United States General Accounting Office 

GAO the Budget, House of Representatives

Report to the Chairman, Committee on 

June 1997 DEBT COLLECTION 

Improved Reporting 

Needed on Billions of 

Dollars in Delinquent 

Debt and Agency 

Collection 

Performance 

GAO/AIMD-97-48


United States


General Accounting Office
 GAO Washington, D.C. 20548


Accounting and Information 

Management Division 

B-275282 

June 2, 1997 

The Honorable John R. Kasich 

Chairman, Committee on the Budget 

House of Representatives 

Dear Mr. Chairman: 

As agreed with your office, this report responds to your request that we 

review debt collection issues for nontax debts. It deals with outstanding 

lending program debt that is being directly managed by federal agencies 

and discusses programs under which federal agencies disbursed the loans 

as well as defaulted guaranteed loans for which agencies reimbursed 

private lenders and are now attempting to collect themselves. Generally, 

this debt is referred to as federal credit receivables. This report 

specifically focuses on (1) reported governmentwide data on credit 

receivables and delinquencies for federally managed loans, (2) the status 

of efforts at four major credit agencies to resolve delinquencies, (3) the 

dollars collected using various legislatively established collection tools, 

and (4) ways debt collection reporting can be enhanced to evaluate 

progress in collecting debt, and thereby assess agency efforts to meet the 

mandates of the Debt Collection Improvement Act of 1996. We did not 

verify the accuracy of the information provided to us by the Office of 

Management and Budget (OMB), the Department of the Treasury’s 

Financial Management Service (FMS), or by the four agencies included in 

our review. 

Results in Brief	 Governmentwide reporting to the Congress indicates that the amount of 

debt federal agencies are directly managing has remained about 

$200 billion for the 5 years ended September 30, 1996. During that time, 

reported delinquencies for these federal credit receivables varied between 

$31 billion to $38 billion. Our report focuses on the four program activities 

that had about two-thirds of this delinquent debt: the Department of 

Education’s Federal Family Education Loan Program with $20 billion and 

housing programs at the Departments of Housing and Urban Development 

(HUD), Veterans Affairs (VA), and Agriculture, which cumulatively had 

another $5 billion. 

To gain a perspective on agency performance, we assessed the status of 

agency efforts to collect on delinquent debts. At September 30, 1995, the 

most recent data available on program-level collection performance at the 

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time of our field work, the housing agencies (1) were dealing with more 

than half of their delinquent debt through various involuntary collection 

tools, such as foreclosure and adjudication initiatives and (2) for almost a 

third of their delinquent debt, were attempting to contact borrowers to get 

them to resume payments on the original or revised terms. Education was 

experiencing similar challenges in collecting delinquent debt. Education 

and its agents, which include state or private non-profit guaranty agencies, 

were attempting to locate and confirm or revise repayment agreements 

associated with about 70 percent of Education’s delinquent debt. 

Contacting borrowers with delinquent student loans is an especially 

difficult task since they tend to be younger and thus more transient. Also, 

collection on such unsecured loans tends to be more difficult because 

there is no collateral to be seized if borrowers do not pay. Delinquent 

student loans accounted for 40 cents of every dollar of delinquent nontax 

debt directly managed by the government and over half of the delinquent 

federal credit receivable debt. 

We identified several enhancements that would facilitate valid 

assessments of agency collection efforts. Better data and key analyses are 

crucial aspects of federal efforts to measure success in accomplishing the 

charter for a more business-like credit management environment as set 

out by the Debt Collection Improvement Act of 1996. Progress in this area 

will be especially critical to the success of FMS as it assumes new debt 

collection management and reporting responsibilities under the 1996 act. 

But more importantly, such data is central to effective day-to-day 

management in terms of selecting collection strategies and deploying 

available staff and contract resources. Among the enhancements that we 

discuss are (1) developing a reporting framework to identify and assess 

the status of agency efforts to collect delinquent balances, (2) providing 

more information on how actively, successfully, and cost-effectively 

agencies are using individual collection tools, (3) reporting actual 

delinquent amounts that agencies are trying to collect and showing how 

those figures relate to amounts reported on agency financial statements, 

and (4) improving the reliability and consistency of reporting on 

delinquencies and credit receivables. 

With credit programs involving outstanding loan balances approaching a Background	 reported $1 trillion (including direct and guaranteed loans), the federal 

government is the nation’s largest credit manager. In carrying out this 

responsibility, federal agencies are faced with the challenge of ensuring 

that this debt, much of which is managed day-to-day by private sector 

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lenders and state or private non-profit guaranty agencies, is collected from 

millions of borrowers, and that billions of dollars in delinquent debt are 

effectively pursued and collected. 

Our review specifically focused on the $25 billion of delinquent credit 

program debt that four of the larger federal credit agencies were managing 

directly. 

•	 The Department of Housing and Urban Development’s Federal Housing 

Administration (FHA) Single Family and Multifamily Housing Loan 

Programs and Title I Program. The Single Family Housing program insures 

mortgages on one-family to four-family housing units. The Multifamily 

Housing program insures mortgages on projects such as rental properties 

of five or more units, housing for the elderly, hospitals, and nursing 

homes. The Title I Program insures loans for home improvements or the 

purchase of manufactured housing. These programs serve first-time home 

buyers with incomes that range from low to moderate, and the elderly and 

disabled who require special housing. 

•	 The Department of Education’s Federal Family Education Loan (FFEL) 

Program, which includes Federal Stafford Loans, subsidized and 

unsubsidized; Federal Parent Loans for Undergraduate Students (PLUS); 

and Federal Supplemental Loans to Students (SLS) (no new SLS loans were 

originated after July 1, 1994). The FFEL Program is the largest post 

secondary education guaranteed loan program of the federal government 

and its primary purpose is to increase post-secondary educational 

opportunities for eligible students. 

