SBA’s debts are written-off after further collection work is legally prevented by
events such as bankruptcy discharge, compromise or statute of limitations prohibi-
tions. After write-off, debts are reported to IRS in the 1099C program and all collec-
tion efforts cease. These accounts are still carried in SBA’s electronic files for record
keeping purposes, but the accounts are closed from a recovery standpoint.

Mrs. MALOneY. I would like to ask Mr. Keevey.

Mr. KEEVEY. I would say very little of it do we try to write off
on the basis that we have another mechanism to get it back on the
defaulted loans when we go through the sale of assets. The same
thing exists in the GNMA situation where we have another insurer
to go to to get the money back, that is from the VA or FHA.

For those that are remaining, which is a very small part of the
Department, we normally wait 180 days and then start looking at
a process to see whether there is an opportunity or a lost oppor-
tunity to get the money back.

[The information referred to follows:]

The Department does have a write-off policy with the following circumstances
(and others) when a recommendation to write off debt can be made: Receivables are
legally without merit; assets can not be substantiated by evidence; costs of asset re-
covery will exceed anticipated recovery amounts; and debtor cannot be located.

Mrs. MAtoney. And, Mr. Sopper, when do you write off?

Mr. Sopper. Mrs. Maloney, we follow the Federal claims collec-
tion standards for write-off; and that is to say, we make write-off
determinations when we are unable to locate the debtor or the
debtor is unable to pay. In terms of the write-off, you can have ei-
ther write-off due to waiver, in which case the debt is forgiven for-
ever, or we write off because further collection activity would no
longer be effective.

As I mentioned earlier to the chairman, even in those cases
where we have written off the debt and suspended collection activ-
ity, we still make use of tax refund offset and ultimately, if pos-
sible, benefit offset.

Mrs. MALONEY. Earlier Mr. Gray made an important point when
he said that the SBA has a policy purpose that goes beyond collec-
tion, that of a billion new ‘obs, saving jobs, helping foster the eco-
nomic growth of the country. The board of education department
has a policy purpose in investing in our young people and helping
them gain an education.

Would you share with us your due diligence policy? How do you
determine—in other words, oftentimes young people cannot repay
the debt. I noticed in one of your reports, sometimes it is 10 years,
even longer, before someone can repay a debt for legitimate rea-


58

With regard to increasing the delinquent debts referred by agencies, FMS
currently has more than 2.4 million debts covering $17 billion in delinquent
receivables in its TOP database. Nearly two million cases represent debts owed to

Federal agencies and another half million are child support debts.

The agreement between IRS and FMS for implementation of Tax Refund Offset
for calendar year 1998 represents a significant change to previous operations,
requiring delinquent debt to be submitted to FMS for inclusion in TOP in order to
participate in tax refund offset. Agencies will submit debt data to FMS and FMS
will pass the data to IRS for Tax Refund Offset, converting it to IRS’ format if
necessary. This should substantially increase the number of debts in TOP. In
addition, FMS has future plans to bring in additional delinquent child support

debts.

As of October 31, cumulative collection in TOP totaled more than $793,347.
Collections were made primarily from Civil Service Retirement payments and
some vendor payments. FMS has plans to include additional payments in the TOP
process, however this is contingent on ihe implementation of GTOP. Therefore
we are committed to a phased process for implementing the GTOP software in the

5


112

particular, much emphasis has been placed on evaluating the different sales methods used to
maximize the return for the taxpayers. It cannot be stressed strongly enough, that the SBA is very
aware of its unique relationship to small business owners and to disaster victims who have
received our loans. The SBA has, and will continue to move cautiously so that public policy
issues are adequately and appropriately addressed in order to ensure that the small business
constituents are not harmed, especially those who have suffered loss due to natural disasters. We
will also need to work with our lending community and other stakeholders in our asset sales

initiative in order to assure its success.

Legislative Proposals Relating to Debt Collection

The Administration is studying the merits of these bills but is not prepared to take a formal position at
this time, The Administration is willing to work with this committee on legislation for the purpose of
creating management tools needed to ensure program integrity, effective debt collection, and the

protection of individual privacy rights

Summary
Mr. Chairman, we believe that SBA is on track to accomplish all key requirements of the DCIA.
We are dedicating resources to implement the legislation, and are working with Treasury and

others to ensure that it is put into effect in a manner that makes sense, and is in the best interests

of the small businesses we serve.

Thank you for the opportunity to testify today. I will be happy to answer any questions you may

have.


16

4) Merger of The Tax Refund Offset Program into TOP

In regard to the merger of tax refund payments into the Treasury Offset Program (TOP), we are
enclosing a copy of the joint Financial Management Service (FMS) and Internal Revenue
Service (IRS) announcement on tax refund offset processing. The announcement details the
operational roles and responsibilities for FMS and IRS for tax refund offset during calendar year
1998. FMS and IRS staffs are working together to ensure that the tax refund offset program
and collections on delinquent debt are operated effectively during the transition year.

Additionally, both FMS and IRS are working to finalize respective task lists for GTOP
implementation and the merger of IRS’ TRO program with TOP. Treasury's plans for the
merger of the tax refund offet program into the TOP next processing season and for completing
the implementation of the TOP are intertwined and interdependent.

5) Cross-Agency System Issues

FMS is also working closely with agencies to address any systems difficulti
experience as they prepare to refer their delinquent debts. Systems compat
formatting electronic files and modifying agency systems to accommodate the data. FMS
accepts debt data from an agency in either the agency's existing formats or the TOP format.
Additionally, TOP is able to receive debt data in a batch or online mode.

6) Status of DCIA Regulations

As requested, enclosed is a status report on all DCIA regulations, including the date they were
published in the Federal Register, if applicable.

7) Unclaimed Assets

The DCIA gives agencies the authority to enter into contracts for the recovery of unclaimed
assets and to pay a fee for this service. Such contracts would be used when Treasury or the
agencies have exhausted other methods for recovery. Without such contracts in place, fees or
“rewards” have not been paid and any funds recovered by Treasury or the agencies generally
have been returned to the General Fund of the Treasury. FMS is in the process of determining
the best method to providing such a contracting vehicle.

We have reviewed the letter from Representative Dunn's constituent Mr. Arthur L. Mason, and
we certainly agree that a few million dollars in unrecovered Federal monies is not trivial.
Recognizing the need to effectively address this problem several years ago, the


28

Today, I would like to focus on perhaps the two most important unimplemented
‘components of the legislation — the administrative offset program and the cross-servicing program.
As you know, the Department of Treasury is now testing the Grand Treasury Offset Program
(GTOP) which would implement the administratively offset program. I have repeated asked for
a target date for completion. Since Treasury has not provided target dates for me, I have put
together my own dates and I would like to submit it into the record.

For the administrative offset program and cross-servicing programs to work, the Federal
agencies must refer their debts to Treasury. So far, most have not. As a result, I have put
together this report on agency compliance with the law. Agencies that have not refer debts for
administrative offset or for cross-servicing receive an F grade. Agencies that have referred debts
for one or the other receive a D grade. Agencies that have referred some debts for both programs
receive a C grade. Since no agency has referred all of their debts to Treasury, no one received
an A.

Lastly, I would want to mention my two pieces of legislation that will focus on curtailing
waste, fraud and abuse in Federal benefit programs. My first bill, the Debt Collection Wage
Information Act would help locate delinquent debtors who move from one state to another to avoid
paying their debt. I have estimated that this bill would bring in an additional $1 billion per year if
fully implemented

My second piece of legislation is the Federal Benefit Verification and Integrity Act of 1997.
This bill would allow federal agencies to verify and confirm the accuracy of information provided by
applicants of Federal benefits. Using this common sense approach, Federal agencies can route out
fraud and abuse before delivering the benefits.

Thank you.


94

Mrs. MALoney. I have been told the Federal Reserve is already
testing it and that the Treasury control service is not testing it.
This is a resource that we could use that might be helpful to you.

I really wonder why, at the very least, the salary payments were
not added to the Treasury offset program. That seems like it would
be easy to do.

Mr. Murpuy. That program currently is operating through the
Office of Personnel Management. It was sort of a stand-alone offset
program, one of a number that we had.

Mrs. MALONEY. But our bill centralized it into the Debt Collec-
tion Act.

Mr. Murpny. That is correct.

Mrs. MALONEY. And added greater authority and power to it. So
that we are not reinventing the wheel, we are not duplicating. It
appears that that would be a very easy item to add. Do you have
an idea of how long it would take to add salary payments to the
Treasury offset program?

Mr. Murpuy. We are not planning to try to add it to this interim
offset program, which was not developed for it. But that will be
phased in in our schedule to bring up the GTOP system.

Mrs. MALONEY. Could you let us know when you think you can
add salary payments from the Federal employees to the system?

Mr. Murpuy. That will be included in the schedule.

Mrs. MALONEY. You mentioned in your testimony the issue reso-
lution plan to improve the referral of debts to Treasury from other
agencies. As we noted in our report, there has not been much fol-
lowup from the agencies. Will you have specific target dates for
when agencies will begin to comply with the law and refer debts
to Treasury?

Mr. Murpuy. Yes. That is part of the process of entering into the
letter agreements with the various Departments. The Departments
had to go through some preliminary stages issuing regulations and
notices and the Tike. They confirmed to us that they have met those
requirements and then we sit down and negotiate a date for when
they will actually be referring. We have, I think it was 24 letter
agreements at the moment. We still do not have agreements with
a number of other agencies.

Mrs. MALONEY. The law said after 180 days. I had to work with
the chairman on that. He wanted 30 days, I think, to have it re-
ferred to Treasury. After 180 days it would be referred to Treasury.
And still we have very, very few people complying with this. It
seems to me it is simple. You have debt. You have 180 days to
bring it in. All of us know that it is easier to bring new debt in
as opposed to old debt, as Mr. Hawke pointed out. So, what are you
doing? The agencies have 180 days. They should be told, bring it
in at 180 days. If you can’t bring it in, send it to us.

What is the letter agreement? It seems very clear in the law,
after 180 days, it goes to Treasury. I do not understand what the
letter agreement is about? Are you doing exemptions to the law?
What is the letter agreement that then gives them more time? As
you know from the report—where is that graph we had? Very few
people—where is that graph, the one that we had? I will find it one
of these days. It seems to me very——

Mr. HorN. Whenever you find it, it will be in the record.


Department of Interior, delinquent debt arises from audits of rents and royalties due for oil,
ga, coal and other minerals extracted from Federal lands. At EPA, delinquent debt results
from fines and penalties for pollution enforcement and clean up. At HUD, most debt arises
from defaults on housing loans.

The Debt Collection Improvement Act of 1996 strengthens the government's ability to
collect delinquent, non-tax debt by providing a number of tools for agencies to use. The Act
also requires Federal agencies to transfer delinquent debt over 180 days old to the Department
of the Treasury for collection. Treasury’s Financial Management Service (FMS) has the lead
responsibility for debt collection. The Act is intended to maximize collection of delinquent
debt by ensuring quick action on recovery using all appropriate collection tools. It will
minimize the costs of collection by consolidating collections at Treasury and reduce losses by
requiring screening of potential borrowers, aggressive monitoring of accounts and information
sharing among agencies. The Act also ensures that the public is informed of the government's
debt collection policies and guarantees appropriate due process rights. The Act also
encourages agencies sell debt when appropriate and to experiment with the use of private
sector collection agencies. The major provisions of the Act are outlined below.

Administrative offset

The Act creates governmentwide administrative offset authority. Federal payments to
individuals and companies would be offset against Federal debts. Veterans Affairs and means
tested benefits are exempt to prevent hardship to beneficiaries. Due process standards under
31 USC 3716 still apply.
Salary Offset

The Act similarly allows Treasury to match Federal employee payroll records against
delinquent debt. Any Federal employee with delinquent debt above $50 can have his or her
wages garnished.
Access to Taxpayer Information Numbers

Federal agencies are required to obtain taxpayer identification numbers from persons
doing business with the government, including recipients of credit, licenses and permits,
benefits and contractors. This provision is essential to making the first two work.
Bars Delinquent Debtors from Receiving Federal Credit

Persons with delinquent non-tax debt are barred from obtaining Federal loans or loan
guarantees. Agency heads have the authority to waive this provision and loans to disaster
victims are not subject to this provision.
Tax Refund Offset

The disbursing officials at Treasury's FMS are authorized to conduct a tax refund offset
program. This program and the administrative offset program will be combined at FMS to
increase efficiency and prevent the unauthorized disclosure of taxpayer information.


TT

Department of the Treasury began a program to actively seek out unclaimed assets belonging to
the Federal government held by states and financial institutions. The enclosed recovered asset
spreadsheet details our accomplishments by state from 1993 through the present.

The information provided by Mr. Mason was helpful and will further our efforts in this program
Using his information, we were able to update our list of state contacts, addresses and telephone
numbers. In addition, we have recently started searching the Internet for unclaimed assets in
order to obtain necessary claim information that has not been forthcoming from some States.
The State unclaimed property site information provided by Mr. Mason may give us access to
information necessary to file claims. We are responding to Mr. Mason, thanking him for his
valuable information and providing a copy of our response to Representative Dunn.


83

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5

Mrs. MALONgY. I thank the chairman for yielding, and I am very,
very pleased that you are holding this oversight hearing on our
Debt Collection Improvement Act of 1996. I, too, am very concerned
with implementing this bipartisan legislation in a timely manner.

though we don’t have much to show for it, I firmly believe this
legislation can dramatically improve the collection of delinquent
debt throughout the Government. However, the problem does not
appear to be our legislation but, rather, the Federal agencies’ un-
willingness to implement our legislation.

Two years ago, I released a report showing that businesses and
individuals owe the Government 350 billion in past due debts. The
Federal agencies asked the Congress for additional tools and meth-
ods to improve collecting this debt. The chairman and I responded
by delivering that legislation. We gave broad new powers to Fed-
eral agencies to improve governmentwide collections. Two years
later, I have released today a second report that, again, shows $50
billion in delinquent debt.

I feel, Mr. Chairman, like we are spinning our wheels. What has
happened is that our Debt Collection Improvement Act, which be-
came law in April 1996, has only collected $2.5 million out of the
$50 billion in delinquent debt. That means in a year and a half,
we have collected only $1 for every $20,000 that is owed. That is
tremendously embarrassing.

And when I look at these dollars, I see teachers, I see police offi-
cers, I see services that we could be giving the American public if
we brought in these dollars.

Today, I would like to focus on perhaps the two most important
unimplemented components of the legislation: The administrative
offset program and the cross-servicing program.

As eu know, the Department of Treasury is now testing the
Grand Treasury Offset Program, which would implement the ad-
ministrative offset program. I have repeatedly asked for target
dates for completion of this program. Since Treasury has not pro-
vided dates for me, I have put together my own suggested dates
and I would like to submit them in the record, proposed target
dates so that we could implement this program and start collecting
this money.

Mr. Horn. Without objection, it will be in the record at this
point.

Mrs. MALONEY. Thank you, Mr. Chairman.

For the administrative offset program and cross-servicing pro-

‘ams to work, the Federal agencies must refer their debts to
Freasury. So far, most have not. As a result, I have put together
this report on agency compliance with the law. Agencies that have
not referred debts for administrative offset or for the cross-servic-
ing receive an F grade. Agencies that have referred debt for one or
the other receive a D grade. Agencies that have referred some
debts for both programs receive a C grade. Since no agency referred
all their debt to Treasury, no one received an A. And I would like


11

Since the submission of the President’s budget in February to the Congress, SBA has been
working toward the development of a plan and strategy to accomplish these sales. Our first step

was to turn to the Office of Management and Budget (OMB) and the FCPWG for assistance.

In response to our request for assistance, a special Asset Sales Advisory Group was formed to

support SBA on this initiative, This group was comprised of representatives from Treasury,
OMB, the Departments of Housing and Urban Development and Education, and the FDIC. SBA
also assembled an internal working group. To date, we have a number of accomplishments to

report
‘* We have completed a draft Strategic Plan for asset sales outlining essential resources
needed and key steps to be taken.

* We have completed the preparation of statements of work to engage outside financial and

technical advisors, including
* program financial advisor
transaction financial advisor
* due diligence advisors
© legal services advisors
+ We have completed the preparation of Commerce Business Daily (CBD) notices for
advisory solicitations, and

+ We have completed a preliminary design of an asset sales Internet website.

The progress to date has been undertaken with substantial input and cooperation from the

FCPWG, other Federal agencies and consultants with hands-on experience with asset sales. In

8


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107

was designated as a pilot agency for the new Treasury Offset Program (TOP), and we have been

working with staff at Treasury to implement this procedure for our portfolio.

With this background on SBA’s efforts, I will now address the specific implementation of the
major provisions of the Debt Collection Improvement Act. First, let me state that SBA fully
endorses the stated purposes of the DCIA. Asan Agency, we have devoted substantial resources
over many years to meeting the goals of the legislation, which is maximizing collection of

delinquent debts and in the shortest period of time.

Referral of Delinquent Debt to Treasury
A. Cross Servicing The DCIA provides that delinquent debt over 180 days shall be transferred
to Treasury for debt collection purposes (“cross servicing") and for participation in

administrative offset.

SBA is prepared to send a letter agreement to Treasury for the purpose of initiating cross
servicing. Under this agreement, SBA intends to promptly refer to Treasury all accounts on
which SBA has completed necessary foreclosure or litigation proceedings, and which have a
deficiency balance remaining. In addition, SBA will promptly refer all loans at 180 days
delinquency, or sooner, which cannot be effectively collected through foreclosure on collateral
or litigation against obligors. SBA has identified approximately $700 million in debt that can
be referred as soon as procedural details and systems requirements are worked out, which we
anticipate will be by the end of this calendar year.

B. Treasury's Administrative Offset Program (TOP) SBA will refer to Treasury all delinquent

accounts which are not being actively pursued through liquidation of collateral or litigation
proceedings. SBA is now preparing to publish in the Federal Register the appropriate

4


92

30 days. We have been optimistic before and wrong, but I think
that is a reasonable timeframe.

Mr. Horn. As you know, the President made a radio address
once on child support. We all agree with that. With the President
taking to the airwaves saying he wanted the Federal Government
to do something about that, that that one ought to also be right at
the top of the priority list and if it is HHS that is failing to issue
those regulations, then Treasury should to be giving them a nod or
take over the whole function. In fact, that is where I am leading
to. I do not understand, as we said earlier, if you were a Cabinet
officer, I think it would be wonderful to get out the awful things
you have to do to some of the clientele, stick them over in Treasury
where they can confuse it with IRS collecting, since it is Treasury
collecting, and maybe just the letterhead alone might get a few dol-
lars in here.

Mr. HAWKE. That point is right on the mark. We have found that
when collection letters go out on Treasury letterhead, they tend to
get attention.

Mr. Horn. Right. I notice in the HUD testimony they want to
offer you a center in Seattle. Is anybody looking at that, to have
you take over their physical processing center in terms of collecting
debts? They have got billions of them in HUD. Is that under way?

Mr. Murpuy. There has been discussions between the staffs on
that proposal. Treasury has made no decision on it yet. I believe
another meeting is scheduled with HUD for later this month.

Mr. Horn. Now, on the interim regulations that are in place al-
lowing agencies to use all available debt collection tools, do those
interim regulations include wage garnishment?

Mr. Murphy. I am not sure I understand your question.

Mr. Horn. As I understand it, you have some interim regulations
out there. I assume somebody signed off on it. Maybe I misread
your testimony. But the question is, does that include wage gar-
nishment or is that some separate regulation?

Mr. Murpuy. That is a separate regulation. The wage garnish-
ment is one that is in clearance now and that we would expect to
go out within 30 days as a notice of proposed rulemaking.

Mr. Horn. So, that would go out as a notice only by Christmas
and then it would take effect the end of January?

Mr. Murpny. It would probably take effect about 4 months later.

Mr. Horn. That would be about the time our hearing is going to
be held again saying what have you done.

_Mr. Murpuy. We have got March 1998. I hope it is done by then,
sir.

Mr. Horn. And it just seems to me that if the lawyers are drag-
ging their feet—you headed a law firm. You know what can hap-
pen—those are billable hours, presumably, in law firms when they
drag their feet. This is wasting the taxpayers’ time when they drag
their feet in agencies. Maybe you can, with your legal skills from
the private sector, confront the general counsel and say, you have
a few angry Members of the Congress here that wonder why we are
not doing more. If it is because of regulations not being issued, I
have got to ask the question: the President goes on the air and says
he wants to go do something about deadbeat dads, all of which


60

electronically without manual intervention. Additionally, FMS is now accepting
credit cards to pay delinquent debt. This tool is expected to be very useful in

collecting debts such as student loans and other small individual debts.

Consistent with the objective stated in the DCLA, FMS awarded its private
collection agency (PCA) contract to collect delinquent debts owed to the Federal
Government to 10 contractors in September of this year. The contractors will
have 60 days to establish systems compatibility with FMS to allow electronic
transfer of delinquent debt file data between FMS and the contractors. FMS has
provided implementation instructions for the Federal agencies and will be
conducting a workshop for Federal agencies and the awardees to facilitate use of
the contract and address questions conceming implementation of this debt

collection tool.

FMS has published interim regulations concerning Tax Refund Offset to Collect
Past-Due Non-Tax Debt, and the Collection of Past-Due Child Support by
Administrative Offset. FMS has also published a notice of proposed rule-making
concerning the Taxpayer Identifying Number (TIN) Requizement on Payment
Vouchers. In addition, three proposed rules have already been developed and are

7


56

° We discussed our efforts to develop a public awareness campaign which
would inform the public of Federal debt collection policies, and remind

debtors of their obligations to repay Federal debts.

Today, Mr. Chairman, we are able to report additional progress in the

implementation of the debt collection provisions of the DCIA.

In terms of the Treasury Offset Program, FMS is developing new software
designated GTOP, which has greater capabilities than the current interim operating
software. GTOP is needed to complete the implementation of TOP, because it will
allow offsets to be taken against greater numbers and types of payments. We had
anticipated having GTOP operational by January 1, 1998.

However, as Under Secretary Hawke has stated, IRS and FMS jointly concluded
that the merger of the tax refund offset program with TOP could not be completed
by January 1, 1998, in time for the 1997 tax refund offset year without risking the

loss of approximately $1.75 billion in offsets collected annually by TRO. Instead,

IRS and FMS have agreed to a transition process which allows for a significant
change in the workflow this year, along with full transfer of functions next year.

3


18

Proposed Target Dates

Administrative Offset -(GTOP) Grand Treasury Offset Program

Development

Testing by the Federal Reserve Board
Conversion from ITOP to GTOP
Implementation

Payment Files

Full salary offset implementation
NTDO - Postal/Defense Dispursing offset
SSA and RRB Benefits

10/97 Done
2/98
3/98
3/98

3/98
3/98
6/98


aT

balances. In response, FMS has put together an action plan for revising Treasury
reporting requirements, with a target implementation of summer 1998. An
interagency team has already been assembled and agencies have been surveyed for
feedback on current requirements as well as suggestions for improvement. We
will continue to update this Committee on progress in this area over the next

several months.

Implementing Regulations. At the April 18th hearing we provided the
Subcommittee with target dates for the publication of regulations implementing.
the provisions of the DCIA. Frankly, the review and clearance process has taken
longer than anticipated. However, FMS has succeeded in publishing those
regulations necessary to proceed with the DCIA implementation schedule over the
next six months. We are pushing ahead with the task of completing our regulatory
agenda. Mr. Murphy will provide more specific details on the current status of

regulation development.

Process for Approval of Federal Debt Collection Centers. It is the intent of the
DCIA to improve on the collection of debt through maximum use of private sector

expertise and a centralized approach to Federal debt collection. While the Act


51

For example, some of the States are concerned in collecting child
support through our interim offset system that we don’t have the
capability of recognizing if there is a wage garnishment already in
place for an OPM retiree. We can’t identify that under the present.
system, therefore, there is a risk that we may take a double hit if
we offset one of those. The new system is supposed to be able to
handle all of those kinds of things.

With those complexities, as Mr. Hawke mentioned, IRS and FMS
jointly decided to defer the tax refund offset merger for 1 year. So
that is now supposed to come up by January 1, 1999.

In some ways, you know, that puts us back a little bit. That slip-
page means that other things have been affected. But we needed
to focus on making the tax refund offset program work well, be-
cause that is a program that, you know, is going to collect $1.75
billion hopefully in this coming year. And we had to make the deci-
sion, because we didn’t want to risk a possible loss of that kind of
revenue.

We are going to get some benefit out of this transitional period,
though, because this year we are going to use an entirely different
process. In the past, agencies have been submitting debts for offset
to IRS under the tax refund offset program and separately trans-
mitting debts to us for the interim offset Treasury program.

This year, they are all going to come in through the Financial
Management Service. So instead of having 17 agencies reporting
debts for offset, we are going to have 40 agencies reporting debts
to us that we can run through our Treasury offset program, as well
as the IRS tax refund program. So we expect to get a lot more
debts into that program.

As has been pointed out, the cumulative collections under the
Treasury offset program, to date, something over $790,000; not
nearly what we want to have. But, again, it is a tribute to the fact
that the interim system can only match against the OPM and the
vendor payments.

In the area of cross-servicing, FMS has 24 letters of agreement
with agencies. That’s sort of our contract with the agency as to
when they will refer debts for cross-servicing. We have 29,000 cases
at the moment, with an excess of $460 million. And of those, we
have collected over $1 million; $1.1 million. Cumulatively, we have
collected more through that cross-servicing, and we have also—it
doesn’t show up in the numbers yet as dollars actually received,
but we have also been able to enter into repayment plans with
some of the debtors that cover an additional $2 million. That’s
going to be paid in installments.

There are also two key changes that we have adopted to make
the offset program a little more efficient. One, we are using an
automated lockbox process now which will do some electronic post-
ing for us to eliminate some of the manual intensive work, and we
are also accepting credit cards from debtors for some of the small
payments which, again, we think will help us collect some addi-
tional amounts.

Mr. Hawke mentioned the private collection agency contract. We
have 10 contractors. Those were awarded in September of this
year. The contractors have 60 days to establish their system’s com-
patibility to allow electronic transfer of the debt files between FMS


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142

. we pioneered the use of the Credit Alert
Interactive Voice Response System (CAIVRS) as a
pre-screening tool to bar individuals who owe the
government money from obtaining new government
loans or loan guarantees. A more detailed
discussion of this system is included later in

this text.

Now to address the specific issues raised by the Committee.

1. Completion of chart. - The chart included with your

request has been completed and is included as our Exhibit

Highlights are:

* The adjusted debt over 180 days delinquent
includes Single Family ($477 million) and
Multifamily ($545 million) debt which is part of
our asset sales program and will not be referred

to Treasury for offset.


135

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13

DEPARTMENT OF THE TREASURY

‘The Treasury Department is owed $399.5 million in delinquent non-tax receivables.
The sources of debt include mostly fines, fees and penalties relating to their programmatic
jurisdiction including U.S. Customs Service duties and Financial Management Service loans.
$313.7 million of their debt it over 180 days old.

ENVIRONMENTAL PROTECTION AGENCY

The Environmental Protection Agency (EPA) reported $701.5 million in delinquent
non-tax receivables, of which 94% is in litigation or administrative appeal. These delinquent
receivables include enforcement and clean up fines and penalties, direct loans for the clean up
of asbestos in schools, cost recoveries for clean up of toxic sites, toxic substance user fees,
vendor overpayments and unused airplane tickets. It considers $386.5 million uncollectible,
and has not referred any debt to Treasury for collection.

EXPORT-IMPORT BANK OF THE UNITED STATES

‘The Export-Import (Ex-Im) Bank programs have $1.4 billion in delinquent receivables.
‘The vast majority of these delinquent receivables consist of the principal, interest and fees
relating to Ex-Im's direct loan program.

Most of Bx-Im's loans are made directly to foreign governments or to foreign entities
in which the repayment of the debt is guaranteed by the government. The Bank does not
write-off sovereign debt, unless there is action on the part of the U.S. Government to provide
debt relief to a particular country. For loans to private institutions or individuals, the decision
to write-off a delinquent loan is made on a case by case basis. Ex-Lm pursues the collection of

inquent debt through its Claims and Recoveries Division which in the case of private
obligors, works with attorneys operating in the country of the obligor.

SMALL BUSINESS ADMINISTRATION

‘The individuals, businesses and organizations involved in Small Business
Administration (SBA) programs currently owe the SBA over $2 billion in delinquent
receivables. The specific sources of delinquent receivables include overpayments, guarantee
fixed foes, SBIC user fees, accrued and deferred interest, loans, judgements, notes,
undisbursed expenditures and legal costs capitalized on judgemeats. The SBA has written-off
on average close to half a billion per year over the last five years. It has referred only $31.2
million to Treasury for tax refund offset.


187

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55

At the previous hearing on the implementation of the debt collection provisions of
the DCIA which this Subcommittee held in April of this year, we detailed the
progress we had made thus far. The following is a brief summary of that

testimony:

° We discussed Treasury efforts to inform Federal agencies of the existence
of the DCIA and their responsibilities under the DCIA.

° We reported that we established an interim operational centralized
administrative offset process that has already begun offsetting a limited
number of Federal payments to collect delinquent debts.

o We discussed the agreement between FMS and IRS to merge the tax refund
offset program into TOP, and our work with HHS to develop procedures to
include past-due child support debts in the offset process.

© Wereported that we established a functional cross-servicing capability so
that Treasury could collect the delinquent debts of other Federal agencies.

° We discussed our efforts to establish and maintain a schedule of debt
collection contractors, as required by the DCIA.

o We detailed the work performed in establishing regulations and guidelines

to implement the DCIA.


2

Debt Collection Improvement Act. Asset sales need to accelerate.
The positive experiences of the Department of Housing and Urban
Development and the excellent returns they have had are eye open-
ing. Further asset sales can dramatically increase collections. Reg-
ulations must be drafted, published, and implemented. Several key
authorities from the Debt Collection Improvement Act will continue
to be unavailable to agencies until regulations are published.

For example, wage garnishment, offset of benefit payments, and
barring delinquent debtors from obtaining additional loans or bene-
fits cannot be used as a collection tool unless these regulations are
published. Would that it were otherwise.

The committee is disappointed at the absence of the Office of
Management and Budget today. Its staff worked hard to help pass
the Debt Collection Improvement Act and has been helpful in var-
ious troubleshooting problems. Acting Deputy Director for Manage-
ment, Ed DeSeve, was unable to be with us. It is very important
that the Office of Management and Budget focus agency attention
on governmentwide problems. Its slowness is another reason to ad-
vocate a separate Office of Management, which we will shortly be
doing. At our last hearing, I questioned Mr. DeSeve’s predecessor,
John Koskinen, about the level of support for this initiative at the
Office of Management and Budget. He was unequivocal in stating
the administration’s support for improving debt collection. We hope
the same message will be expressed by the Office of Management
and Budget in both words and deeds in the near future.

Ultimately, success will be measured by dollars collected and ac-
counts resolved. With that said, we welcome witnesses from several
Federal agencies to discuss implementation of the Debt Collection
Improvement Act. Although agencies are at varying stages in im-
plementation, it is fair to say that everyone here can do better. And
if there are additional laws you wish Congress to enact in this
area, please let us know.

I now yield to Mrs. Maloney, the ranking Democrat on the com-
mittee, for an opening statement.

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


174

Mr. Gray. Approximately 700.

Mr. Horn. Seven hundred. OK. You might check those.

[The information referred to follows:]

Across the SBA, there are approximately 700 employees engaged in the full range
of debt collection activity including servicing, working-out and liquidating both dis-
aster and regular business loans. Approximately 125 attorneys, as noted above, have
been hired by their Agency to support its loan portfolio management activity.

Mr. Horn. Now, what I am interested in, since we had a discus-
sion previously with the Treasury officials, we all know, if we can
get out within 60 days to remind people that they have got a debt,
there is more likelihood of them taking it seriously and of the Gov-
ernment collecting it to save us taxpayers a lot of money. If we
could not only get a surplus under what we have done in this Con-
gress, but also get the debts that are owed, this should help a lot
of things.

Mrs. Maloney has named a whole series of things that want for
help. And I will start with the $5.3 trillion national debt and infra-
structure and a few other things that should be in there some-
where.

Now, what I am curious about is, how many of you have given
notice at the 60-day mark, or before, even earlier?

Mr. Gray. We give a 10-day notice after delinquency, which
would be 30 days from payment date. So if a loan payment was due

‘ay 1—~

Mr. Horn. Yes.

Mr. Gray [continuing]. On June 10, they would have a letter if
they were delinquent as of the end of May.

Mr. Horn. OK. And have you found that has been effective,
doing that 10-day notice?

Mr. Gray. Oh, absolutely.

Mr. Horn. What did they do before that? Was it a longer number
or is this a new proposal or has SBA always done that?

Mr. Gray. We have historically had very good loan servicing, and
this falls into that area.

Mr. Horn. OK.

Education, what is the earliest you notify the debtor?

Mr. LONGANECKER. In delinquency?

Mr. Horn. That they are in default.

Mr. LONGANECKER. Ours is a little different program because our
students come out of school and they are in school for a while. So
we have entrance and exit counseling for the students. Once they
come out of school, they are in 6-month deferment. But if they go
into delinquency—as soon as they go into delinquency, there are
various stages that the law is set up for due diligence by the lend-
ers.

Then, if they do go into default, there is also preclaims assistance
provided by the guaranty agencies. Then the guaranty agencies do
due diligence. Then it comes to Tom and his crew, and they do due
diligence as well.

So we are—there is an awful lot of notification going out; and in
the new Direct Student Loan Program, we are in regular contact
with the students from the time—well, in fact, we are in touch with
them all the way through school and then once—if they move into
delinquency status, we increase our contact with them.


163

Mr. Horn. Mr. Gray, if I understand it, and you probably weren’t
around when they formulated this, but maybe you have had a
chance to look at it, Members of Congress on the authorizing com-
mittee, the Appropriations subcommittees, and our own investigat-
ing committees on oversight have been reviewing the various stra-
tegic plans agencies have submitted. And the strategic plan for the
Small Business Administration lists five general goals. The goal
closest to debt collection is, “transform SBA into a 21st century,
leading edge financial institution.”

If debt collection is not a chief focus of the agency, you may find
that partnering with the Financial Management Service in Treas-
ury is an attractive option to have another agency, whose principal
focus is debt collection, perform this function. If you were here this
morning, I think a lot of us agreed that the obvious—that when
you are trying to serve a certain number of clientele in a segment
of our economy, you serve small business, agriculture serves farm-
ers, and on and on.

It might be best if you let somebody else collect the debt, and you
will still be the nice guys and gals, and you let them worry about
collecting it.

What are SBA’s feelings on this?

Mr. Gray. There are really two kinds of debt for us. One is the
debt that is made to a small business or an entrepreneur or a vic-
tim of disaster, where their ability to repay the agency is com-
promised for a period of time, that is, after a disaster, and they
have a tough time paying us back. With that kind of debt, we have
the ability within the agency to defer repayment for a period of
time.

The same with small businesses. At some point, the debt be-
comes—it is clear that you can’t defer it; you can’t work it out. The
small business doesn’t have that ability, and at that point, it has
to be referred directly to another debt collection agency or to the
Treasury. Because we do have a real public purpose decision, we
are trying to make sure that our systems are clear about who, and
with whom, we are working and the purpose of that.

I think that, internally, we recognize that and we can manage
that.

Mr. Horn. Mr. Keevey, let me turn to HUD on delinquent debt.
Much of that $1.8 billion that is noted is reported as exempt from
cross-servicing because it is scheduled for sale, as I understand it.
Is that correct?

Mr. KEEVEY. That’s correct, Mr. Chairman.

Mr. Horn. What does this debt consist of and what is the status
of those pending sales?