•	 The Department of Veterans Affairs’ (VA) Guaranty and Vendee Loan 

Programs. Under the Loan Guaranty Program, VA guarantees loans to 

veterans and current service personnel to purchase, construct, or improve 

homes. Through the Vendee Loan Program, direct loans are made to 

purchasers of VA-owned houses acquired as a result of defaults on 

guaranteed loans. 

•	 The Department of Agriculture’s Rural Housing Service (RHS) Single 

Family and Multifamily Housing Direct Loan Programs. Single Family 

Loans are made to low- and moderate-income families to purchase or 

repair homes in rural areas. Borrowers of single family loans are required 

to “graduate” from the direct loan program when their incomes are 

sufficient to afford private credit. Multifamily Housing Loans are made to 

provide moderate cost rental housing to persons of low and moderate 

incomes in rural areas. 

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The above programs represent about half of the reported $50 billion in 

reported delinquencies for credit programs and noncredit nontax 

programs as of September 30, 1995. Of the reported $50 billion, 

approximately $38 billion was attributable to credit programs. The 

residual, categorized as “nontax, noncredit,” includes such things as fines, 

penalties, and overpayments associated with a variety of government 

functions. 

At the end of fiscal year 1995,1

 the credit programs included in our review 

comprised 19 percent of reported outstanding direct loans2

 and 75 percent 

of reported defaulted guaranteed loans receivable. 

How Credit Programs Under direct loan programs, a federal agency generally makes a direct 

Work
 disbursement to an approved borrower and then services and collects on 

the loan. These loans may be secured, as in the case of the Department of 

Agriculture rural housing loan programs, or unsecured, as are Department 

of Education direct student loans. Under guaranteed loan programs, 

federal agencies rely on private sector lenders to originate and service 

loans within federal guidelines. All or a part of the interest and loan 

principal are guaranteed by the government in the case of borrower 

default. As with direct loans, guaranteed loans may be secured by property 

or unsecured. (For more information on the growth of guaranteed loan 

programs in recent years and on what happens when borrowers default on 

guaranteed loans, see appendix II). 

In general, federal direct loan and loan guarantee programs have 

legislatively mandated provisions to accomplish certain social and 

economic results. However, because many federal loan programs are 

targeted at borrowers who, due to their financial situation, cannot 

otherwise obtain private financing, the government’s risk is generally 

greater than that of private lenders. By their nature, many of these 

programs can be expected to result in a cost to the government—the cost 

of achieving a program’s social or economic goals—and agencies are faced 

with achieving these goals in conjunction with good credit management 

practices. Costs are incurred on direct and guaranteed loans when 

1

Our review focused on selected programs at FHA, VA, RHS, and Education and for those programs, 

fiscal year 1995 amounts were the most recent data available when we performed our field work. 

2

Most of the remaining outstanding direct loans relate to the Department of Agriculture’s farm loan 

program, which we have reviewed extensively in other reports and testimony. See Consolidated Farm 

Service Agency: Update on the Farm Loan Portfolio (GAO/RCED-95-223FS, July 14, 1995). 

Page 4 GAO/AIMD-97-48 Debt Collection 
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(1) interest rate or other subsidies are provided or (2) debts are not fully 

repaid and liquidation of any available collateral is insufficient to recover 

the unpaid balance. Whether or not a program is cost-effective depends 

largely on securing repayment and on the timeliness of those loans 

repayments. Therefore, within the objectives and provisions set out for 

each federal credit program, controlling and mitigating the risk of 

nonpayment are important, as are measuring and reporting on 

performance to hold agencies accountable for program results and costs. 

Figure 1 explains how failing to mitigate risks at any point during the 

credit management process—when first extending credit, when servicing 

accounts, or when recovering delinquent debt—can affect loan payment. 

Figure 1: Credit Management Functions and Risks 

Credit This includes a review of the loan applicant's credit worthiness and 

extension compliance with program loan eligibility criteria. If a credit 

extension process does not provide the ability to detect prior failure, 

or current inability, on the part of the applicant to repay outstanding 

federal or federally guaranteed loans, the risk of nonpayment on 

new loans is increased. 

Account This involves monitoring payment activity which enables an 

servicing agency to "flag" overdue payments for special attention because if 

they are left unattended, the risk of nonpayment increases. 

Recovering Debt collection should include a fair but aggressive program 

delinquent to recover delinquent debt. Restoration of the debt to a current 

debt status is the primary goal or, if that is not achieved, maximum 

collection of available assets should be sought to offset the entire 

debt. 

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Differences in Credit 

Programs 

It is important to note that differences among credit programs affect the 

validity of efforts to compare and contrast performance. In general, 

secured loans offer better recovery options than unsecured loans chiefly 

because delinquencies can be recovered by seizing or foreclosing on the 

asset securing the loan rather than by pursuing the borrower. By program 

design, some housing programs collect fees when the loan is originated to 

help cover the default costs of the program and generally do not record 

receivables or pursue shortfalls on loans after foreclosure. In contrast, 

because of the legislatively mandated structure of the FFEL Program, 

Education attempts to collect on all defaults, since there is no collateral to 

seize, and loan origination fees collected are not designed to cover all 

default costs. Other program differences and their effect on debt reporting 

are noted throughout this report. 

Prior GAO Work and 

Legislative Initiatives 

Affecting Federal Credit 

Programs 

Federal loan programs have been a major focus of GAO’s High-Risk 

Program.3

 We have designated high risk areas involving loan programs at 

three of the four major credit agencies included in our review. Recent 

reports on our High-Risk Program discuss: the Department of Agriculture’s 

farm loans, the Department of Education’s entire student financial aid 

program, and the Department of Housing and Urban Development. Our 

audits, those by the inspectors general, and others, have consistently 

disclosed serious weaknesses in agency systems used to account for and 

manage receivables. Audits have shown that some information for credit 

and debt management is not accurate or complete. 