Mr. KEEVEY. They consist mostly of FHA single family and mul-
tifamily defaulted loans, and as I mentioned in my testimony, we
have a very active program. We have received gross proceeds of
over $7.5 billion. The program has been temporarily suspended be-
cause of problems with the financial advisor.

There is an intent to renew this program once that issue is
straightened out, and it is the intent of the Department to sell the
remaining single family and multifamily debt.

Mr. Horn. Is it going to be referred for administrative offset, any
of that debt?


12

DEPARTMENT OF THE TREASURY
WASHINGTON
November 3, 1997

UNDER SECRETARY

NOV 12 1997

The Honorable Stephen Horn

Chairman, Subcommittee on Government Management
Information and Technology

Committee on Government Reform and Oversight

U.S. House of Representatives

Washington, DC 20515-6143

‘Dear Mr. Chairman:

Thank you for your letter dated September 4, 1997 concerning the implementation of the Debt
Collection Improvement Act of 1996 (DCIA). Treasury appreciates the support that you and
the Subcommittee have shown concerning our efforts to implement fully all provisions of the
DCIA.

In your letter you request information on the Treasury Offset Program (TOP), including
1) milestones and time frames for complete implementation; 2) plans to increase the volume and
type of payments that can be offset; and 3) strategies for increasing the number of delinquent
debts subject to offset under TOP. These issues are addressed in the enclosed narrative. The
requested list of key milestones and time frames is dependent on our schedule for
implementation of the Grand Treasury Offset Program (GTOP) software. This schedule is being
revised as a result of the delay in the merger of the IRS tax refund offset program (TRO) and
TOP. A revised implementation plan with milestones and time frames will be provided to your
office in the near future.

In addition, your letter contained a request for the following information:

+ Revised plans for the merger of TRO with TOP, including any outstanding issues
and plans for resolution (Enclosures A & B).

4 Status report on Federal agency compliance with the DCIA requirement to
include taxpayer identification numbers (TIN) with payment files (by agency and
dollar volume percentage of payments including TINs) (Enclosures A & C).


Slower Ne You @ o WES
Perc o mymegee
commarniowno  - CONGTESS of the United States ‘ie

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‘Blashington, BE 20515-3214

November 12, 1997

REP. CAROLYN B. MALONEY --
OPENING STATEMENT

HEARING ON THE IMPLEMENTATION OF
THE DEBT COLLECTION IMPROVEMENT ACT OF 1996

‘Thank you Mr. Chairman.

T am very pleased that you are holding this oversight hearing on our Debt Collection
Improvement Act of 1996 (DCIA). I, too, am very concemed with implementing this bipartisan
legislation in a timely manner.

Although we don’t have much to show for it, I firmly believe this legislation can
dramatically improve the collection of delinquent debt throughout the government. However, the
problem does not appear to be our legislation, but rather the Federal agencies unwillingness to
implement our legislation.

‘Two years ago, I released a report showing that businesses and individuals owe the Federal
‘government § 50 billion in past due debts. The Federal agencies asked the Congress for additional
tools and methods to improve collecting this debt. ‘he Chairman and responded by delivering
that legislation. We gave broad new powers to Federal agencies to imp:
collections. Two yeu ner Ihave eased Sood port tangas shoes $30 billion in
delinquent debt. I fee! like we are spinning our wheels.

‘What has happened is that our Debt Collection Improvement Act (DCIA), which became
law in April 1996, has only collected $2.5 million out of the $ 50 billion dollars in delinquent
debe. That means in a year and a half we have collected only $ 1 dollar for every $20,000 dollars
that is owed. ‘That's embarrassing.


70

revenues into the Treasury. And I must note that our report does
not touch tax revenues. This is all nontax delinquent debt.

And there was a mention earlier that a lot of this debt was owed,
and the law now, the departments can write off old debt that they
deem uncollectible. And one of the goals of our legislation was for
Treasury to come forward with some guidelines that gave some
type of unified direction for writing off debt. If something is
uncollectible, ask the agencies and have them write it off.

But right now I would really like to address my comments to Mr.
Murphy, who really has more of the on-hands direct responsibility
for the implementation of the program.

One of the things that I am having difficulty understanding, with
the implementation of the Treasury Department’s Grand Treasury
Offset Program, which is absolutely critical to improving debt, you
cannot improve debt collection until you implement this program,
and, unfortunately, Mr. Murphy, you missed a great opportunity to
merge this program with the tax refund offset program. I have
been told that the FMS contractor for the offset program, the
Treasury offset program, delivered the product completed; he com-
pleted his work on schedule last month. Why then was there a de-
cision to delay implementing the Treasury offset program?

We cannot {mplement this law until we implement the Treasury
offset program. And I would like to hear again why we are not
moving forward? If you have a job to do, you get it done. If you
don’t want to do the job, you push it off in the corner, and that is
what you have done by announcing that you are going to put off
implementation for a year.

Mr. Murpuy. It is true that the contractor delivered a software
package to us the end of October. That system, however, now needs
to be tested and that is going to take some time, and we also have
to be sure that that system is going to be able to interface with the
other systems in FMS and with the systems in IRS.

I can’t give you a timeline on that yet. That is something that
we are working on. And in our response to Chairman Horn, our
November 3 letter, we indicated that as soon as we develop that
revised schedule we will certainly share it with you.

But that is a complicated process, and I don’t—I agree with your
main point. We missed an opportunity. But in retrospect, I believe
very firmly that that was a good decision. I think we would have,
without having a system fully tested before going in to that Janu-
ary conversion, I think we really would have put a lot of those tax
refunds at risk.

Mrs. MALONEY. Well, I disagree. I think it was a very bad deci-
sion, and I think it was one that showed that you don’t put debt
collection on a high priority in your agency. And I simply do not
understand how there could be a negative impact. FMS would have
had ample time to test the program, and in the unlikely event that
a merger failed, you could easily go back to the old system.

In addition, you would have the opportunity to learn from your
mistakes. I don’t see how the tax refund offset program would suf-
fer. I really fail to see that. I feel that this was a delay tactic, and
I would like to ask in writing for you to submit to the record how
the tax refund offset program would suffer if you went forward
with the merger and the testing.


146

management facilities, the Seattle ARC, would operate as a
Treasury Debt Collection Center and collect delinquent Title
I and, eventually, all HUD debts would fall under the
jurisdiction of the DCIA. The Seattle ARC will carry out
Treasury responsibilities under the DCIA and take program
direction from Treasury’s Debt Management Service staff.

HUD would turn over the total operation -- staff, equipment
and space -- to Treasury. The pilot would run for less than
a year and conclude with an evaluation of the Seattle ARC’s
success as a reimbursable debt collection center for

Treasury.

This pilot was sent to the National Performance Review (NPR)
for designation as a reinvention laboratory. This pilot
program would promote one of the overall goals of NPR’s
reinvention laboratory effort: building models of
interagency cooperation that promote savings and work
efficiencies in the federal sector. Through the use of such
a pilot, and the ultimate transfer of HUD staff to Treasury,
strategic objectives are accomplished for both HUD and
Treasury. HUD’s Business Process Redesign of its Title I
debt collection activities identified opportunities to gain
efficiencies and free up staff by streamlining business
processes and leveraging the provisions of the DCIA, such as
cross-servicing. Further, DCIA requires Treasury to

7


63

1, Debt collection issues on purchase card transactions;

2. Taxpayer Identifying Numbers; and

3. Treasury offset and cross-servicing of agency debts.
As a result of this meeting FMS and other agency officials formed an interagency
steering committee with a separate working subgroup for each of the three primary
issue areas. We anticipate that these work groups will result in greater
understanding by agencies of their responsibilities under the DCIA, clearer
identification of the volumes of debt to be referred by each agency, and
establishment of definitive targets for agencies to achieve compliance with these

DCIA requirements.

In order to establish accurate target volumes for referral, agencies will be asked to
assess their delinquent debts against the provisions of DCIA that call for
exceptions to the requirement for referral to Treasury. These provisions exclude
debts that: é

1. are in litigation or foreclosure;

2. will be disposed of under an Asset Sales Program;

we

are already referred to z private collection contractor;


Agency/Program Delinquent Reciveables DR>180days Uncollectable
Justice oL1 22.8
BOP 7 na
DEA 052 na
FBI 46 na
INS 83.8 228
FPI $ na
OBD 0 na
Labor 69.8 46.4
BLS 312 016
ESA/Black Lung 41 4l
ESA/Fed Emp! Comp ns 93
ETA 68 as
MSHA Bo 1s
OASAM 007 C)
OSHA 24.6 19.5
PWBA 144 122
State 64 al
Repatriation Loans 33 na ma
Emergency Medical 2 na na
Evac Loans 04 na na
Cuban Repat. Loans 2 na na
Salary Overpayment 8 na na
Non-State Travel 16 na na
Travel 8 na na
Excess shipment 008 na na
Other 3 na ma
‘Transportation 159.3 142.3 108.7
Direct Loans 0657 0657 ma
Defaulted Guar. Loans 39.1 39.1 na
Non-Credit Receivables 120.0 103.1 na
‘Treasury 399.5 313.7 na
Veterans Affairs 2265.6 1818.3 1916.4
Compensation and Pension 332.4 210.5 na
Direct Home Loan/Active 259.6 120.2 na
Defaulted Home Loan 1171.3 1094.2 na
Med. Care Cost Recovery 308.5 187.7 na
Readjustment Benefits 196 no ma
Medical Care 743 49.0 na
General Fund Receipts 40.0 25.9 na
Department Totals 44,266.1 39,9724 33,294.7

“The report on Receivables for FY 1996 included $44 million as an allowance for
uncollectible accounts. This allowance was developed by usinga calculation of debt that included
debt that was referred to or being prepared for referral to DOJ.”

*Of which 8.5 has been referred to. DOJ for litigation.


37

regulations needed to
implement the DCIA
have been made final.
Finally, I am
interested in hearing
what procedures have
been put in place to
ensure due process
rights of individuals
whom the government
will go after to collect


157

The Deficit Reduction Act of 1984 included a provision which authorized the Tax
Refund Offset program. This legislation precluded use of this collection tool to
recover any debts under the OASDI programs.

In 1990, the Omnibus Budget Reconciliation Act of 1990 (OBRA) was passed
which authorized SSA to use Tax Refund Offset to collect OASDI delinquent
debts. SSA implemented Tax Refund Offset in 1992.

The Domestic Employment Reform Act (DERA), passed in 1994 gave SSA
limited authority to use three of the collection tools that were originally contained
in DCA. These tools were credit bureau reporting, administrative offset, and use
of collection agencies. The authority was limited, however, to OASDI debts
where the overpaid amount was paid to the individual after the individual tumed
age 18, and the debt was determined to be unrecoverable under regulations issued
by the Commissioner of Social Security.

Last year, the Debt Collection Improvement Act of 1996 (DCIA) provided SSA
with the remaining two authorities contained in DCA with the same restrictions as
set forth in DERA. That is, SSA is authorized to charge interest on overpayments
and offset against Federal salaries in cases in which an OASDI overpayment was
made to an individual over the age of 18 at the time the overpayment occurred, and
the overpayment has been determined to be otherwise unrecoverable.

I would like to emphasize that, because we lacked for many years the statutory
authority to use these collection tools, SSA is now attempting to get on an equal
footing with other Government agencies.

With the authority given SSA by OBRA 1990, SSA implemented tax refund offset
to recover OASDI debts beginning with the 1992 tax refund year. In subsequent
years SSA made refinements to the program. Since the initial implementation in
1992, Tax Refund Offset has provided SSA with more than $140 million in
collections of past due OASDI debts.

Beginning in January 1998, SSA will participate in the Treasury Offset Program,
which will offset an individual's OASDI debt against most payments issued by the
Treasury Department. Also in January 1998, SSA will begin referring information
about debtors’ delinquencies to consumer credit reporting agencies. SSA will send
a notice to the individual indicating that the debt will be referred to the Treasury
Department for offset against Federal payments under the Treasury Offset


57

This Transition Year Process will result in an increase in the number of
participants in the interim Treasury offset program (ITOP) from 17 to over 40
agencies. As part of this process, several technical actions need to be
accomplished before the GTOP software becomes operational and capable of
supporting the tax refund offset process: (1) the GTOP software must be
completed and tested by FMS, (2) changes must be made to the IRS system to
enable interface with GTOP, (3) the interfaces between GTOP and the IRS system
must be tested, and (4) the current FMS TOP software, ITOP must be phased out
and replaced by GTOP. We are working to complete an amended plan for the full

GTOP implementation, and we will share this plan with you upon its completion.

FMS and IRS issued a joint announcement on September 10, 1997 that
implementation of the merger would be delayed, and held a workshop on
November 4th for Federal agencies participating in Tax Refund Offset. This
workshop was used to train agencies on the Transition Year Process. We
emphasized that Treasury’s primary objective at this stage is assuring that tax

refund offset operates efficiently during the transition year.


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144

In addition to the debt that has already been
referred to the offset program, we are currently
clarifying the eligibility of delinquent debt
associated with the Section 312 program for
referral to the offset program: 2,700 Cases with

a value of $23.5 million.

3. The status of regulations to implement DCIA is as

follows:

The Department's existing regulations governing
debt collection and interagency agreements for the
routine use of records under the Privacy Act of
1974, are adequate to permit our participation in
the Treasury Offset Program.

We have published an amendment to the Civil
Monetary Penalties regulations, and published new
inflation adjustment factors for these penalties,

as required by DCIA.

4. Crose-Agency System issues.

The Department participates in government-wide system user

groups that provide input to Treasury concerning systems

changes or enhancements that are needed to implement the

provisions of DCIA. While we currently have no major

systems issues regarding implementing DCIA, we are awaiting

5


90

Mr. Davis. I would appreciate that. We have talked about the
technical difficulty of merging and integrating, of getting the sys-
tems altogether and in place. Is there any new technology or dif-
ferent technology that is needed that we do not currently have that
perhaps would be helpful in the process?

Mr. Murpuy. I am not aware of anything offhand that is not ei-
ther available or being planned.

Mr. Davis. And so we, the equipment and technology is not an
issue, is not a problem or is not perceived to be, and we think that
we have got that?

Mr. Murpny. Well, there is a healthy investment in equipment
and systems to make these things work, of course. Adding tax debt,
for example, under a continuous tax levy program sometime in the
future is going to have a very large implication on the capacity of
the systems needed to handle all the types of debts that we will
try to collect.

Mr. Davis. I know that private agencies are oftentimes more ef-
fective at debt collection than any other sources that we have en-
countered. Have you encountered or heard of any difficulty with
any of the agencies in terms of heavy-handed tactics or in terms
of overbearing tactics dealing with individuals to whom they are
trying to collect from?

Mr. Murpuy. Personally, I am not. I think the contract that, pre-
vious contracts that have been let and the current one, which we
have just awarded, spell out pretty clearly what the contractors can
do and so I am not aware of any egregious violations.

Mr. Davis. So we have built into the contract protection for the
individuals to whom we are going to be trying to extract payment

rom?

Mr. Murpny. I think we have attempted to protect the rights of
debtors in all areas that we have been working on. Obviously, part
of that may be perception. A person who owes money and is unable
to pay may view it as harassment when they get a letter from us
or they get contacted by a private collector. But I am not aware of
any real type of violations of inappropriate behavior, which I think
is the point of your question.

Mr. Davis. Do we have safeguards? Oftentimes, of course, people
have the same names and there are similar names. I have known
people who get kind of tied up and hung up because they were mis-
taken for their father or their father was mistaken for them or they
were mistaken for somebody else who was Danny K. Davis. They
just went through lots of changes to try and get that resolved.

‘hese kinds of discussions took place in the negotiations and as
part of the requirement to protect, again, the rights of individuals
and not violate those the way sometimes we have seen.

Again, I thank you very much.

I have no further questions at this moment, Mr. Chairman.

Mr. Horn. We thank you very much. I yield myself 10 minutes
to round up a few questions here. Mrs. Maloney will then be next.

Under Secretary Hawke, I am curious, as I recall the authorizing
committee for the Department of Education gave them the author-
ity to use administrative wage garnishments to collect debts. It was
using the authority shortly after enactment and it did not require
any regulations. The garnishment authority in the Debt Collection


172

Mr. Horn. Now, you haven’t had any problem using the Social
Security number, I take it?

Mr. PestKa. We know that some of the numbers in our system
are incorrect Social Security numbers, and we are having discus-
sions currently with the Social Security Administration to create a
program which will check those numbers. And we might have to
come back and ask for legislation when we know numbers are
wrong and we do not have correct numbers, but we are not pre-

red to do that at this time without first working with the Social

ecurity Administration.

Mr. Horn. Let me ask, Mr. Sopper, on that, I know there is a
concern about privacy. I heard that from the IRS Commissioner 3
or 4 years ago, and I said, you know, give them the address, give
them the amount they owe, put it out to private collectors, and let’s
see what happens. And there was great worry about the use of the
Social Security number. Everybody else seems to use it. Every uni-
versity in America, practically, uses it to register students, and so
it goes.

go is there any problem there on the use of Social Security, or
interconnection, to check if this person of this name at this address
is—and maybe help Social Security find a lot of the phonies that
are in their system when you can sell them in MacArthur Park in
Los Angeles for $25 and maybe 100 people have bought that num-
ber? So what do you know about that in terms of debt collection
in other parts of the Federal Government?

I assume you use it as an identifier, obviously, in your own agen-
cy.
or. Sopper. Well, yes, we do, Mr. Chairman. I am not familiar
with the particular problem that Mr. Gray or his colleagues may
be having with SSN’s and their debt collection activities. And if he
is talking with people in the agency, hopefully we can resolve for
them whatever problem there is. We do have the ability to do enu-
meration verification for the employer community, and if such a
service was needed by SBA in connection with its debt collection
activities, I am sure we could arrive at some kind of an amicable
solution to help them out. I am just personally not aware of it.

As you know, Mr. Chairman, for our claims paying purposes, the
Social’ Security number is key to everything we do. There is a great
sensitivity, however, about the use of the number beyond its stated
statutory purpose, and there are people on-all sides of this issue
as soon as this becomes a point. So I would not want to say that
we ought to just use the number in any kind of a universal way
for all kinds of activity. I think that’s a very significant question
we have to be cautious about approaching.

Mr. Horn. Let me ask one general question of all of you, and
let’s start with Social Security. How many full-time positions do
you have directed at your debt collection effort? Do you happen to

ow that? If not, file it for the record.

Mr. Sopper. I had told you earlier we have 260 people in our
debt collection centers. Actually, the correct number is 239 people
who work strictly on debt collection, following up on delinquent

lebt.

There are other people, other work years in the organization that
are dedicated to such things as processing waiver requests, devel-


44

. FMS has entered into 24 Letters of Agreement with agencies to collect
delinquent debt through cross-servicing. Over 29,000 cases with a dollar

value exceeding $460 million have been referred.

. FMS has awarded contracts to 10 private collection agencies for collection
of delinquent Federal debts. As is required by DCIA, Treasury will make
maximum use of this key collection tool.

Mr. Murphy will detail these and other developments in his testimony.

Let me turn now to several questions that have been raised by the Subcommittee:

Tax Refund Offset. Our original plan was to merge the IRS’ Tax Refund Offset
Program into FMS’ Treasury Offset Program effective January 1, 1998.
Accomplishment of this merger requires the development of new software for
TOP -- which we refer to as the Grand Treasury Offset Program or GTOP -- anda
complex process of integrating existing IRS and FMS systems. In September,
FMS and IRS jointly assessed progress toward this goal and determined that
additional time was required to ensure that all aspects of the transition would go
smoothly. A decision was made to delay the merger of the tax refund offset

3


85

Mrs. MALONEY. Thank you. I have been told that the Federal Re-
serve Board will have another group test for the Grand Treasury
Offset Program, and J have heard that the Treasury control service
staff are working only part time on this effort.

And I have been told that if it were a priority in Treasury, that
many of the problems that you say are there would go away if you
put the personnel and effort and focus on trying to accomplish it.

Mr. HAWKE. Mrs. Maloney, believe me, we share your devotion
to getting this program up and running. As with all programs,
there are competing claims for resources of agencies. We are trying
to implement the electronic funds transfer provisions of the Debt
Collection Act, but there is no excuse for unreasonable delay. We
don’t think the delay has reached the level of unreasonableness at
this stage.

I do want to say, though, that I think the decision to delay the
combination of the tax refund offset program was a responsible
one. These are exceedingly complex computer systems that we are
talking about, and the idea that we could simply merge them with-
out adequate testing and retreat to the older model if it didn’t
work, I don’t think realistically would be a good way to go.

Just imagine, for example, if the systems didn’t mesh properly
and we found that taxpayers were having their tax refunds offset
at the same time as other Federal payments were being offset for
the same debt. The kind of clamor that would arise in that situa-
tion would be similar to the kinds of complaints that taxpayers
have made about IRS collection methods and would run the risk of
undermining the basic public and political support for this entire
program. I think it is much more important for the long-range
health and success of this program that we go about this prudently
and carefully and make sure that we have got systems that are re-
liable in place before we start implementing them.

They have not even started testing this. I will say the electronic
funds transfer, which was under your realm, is being implemented,
and I congratulate you for that. But to make the Treasury Offset
Program work, the Treasury Department has to have an adequate
payment file. Again, we have no target dates for the various pay-
ment files.

As a result, Mr. Murphy, I would like to provide you with sug-
gested target dates for the Federal salary offset. That is simple.
Why in the world should Federal employees get away with not pay-
ing the debts that they owe the Federal Government? I am suggest-
ing by March 1998 that we should have that payment file in place
and the non-Treasury disbursing offices, that of Postal and the De-
partment of Defense, by March 1998 and the Social Security and
the Retirement Railroad Fund by June 1998. I think they are rea-
sonable.

We were serious about this bill. And even in your comment, Mr.
Hawke, that maybe not all of this is, you are able to collect it, but
even if you brought in 10 percent, that is $4 billion. To me, that
is a Jot of money. That is a lot of money that could be used for po-
lice officers, school teachers, for day care providers, or for environ-
mental protection efforts.


176

And I would just like to add, Mr. Chairman, that to the extent
that we ultimately have to terminate collection activity, we con-
tinue to refer those terminated cases for 10 years to the Tax Re-
fund Offset Program. And as you also know, Mr. Chairman, the So-
cial Security Act provides that if an individual who has a debt with
us in the future ever comes back on the rolls, we can use benefit
offset to collect that amount of the debt from them.

Mr. Horn. On the point of benefit offset, what is the minimum
that you process? Now, obviously, sometimes there has been an
overpayment by accident. Sometimes, with that crazy earnings lim-
itation we have had and, thank heavens, are phasing out, people
had their checks held up and then they had outside income and all
of that. I hope we are getting away from that as fast as we can.

But what’s the minimum person? I don’t think we want to harm
people that only get $500 a month. So where does it start?

Mr. SoppeR. The minimum is $10, Mr. Chairman. The statute
provides that, initially, we can take all of the benefit, but as you
know, in some cases, whether it is a Title II beneficiary on retire-
ment benefits or, more likely, someone receiving Supplemental Se-
curity Income, for them to take all the benefit would impose an
pndue hardship on them. So $10 is the minimum that we can col-

lect.

Mr. Horn. OK. What would you say is the median for your col-
lections in these areas?

Mr. Sopper. On benefit offset, Mr. Chairman?

Mr. Horn. Yes.
onTM Sopper. I will have to give you that for the record, if that’s

Mr. Horn. Let’s have it. Without objection, it will go in at this
point.

I thank you very much for coming. We have one question before
we close.

[The information referred to follows:]

The average benefit offset rate for recovery of overpayments varies by program.
For the Old Age, Survivors and Disability Insurance program, it is approximately
$180 per month. For the Supplemental Security Income program, it is approxi-
mately $50 per month. Present law limits the amount of offset in the Supplemental
Security Income program to 10 percent of an individual's income.

Mrs. MALONEY. I would like to ask all of you the question that
I asked Mr. Longanecker earlier about your write-off policy; and I
would like to know—because a lot of this debt is very old debt, do
you have a policy at which point you write off old debt and just for-
get about it?

The board of—the Education Department said it was death and
disability. I would just like to ask your write-off policy, Mr. Gray.

Mr. Gray. We write off the debt after 180 days, but that doesn’t
mean we don’t try to collect it. We just don’t recognize a principal
balance on our books.

Mrs. MALONEY. But when do you—like in our report, we are col-
lecting—$50 billion is owed. Is there some point where you say,
this is uncollectible, and you just write it off completely, off your
books? Or do you always carry it?


62

DCIA legislaticn transfers responsibility for reporting on receivables due from the
public from OMB to Treasury. In June of this year, GAO issued a report
indicating that improved reporting was needed on delinquent debt and agency
collection performance. In response, FMS convened an interagency task force in
July to revise the Report on Receivables Due from the Public. This task force has
developed an exposure draft currently under review by individual members of the
task force and OMB. The task force anticipates having a final report by January
1998. Reporting under the revised format may begin as early as June 1998,
contingent on the reporting agencies’ ability to revise their systems so that data

may be supplied in the new format.

Under Secretary Hawke mentioned FMS’ Issue Resolution Plan for the Debt
Collection Improvement Act of 1996, and I would like to provide some additional
details. The Plan resulted from a meeting hosted by OMB in September. The
meeting was attended by CFOs and Depity CFOs of the Federal agencies, senior
debt collection officials of the Federal agencies, and FMS officials. Agency
Tepresentatives expressed concern with various aspects of the DCIA.

implementation effort. These concerns fel! into three categories:


86

I would like to ask Mr. Murphy, in those three areas, since you
didn’t reply to our letter, do you think that Treasury could meet
those deadlines?

Mr. Murpuy. Again, with all due respect, it is all part of the
same thing. Those payments will be scheduled into the GTOP sys-
tem. So we have to test that system. We have to make sure the
interfaces are there and then we will be scheduling implementation
of the addition of salary payments and benefit payments and the
ike.

In regard to salary payments, I would just mention, there is a
separate salary offset process that has been in existence for a num-
ber of years. So Federal employees are not getting away scot-free.
But we have not brought this into the Treasury Offset Program

ret.

x Mrs. MALoney. I have just been told that a lot of the States are
pulling their child support debts out of the Treasury Offset Pro-
gram because so few payments are currently being matched
against the debts. You could argue that this is a State issue, but
to the extent that we are federally sending funds to States for wel-
fare and other child support programs, we certainly need and have
a Federal responsibility to help States implement those.

Mr. Hawke. Mr. Chairman, at the risk of burdening the commit-
tee’s time, I think it is really important to have a realistic assess-
ment of what this program is all about. We have $51 billion in un-

aid debt to the Federal Government. Not all of that debt is owed
by people who are recipients of Federal payments. The overwhelm-
ing number of regular payments that the Federal Government
makes are retirement and benefit payments.

Salary payments and vendor payments also figure into the mix.
But I think the public should understand that that $51 billion is
not perfectly matchable against the universe of Federal payees.
There are millions and millions of people out there who owe the
Federal Government money who wil never get into the offset pro-
gram because they are not getting Federal payments that we can
offset against. That is an important point to recognize.

Also you raised a question about the child support program. This
is one that we have put a tremendous amount of energy into. But,
once again, I think it is important to recognize the mismatch be-
tween what is owed and what is being paid. Again, the overwhelm-
ing number of Federal payments are Social Security benefit pay-
ments, retirement payments, and the like. Those recipients are not
necessarily the same population of people who are subject to child
support payments. They tend to be the older segment of the popu-
lation. While the offset programs hold out the hope of bringing peo-
ple in and getting collections from people who are Federal payees,
we have to be realistic about the extent to which there really is
going to be a match-up.

Mrs. MALONEY. My time is up. Very briefly, the offset program
is a tool to bring in revenues that are owed the Federal Govern-
ment. Many people abuse the system, as we well know. There is
no reason why we cannot move forward to implement and put into
effect this tool so that we do not continue giving loans, royalties,
fines, and fees to people who are abusing the system.

Mr. HAWKE. We agree.


121

Mr. Horn. We will withhold questions until we hear from all the
witnesses.

I take it, Mr. Longanecker, you are the principal respondent and
Mr. Petska is here to help you out. I hear you are a very distin-
guished career servant and you have been doing this for a long
time. Maybe we can get a lot of lessons on other agencies for you
somewhere this morning.

Go ahead, Secretary Longanecker.

Go ahead.

Mr. LONGANECKER. Thank you.

Mr. Chairman, I am the Assistant Secretary for Postsecondary
Education, Department of Education, and I am joined today by
Tom Petska, who is the director of our Debt Collection Service.

It is a distinct pleasure to be before this committee today. I ap-
preciate this opportunity to discuss with you the success in the De-
partment with implementing the Debt Collection Improvement Act
and to discuss some of our ideas for the future with you, as well.

As you know, the Department of Education is the primary source
for student loans in this country. This year, through our various
programs, students and their parents will borrow more than $30

ution.

Since the inception of our three basic student loan programs,
those are the original programs we now call the Perkins Student
Loan Program, the old Federal Family Education Loan Program,
and our wonderful new Direct Student Loan Program. Between
those three programs, since the inception, we have made $285 bil-
lion worth of student loans; $184 billion of that remains outstand-
ing, with $91 billion of that in repayment, $68 billion still with stu-
dents who are enrolled in school and, thus, not yet in repayment
on their student loans, and about $25 billion in default.

I might mention that since its inception just 3 years ago, in 1994,
the Direct Loan Program has already made $20 billion worth of
loans,

The Department has been making concerted efforts to reduce the
student loan default rate with substantial success. Over the 5 years
preceding this last year, the default rate was reduced from 22.4
percent to 10.7 percent, and later today the Secretary will be an-
nouncing that for the 6th year in a row that rate has gone down,
this time slightly.

Credit for that substantial reduction must be shared broadly.
You, in Congress, deserve much of the credit because of the two
major pieces of legislation, the credit reform piece in 1989, and the
amendments of 1992, which have given us the tools necessary to
improve our collections.

Our partners in the FFEL program, particularly the guarantee
agencies, have done a very good job of improving their collection on
debt; and the Department, through its oversight of institutions,
lenders and guarantors and, most significantly, through the Debt
Collection Service, has really improved our performance.

As you know, student loans are inherently risky because the only
collateral behind them is the mind being developed. We are work-
ing with borrowers who are generally unsophisticated in debt man-
agement, many of whom are academically at risk as well as being
financially at risk. So some will default. When they do default, it


124

Statement of David A. Longanecker, Assistant Secretary
Office of Postsecondary Education
to the
Subcommittee on Government Management, Information, and Technology
United States House of Representatives
Committee on Government Reform and Oversight

Hearing on
Implementation of the Debt Collection Improvement Act of 1996
and Legislative Proposals in the Debt Collection Area

2154 Rayburn
November 12, 1997

Mr. Chairman and Members of the Subcommittee,

I'm pleased to be here today to discuss with you the implementation of the Debt Collection
Improvement Act of 1996 by the Department of Education and proposals we are considering to
improve our debt collection efforts further. The Department has undertaken a broad range of
activities over the past 20 years or so to improve all aspects of our loan programs, including debt

collection, and we are committed to continuing to seek improvements in the future.

The Department of Education has been, for some time, the primary source of student loans. Our
Direct and Federal Family Education Loan programs have allowed many millions of students to
enroll in postsecondary education. Through the Direct Loan Program, in which Federal loans are
disbursed directly to students by their institutions, we have made about $20 billion in loans since

the program began in 1994. Through the Federal Family Education Loan (FFEL) Program, about


31

time to share with us
their expertise as it
relates to this issue.

This hearing focuses
on the implementation
of the Debt Collection
Improvement Act of
1996 (DCIA). The
DCIA authorizes

agencies to refer


156

statute). Both of these recovery rates are negotiable if they would create a
financial hardship. The subcommittee should be aware that some SSI beneficiaries
leave the rolls, and debt collection becomes much more difficult in those
situations.

If the individual is not on the benefit rolls, no offset is possible. The overpayment
letter, requesting repayment of the overpaid amount, indicates that the debtor
should contact SSA if unable to repay in full. In this circumstance we will
negotiate an installment arrangement. For those who enter into an installment
arrangement we send a monthly bill for the amount due. If the individual fails to
respond to the initial notice, or does not remit a monthly payment, our billing
system issues a reminder notice and then a past due notice.

If these notices do not result in recovery, SSA’s debt collectors attempt telephone
contact. At this point, an OASDI delinquent debtor will be considered for tax
refund offset. If he or she meets the criteria, SSA will send a notice advising the
individual that any income tax refund due could be used to recover the
overpayment, and providing an opportunity for the debtor to protest.

In general, at any point in this process, if the individual exercises his or her due
process rights, we suspend recovery efforts until the matter is adjudicated.

Improvement Initiatives
T should point out that SSA has, for many years, lacked the authority to use debt

collection, tools available to other agencies. SSA is working diligently to make in
a short time the same improvements the other agencies have had years to achieve.

In discussing SSA's plans for implementing debt collection improvement, I would
like to first provide a history of debt collection legislation and its relationship to
SSA’s debt.

The Debt Collection Act of 1982 (DCA) authorized Federal agencies to use
aggressive debt collection tools to improve performance. The collection tools
authorized by this act were administrative offset of the debt against most Federal
payments due, notifying credit bureaus of the individual's indebtedness, offsetting
the det against the individual's Federal salary, charging interest on the debt, and
using collection agencies. This act, however, exempted SSA, both the OASDI and
SSI programs, from the provisions authorizing use of these collection tools.


179

Ebert, the new clerk and staff assistant; and then for the minority,
Mark Stephenson, professional staff member; Mark Guiton; Jean
Gosa, clerk for the minority, and the court reporters are Rebecca
Eyster and Mindi Colchico.

Thank you all.

With that, the hearing is adjourned.

(Whereupon, at 1:04 p.m., the subcommittee was adjourned.)

12)


14th District * New York
Congresswoman

Carolyn Maloney

Reports

1330 Longworth Building * Washington, DC 20815 » 202-225-7944
110 Bast 59th Street * 2nd Floor * New York, NY 10022 © 212-832-6531

FOR IMMEDIATE RELEASE CONTACT: Terese Schlachter
‘November 12, 1997 202-225-7944

FIFTY BILLION BUCKS STILL OWED TO FEDERAL GOVERNMENT
Maloney Assigns Poor Marks To Agencies For Collecting Debt

Washington, DC — November 12, 1997. Delinquent fines, student loans, royalties,
and other debts to the U.S. government have rolled into a 50 billion dollar tab- and debtors are
doing little about it. The numbers are the topic of hearings being held today in the
Government Reform and Oversight Subcommittee on Government Management, Information
and Technology. Congresswoman Carolyn Maloney released a report today, in conjunction
with the hearings, which shows the break-down of the debt, and the degree to which the
agencies are breaking the law.

‘The “Debt Collection Improvement Act" written by Maloney in 1996, calls for debts
over 180 days old to be turned over to the Department of Treasury for collection. Thirty five
agencies are in violation of this law. In the year and a half since the law has been in place,
only 2.5 million dollars in detinquent debt has been collected.

“What I find most disturbing is the fact that the debt has increased from about 25
billion in 1985, to more than 50 billion in 1997. We've handed the government departments
the tools to clamp down on people who owe them money- yet they continue to let the debt pile
up," remarked Maloney. 50 billion doliars is twice this year’s forecast for the national deficit!
‘There is always a move to tighten purse strings...why are they not bringing in the money that’s
right under their noses!"

Maloney also issued a report card today, reflecting how well each agency has
implemented the legislation.

Federal Agency Report Card
Department of Education
Department of Health and Human Services
Department of Veterans Affairs

i

g

fat

|
aimdamooanaad



139

Thank you, Mr. Chairman.