Over the past 15 years, numerous legislative and other initiatives—some of 

which were in response to our recommendations—have strengthened 

agency debt collection efforts or its oversight, including the Debt 

Collection Act of 1982, the Debt Collection Improvement Act of 1996, 

OMB’s nine-point credit management program, the Chief Financial Officers 

(CFO) Act of 1990, as expanded by the Government Management Reform 

Act (GMRA) of 1994, the Government Performance and Results Act (GPRA) 

of 1993, the Federal Credit Reform Act of 1990, and the establishment of 

the Federal Accounting Standards Advisory Board (FASAB). Among other 

things, these initiatives clarified and strengthened agency authority for 

collecting debt, provided the underpinning for improving financial and 

3

Our High-Risk Program, which began in 1990, represents a special effort to review and report on the 

federal program areas we considered high-risk because they were especially vulnerable to waste, 

fraud, abuse, and mismanagement. The effort has brought much needed focus to problems that were 

costing the government billions of dollars. In February 1997, we issued a series of reports on the status 

of efforts to address problems in designated high-risk areas (High-Risk Series GAO/HR-97-20SET, 

February 1997). 

Page 6 GAO/AIMD-97-48 Debt Collection 
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program management and accountability in federal agencies, and revised 

budget and accounting requirements for federal credit programs. 

The Federal Credit Reform Act of 1990, in particular, changed the 

budgetary treatment of loans and loan guarantees so that the government 

could better measure and control its subsidy costs for loan programs. 

Under the act, agencies are required to estimate and budget for the full net 

present value cost of direct loans and loan guarantees, before credit is 

extended. Recovery of delinquent debt is a factor not only in determining 

the estimated cost of the loan program but also in controlling the cost of 

the program. Higher recovery rates for delinquent debt translate into lower 

program costs. The Federal Credit Reform Act of 1990 and the other 

initiatives are discussed in further detail in appendix III. 

The Debt Collection The Congress also just last year took an important step in improving debt 

Improvement Act of 1996
 collection efforts by expanding collection tools and authorities available to 

agencies. The Debt Collection Improvement Act of 1996, which we 

supported, allows the public dissemination of information regarding the 

identity of persons with delinquent nontax debt. In an effort to reduce 

future delinquencies, it also requires agencies to screen potential 

borrowers—except for disaster loan applicants—and requires denial of 

credit to anyone who is delinquent in repaying federal debt (except for tax 

debt). The 1996 act also calls for centralizing the servicing of debt that is 

more than 180 days delinquent at Treasury’s FMS and designated collection 

centers. In certain circumstances, the act provides authority for agencies 

to retain and use a portion of collections, if appropriated. The act also 

transferred the responsibility to prepare annual reports to the Congress 

regarding agency debt collection efforts from OMB to FMS. A more extensive 

description of this new legislation and the expanded responsibilities 

accorded FMS are provided in appendix IV. 

In carrying out our review, we analyzed debt collection information Scope and available from OMB and the agencies included in our review for fiscal years Methodology 1992 through 1996. Amounts for fiscal year 1995 were used to show the 

status of delinquent debt for the selected FHA, VA, RHS, and Education 

programs discussed in this report because it was the most recent 

information at the program-level available at the time our fieldwork was 

done. Because preliminary governmentwide debt collection information 

for fiscal year 1996 just became available in February 1997, we included 

this data in our report where possible. We also reviewed the Debt 

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Collection Act of 1982, the Debt Collection Improvement Act of 1996, and 

other significant applicable legislative and regulatory provisions affecting 

the programs included in our review. We analyzed information in the 

Analytical Perspectives section of the Budget of the United States 

Government Fiscal Year 1997 and Fiscal Year 1998 and other selected 

program data used by agencies to manage their credit programs. 

To determine progress toward resolving outstanding delinquent debt in the 

programs reviewed, we analyzed data provided by agency officials 

describing actions taken to resolve delinquent debt. We did not verify the 

accuracy of the information provided to us by OMB, FMS, or the four 

agencies included in our review. We did, however, consider the results of 

financial statement audits, and sought to determine whether agencies 

reported debt collection information on a consistent basis, for the 

agencies included in our review. 

We conducted our work from October 1995 through March 1997 in 

accordance with generally accepted government auditing standards. 

Details on the scope and methodology of this review are included in 

appendix I. 

We requested comments on a draft of this report from the Department of 

the Treasury; the Office of Management and Budget; and the Departments 

of Agriculture, Housing and Urban Development, Veterans Affairs, and 

Education. At a joint meeting on April 17, 1997, we received oral 

comments from those agencies. Their comments are discussed in the 

“Agency Comments and Our Evaluation” section of this report. 

OMB’s data showed that as of September 30, 1996, federal agencies were Reported Credit responsible for directly managing about $204 billion of the approximately Receivables and $1 trillion attributable to government lending programs. The federally 

Delinquencies	 managed segment of the overall credit portfolio (credit receivables) 

included (1) $164 billion of direct lending and (2) $40 billion of defaulted 

guaranteed loans for which agencies had reimbursed private lenders and 

were now trying to collect directly from borrowers. 

Of the total reported $51 billion of governmentwide delinquencies, about 

$36 billion (down from $38 billion in fiscal year 1995) was associated with 

the federal credit programs. The remaining $15 billion of delinquencies 

were nontax noncredit receivables resulting from such actions as grant 

overpayments and civil monetary fines. 

Page 8 GAO/AIMD-97-48 Debt Collection 
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The numbers reported indicate that total credit receivables and 

delinquencies on agency books were steady from 1992 to 1996. As 

discussed later in this report, caution must be exercised in using this data 

for comparison or analytical purposes because agencies did not uniformly 

report data and reliability issues have surfaced during audits of agency 

financial statements. 

Receivables	 Table 1 shows the reported credit receivables from fiscal year 1992 

through fiscal year 1996. For financial reporting purposes, credit agencies 

wrote off about $20 billion of credit-related debt during these years 

including: $3 billion in fiscal year 1992, $3 billion in fiscal year 1993, 

$8 billion in fiscal year 1994, $3 billion in fiscal year 1995, and $3 billion in 

fiscal year 1996. As discussed later in this report, although the write-offs 

allow financial statements to depict amounts the agency reasonably 

expects to collect, some agencies continue to pursue amounts that have 

been written off. 