Mr. Horn. Well, we thank you. Again, that was a very thorough
statement. We will have some questions when we get to that.

{The prepared statement of Mr. Keevey follows:]


147

establish Debt Collection Centers to service debt referred
to Treasury by the various agencies. This potential

transfer matches the skills in debt collection of current
HUD staff in its Seattle ARC with the need for Treasury to

establish Debt Collection Centers as required by DCIA.

ASSET SALES
HUD‘s asset sales program is a significant element of our
compliance with DCIA. This program was started in 1994 and
was designed to dispose of up to $11 billion of notes that
resulted from defaulted loan guarantees. The mortgage loan
sales program includes both single family and multifamily
mortgages and is designed to:
(1) transfer the mortgages back to the private sector,
where they can be more efficiently serviced and
(2) allow more of FHA’s resources to be assigned to
monitor the more than $400 billion worth of single
family and multifamily mortgages the agency currently
insures. More proactive monitoring of the FHA insured
portfolio lowers the likelihood of defaults and claims
in this critical inventory and, in the long run,
reduces taxpayer exposure. Since 1994, HUD has sold
over 115 thousand defaulted loans and received gross

proceeds of over $7.5 billion.


153

Mr. Horn. Our last witness is Dale Sopper, Acting Deputy Com-
missioner, Social Security Administration.

Welcome.

Mr. Sopper. Thank you, Mr. Chairman.

Mr. Chairman, Mrs. Maloney, Mr. Davis, I would like to summa-
rize my remarks and ask that my prepared statement be included
in the hearing record.

Mr. Horn. It is automatically.

Mr. Sopper. Attached to my statement for the record is the chart
you requested on debt performance indicators.

Last year, the Debt Collection Improvement Act of 1996 provided
the Social Security Administration with two new debt collection
tools which had been available to other Federal agencies since
1982; that is, SSA is authorized to charge interest on overpayments
and offset against Federal salaries in cases in which the Social Se-
curity overpayment was made to an individual over the age of 18
at the time the overpayment occurred, and the overpayment had
been determined to be otherwise unrecoverable. These new tools,
when implemented, will put SSA on an equal footing with other
Government agencies.

Beginning in January 1998, SSA will participate in the Treasury
offset program, which will offset an individual’s debt against most
payments issued by the Treasury Department. Also in January,
1998, SSA will begin referring information about debtors’ delin-
quencies to consumer credit reporting agencies. These new authori-
ties will be used only to recover OASDI, that is, Old Age, Survivors
and Disability Insurance debts since there is no statutory authority
to do so for debts which are incurred by recipients of supplemental
security income payments.

We plan to improve collection of supplemental security income
debts by expanding the use of the tax refund offset program for
which there is no statutory exclusion.

We anticipate that the combination of these new collection tools
will increase SSA’s debt collections by $10 to $20 million, $6 mil-
lion of which we expect to come from the expansion of the tax re-
fund offset program to the Supplemental Security Income Program

lebt.

In your invitation to testify, you requested information on the
status of regulations necessary to implement the Debt Collection
Improvement Act. We are about to publish regulations that will
govern the use of administrative offset and the use of consumer
credit reporting agencies for OASDI debts, as well as revised regu-
lations for the Old Age, Survivors and Disability Insurance Tax Re-
fund Offset Program that address the conversion of the program
from the Internal Revenue Service to the Financial Management
Service.

Specific provisions of the Debt Collection Improvement Act of
1996 allow for the offset of Old Age, Survivors and Disability Insur-
ance payments to recover debts owed to other Federal agencies. We
are ready to work with the Treasury Department to implement this
provision and are in the process of reviewing draft regulations that
will put this provision into effect.


46

offset program. Currently, FMS and IRS are developing an amended plan with
target dates for implementation of GTOP and merger of the tax refund offset
program. I have asked Mr. Murphy to share that plan with you as soon as it is

developed.

Referral of Debts. Progress in the referral of debts to FMS for TOP and
mandatory cross-servicing has been disappointing. To date, only 17 agencies have
referred delinquent non-tax debt to FMS. However, it is anticipated that
implementation of this year’s transition process for tax refund offset will increase
the number of referring agencies to over 40. In an effort to accelerate this process,
FMS, in partnership with the CFO Council and the Federal Credit Policy Working
Group, is developing an Issue Resolution Plan that will help in developing

Government wide solutions and policies to increase referrals under both programs.

Ina related area, a June 1997 GAO report suggested that FMS incorporate several
enhancements into the current process for reporting to Congress at least annually
on Government-wide delinquent debt. These enhancements are intended to
increase the reliability and consistency of reporting on delinquencies and credit

receivables, and would provide information on agency efforts to collect delinquent

5


6

to put this grading schedule on Federal agencies into the record
with the supportive documentation that supports these grades.

Mr. Horn. Without objection, it will be in the record at this
point.

Mrs. MALONEY. Thank you, Mr. Chairman.

[The information referred to follows:]


40

rather than moving ahead with a program that might have such
significant flaws in it that it would threaten public support and
congressional support for the entire program.

We are moving ahead. While I have not yet seen Mrs. Maloney’s
suggested schedule for implementation. We are anxious to see that
and to give you our views on whether we can meet the goals that
you are suggesting for us.

On the question of referral of debts, I think the committee is very
cognizant of the fact that we can only collect in the offset program
what agencies have referred to us, and to date, only 17 agencies
have referred delinquent nontax debt to us for the offset program.

In fairness, we don’t yet have in the offset program all of the
payment files from different agencies that are _necess: to run
that program effectively. To date, we essentially only have the
OPM retirement payments and vendor payments in that system.
The major payment programs have not yet been put into the sys-
tem. So there has been tardiness, I think, on both sides.

We have been working with OMB to try to stimulate agency par-
ticipation in the process, and Mr. DeSeve, I think, has been par-
ticularly helpful in that regard in getting the message out.

One of the issues that the committee has focused attention on,
which I know is frustrating for the committee and is frustrating for
us, is the pace of implementing regulations. There are a variety of
different types of regulations that have to be put into place so that
the system, when it is finally up and running, will be fully docu-
mented so that all participants in the system know exactly what
the ground rules are.

The process of developing and clearing regulations has been far
more complex and burdensome than I think we estimated at the
outset. The number of levels of legal review that regulations have
to go through before they can get put in final form, the number of
offices that have to sign off on regulations, is significant. We hope
to be able to accelerate that process, but we haven’t even met the

rojections that we set for ourselves for putting implementing regu-

ations in place.

I should say that, in fairness, the lack of a fully fleshed out set
of regulations has not been the cause of delay in the program. We
have put interim regulations in place and we are pushing ahead
with the task of getting regulations through the process so that
they can be put in place.

Another issue I know that the committee has been interested in
is the question of the appointment of pro, agencies as debt col-
lection centers. We have had a number of discussions about this at
Treasury, and my view is that any agency that wants to be des-
ignated as a debt collection center should have a very high thresh-
old of proof to satisfy before we should designate them as such.
After all, we are dealing with a statute here that reflects a percep-
tion on the part of Congress that agencies have not done a good
enough job in collecting debts, and we think that before we sign off
on the appointment of an agency as a debt collection center they
should make an extremely compelling case as to why that should
be done and why the process of collecting their delinquent debts
should not be separated from them and put in third party hands,
as the act contemplates.


120

» costs of using each debt collection tool

Additionally, the SBA is able to certify to Treasury the accuracy of the data contained
in the Report on Receivables Due from the Public. Tracking the status of loans in the
collection process takes place both through DLCS and the Liquidation/Litigation
Tracking System (LTS). Debts are routinely aged internally according to categories
such as current (0 to 30 days), past due (31-60), delinquent (61 days and over) and
liquidation. Additional categories are available through various reports both at the field
office and servicing center level. In the centers, performance goals have been
established for currency rate, delinquency reduction and cash collections. These goals
are monitored on a monthly basis.

¥._Summary

SBA presently has the full range of debt collection capabilities for all of its consumer
and commercial accounts, and the Agency has necessary accounting and computer
systems to provide for comprehensive reports on these activities. Consequently, SBA
should be immediately designated as a collection center for its own debt, and should
be considered in the future to be a collection center for the debts of other federal
agencies.


TABLE ONE
Agency/Program ‘Delinquent Resiveables DR>180days ‘Uncollectable
Agriculture 8716.8 9314.1 6516.1
Farm Serv. 2431.9 2408.2 2383.0
ComCredCorp 3118.8 2849.4 147.0
FoodConSer 687.0 664.6 503.4
ForServ 217.4 201.5 104.1
Risk Manage Ag 47 145 9.0
Rur Util Serv 1139.0 1084.4 1084.4
Rur Hous Serv 1076.0 1060.5 2248.9
Rur Bus. Coop 32.0 31.0 363
Commerce 96.9 864 126
Gen Admin 02 ma na
ITA 8 na na
Census 2 na na
Min Bus Devel 17 na na
NIST Mt na na
NTIA 4 na na
Trav and Tour 005 na na
Pat and Trade 0) na na
NOAA 64.4 na na
EDA 15.7 na na
Bur Ex Admin 19 na na
Econ and Stat 028 na na
NTIS 5 na na
2697.7 2483
52.4 65.0
123.6 153.1
1599.3 141
331.1 13.1
591.3 0
18,755.6 15,788.4
18,708.9 15,7373
5 34.0
43.2 16.3
3.0 a
2329.0 2456.0"
3400.0 2148.0
na na
na na
na ma
na na
ne na
1617.9 31819
381.6 175.5
543 549
106.7 a
101.6 18
917 12.2
212 164

19

2310 million in bankruptcy or adjudication.
See Energy Response (Uncollectable > delinquent receivable)
‘Allowance for uncollectible account.


14

DEPARTMENT OF VETERANS AFFAIRS

‘The Department of Veterans Affairs delinquent receivables balance is $2.3 billion,

mainly from defaulted loan guaranty debt. vendor loan debt, compensation and pension debt,
medical care cost recovery debt, and education debt. It considers $1.9 billion uncollectible.
‘The Department has referred $3.6 million to the Treasury Department for tax refund offset.

CONCLUSION

The U.S. Government is owed over $ 50 billion in delinquent non-tax receivables. In
other words, individuals, businesses and organizations are late in paying one in every five non-
tax dollars owed to our government. Many of these individuals and business are quite capable
of paying, but they simply don't. Some even have debt that is decades old. When fully
implemented, the Debt Collection Improvement Act will help enhance collection efforts and
must be implemented fully and swiftly. Unfortunately, its implementation has been slow and
spotty. Agencies must begin availing themselves of the tools of the DCIA. It can help
achieve deficit reduction without resorting to reductions in important Federal programs or tax
increases.


Romane (OMe HUNORED RTH CONGRESS.

=e Congress of the United States

a House of Representatives
ered COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
ae 2157 Ravaunw House Orrice But.pea
Sese WasveeaTon, 06 20615-6143

“Oversight of the Debt Collection Improvement Act of 1996”
November 12, 1997

OPENING STATEMENT
REPRESENTATIVE STEPHEN HORN (R-CA)

Chairman, Subcommittee on Government Management,
Information, and Technology

‘One-and-one half years ago, Congress passed and the President signed into law the
Debt Collection Improvement Act of 1996. This law changed the rules of the game for
debt collection. Currently, the total of delinquent non-tax debts is $50 billion dollars. By
providing new collection tools to agencies and incentives to increase collections and
accountability, Congress hoped to increase the dismal performance of the Federal
Government in collecting delinquent debts.

What results have been achieved so far? The Department of the Treasury's
Financial Management Service has spent between $20 and $30 million implementing the
Debt Collection Improvement Act. This involves coordinating with Federal agencies,
conducting awareness campaigns, drafting contracting documents and regulations, and
working with agencies to refer their debts to the Treasury. The Financial Management
Service has only collected $2.8 million from these efforts. While it is an improvement
from the $300,000 collected in April as of our last hearing, it is not enough. The
Department of the Treasury is still not covering its casts. I hope that as of our next
hearing, we have another improvement of at least one order of magnitude, and ideally
‘two. That would bring us to collect about $300 million per year. 50 million dollars is
significant, but we ought to set our sights considerably higher.

In order to get the real money and to begin collecting more than we spend,
agencies need to implement three key provisions of the Debt Collection Improvement
Act:


132

questions you may have.

Attachments:

Chart 1
Chart 2
Chart 3
Table

-U.S. Department of Education, Fiscal Year Cohort Default Rates
-U.S. Department of Education, Collections by Tool, FY92 -FY97
US. Department of Education, Tax Refund Offset

U.S. Department of Education, Debt Performance Indicators


110

Asset Sales
The Administration’s FY 1998 budget proposed the sale of all SBA-held business loan assets,
including direct business loans and guaranteed business loans that have defaulted and
subsequently purchased by SBA, as well as all direct disaster loans, over the period FY 1998-
2000. The total portfolio of these loans was estimated at about $9 billion last year. Additionally,
it was estimated that another $1 billion would be added over the loans sales period, for a total
loan asset sales program of $10 billion. In keeping with this budget proposal, SBA has begun to
develop an asset sales program, Given the expanding loan volume of SBA over the past few
years coupled with overall budget constraints, loan asset sales will be an effective credit

‘management tool for the Agency. We will seek to use asset sales as another management tool to:

take advantage of private-sector expertise,

improve our loan documentation;

better understand the value of our assets;

preserve public policy objectives of the SBA;

maximize net present value return;

minimize the cost of loan programs to the taxpayer,

utilize private sector expertise to assist with Agency goals, and

allow more flexibility in allocating staff in areas of loan production and lender

monitoring


69

wonder why the Federal side, which it should be fairly easy to put
a garnishment or anything else on, or a lien, why the Federal side
doesn’t seem to be moving ahead on these deadbeat dad child sup-
port situations. What is happening?

Mr. Murpuy. Basically, the States have been participating for a
number of years in the IRS tax refund offset program, and last
year they collected over $1 billion in offsets against tax refunds.

We just started working with the States back in June. The first
few States entered into the interim Treasury offset program. We
have talked with all 50 States. At the moment, there were—this
year there have been nine who were participating in the interim
offset system. One or possibly two may withdraw because they
weren’t collecting that much because of the limited number of pay-
ments that we have in that system to match against and for the
technical reasons I mentioned earlier about not being able to detect
the garnishment and the possibility of a double hit.

But essentially that program is going to take off again when the
GTOP system comes up and we have more Federal payments in
that matching process to match against all those debts. The States
submit something like $34 billion in delinquent child support debts
to the IRS for offset. As I mentioned, they collected over $1 billion.
But those debts could go in the Treasury offset system, too. But the
IRS tax refund program is sort of mandatory participation. With
our system, it is voluntarily and the States have to make their own
determination as to how much it would cost them to change sys-
tems, to participate, and how much they expect to get out of it. So
it is building but it will really pay off when we have the full robust
system.

Mr. Horn. Thank you. My time is up. I yield 10 minutes to Mrs.
Maloney, the ranking Democrat.

Mrs. MALoney. Thank you, Mr. Chairman.

Unfortunately, even though Treasury is one of my favorite de-
partments, and I think you do a good job on a lot of things, unfor-
tunately Treasury got an F on our report based really on lack of
leadership and lack of making this a priority. In our questionnaire
to Treasury, they didn’t even answer the question on the GTOP
area and cross-referencing.

I would like to put this chart in the record, and it shows really
very simply where we are. That $50 billion is owed. Roughly $40
billion is over 180 days old, meaning according to the law it should
have been referred to Treasury. Yet, only $9 billion was referred
to the Treasury offset program and only $727 million was referred
to Treasury. It is no wonder that we collected only $2.5 million.

The two major components of the law have not been imple-
mented at all. And I just would like to respectfully respond to some
of Mr. Hawke’s comments.

Earlier, you said that it was important to—most people didn’t
want to interfere with their programmatic work. I agree. That is
why we put into place a referral to Treasury, whose mission it is
to bring money into the Treasury. That is the prime mission of the
Treasury Department. Educators want to educate people. The Agri-
cultural Department wants to support more farmers and more
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143

* The amount to be collected by internal offset is
GNMA debt ($308 million), associated with our
Mortgage Backed Securities Program, that will be
collected from the FHA insurance or VA guarantees.

* We have participated in the Tax Refund Offset
program since its inception in 1986.

* A statutory impediment currently exists which will
prevent the Department from selling subsidized
multifamily notes with an unpaid balance of $1.232
billion. The Department has sent language to the
Committee of jurisdiction to permit the sale of

subsidized Multifamily notes.

Implementation of Administrative Offset Program.
* HUD has referred $135 million to Treasury for

inclusion in the offset program; as shown below:

Program Cases Referred pe ar!

FHA Title I 15,518 $134.5 million
Admin Debt 103 $400 thousand
* The cases that were referred to Treasury for the

administrative offset program are essentially the
same cases that were sent to the Internal Revenue
Service for the Tax Refund Offset Program.

4


10

Wage Garnishment

‘Wage garnishment of up to 15% of a delinquent debtor's disposable pay is authorized if
the individual is not making required repayment in accordance with any agreement between an
agency and the individual.
Credit Reporting

All debts owed to the Federal Government can be reported to credit bureaus.
Governmentwide Cross-Servicing

Federal agencies are authorized to make agreements with other agencies, which have
been designated as “debt collection centers,” to cross-service debts. Agencies seeking these
services will have to pay for them, but the cost should be less than if the agency performed the
service itself, The Act also requires the transfer of claims over 180 days delinquent to
‘Treasury if adequate collection action is not being taken.
Gainsharing

Agencies that improve their debt collection over a previous year’s baseline will be able
to deposit a portion of the amount of improvement into a fund, and may use those monies to
improve its debt collection process. OMB will set the baseline and Treasury will manage the
fund.

Debt Sales by Agencies

Sales to the private sector of delinquent debt over 90 days old are authorized if the sale
is in the best interest of the United States as determined by the Secretary of the Treasury.
Contracting with Private Attorneys

‘The Act makes permanent the Department of Justice’s authority to contract with private
attorneys to collect Federal debts.

‘The biggest obstacles to implementation of the law to date are the lack of
compliance of ageacies with requirements to refer delinquent debts to FMS for servicing
and/or offset and the lack of compliance by FMS, USPS and DoD in matching payments
against debts for offset. Agencies are reportedly reluctant to refer debt because of concerns
about jobs, even though FMS reports that they are fully operational to begin the cross-
servicing and offset provisions.

While Congress expects hundreds of millions of dollars to be collected every year by
using these new tools, results to date have been very disappointing. Latest reports indicate that
‘only about $2.5 million has been collected by the Treasury Department. Agencies have
referred approximately $17 billion (inctuding $8 billion in child support debts) for
administrative offset and about $727 million for cross-servicing.

Outlined below is an agency-by-agency description of survey results. The majority of
non-tax debt comes from the Department of Education, the Department of Agriculture, the
Department of Health and Humans Services, the Department of Housing and Urban
Development, the Department of Veterans Affairs and the Department of Energy. This list is
limited to only those agencies which reported more than $ 100 million in delinquent
receivables, although the complete list is included in the table.

3


141

Before addressing the specific issues that were included as
part of your invitation to the Secretary to participate in
these hearings, let me first say that HUD is in substantial

compliance with the major provisions of DCIA.

* we have addressed the administrative offset
provision of the Act by referring FHA Title I debt
(debt related to our manufactured housing and home
improvement loan guarantee program) to Treasury
for offset. This is the majority of the debt that

could be referred.

we are addressing the cross-servicing provisions
of the Act by working with Treasury to transfer
responsibility and staff of HUD’s FHA existing
Seattle Asset Recovery Center (ARC) to the
jurisdiction of Treasury (this will be explained

in more detail later).

* we have a successful asset sales program that has
made us the leader in the federal government in

this area.


29

Mr. Horn. I now yield to the gentleman from Illinois, Mr. Davis,
to make an opening statement.

Mr. Davis of Illinois. Thank you very much, Mr. Chairman. Let
me thank you for convening this hearing regarding the Federal
debt collection practices. I also want to thank our distinguished
witnesses for taking time to share with us their expertise as it re-
lates to this very touchy subject.

This hearing focuses on the implementation of the Debt Collec-
tion Improvement Act of 1996. The act authorizes agencies to refer
delinquent debt to the Treasury Department’s Financial Manage-
ment Service.

The DCIA is important for several reasons. First, it strengthens
the Government’s ability to collect delinquent nontax debt by pro-
viding a number of tools for agencies to use. In addition, the act
requires Federal agencies to transfer delinquent debt over 180 days
old to the Treasury Department for collection. Interestingly, as we
examine debt collection processes, we do so at a time when our
economy is robust and many in our Nation are letting the good
times roll in terms of spending.

However, personal bankruptcies, student loan defaults, and fore-
closures on homes and farms are seriously on the rise. In fact, over
the last decade delinquent debt has increased from $23.9 billion in
1985 to $48.8 billion in 1994. And in 1995 and 1996, the level rose
to approximately $51 billion.

It is my hope that this hearing will address the issue of why the
DCIA has been little used to date. In addition, I look forward to
hearing why only 3 of the 16 regulations needed to implement the
DCIA have been made final.

And finally, I am interested in hearing what procedures and
processes have been put in place to ensure due process rights of in-
dividuals whom the Government will go after to collect outstandin;
debt. Therefore, I look forward to hearing from this distinguishe
panel of witnesses and, again, Mr. Chairman, I would like to thank
you for the leadership that you have taken in leading us toward
hopefully some real resolution to a difficult problem.

I thank you and yield back the balance of my time.

Mr. Horn. I thank the gentleman from Illinois for his kind com-
ments.

(The prepared statement of Hon. Danny K. Davis follows:]


166

that are financial intermediaries are making some of those deci-
sions.

Mrs. MaLoney. And I understand that you have applied to be a
debt collection center in SBA and to centralize debt collection there.
And are you aware, or are you ready to take debt from other agen-
cies and process it, if you are, in fact, a debt collection center?

Mr. Gray. The answer is “yes.”

Mrs. MALONEY. And I have read in your testimony, you said that
you have $10 billion in your loan asset program. How much of that
is delinquent, if any?

Mr. Gray. Well, the majority of that—$1.7 billion is delinquent.

Mrs. MALONEY. $1.7 billion is delinquent?

Mr. Gray. Yes.

The reason I smiled at the question is, the Government defines
delinquency and private industry defines delinquency somewhat
differently. If you were a bank, it would be greater than that be-
cause it is in deferment or you are working it out. Because the SBA
has such a clear public purpose with its small businesses, a lot of
those loans have been rewritten or extended so as not to adversely
affect the small business.

Mrs. MALoney. OK. Thank you very much.

And I would like to ask David Longanecker—and congratulations
on your very good news that you reported today in the report that
you put forward from your Department, unrelated to this hearing,
on the fact that your delinquency rate is yet lower than before. I
thank the Department of Education for taking the lead in referring
debt to the Department of Treasury, and I gave your agency one
of the highest grades on my report card, a C.

Can you tell me when you plan to refer the rest of your debt to
Treasury for administrative offset and cross-servicing? That you
have referred more and done more than any other agency.

Mr. LONGANECKER. I thought I would come in and see if I could
talk you into a B. We think we could do better, but we think we
are doing pretty well. We began a pilot with Treasury in July to
figure out how best to collect the maximum amount.

Our goal is to make sure—in fact, it was interesting here today.
Maybe I would be better liked in the higher education community
if we just gave all of the debt and didn’t try so hard to collect it.
But, in fact, we have been very vigorous in trying to collect the
debt. We want to work with FMS to find the best balance, so that
we are maximizing the return to the Federal Government of our
debt program. -

Mrs. MALONEY. I congratulate you. You really have been a model
not only in collecting debt, but in sensitive workouts with students.

What is your policy for writeoff of bad debt? Do you write off bad
debt after a serious period of time?

Mr. LONGANECKER. Death and disability.

Mrs. MALONEY. Pardon me?

Mr. LONGANECKER. Essentially death and disability are the only
two provisions.

Mrs. MALONEY. Death and disability?

Mr. LONGANECKER. We don’t write off debt at the present time.
We consider them there.


98

Mr. Davis. I guess what I was hoping was that you had a way
of reviewing or suggesting to them that perhaps you have got more
experience than they do. You have had more contact. You have had
more interaction with the process and may have developed some
nuances or expertise along the line that they could benefit from
which would help them in the early stages which would prevent

erhaps as many accounts reaching the 180 days as is currently

appening.

Mr. MurpHy. We try to share the best practices. Treasury has
developed many of the tools, and we have tried to share those with
agencies and to provide training on how to use those. Quite frank-
ly, some of the agencies have more experience than we do in cer-
tain areas. They are out there; they have been out there trying to
collect this debt for quite a while. They have developed some good
practices as well, which they have tried to share with others. So
we are trying to learn from one another as to what works and what
works best.

Mr. Davis. I know that we have not been or it does not appear
as though we have been as aggressive as perhaps we can be and
perhaps we ought to be. But what kind of complaints have Pita ‘ot-
ten from individuals in terms of people who may have felt that
they have been unduly put upon?

Mr. Murpuy. The actual debtors?

Mr. Davis. Yes.

Mr. Murpny. In the nontax debt area, I am not really personally
aware of any specific cases. I am sure there may have been some.
But we have really tried to go through a due process procedure
where people are given notices in advance and sometimes second
notices in advance before we even make a referral. And so we have
tried to address that concern as best we can.

Mr. Davis. Could you check and see if we have got some and, if
so, I would just be interested to know what kind of complaints we
get and how people feel about what we are doing in terms of the
methods that are used. And finally, what happens if we discover,
for example, that we are getting a large number of complaints on
some of the contractors or companies that we have engaged? Let
us say down the line we discover or people started complaining
that company X is doing whatever that is not in compliance or not
the intent of the protections that were built in. What happens

en?

Mr. Murpuy. I think the contractor would probably be removed.
FMS will be doing some oversight of the 10 contractors under our
new private collection agency contract. We will be assessing their
performance and, to the extent that complaints come in, those
would have to be addressed. If a contractor is violating the terms
of the agreement, they could be potentially removed.

Mr. Davis. I am very pleased to note that. Because even though
I think we must do everything humanly possible to try and collect
the moneys that are owed, I think we also have to make sure to
the best of our ability that we do not violate the rights of individ-
uals as we pursue that. I appreciate that component.

The last thing I would probably say on this is, Representative
Maloney, when you win the bet, make sure it is disclosed on your
financial disclosure statement.


140

Good Morning, Mr. Chairman and Members of the Subcommittee
on Government Management, Information and Technology. 1 am
Richard F. Keevey, Chief Financial Officer of the Department
of Housing and Urban Development. On behalf of Secretary
Cuomo and the Department, I appreciate this opportunity to
come before you and the Subcommittee to report on HUD’s
implementation of the Debt Collection Improvement Act

(DCIA) .

In order to give you a better perspective of the
Department's debt collection initiatives and its
implementation of the DCIA, I would like to first present a
description of the Department's debt portfolio. As of
September 30, 1996, there was approximately $2,282 billion
in delinquent debt due the Department (a decrease of $443
million from the balance of September 30, 1995). Of this
amount, approximately $1,764 billion pertained to FHA
receivables that resulted from defaulted insured loans.
Because of this, our major debt collection initiatives
(including asset sales) center around ways to service and
dispose of these FHA receivables. I have attached charts
that summarize the nature of HUD’s delinquent debt (Exhibit
"A") and the nature of HUD’s delinquent debt in excess of
180 days old (Exhibit "B").


91

Improvement Act seemed to languish unused for nearly 2 years
awaiting regulations. Do we really need regulations? Did the De-
partment of Justice insist that you issue regulations? Where are we
on that?

Mr. Hawke. I cannot speak to the other agencies’ programs, Mr.
Chairman. I do know that the lawyers think it is important to have
regulations in effect when you are doing things like wage garnish-
ment. The potential for litigation is significant in these situations
and not having a set of regulations against which agency contact
can be measured, I think, would probably be a significant exposure
in the program.

Mr. Horn. If I remember Cabinet departments, the general coun-
sel’s office and the general counsel usually report directly to the
Secretary, Deputy Secretary, or the Under Secretary. They are the
ones that prepare these regulations. Do you have any of the gen-
eral counsel’s staff physically officed with, say, the Financial Man-
agement Service, or do you strictly have to beg, borrow, and heaven
knows what out of the general counsel of the Treasury?

I cannot understand why this cannot be done in a weekend, very
frankly, if people are serious about it. I do not say it is the usual
routine. We write laws here sometimes in 24 hours and they are
pretty good ones and we get them passed. What is the problem?

Mr. HAWKE. FMS does have its own cadre of lawyers that report
to the general counsel of the Department as a whole.

Mr. Horn. They do not report to you or they do not report to
FMS? They report to the general counsel.

Mr. Hawke. I suspect that they really have kind of dual report-
ing requirements. In their legal work, they are responsible to the
general counsel of the department. They are employed at FMS.

Mr. Horn. When you recently sent up your strategic plans in
this area, did you make any proposals where you would get better
legal service and faster legal service than you seem to be getting?

Mr. HAWKE. I cannot answer that.

Mr. Horn. Well, I would sure suggest you look at it. If it is just
a few lawyers that cannot seem to draft something very rapidly,
this law now has been on the books 2 years. Before that we had
a lot of help out of the chief financial officers. Everybody knew this
was coming. I can only speak for the Eisenhower administration
when I was in a Cabinet department. When we saw that law com-
ing, we put our lawyers to work all during the implementation of
any law. We were ready to go when it was finally signed by the
President.

Mr. HAWKE. Let me just correct one point that I made. The Debt
Collection Improvement Act apparently does require that regula-
tions be published concerning the administrative wage garnish-
ment tool. A proposed rule has been drafted and is in the clearance
process now.

Mr. Horn. Does that mean it is going out in the Federal Reg-
ister?

Mr. Hawke. It will as soon as it finishes the internal clearance
process.

Mr. Horn. When do you think that will be?

Mr. Murpuy. We were expecting those three that have already
gone through the clearance or are in clearance would be out within


un

DEPARTMENT OF AGRICULTURE

As of April 1997, the USDA was owed $8.7 billion in delinquent debt. These
delinquencies consist mostly of farm loans, food stamp overpayments, unpaid insurance
premiums, overpaid indemnities, utility loans, defaulted loan guarantees, defaulted direct
credits, and operations to support programs for agricultural commodities. The Department
estimates that 6.5 billion is uncollectible. $785 million has bee referred to the Treasury
Department for tax refund offset, but none for administrative offset or cross-servicing.

DEPARTMENT OF DEFENSE

‘The Department of Defense has a broad array of delinquent receivables ranging from
education and hospital debts to travel, excess leave and damaged government property
reimbursements, The total delinquent debt amount comes to $4.2 billion, of which $245
million is considered uncollectible. Delinquent debt includes $265 million from the Army,
‘$2.1 billion from the Navy, $75 million from the Air Force, $586 million from the Defense
Security Assistance Agency, and $898.5 million from other Defense Agencies. None of the
Defense Department’s debt has been referred to the Treasury for any collection.

DEPARTMENT OF EDUCATION

‘The Education Department reported having over $19 billion in delinquent receivables.
‘The great majority, $18 .7 billion, are student loans, and consists of amounts arising from
direct student loans, program reviews, audits, and college housing loans. So far, the majority
of debt collected comes from gross guaranty agencies which collected over $1 billion in 1996.
‘The Department has begun using the Treasury Department's collection facilities, with $9.6
billion referred for tax refund or administrative offsets in 1996.

DEPARTMENT OF ENERGY

‘The Energy Department's delinquent receivables are quite unique. The predominate
source of delinquent receivables stem from companies who overcharged customers during the
days of oil price controls in the 1970's. Of the Department's $2.355 billion in delinquent
debt, $2.298 billion results from this source. These companies were penalized

pricing violations, but are presently in or on the verge of bankruptcy. $2.310 billion of the

total amount of delinquent receivables owed to the Department are in bankruptcy or



97

bers of the committee have shown in this regard. Our progress has
not been what anybody would want.

On the other hand, this is a program that is going to be in exist-
ence for a long, long time. It holds out the promise, over time, of
being of great benefit to American taxpayers. It is exceedingly im-
portant that this be done right, that the education and advertising
campaign be such that it does not create adverse reaction in the
public and erode the support for the program.

We have seen in the context of the Internal Revenue Service
what can happen when public confidence in a program is eroded.
We do not want that to happen, for all the reasons that I think are
clear.

To launch out on a program before we have got the computer sys-
tems adequately integrated and tested, to run the risk of duplica-
tion of our collection efforts really threatens to undermine support
for the program. We want to get it done right and we are going to
put the resources to work that are needed to get it done right.

Mrs. MALONEY. Very respectfully, I am not even talking about
the computer system now. I am just talking about having debt that
is 180 days old referred to Treasury and getting one letter out, just
one. I am betting it will go to $10 million. I just would respectfully
like to ask Mr. Murphy if he could send a letter to all the agencies
and ask them to refer their debt within 180 days and then send
one Treasury letter out and I think that this will jump to $10 mil-
lion pretty fast.

You have got all these reasons why, that I do not agree with,
that you have to put off all these other systems, et cetera, fine. But
let us just move it over and comply with that one aspect of the law
now. That is all I am saying. My time is up.

Mr. Horn. I thank the gentlewoman from New York.

I intend to give her a letter by the end of business today to
cosign to the President to say, how about an Executive order in this
area and let us move ahead.

I might add, Mrs. Maloney has had some very good training in
this area. She was a member of the New York City Council. Actu-
ally, she is in great, good humor today. You should see what she
did on the New York City Council to get debts collected. That is
a lot tougher town than this town. I know who I am going to rec-
ommend to the President if Mr. Rubin ever decides to do something
else because she also sits on the Banking Committee and she has
got a lot of good experience.

Mr. Davis, do you have some questions?

Mr. Davis. Yes. Thank you, Mr. Chairman.

Mr. Murphy, does Treasury have the responsibility and the re-
sources to assist other agencies to develop their debt collection cen-
ters or debt collection programs?

Mr. Murpuy. We have been providing what assistance we can,
both in terms of written guidance and conferences and training
conferences, but we do not really have the resources to build both
our systems and theirs. We are spread pretty thin. We have got a
lot on our plate. So, I would not want to be making any new com-
mitments in terms of systems development outside of the ones we
already have.


102

In terms of the Treasury Administrative Offset Program, we
refer to Treasury all delinquent accounts which are not being ac-
tively pursued through liquidation of collateral or litigation pro-
ceedings. Accounts which initially will be included for TOP are
22,000 accounts with indebtedness totaling $570 million. Holders of
these accounts were notified in mid-October that their loans are
candidates for offset.

We anticipate that these accounts will be referred in December
1997 or early January 1998. The DCIA envisions that a number of
Federal agencies should be designated as collection centers for
their own debt as well as that of other agencies. SBA firmly be-
lieves that it should be designated as a debt collection center be-
cause of its well-established experience in its loan collection activi-
ties.

On October 30, 1997, SBA sent a proposal to Treasury requesting
designation as a debt collection center. A copy of that letter is at-
tached to my written testimony and I will make no further com-
ments on it.

Asset sales. The administration’s fiscal year 1998 budget pro-
posed the sale of all SBA-held business loan assets, including direct

usiness loans and guaranteed business loans, that have defaulted
and were subsequently purchased by the SBA. This includes all di-
rect disaster loans over the period fiscal years 1998-2000. The total
portfolio of these loans was estimated at about $9 billion last year.

Additionally, it is estimated that an additional billion dollars
over the next several years will be added for a potential loan asset
sale program in excess of $10 billion. In keeping with this budget
proposal, SBA has begun to develop an asset sales program. We
will seek to use asset sales as another management tool to take ad-
vantage of private sector expertise, minimize the cost of programs
to the taxpayer, and still preserve the public policy objectives of the

A.