Table 1: Credit Receivables Reported


by OMB for Fiscal Years 1992 Through Dollars in billions


1996 Fiscal year 

Credit receivables 1992 1993 1994 1995 1996 

Direct loans $157 $157 $161 $160 $164 

Defaulted loan guarantees 49 48 37 44 

Total $206 $205 $198 $204 $204 

Source: Debt collection reports and FMS. 

Table 2 shows these same reported credit receivables for fiscal years 1992 

through 1996 by lending agency. As the table indicates, most of these 

receivables belonged to the Department of Agriculture. We extensively 

reviewed most of Agriculture’s receivables in our reports, entitled 

Consolidated Farm Service Agency: Update on the Farm Loan Portfolio 

(GAO/RCED-95-223FS, July 14, 1995) and Farm Service Agency: Update on the 

Farm Loan Portfolio (GAO/RCED-97-35, January 3, 1997). 

Table 2 also shows an $18 billion increase in Education receivables 

between fiscal years 1994 and 1996. This was primarily the result of 

(1) $12 billion in loan growth from fiscal years 1994 to 1996 for the direct 

loan program, which was not part of our review,4

 and, as explained later, 

4

The direct loan program at Education was started in 1994 and was not included in our review 

because, as a new program, it did not have significant delinquencies. 

Page 9 GAO/AIMD-97-48 Debt Collection 

40 
B-275282 

(2) Education increasing the recorded net financial value of its receivables 

based on the audit of its fiscal year 1995 financial statements. 

Table 2: Credit Receivables Reported


by Lending Agency Dollars in billions


Fiscal year 

Agency 1992 1993 1994 1995 1996 

Department of Agriculture $108 $108 $111 $109 $104 

Agency for International Development 16 16 16 16 

Department of Housing and Urban 

Development 21 21 21 20 

Small Business Administration 6 7 9 10 

Department of Education 15 13 14 24 

Department of Veterans Affairs 3 3 3 3 

Export Import Bank 9 8 6 7 

All other agenciesa 28 29 18 15 

Total $206 $205 $198 $204 $204 

aAmounts for 1992 and 1993 include $10 billion and $8 billion, respectively, in accrued interest 

that were not distributed among agencies until 1994. 

Source: Debt collection reports and FMS. 

It should be noted that the credit programs at FHA, VA, RHS, and Education 

that we reviewed in more detail represent only a portion of the amounts in 

table 2. Table 3 identifies the credit receivables for the programs we 

reviewed as of the end of fiscal year 1995, which was the latest data 

available for the programs included in our review. 

Table 3: Credit Receivables for


Programs Reviewed for Fiscal Year Dollars in billions


Credit 

Program reviewed receivables 

Education: FFEL Program $20 

HUD—FHA: Single and Multifamily Housing and 


Title 1 Loan Programs 10


Agriculture—RHS: Single and Multifamily Housing Loan Programs 30 

Veterans Affairs: Guaranty and Vendee Loan Programs 3 

Total $63 

Source: Agencies’ Report on Receivables Due From the Public. 

Page 10 GAO/AIMD-97-48 Debt Collection 

15 

16 

10 

32 

3 

9 

15 

1995 
B-275282 

Delinquencies	 Table 4 shows that from fiscal year 1992 to fiscal year 1996, reported 

delinquencies on credit receivables started and ended at $36 billion with 

interim fluctuations. At September 30, 1996, $26 billion, over 70 percent of 

the credit receivable delinquencies, was attributable to defaulted loan 

guarantees, primarily student loans. The remainder was attributable to 

direct loans. Reported delinquencies for the programs we reviewed 

accounted for about $26 billion (two-thirds) of the $38 billion in delinquent 

credit receivables managed by federal agencies at September 30, 1995. 

Table 4: Delinquent Credit Receivables


Reported by OMB for Fiscal Years Dollars in billions


1992 Through 1996 Fiscal year 

Loans 1992 1993 1994 1995 1996 

Direct loans $11 $10 $12 $10 $10 

Defaulted loan guarantees 25 21 22 28 

Total $36 $31 $34 $38 $36 

Source: Debt collection reports and FMS. 

On the surface, delinquencies from defaulted guaranteed loans appear to 

be a greater problem than those for direct loans. However, it is not 

possible to calculate the percentage of guaranteed loans that are 

delinquent because, according to OMB, no governmentwide data exists on 

the status of delinquencies for the $760 billion of guaranteed loans 

currently being serviced by private lending institutions. Without this 

information, reliable comparisons of delinquencies for direct and 

guaranteed loans are not possible. See appendix II for an analysis of 

guaranteed loans outstanding. 

While the amounts of reported delinquencies for the programs changed at 

each of the four agencies included in our review, the largest change 

related to Education’s Federal Family Education Loan Program, which 

grew from $14 billion to $20 billion from fiscal years 1992 to 1995. The 

major part of this increase was a result of Education increasing the net 

financial value of its receivables by $5.6 billion based on an independent 

audit of its fiscal year 1995 financial statements. Specifically, the audit 

revealed that Education should recognize a receivable for expected 

collections from loans previously considered uncollectible. 

The changes in the amounts reported as delinquent for fiscal years 1992 

through 1995 at the three housing agencies included in our review are 

highlighted below. More specific information on the status of collection 

Page 11 GAO/AIMD-97-48 Debt Collection 

26 
B-275282 

efforts of the housing programs and Education are discussed in the next 

section of this report. 

•	 FHA’s reported delinquencies declined from $2.6 billion to $2.3 billion due 

to loan sales, loan restructuring, foreclosures, and property dispositions. 

In March 1994, FHA began an aggressive program to sell defaulted 

FHA-insured single and multifamily mortgages. This initiative was 

undertaken as part of HUD’s overall reinvention efforts.5

 As discussed later 

in this report, however, FHA officials acknowledged that reported 

delinquencies would have been significantly higher if they were consistent 

with FMS criteria. 

•	 VA’s reported delinquencies declined from $2.2 billion to $1.5 billion due to 

pre-foreclosure loan servicing activity, debt waivers and the Veterans 

Home Loan Indemnity and Restructuring Act of 1989. Under this act, 

borrowers pay a higher funding fee to cover defaults. VA does not pursue 

any remainder due on the loan after foreclosure.6

 Thus, the delinquencies 

in VA’s portfolio primarily represent efforts to collect on defaults resulting 

from pre-1990 loans. A VA official said that the amount of delinquencies 

should continue to decline because few new housing delinquencies are 

being added, allowing VA to concentrate on resolving older delinquent 

debt. 

•	 RHS’ reported delinquencies stayed steady at about $1.2 billion during the 

4-year period. This amount is attributable solely to RHS’ direct lending 

program. 

In addition, our January 1997 report7

 on farm loans showed that


reported delinquencies had dropped from 28 percent to 23 percent during


fiscal year 1996, largely due to a write-off of $1.1 billion of interest and


principal during the year. As noted in the overview report (GAO/HR-97-1,


February 1997) for our series of reports on high-risk federal programs, the


Congress passed the Federal Agriculture Improvement and Reform Act of


1996, which made fundamental changes in loan-making, loan-servicing,


and property management policies. Agriculture is still in the process of


implementing the mandated reforms and their impact on the loan


portfolio’s financial condition will not be known for some time.


5

For more information about HUD’s reinvention program, see High-Risk Series: Department of Housing 

and Urban Development (GAO/HR-97-12, February 1997). 

6

Except when fraud or misrepresentation is proved. 

7

Farm Service Agency: Update on the Farm Loan Portfolio (GAO/RCED-97-35, January 3, 1997). 

Page 12 GAO/AIMD-97-48 Debt Collection 
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We obtained information on efforts to resolve delinquencies from the four Status of Agency agencies included in our review and grouped their efforts under four Efforts to Resolve general categories: 

Delinquencies •	 attempting to contact delinquent borrowers to seek resumption of 

voluntary payments by confirming or rescheduling loan terms, 

• receiving payments under those agreements, 

•	 applying involuntary collection tools if payment is not made voluntarily, 

and, 

• deciding whether or not to terminate collection activity. 

Agency debt collection officials agreed that categorizing collection action 

in this manner would be useful for assessing progress in collecting 

delinquent debt. 

Description of Collection 

Phases 

For internal management purposes, agencies tracked delinquent debt 

using various formats and phases. A breakdown of delinquent debt on a 

uniform basis according to where it is in the debt collection process is 

useful to determine the status of efforts at agencies to resolve 

delinquencies. Such a breakdown can serve as an initial framework by 

those responsible for overseeing agency and governmentwide credit 

management to identify where backlogs of work may be occurring or 

factors that may be preventing timely debt resolution. Figure 2 illustrates, 

on a very general level, the debt collection process. A more detailed 

explanation of each activity follows. 

Page 13 GAO/AIMD-97-48 Debt Collection 
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Receive 

payments 

(voluntary) 

Terminate 

collection 

Apply involuntary 

collection tools 

Attempting to contact 

borrower-to determine 

reason for delinquency and 

establish new payment 

agreement if necessary 

Debt collection activity is to be initiated when a borrower does not make a 

scheduled payment. Since most loan payments are received from 

borrowers who have been routinely making payments, the ultimate goal is 

to restore delinquent loans to a current status. The first step involves 

contacting the borrower to determine the cause of the delinquency, 

whether the cause was a temporary or permanent condition, and whether 

the borrower is capable of resuming timely voluntary payments under the 

original or rescheduled loan terms. These contacts and the associated 

procedures are intended to give the borrower the opportunity to resume 

making timely payments. Sometimes the reason for the delinquency can 

not be readily determined because the agency has difficulty locating the 

borrowers due to missing or incorrect names, addresses, or social security 

numbers. Also, borrowers sometimes do not acknowledge attempts to 

contact them. 

Depending on the reason for the borrower not making payments, the 

agency has several options. If the cause of the delinquency is a temporary 

condition, the agency may negotiate a repayment agreement for the full 

liability or lesser amounts. The agency can turn to involuntary collection 

techniques if efforts to work out a repayment agreement with the 

borrower are unsuccessful. Depending on program policy, if the borrower 

Figure 2: Major Debt Collection 

Activities 

Attempting to Contact 

Borrowers 

Page 14 GAO/AIMD-97-48 Debt Collection 
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cannot currently pay or has no assets to offset, collection actions may be 

suspended or terminated. 

Delinquent Debt Being Repaid	 When borrowers resume payments on formerly delinquent debt, some 

agencies reclassify it as current; others leave it classified as delinquent for 

the life of the loan. Regardless of how it is classified, for installment loans 

such as the ones included in our review, the repayment period may extend 

over a long period of time (up to 30 years, depending on loan terms). This 

category also includes loans subject to moratoriums under which 

payments can be deferred for up to 2 years. 

Involuntary Collection Tools	 If the agency cannot collect either under the original payment terms or 

under modified terms as discussed above, more aggressive collection 

actions can be attempted, including the following. 

•	 Offsets: Tax refund offsets allow the agency, in coordination with IRS, to 

offset (withhold) delinquent amounts from a debtor’s income tax refund. If 

the debtor is a federal employee, an agency can arrange to withhold 

15 percent of his or her disposable income. Agencies can also use 

administrative offsets, which allow them to withhold other types of 

payments due the debtor from the federal government, such as retirement 

pay. 

•	 Foreclosure: If the loan is secured by property, the government, or its 

agent, may seize the mortgaged property. Foreclosure terminates all 

borrower rights in the mortgaged property. 

•	 Adjudication: This refers to delinquent debt that is in an administrative 

appeals process, being litigated by the agency or the Department of 

Justice, or being collected by the Department of Justice. 

•	 Bankruptcy: The agency may become involved as a creditor in bankruptcy 

proceedings.8 

FMS policy stipulates that if either litigation or bankruptcy is being 

pursued, the agency cannot pursue offsets. 