SBA has been working toward the development of a plan and
strategy to accomplish these sales in conjunction with the Office of
Management and Budget and the Federal Credit Policy Working
Group. I am pleased to report that we have completed our draft
strategic plan. It has been improved internally, and it outlines the
essential resources that we need and key steps to be taken by us.

We have also completed the preparation of statements of work to
engage all necessary outside financial and technical advisors. It
cannot be stressed strongly enough that SBA is aware of its unique
relationship to small business owners and to disaster victims who
receive our loans. The SBA has and will continue to move cau-
tiously so that public policy issues are adequately and appro-
priately addressed in order to ensure that small business constitu-
ents are not harmed, especially those who have suffered loss due
to natural disasters.

We will also need to work with our lending community and other
stakeholders in our asset sales initiative in order to ensure success.
This is a particularly important area because many of our financial
intermediaries liquidate the collateral, with prior approval of SBA,
as they retain an ownership position in the assets.

In summary, Mr. Chairman, we believe that SBA is on track to
accomplish all key requirements of the DCIA. We are dedicating re-


118

and a monthly report on currency rate and portfolio aging statistics. Loan
servicers have access to on-line systems containing public records for use in
locating debtors and determining property ownership and lien positions.

Account Rehabilitation SBA has established procedures to enable its loan
officers to reamortize or otherwise restructure problem accounts to keep them
in a paying status. Intensive servicing units exist in some of the centers and
are proposed for all the servicing centers to rapidly accomplish financial and
legal review of seriously delinquent accounts. Those accounts which can be
salvaged will be returned to a paying status and all others will be placed in
liquidation for expedited recovery.

Liquidation of Collateral Once an account is identified as a candidate for
liquidation, it is transferred by the servicing center to the SBA field office that
is closest to the borrower, and consequently best acquainted with local and
state legal requirements and practices. Loan collateral is located, catalogued
and appraised, and then is disposed of through summary or judicial foreclosure
processes as required by the jurisdiction in which the property is located. This
type of enforced collection activity is site-intensive in nature and usually
requires physical inspection of recoverable assets along with other local
procedures. Judicial foreclosure is often handled by SBA attorneys in their
capacity as Special Assistant U.S. Attorneys.

Litigation If a deficiency balance exists after liquidation of all worthwhile
collateral, SBA may pursue through litigation uncooperative obligors with
recovery potential. Preparation for litigation, including completing Claims
Collection Litigation Reports (CCLAs), is addressed either at the servicing center
fevel or at the local field office. As with judicial foreclosure, litigation is often
handled by SBA attorneys functioning as Special Assistant U.S. Attorneys.
This helps simplify preparation of appropriate pleadings and expedites other
court processes since SBA attorneys are familiar with the Agency’s loan
programs and procedures.

Credit Bureau Reporting On a quarterly basis, SBA reports the status of all
business loans to credit bureaus. All consumer accounts referred for tax refund
offset are also referred to credit bureaus. SBA intends to expand the consumer
teporting process to more frequent reporting including more delinquent
accounts.

Collection Agency Referral SBA has been a strong advocate for referral to
collection agencies of account balances on all loans after completion of
foreclosure or litigation where these actions would result in worthwhile
recovery. SBA refers unsecured loans or those with non-collectible obligors
promptly after completion of restructuring attempts, if these attempts do not
return aloan to a paying status. At present, $700 million of loans are ready for
referral pending finalization of national collection agency contracts.


65

success in implementation of DCIA. In addition, serving as our senior
management team within FMS, Commissioner Russell Morris and Deputy
Commissioner Mike Smokovich will remain active in the direction of debt

collection implementation policy.

My office will continue to take an active oversight role to assure that the efforts to
implement the DCIA remain on track. To this end, I have detailed Mr. David
Lebryk, recently selected as Assistant Fiscal Assistant Secretary, to assist FMS in

the timely implementation of DCIA.

Thank you, Mr. Chairman. This concludes my remarks this morning. I appreciate
the committee’s continued interest in the success of the program and I would be
pleased to address any questions regarding the implementation of this legislation
or our debt collection efforts that you or other Members of the Subcommittee may

have.


7

You know, a lot of times when we are in Government, or in any
job, you don’t have the absolute perfect solution sitting in front of
you. But you are certainly not going to go forward if you don’t try,
if you don’t test, if you don’t try to complete it. And by putting it
off, you just shunted it off in the corner. You could have started
testing it. If it didn’t work, then go back to the old system.

And I would like to say that the failure of the tax refund offset
merger is no reason to delay the implementation of the tax offset
program. And it has been a year and a half since this bill passed,
and I still haven’t seen target dates coming out of your office, Mr.
Murphy. Mr. Horn and I wrote you in September asking again for
target dates.

Very respectfully, I would like to put again in the record, Mr.
Chairman, our joint letter to Mr. Murphy requesting target dates
of when you were going to implement this. And since ‘you have not
come back with target dates, I would——

Mr. Horn. Without objection, the letter will be put in at this
point.

Mrs. MALONEY. I would like to put forward suggested target
dates and if you can’t meet these target dates then let us know
what you think should be the target dates. And we are saying that
testing, or, at least, I am saying, testing by the Federal Reserve
Board by February 1998; conversion from the intermediate, you
know, program, ITOP to the Grand Treasury Offset Program by
March 1998; and implementation by March 1998, too. Can you
comment or commit the Treasury to meet these deadlines?

Mr. Murpuy. At this point in time, I cannot commit to meeting
those specific dates. We will, though, be happy to provide you with
any written response to your question.

The one area which we may be perceiving a little differently, I,
too, was initially of the opinion that we could wait right up until
the last minute to make a decision as to whether to go or not go
on the merger, assuming that we could always fall back to the sys-
tem that IRS has run for years. I turned out to be mistaken about
that and a decision had to be made much earlier as to whether IRS
was going to work on programming for the new system or to pro-
gram to keep the old system going. As a result of that, that’s why
T described it as we were walking a tightrope without a safety net.
We didn’t have a fallback, and the risk was just too great. And in
retrospect, given, you know, where we are today, I think it was a
good decision. But we would be happy to provide something for the
record to you.

Mr. Horn. Without objection, it will be put in the record at this
point.

[The information referred to follows:]


16

Debt Collections

(in $Millions)

0 T = T
Amount Owed Amount Collected

GE exhibit a


160

* Conclusion

In conclusion, I would like to restate SSA’s commitment to debt management and
the implementation of the relevant provisions of the Debt Collection Improvement
Act of 1996. We have been conscientiously collecting Social Security-related debt
since the beginning of the program. Since SSA was first authorized to participate
in the tax refund offset program for OASDI, we have continuously been expanding
and enhancing the use of authorized debt collection tools as they have become
available to us. We will continue to implement the debt collection authorities
availaisle to us, so that we will be on an equal footing with other agencies. Thank
you for the opportunity to testify before you today.


99

Mr. Horn. Mrs. Maloney has a short question for Under Sec-
retary Hawke.

Mrs. MALONEY. I would just like to follow up on Mr. Hawke’s
statement that if I was a detailee in Treasury, we would bring the
money in. I would like to offer if Mr. Hawke would give us one
detailee from Treasury who has worked in debt collection to work
with us on our committee, I believe we can bring that money in.
We would have to interview that person to make sure they are
committed and hard-working and passionate about helping the tax-
payers, but I truly do believe that. I would like you to respectfully
consider if this committee could have a detailee, just one, out of
Treasury. I firmly believe that we can improve this dramatically.

Mr. HAWKE. Mrs. Maloney, we will work as closely as possible
pith the committee in trying to accomplish our mutual objectives

ere.

Mr. Horn. We thank you. Mr. Murphy has the responsibility for
implementing this program; is that correct?

Mr. HAWKE. Mr. Murphy presides over the Financial Manage-
ment Service and he has got, as he mentioned before, a member
of his staff who is now stationed down there personally overseeing
the program.

Mr. Horn. I think what you have heard here this morning, some
of us said it in a very quiet way, others said it a little less quiet.
The point is the same. At our 6-month hearing starting from this
day we expect substantial results. You look at that chart over
there, the lost potential of the Treasury offset program. The ques-
tion is not simply going up from the bottom in terms of the total
debts. That is fine, but to get that box also moving across on the
payments as well as the debts. Here we have $43 million has been
collected. The total payment volume is $856 million. And that dark
side of the box in that little teeny-weeny corner reflecting the $39.5
billion, that box boils down to $8.9 billion, and we collected $43
million, as I look at that. We need to come across and to be going
up on that particular chart within the 6-month point.

Mr. Hawke. Those are, I believe, numbers of payments along the
bottom axis there. I think one of the things we would like to do is
to work with the committee to get an appropriate set of bench-
marks. That $856 million in payments is not really a realistic tar-
get for the number of payments that are effectively subject to off-
set.

As you know, there is means testing in a number of those pro-
grams. Social Security payments only can be offset to the extent of
15 percent above $750 a month. So looking at a total of $856 mil-
lion in payments is not necessarily the right number to be looking
at. But we would like to work with you to come up with a set of
standards that is meaningful and will adequately, properly meas-
ure progress against where we are now.

Mr. Horn. Well, we thank you. Mrs. Maloney has a comment to
make on this.

Mrs. MALONEY. We can go back and forth, but I just know that
we asked for standards and guidelines in our September letter. I
think this clearly shows $2.5 million, the two major components
not implemented at all. All of this revenue out there. I thank both
of you for testifying and I look forward to working with you. And


21

Agency/Program ‘Delinquent Reciveables DR>180days Uncollestable
AID 872.4 TOLL 234.1
EPA 701.5 630.0 386.5
FEMA 29.8 20.2 31
GSA 63.4 39 22.9
NASA 2.0 7 s
NSF 36 36 a
NRC 3.1 Ls 21
OPM 914 46.8 31.6
SBA* 2030.8 1582.2 2165.2
SSA* 663.1 3145 1533.1
CFTA 45 45 42
Exim Bank 1435.3 1152.6 2895.4
FDIC oa na na
FTC 4s 45 42
PBGC 18.6 44 99
RRB 29.8 21.3 209
SEC 1746 162.9 60.6
Salary and Travel 18.9 15.2 na
Remedies Act Penalties ng 4.7 52.9
Insider Trading Penalties 378 33.0 17
‘Small Agency Totals 6,125.2 4,752.5 7,380.8
Grand Total All Agencies 50,3913 4,749 40,675.5

‘94% of this amount is in litigation or in administrative appeals process.


50

Mr. Horn. Let me just say, since the word offset is being used,
some people will not understand what that is. Correct me if I am
wrong. It is the interception or withholding of a payment due to a
delinquent debtor. Do you have a better definition than that?

Mr. HAWKE. Yes.

Mr. Horn. I assume you do.

Mr. Hawke. That’s a good definition, Mr. Chairman. And what
we really are doing—I hope everybody who looks at this program
understands the complexity of this is trying to take computerized
lists of payments that the Government makes, the hundreds of mil-
lions of payments that the Government makes every year, and
match those against very large lists of debts that are owed to the
Government. That’s a process that is going to be done by a complex
computer program, and if that program is not done carefully and
tested carefully before it is put into operation, we run a risk of cre-
ating the kind of chaos that could undermine confidence in this
whole program.

Mr. Horn. Well, we thank you, Under Secretary Hawke. I take
it you will be able to remain with us?

Mr. Hawke. Oh, yes.

Mr. Horn. Because we have a number of questions.

We now have the statement of Gerald Murphy, Fiscal Assistant
Secretary. Mr. Murphy.

Mr. Murpuy. Thank you, Mr. Chairman, members of the commit-
tee. I would just like to elaborate a little bit on some of the items
that Under Secretary Hawke mentioned.

In the area of the Treasury offset program, we are running an
interim system, as you know, and we are attempting to develop a
new software, designated GTOP, which will be much more robust.
and have capabilities that the current interim system does not
have.

We had originally intended to complete the GTOP system and to
merge it with the IRS tax refund offset system on January 1, 1998.
And when I testified before you last April, I was truly committed
to making that happen. As we went along in that process, however,
we started finding complexities that had not yet been resolved and,
in essence, we were walking a tightrope without a safety net be-
cause we had to make a decision at some point as to whether the
GTOP system could be brought up, whether all the interfaces with
other FMS systems could be worked out.

Mr. Horn. If I might interrupt, I established about 50 things like
GTOP in this wonderful bureaucratic testimony. Could you explain
that as we go for the average listener, including Members of Con-
gress? That is the grand Treasury offset approach. Tell us how it
WOrks.

Mr. MurpHy. It seems to be a more robust system that will en-
able us—the primary thing that it will do is to enable us to put
more payments into the matching process. As Mr. Hawke men-
tioned, at the moment we have basically OPM retirement and ven-
dor payments that we are matching against the debts we have.
With the more robust system, we will be adding salary payments
in at a later point; we will be adding benefit points in at a later
point, and we will be able to do a lot of the things that the interim
system cannot do.


95

Mrs. MALONEY. Here it is. You bring in $2.5 million because the
two major components of our law have not been implemented. It
appears that the easiest, that of just referring to Treasury, you
have only referred or achieved in referring $727 million. I fail to
understand? What is in the letter agreement? Does it give them
more time to refer to Treasury?

Mr. Murpuy. It is strictly a date by which the agencies say that
they will have the capability to provide all of this information to
us. If we were dealing with a handful of debts, you could just walk
them across the street and give them to us. When you are talking
about large volumes, you are talking about systems needed to
transmit data electronically and to get data back electronically, to
update all your accounts and keep your records straight. So, it is
those kinds of systems issues, identifying the TIN numbers for
each person, meeting the format requirement for computer trans-
fer. That is where we are trying to negotiate dates. No question,
180 days old, it is supposed to come to us. I agree.

Mrs. MALONEY. It appears that maybe we should just take a
commonsense approach. Instead of having all the computer systems
set up and looking at all the debt, if I were you I would be focusing
at the new debt, the 180-day-old debt. I would have them send it
over to me so we can send it out in one mailing on Treasury.

I talked to one of the people who used to work for you. They told
me just by sending out a letter on Treasury stationery, you got
something, a huge response back. But you are not going to be able
to do that if you cannot get it moved over to Treasury. We are hav-
ing a problem moving it over. Instead of trying to solve the whole
problem, if you just would concentrate on the new debt, you might
have more success in responding to bringing it in and responding
to being successful.

I would not worry about the computer systems and all of the pro-
grams. I would say, send me your 180-day-old debt. I think you will
see, since we added gain-sharing provisions that those agencies
that were successful in bringing money in were able to keep part
of the money, which makes sense, reward them for their effort. I
think if you impose the 180-day deadline, you would see much
more of an effort by the agencies to bring that debt in as opposed
to—I just don’t understand why it is so complicated.

Maybe we ought to approach it like we did the health plan, in-
stead of trying to solve everything at once, take one aspect of it and
implement it. If you could just get them to refer the debt to you
within 180 days, so you could send out one letter, I bet you a lunch
in any restaurant of your choice, any continent of your choice, I am
so confident of winning this bet, that if you just would get them
to send you the debt that is 180 days old and send out one letter,
I am not even talking about a phone call, one letter, I think that
this $2.5 million is going to be more near $5 or $10 million. But
how do you expect to succeed? If you are going to create computer
systems and double check them with everything else, you are never
going to get anywhere.

Mr. Murpuy. You definitely have hit on the key for success is to
promptly get all the debts when they turn 180 days old into a cen-
tral place to be worked on, because that is truly going to be—


33

non-tax debt by
providing a number of
tools for agencies to
use. In addition, the
Act requires federal
agencies to transfer
delinquent debt over
180 days old to the
Treasury Department
for collection.


168

the financial advisor to the Department, and the financial advisor
was removed by the Secretary and the program is being looked at
by the inspector general in terms of the process of how that was
accomplished by the financial advisor. But the goals of the program
remained solid and intact, and it is our intent to continue that once
this review is completed.

Mrs. MALONEY. I also understand——

Mr. KEEvEyY. OK.

Mrs. MALONEY [continuing]. From your testimony that you are
working with the Department of the Treasury on a pilot debt col-
lection center.

Mr. KEEVEY. That’s correct.

Mrs. MALONEY. And, in fact, this pilot was approved by Vice
President Gore as a national performance review initiative for des-
ignation as a reinvention laboratory. I want to understand how
that works.

In other words, your laboratory will be an arm of the Treasury
Department. Will you then turn over this collection center to the
Treasury or is it still under HUD?

Mr. KEEVEY. Our proposal is, we had done a review of business
process reengineering, if you will, of how we were administering
debt in HUD. And the lion’s share of the debt that is in our Seattle
office is the lion’s share of the debt that we would normally refer
to Treasury anyway. So, our proposal to them was, we would trans-
fer the center and the staff over to you to administer the debt. We
would do it with a pilot program for 9 months to a year, with the
people reporting to Treasury even though they would remain on
our payroll.

Assuming it would all be a workable endeavor during 9 months—
and we had every reason to expect it would be—then we would
transfer the center and the people over to Treasury. That is our
proposal to Treasury. Treasury is now reviewing that, and we are
expecting, I think, a meeting later on this month to hopefully final-
ize it.

From our point of view, we think it is a good thing to do. We
don’t need to have that center as part of debt collection. It would
mostly be the debt that we cannot service, as contrasted to the
FHA debt and as contrasted to the GNMA debt, where it makes
perfectly good sense for us to handle it either through the sale of
assets that I described or through the GNMA process where we get
our money back from the VA or from FHA.

Mrs. MALONEY. Well, I find the proposal interesting, and it is
certainly a new way of looking at an old problem, and I congratu-
late you for coming up with this idea, and I hope it works.

Mr. Chairman, I have no further questions.

D Mr. Horn. I yield 10 minutes to the gentleman from Illinois, Mr.
avis.

Mr. Davis of Illinois. Thank you very much, Mr. Chairman.

Mr. Gray, in your testimony, you noted that SBA routinely uses
private collection agencies to bolster its efforts. What has been the
result of those efforts?