Terminating Collections	 When the cause of the delinquency is permanent, such as permanent 

disability of the borrower, debt collection efforts are sometimes 

terminated. If the debtor is deceased, the agency is to file a claim against 

the debtor’s estate for liquidation of the debt. Debt at this stage also 

includes amounts being considered for write-off. 

8

Bankruptcy is initiated by the borrower and therefore is not an agency tool. We have included it in 

this section because OMB tracks debt in bankruptcy along with adjudication and foreclosure. 

Page 15 GAO/AIMD-97-48 Debt Collection 
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Collection Efforts of For the housing agencies included in our review, figure 3 shows the status 

Agencies Included in Our of efforts to collect delinquent debt at the end of fiscal year 1995. We 

Review present data for the three housing programs and student loan program 

separately because of the different nature and the status of the debt. A 

separate analysis for each agency follows. 

Figure 3: Distribution of Housing


Delinquent Debt as of September 30, 

28% • 

13% • 51% 

• 

• 

7%
 1995 (Dollars in billions) Collection action terminated $.420 

1% 

Status not readily determinable 

$.049 

Agency or private firm attempting 

to contact borrower $1.58 

In repayment $.727 

Adjudication, foreclosure, or 

bankruptcy $2.874 

Source: Reports on Receivables Due from the Public and other agency schedules. 

Federal Housing Table 5 shows the distribution of FHA’s reported delinquent debt for debt 

Administration collection activities related to the Single Family, Multifamily, and Title 1 

housing programs as of the end of fiscal year 1995. 

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Table 5: Distribution of FHA’s


Delinquent Debt as of September 30, Dollars in millions


1995 Collection activity Amount 

Agency or private collection firm attempting to contact borrower $380 

In repayment ___ 

Adjudication, foreclosure, or bankruptcy 1,784 

Collection action terminated or suspended 

Status not readily determinable 

Total $2,300 

Source: FHA. 

According to FHA officials, the $380 million relates to Title I delinquent 

loans for mobile homes or for improvements to existing homes. 

Comparable data for single and multifamily debt were not readily 

available. 

FHA does not list any delinquent debt in the repayment status category. 

Debt being paid in accordance with original or rescheduled loan terms is 

reclassified as current. 

Over 70 percent of FHA’s delinquent single family and multifamily debt is in 

adjudication, foreclosure, or bankruptcy. Of the total $1.784 billion in 

these categories, according to FHA reports, $576 million relates to 

foreclosures on multifamily loans and $600 million relates to adjudication 

of single family debt. 

FHA identified $87 million being considered for termination. FHA explained 

that this debt represented Title I cases that had cycled through all phases 

of its debt collection process with no resulting recoveries. FHA holds this 

kind of debt in a special inventory for up to 3 years and then liquidates it 

through sale or write-off. 

Veterans Affairs	 Table 6 shows the distribution of delinquent debt for VA housing and 

nonhousing programs according to the debt collection activities. Although 

collection activity for the individual programs was not readily available, VA 

officials told us that $2.18 billion total delinquent debt represents 

$1.5 billion of delinquent housing loans (VA Guaranty and Vendee loan 

programs) and $.68 billion pertaining to non-housing programs such as the 

compensation and pension programs. 

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Table 6: Distribution of VA’s


Delinquent Debt as of September 30, Dollars in millions


1995 Collection activity Amount 

Agency or private collection firm attempting to contact borrower $1,200 

In repayment 

Adjudication, foreclosure, or bankruptcy 

Collection action terminated or suspended 

Status not readily determinable ___ 

Total $2,180 

Source: VA Debt Management Center. 

VA officials informed us that most of VA’s delinquent debt is attributable to 

housing loans that were made before 1990. Prior to that time, VA billed 

borrowers who lost their homes through foreclosure for residual amounts 

not recovered through the sale of the property. The Veterans Home Loan 

Indemnity and Restructuring Act of 1989, as amended, restructured the 

program to require borrowers to pay up-front fees, ranging from 0.5 to 

3 percent of the loan, to help compensate for defaults. For loans closed 

after December 31, 1989, amounts not recovered through the foreclosure 

and/or sale of the property to a third party have not been recorded as a 

receivable or pursued, unless fraud or misrepresentation is proved. 

Most of the $1.2 billion in the first stage of collection represents debt 

referred to private collection firms. If VA cannot locate the borrower, it 

uses two major private collection firms to contact the debtor and work out 

repayment terms. If these firms cannot contact the borrower, VA will 

consider writing off the debt. One reason for debt in this category is that 

VA is legislatively prohibited from using tax refund offsets, administrative 

offsets, and salary offsets in pursuing collections on delinquent housing 

loans in certain circumstances. 

VA reported that the loan terms for $420 million in delinquent debt were 

rescheduled, for example, by reducing monthly payments and extending 

the repayment period. VA typically negotiates monthly payment plans over 

1 to 3 years, depending upon the borrowers’ financial condition. Longer 

terms are negotiated for very large debts. 

VA reported $230 million in adjudication or bankruptcy. Over half the debt 

in this category represents amounts for which adjudication actions were 

being pursued, after the failure of other collection actions. The remaining 

debt represents amounts for which the borrower had filed bankruptcy and 

Page 18 GAO/AIMD-97-48 Debt Collection 

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230 

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VA was waiting to secure a portion of the payment due, pending 

completion of bankruptcy proceedings. 

Two-thirds of the $330 million in the terminated or suspended phase 

represents amounts that have been returned to VA from private collection 

firms or the Department of Justice as uncollectible. The remaining 

amounts represent debts owed by borrowers who died and for which VA is 

awaiting receipt of death certificates and debt that was suspended because 

the borrower is unemployed, in prison, or currently unable to pay. 

Rural Housing Service	 Table 7 shows the distribution of RHS’ delinquent debt according to the 

debt resolution activities for its direct lending for single family and 

multifamily housing programs as of the end of fiscal year 1995. Most of the 

debt relates to loans for single family homes. 

Table 7: Distribution of RHS’


Delinquent Debt as of September 30, Dollars in millions


Collection activity Amount 

Agency or private collection firm attempting to contact borrower $— 

In repayment 

Adjudication, foreclosure, or bankruptcy 

Collection action terminated or suspended 

Total $1,170 

Source: RHS. 

RHS has no debt identified in the first category because the agency did not 

track how many borrowers it was contacting to determine the reason for 

delinquent loan payments if payments were not made on time. In addition, 

RHS policy did not require the use of private collection firms. RHS officials 

stated that they were currently studying the option of using this tool. 

In addition, RHS officials informed us that since most of their debt is 

tracked by number of borrowers rather than by dollar amount, the 

amounts shown in repayment were estimates. Dollar amounts were, 

however, tracked for amounts in adjudication, foreclosure, bankruptcy, 

and collection action terminated categories. 

As table 7 shows, $307 million was in repayment. RHS loan servicing 

guidance encourages avoiding foreclosure whenever appropriate. RHS 

officials reported that the agency has many options for getting the 

borrowers into a repayment status. Borrowers are offered various types of 

Page 19 GAO/AIMD-97-48 Debt Collection 

1995 

307 

860 

3 
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loan restructurings (e.g., loan extension) to give them an opportunity to 

make loan payments on time. Borrowers may qualify for a moratorium, 

also known as forbearance, if their financial hardship is temporary and 

likely to improve. Under the moratorium program, no payments are 

required for up to 2 years. 

Most of RHS’ delinquent debt—about 74 percent—was in bankruptcy, 

foreclosure, or adjudication. Roughly half of this amount represents 

amounts for which the borrowers have declared bankruptcy and debt 

recovery is delayed until bankruptcy proceedings are finalized. The 

majority of the remaining amounts in this category represent amounts in 

foreclosure. 

Education	 Education’s defaulted guaranteed loans represent over half of the reported 

credit program delinquencies and about 40 percent of the federal 

government’s total delinquent nontax debt. Figure 4 categorizes 

Education’s reported $20 billion in delinquent debt as of the end of fiscal 

year 1995. Table 8 offers an additional data breakout by identifying how 

much in the four categories is being administered by Education itself 

versus its agents—state and private non-profit guaranty agencies9

—with 

which Education shares its collection process. 

9

Guaranty agencies are responsible for verifying that lenders properly service and attempt to collect 

loans, making payment to the lending institutions for the guaranteed portion of loans that are 

terminated for default, and, subsequently, attempting to collect on those defaulted loans. If successful, 

the guaranty agencies retain a portion of amounts collected, in part to cover their collection costs. 

They are also reimbursed for certain administrative costs. 

Page 20 GAO/AIMD-97-48 Debt Collection 
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Figure 4: Distribution of Education’s


Delinquent Debt as of September 30, 

72% • 

• 14% 

• 

• 

In repayment $2.815
 1995 (Dollars in billions)


9% 

Adjudication, foreclosure, or 

bankruptcy $1.767 

4% 

Collection action terminated $.842 

1% 

Other $.229 

Educ./private firm attempting to 

contact borrower $14.486 

Source: Reports on Receivables Due from the Public and other agency schedules. 

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Table 8: Distribution of Education’s


Delinquent Debt as of September 30, Dollars in millions


1995 Guaranty 

agencies 

In-house 

Collection activity management Total amount

Agency or private collection firm 

attempting to contact borrower $10,240 $4,246 $14,486 

In repayment 2,460 355 2,815 

Adjudication or 

bankruptcy 1,680 87 1,767 

Collection action terminated or suspended 140 702 

Othera 0 229 

Total $14,520 $5,619b $20,139 

aOther debt includes debt owed by borrowers with multiple student loans in various stages of the 

debt collection process. 

bEducation’s Debt Collection Service center records showed an additional $3.6 billion, which 

includes accumulated interest and other amounts legally due from borrowers being pursued for a 

total of $9.2 billion. 

Source: Department of Education. 

Education and the state or private non-profit guaranty agencies were 

trying to contact and establish repayment agreements with borrowers 

owing 72 percent of outstanding delinquencies. Although success in 

getting borrowers into a repayment status was somewhat elusive, 

Education had collected from some of these borrowers by having Treasury 

intercept their tax refunds. Education officials told us that the $4.2 billion 

of the $5.6 billion that Education was managing in-house had cycled 

through the resolution process several times. 

About $2.8 billion, 14 percent, was in repayment status. Education 

considers borrowers to be repaying if at least two payments were made 

during the quarter being reported. Education had about $1.8 billion that 

was in the process of being resolved through bankruptcy or adjudication 

proceedings and was awaiting the completion of these activities. Debt for 

which collection action was terminated or suspended totaled $842 million. 

Reasons for termination include the death or permanent disability of the 

borrower. 

Delinquent student loans are harder to collect than the other types of 

loans discussed in this report for several reasons. First, unlike the housing 

loans, student loans are unsecured, leaving the government and private 

lenders with no collateral. Second, for the loans on which Education itself 

Page 22 GAO/AIMD-97-48 Debt Collection 

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229 
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is trying to collect, delinquent cases are not received until both lenders 

and the guaranty agencies have attempted collection, a process which 

typically lasts at least 4 years after the debt became delinquent. Third, it is 

more difficult to locate and contact borrowers who frequently relocate 

after attending post secondary schools, experience name changes in the 

event of marriage, and, in general, tend to have more frequent changes in 

residences. 

Other federal entities, such as the U.S. Postal Service and the Internal 

Revenue Service, can assist in finding addresses, but those efforts still 

leave some gaps. Education’s Debt Collection Service sent 3 million 

delinquency notices to borrowers during 1995. About 662,000 (23 percent) 

were returned by the U.S. Postal Service as undeliverable. Although the 

Internal Revenue Service (IRS) was one source for providing more current 

addresses for about 400,000 of these borrowers, its data could not provide 

current addresses for about 240,000 borrowers. 