Mr. Gray. Measured on an economic basis, I know that it is
under 18 percent cost to the agency. I would have to get back to
you on a detailed basis for that.


183

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61

in the clearance process. These include 1) the Federal Claims Collection
Standards; 2) Administrative Wage Garnishment; and 3) the Offset of Federal
Benefit Payments. We expect to publish all three of these proposed rules within

the next 30 days.

FMS is also working on additional rules to implement the provisions of the DCIA.

These include regulations to:

1. Implement Salary Offset as Part of TOP;

2. Offset Federal Payments (Other than Tax Refund and Federal Benefit
Payments) to Collect Federal Non-tax Debt;

3. Offset Federal Payments (Other than Tax Refund and Federal Benefit
Payments) to Collect Debts Owed to States; and

4. A comprehensive rule to cover non-Administrative Offset functions
including cross-servicing, obtaining taxpayer identifying numbers from
persons doing business with the Government, barring delinquent debtors
from obtaining Federal loans or loan guaranties, public dissemination of

debtor information, and debt sales.


130

on the issue of denying Title IV aid to prospective borrowers who are delinquent on other Federal
debts. These discussions, which will be expanded to include Treasury Department officials, are
focused on determining the best way for the Department to proceed with regard to full
compliance with this provision, while considering the best interests of the taxpayer and the

Department.

We have developed a working relationship with the Treasury Department in several areas. One
joint venture began in July, when the Department of Education started a pilot program with
‘Treasury's Financial Management Service (FMS). The program will test FMS’s ability to collect
defaulted student loans, with results expected by April 1998. We will examine FMS’s overall
recovery rate as well as its success on selected loan cohorts. We will use the data to develop
strategies for further cooperation between FMS and the Department to improve collections on

defaulted student loans.

Although our working relationship with Treasury has been successful on a number of projects, we
need additional discussions with their Financial Management Service (FMS) to improve
collections through the “other Federal payments to defaulters” program. Improving collections
through this program requires the exchange of information between large and complex data
systems. The Department has considerable experience in using such data systems and hopes to

share its expertise with Treasury in developing mutually satisfactory solutions,

Although the Debt Collection Improvement Act has primarily focused on improving collections,


114

U.S. Small Business Administration
Request for Design a Del ‘collection Center
Statement of Capabilities

The U.S. Small Business Administration (SBA) actively seeks designation as a debt
collection center for its own loans. To assist the Treasury Department's Financial
Management Service (FMS) in its assessment of SBA, this document has been
prepared using center designation criteria posted on the FMS Internet site. SBA has
also addressed the minimum criteria for center designation as set forth by the Chair
and ranking minority member of the Subcommittee on Government, Management,
Information and Technology in a recent letter to Treasury Secretary Rubin.

SB Coll
The SBA is confident that it fully meets all Treasury Department criteria to be

designated as a debt collection center for the Agency’s loans. Using an agency with
extensive loan recovery experience, such as SBA, as a debt collection center was
expressly contemplated by the legislative history of the Debt Collection Improvement
Act of 1996 (DCIA). Of particular note is a statement by Rep. Horn entered into the
Congressional Record on April 25, 1996, which reads in part:

"The Debt Collection Improvement Act...provides independent authority for all
Federal non-tax debt to be collected by those Federal agencies that are
proficient in debt collection and have been designated as debt collection
centers. Agencies which currently run large debt collection operations and
should be considered for designation as debt collection centers by the Secretary
of the Treasury include...the Small Business Administration..." [emphasis
added}

Indeed, we believe it would be wasteful and inefficient not to designate SBA as a
collection center since the Agency has an extensive administrative structure to collect
delinquent loans, and has had over 40 years experience in the full range of loan
recovery activity and strategy. Moreover, as discussed below, SBA has just
completed a comprehensive evaluation of collections, loan guaranty purchases and
resource allocation within the Agency. In connection with the evaluation, SBA has
adopted a number of new “best practices" in its revised procedural manuals,
conducted on-site reviews of collection activity at almost 30 field offices, and
designed and implemented basic and advanced training programs for the new
streamlined procedures, practices and systems.

Because of SBA’s internal capabilities for loan collection and liquidation, the Agency
routinely begins aggressive liquidation action when appropriate on accounts well
before 180 days delinquency. This action is carried out at SBA’s 80 field office


116

types of actions. First, if there is worthwhile collateral to pursue, or obligors who
have repayment ability, the account will be returned to the SBA field office closest to
the borrower for initiation of foreclosure or litigation, as appropriate. These actions
are site-intensive and procedures may vary greatly in accordance with local law and
custom. Therefore, decentralization at this point in the loan servicing process is
conducive to greater overall recovery. In its collection processes, SBA routinely
coordinates with local U.S. Attorneys’ offices to obtain recoveries through litigation
from account obligors. In most of these actions, SBA lawyers perform much of the
casework in their capacity as Special Assistant U.S. Attorneys.

Under the second option, used primarily with small balance unsecured loans, or loans
with no demonstrated recovery potential, SBA rapidly charges off the accounts and
refers them to Treasury for participation in all the offset and collection processes used
by Debt Management Services (DMS). SBA has recently completed changes to its
automated systems to allow the mass referral to Treasury of these accounts, which
have been referred in previous years to government contract collection agencies.
Unsecured accounts will be referred to Treasury at 180 days delinquency, and secured
accounts will be referred immediately upon completion of foreclosure and litigation
procedures directed toward obtaining timely recovery from joan collateral and account
obligors. Either category of loans may be referred sooner if, in SBA’s determination
recovery could be more effectively pursued through the Treasury Department,

Prior to referral to Treasury, all affected obligors will receive appropriate notification.
In this regard, on a monthly basis SBA routinely notifies all loan obligors on SBA-
serviced accounts that in the event of default, SBA may foreclose, report to credit
bureaus, refer to the Department of Justice or collection agencies, initiate
administrative offset or use computer matching programs for purposes of debt
collection or credit screening.

The SBA’s loan servicing centers are highly automated and specialized, allowing a
maximum level of efficiency. Borrower calls are made on a rapid follow-up basis using
recently installed autodialing technology and on-line loan accounting information from
interactive computer screens. This allows for immediate input of loan servicing
comments and automated overnight mailing of a variety of collection letters. The
effectiveness of servicing actions and the tracking of response times are monitored
through automated systems.

SBA has recently established debt collection goals for each of its field offices as part
of its national Liquidation Improvement Project (LIP). These goals are aimed at
increasing cash collections from recovery actions and promoting the timely completion
of loan liquidations including disposal of acquired assets. As part of the ongoing LIP
effort, SBA has also taken the following management actions: (1) strengthened
training for financial and legal staff; (2) promoted a team approach to liquidation; (3)
encouraged greater use of contract assistance to supplement in-house liquidation
resources; (4) conducted or scheduled in-depth reviews of liquidation procedures at
almost 30 field offices; and (5) made significant upgrades to the automated systems


> Administrative Offset must be fully implemented. The Department of the
Treasury needs to increase the volume of payments into the offset program;
agencies need to refer all eligible debts for offset. Neither has happened. This is
dramatically illustrated by the chart we have handed out. At the very least,
agencies ought to refer debts for administrative offset to the Internal Revenue
Service for Tax Refund Offset.

> Asset sales need to accelerate. The positive experiences of the Department of
Housing and Urban Development and the excellent returns they have had are eye-
‘opening. Further asset sales can dramatically increase collections.

> Regulations must be drafted, published, and implemented. Several key
authorities from the Debt Collection Improvement Act will continue to be
unavailable to agencies until regulations are published. For example, wage
garnishment, offset of benefit payments and barring delinquent debtors from
obtaining additional loans or benefits cannot be used as a collection too! until these
regulations are published.

‘The committee is disappointed at the absence of the Office of Management and
Budget today. Its staff worked hard to help pass the Debt Collection Improvement Act
and has been helpful in troubleshooting problems. Acting Deputy Director for
‘Management Ed DeSeve was unable to be with us today, as he is working on another
priority. It is very important that the Office of Management and Budget focus agency
attention on this government-wide problem. Its slowness is another reason for a separate
Office of Management. At our last hearing, I questioned Mr. DeSeve’s predecessor, John
Koskinen, about the level of support for this initiative at the Office of Management and
Budget. He was unequivocal in stating the Administration's support for improving debt
collection. We hope the same message will be expressed by the Office of Management
and Budget in both words and deeds in the near future.

Ultimately, success will be measured by dollars collected and accounts resolved.
That said, we welcome witnesses from several Federal agencies to discuss
implementation of the Debt Collection Improvement Act. Although agencies are at
varying stages in implementation, itis fair to say that everyone here can do better.


93

Mrs. Maloney and I concur in, and so Commissioner Adams phoned
me because, as I mentioned earlier in the day, the law took effect.

He said, your law has made my day. I am going to collect mil-
lions in this area. So, go to Massachusetts and find out how they
do it because they are doing it. I think all of us want that done.
It is a good thing. I think the President must want it done. As I
say, an Executive order should be what the Secretary of the Treas-
ury is presenting him with, clearing it through OMB. Let us get
the show on the road.

Mr. Hawke. I can tell you that the deadbeat dads program has
been given very high level consideration within the Treasury De-

artment. Once again, I just want to sound a cautionary note about
Being realistic about what the potential is here. The extent to
which we can get child support payments enforced against a popu-
lation of hundreds of millions of Social Security annuitants and
Federal retirees is something of a question. They are not nec-
essarily the same people who have child support obligations out-
standing.

Mr. Horn. Ten minutes to Mrs. Maloney.

Mrs. MALONEY. Mr. Chairman, first, I would like to followup
really with a very important point that my colleague, Mr. Davis,
brought up. That is to underscore that our legislation, which was
supported by Treasury, called for full due process and includes full
due process. If someone is contacted and it is a wrong contact, then
the debt collector would be notified immediately and there are total
repayment programs in place, particularly in the Department of
Education. Many young people cannot afford to pay back their
debts at certain times. This goes into consideration.

Our bill is aimed at those that are truly deadbeats, that have
taken a loan or a payment from the Federal Government and have
abused that payment. I just wanted to make that very clear. Also
our bill only applies to nontax delinquent revenue. This is not per-
sonal taxes of people. This is nontax delinquent revenue, fines,
fees, debts, and loans that were given to individuals that they then
refused to pay back.

I would just like to ask Mr. Murphy, how many people are now
testing the Treasury offset program? Are you testing it now?

Mr. Murpuy. I believe it was just received October 31. It has
been so recently that I can’t tell you whether someone is actually
beginning to test or not, but that will begin shortly, if it has not
already.

Mrs. MALONEY. And so it will begin testing. How many people
will you have working on testing the program?

Mr. Murpuy. I do not have those numbers. I would be happy to
provide something for the record if you care to.

Mrs. MALONEY. And the other program we were talking about,
the Treasury control service, will they be working on this effort,
too?

Mr. Murpuy. I don’t know how it is going to break down. The
original plan was to either have in-house testing or the Federal Re-
serve or some combination. And I have not been briefed on what
final conclusion has been made there.

Mrs. MALONEY. Could you get that back to us?

Mr. Murpny. Certainly.


38

outstanding debt.
Therefore, I look
forward to hearing
from our
distinguished
witnesses.

Again, thank you Mr.
Chairman for this
opportunity.


158

Program, and also advising the individual that we will report the delinquency to a
credit reporting agency. The notice will also inform the debtor of their protest
rights.

These new authorities, administrative offset and credit bureau referrals, will be
used only to recover OASDI debts, since there is no statutory authority to do so for
SSI debts. We plan to improve collection of SS] debts by expanding the use of the
Tax Refund Offset program, for which there is no statutory exclusion. On an
annual basis, we recover more than $20 million through the Tax Refund Offset
program. We anticipate that the combination of these new collection tools will
increase SSA’s debt collections by an estimated $10 to $20 million, $6 million of
which we expect to come from the expansion of tax refund offset to SSI.

Because of the differences in the statutory authorities governing how we can
utilize the different debt collection authorities, we will refer 356,713 qualified
cases worth $575 million for tax refund offset only. Of the tax refund offset-only
cases, 277,518 cases worth $452 million are SSI cases and the remaining 79,195
cases worth $123 million are OASDI cases. Some of the OASDI cases were
previously submitted for the 1997 tax refund offset program and some are being
submitted for the first time.

When we implement Treasury’s Offset Program for offset against Federal
payments, in January 1998, we will initially refer 55,509 OASDI cases worth $282
million in overpayments. We will at the same time be referring these cases to the
Internal Revenue Service (IRS) for inclusion in the 1998 tax refund offset
prograin.

Once we have completed implementation of these current projects, we will begin
efforts to implement the remaining statutory debt collection authorities available to
us, namely, federal salary offset, use of collection agencies, and interest charging.
We expect to begin these efforts in the next few months.

Regulations

In your invitation to testify you requested information on the status of regulations
necessary to implement the Debt Collection Improvement Act. As I mentioned
earlier, SSA is diligently implementing authorities other agencies have had for

many years. We are about to publish regulations that will govern the use of
administrative offset and the use of consumer reporting agencies for OASDI debts,


125

‘$245 billion in loans have been made since the program began in 1965. Under FFEL, loans are
made to eligible students by participating lenders. Repayment of the loans is guaranteed by
national or state guaranty agencies using Federal reserve funds. The guaranty agencies receive
reinsurance and other funds from the Department. Of the approximately $285 billion in loans
made to students and parents (including the $20 billion in loans made since 1959 through the
Federal Perkins Loan Program), approximately $184 billion are outstanding. Of the outstanding
amount, about $91 billion are in repayment, another $68 billion are held by students still in school,

and almost $25 billion are in default.

‘The Department is, and has been, making concerted efforts to reduce the default rate on student
loans and hence the amount that needs to be collected. I am proud to say we have had
considerable success. The FFEL cohort default rate has declined from 22.4 percent in 1990 to
10.7 percent in 1994. And we recently determined that the default rate declined further to 10.4
percent in 1995 (see chart 1). This decline in the default rate throughout the 1990's has been
brought about by the adoption of legislation and policies supported by both Congress and two

Many parts of the Office of Postsecondary Education have contributed to our efforts to reduce
defaults. The Guarantor and Lender Oversight Service (GLOS) helps to ensure that lenders and
guaranty agencies comply with due diligence requirements and provide pre-claims assistance,
among other efforts. The Institutional Participation and Oversight Service (IPOS) has, through

its gatekeeping initiatives, tightened financial and administrative requirements that schools must


100

I truly am sincere, Mr. Hawke. I feel if I had a good Treasury
detailee working with the subcommittee, we could bring this money
in. I really believe that.

Mr. Horn. We thank you for coming. We look forward to more
optimistic results and delivery of results in what we are stressing
is a performance results-oriented government at the 6-month mark.
Hopefully that will be expedited. The lawyers will be doing their
good deeds on writing regulations and the other agencies will be
implementing.

What we are going to do now, and we thank you, is to merge
panels II and III with the four agency witnesses. And go right
down the line there.

We have Mr. Gray. Mr. Petska, could you identify yourself for
the record?

Mr. PETSKA. Thomas Petska, Director of the Debt Collection
Service, Department of Education.

Mr. Horn. And then we have Secretary Longanecker, Mr.
Keevey, and Mr. Sopper.

Gentlemen, I think you know the routine. If you will rise and
raise your right hands.

[Recess.]
fi Mr. Horn. The clerk will note that all five witnesses have af-
irmed.

What we will do is just take the order in which they are on the
agenda. We will start with John Gray, Deputy Administrator of the
Small Business Administration. We have read your statement. We
do not want it read to us. It is filed automatically once we intro-
duce you. We want you to look us in the eye and tell us the sum-
mary of your statement and where you are and where you are
headed in this area.

Mr. Gray.

STATEMENTS OF JOHN GRAY, DEPUTY ADMINISTRATOR,
SMALL BUSINESS ADMINISTRATION; DAVID LONGANECKER,
ASSISTANT SECRETARY FOR POSTSECONDARY EDUCATION,
DEPARTMENT OF EDUCATION, ACCOMPANIED BY TOM
PETSKA, DIRECTOR OF DEBT COLLECTION SERVICE, DE-
PARTMENT OF EDUCATION; RICHARD KEEVEY, CHIEF FI-
NANCIAL OFFICER, DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT; AND DALE SOPPER, ACTING DEPUTY COM-
MISSIONER, SOCIAL SECURITY ADMINISTRATION

Mr. Gray. Mr. Chairman, members of the subcommittee, my
name is John Gray. I am the Associate Deputy Administrator for
Economic Development at the Small Business Administration. I am
responsible for providing overall direction for the SBA’s credit pro-
grams and portfolio management. I have been in this position since

late July, coming from a career in the banking industry.

I believe this is the first time that the SBA has been asked to
appear before this committee and I am pleased to provide testi-
mony on SBA’s implementation of the Debt Collection Improvement
Act, including our efforts to undertake and implement a loan asset
sales program.

In the interest of time, I will not address each part of the act.
Instead I will summarize SBA’s implementation under three key


4l

I know there are a number of other issues that the committee is
interested in. I will try to do my best to answer the committee’s
questions. Mr. Murphy will be here to answer questions that in-
volve a level of detail that I can’t address. But I do want to say
again, Mr. Chairman, Mrs. Maloney, and Mr. Davis, that we are
not ignoring this statute. We think it is extremely important. We
supported its enactment. We believe it is of tremendous importance
to the integrity of our credit programs that we make vigorous ef-
forts to collect what is owed to the Government.

Again, in fairness to the program, I think we have to recognize
the complexities involved in taking hundreds of millions of pay-
ments that we make each year and matching them against lists of
delinquent debtors in a way that both observes due process rights,
avoids duplication, and avoids the kind of horror stories that we
have seen in the context of the tax collection program.

We want to do this right. It is going to e more time than we
had originally thought to get it done right. We still think that there
is a lot of merit in the program and we are going to continue to
work hard at achieving those objectives.

Thank you, Mr. Chairman.

Mr. Horn. Thank you, Under Secretary Hawke.

[The prepared statement of Mr. Hawke follows:]