Several other problems associated with student loans also make it difficult 

to collect. Our February 1997 high-risk series report,10 for example, noted 

that many student borrowers have little or no means to repay their loans 

because they attended poor quality proprietary schools that failed to 

provide them with marketable skills. In addition, we have also reported 

that, in the past, many student loans were initiated absent important 

controls critical to mitigating risks up front, including checks to identify 

prior defaults on the part of applicants. 

Notwithstanding the difficulty of finding a segment of the borrower 

population, some may not respond to notices or may not honor repayment 

agreements. In the latter cases, the contact process has been reinitiated 

and involuntary collection measures have been used. 

Governmentwide	 In examining each agency’s efforts to collect on delinquent debt above, we 

focused on some of the returns they were able to generate from five Reporting on Dollars mandatory collection tools: tax refund offsets, federal employee salary 

Collected Through	 offsets, administrative offsets, private collection firms, and litigation. At 

OMB’s direction, agencies provided information on collections from these Five Specific Tools	 tools. Figure 5 shows that three of these tools—tax refund offsets, 

litigation, and private collection firms—accounted for more than $2 billion 

in collections across government—86 percent of the $2.4 billion collected 

with the five techniques during fiscal year 1995. OMB’s report also revealed 

10High-Risk Series: Student Financial Aid (GAO/HR-97-11, February 1997). 

Page 23 GAO/AIMD-97-48 Debt Collection 
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that the use of these five tools generated twice as much in fiscal year 1995 

as in fiscal year 1992. Additional information about the tools and related 

collections is provided in appendix V. 

Figure 5: Reported Collections on 

Delinquent Debt Using Prescribed 

Tools, Fiscal Year 1995 (Dollars in 

billions) 

14% 

22% 

23% 

40% 

Federal salary offset $21 

1% 

Tax refund offset $965 

Litigation $553 

Administrative offset $330 

Private collection firms $533 

Source: Status Report on Credit Management and Debt Collection for fiscal year 1995. 

Improving Debt 

Collection Reporting 

In recent years, the Congress has responded to the need to reform 

government management through such initiatives as the Government 

Performance and Results Act (GPRA) of 1993 and the Chief Financial 

Officers (CFO) Act of 1990. GPRA aims to provide systematic information on 

the performance of government programs and to directly link such 

information with the annual budget process. The audited financial 

statements required by the CFO Act, as expanded in 1994, are intended to 

provide congressional and executive decisionmakers with the reliable 

financial and program information that they have not previously had. This 

information is to be provided to decisionmakers in results-oriented reports 

on the government’s program results and financial condition that, for the 

first time, integrate budget, financial, and program information. These 

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reports are also to include cost information that add critical information 

about what citizens and the nation are receiving for each dollar spent. 

The 1982 and 1996 debt collection legislation are fully consistent with 

these managerial concepts and established expectations that agencies will 

make concerted efforts to collect debt. As mentioned earlier, Treasury’s 

FMS has been charged with new debt management and reporting 

responsibilities under the Debt Collection Improvement Act of 1996. FMS 

officials told us that they intend to evolve annual collection reporting to a 

more evaluative perspective. They envision presenting data on the status 

of the delinquent debt being worked on, what types of collection 

mechanisms are being used, the associated costs, and what can be done to 

increase collection prospects. 

Such reporting would offer the Congress better information, would also 

address some of the underlying principles of GPRA and the CFO Act, and 

would assist agencies in assessing the effectiveness of their current 

strategies and identifying other potential strategies for managing or 

increasing the collection of delinquent debt. Another valuable benefit is 

that better data and analysis would assist agencies in their day-to-day 

management of collection activities. Further, FMS could use such 

performance information on the effectiveness of collection functions in 

deciding which agencies should be named as debt collection centers. 

Under the 1996 act, these centers are intended to play a key role in helping 

FMS manage delinquent debt that other agencies cannot resolve within 180 

days after the debt becomes delinquent. 

We have identified a number of reporting enhancements that would be 

valuable for assessing agency debt collection strategies and providing 

better context for report users. Systematically building upon the available 

analytical data would help ensure that relevant performance information 

exists to allow FMS and agencies to continue progressing toward a more 

business-like debt management environment. In particular, it would be 

useful in looking at the status of delinquent debts, examining what 

agencies are doing and how much they are actually trying to collect, and 

determining if any lessons can be learned or experiences shared by 

analyzing debt with similar characteristics. Further, addressing quality 

issues, including whether agencies are reporting on a consistent basis and 

whether their data are reliable, would be valuable initiatives. 

Enhancing Debt Collection We identified four potential enhancements to annual debt collection 

Reports reporting to the Congress. The first—developing a framework to highlight 

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the status of collection efforts—would pinpoint where delinquent debt is 

in the debt collection process and thus highlight backlogs and help to 

identify existing collection barriers. The second—assessment of agency 

use of collection tools—would expand reporting beyond the five tools 

currently assessed to include information needed to develop performance 

measures for tracking agency progress. The third—including additional 

information on the amounts of delinquencies agencies are 

pursuing—would provide a better sense of the workload managed by 

agency debt collection functions. The fourth—aggregating information 

according to program characteristics (e.g., secured housing loans)—would 

better portray program differences and highlight collection challenges of 

similar programs. Collectively, such data would provide a reasonable basis 

for assessments of whether agencies are making concerted efforts to 

collect delinquent debt. 

Status of Delinquent Debt in the While various reporting frameworks could be used to report progress in 

Collection Process	 collecting delinquent loan balances, and thus prospects for collections, a 

framework such as we discussed earlier would be one approach. Below, 

we highlight, for each phase of the debt collection process, why 

developing this information is important. 

Attempting to Contact Borrowers: For much of the delinquent debt, the 

primary challenge is to locate the borrower and/or borrower assets to 

encourage and arrange for voluntary payments. This challenging task is 

now standing in the way of efforts to pursue the collection of at least 40 

cents of every dollar of delinquent nontax debt that the federal 

government is reportedly trying to recover. A preponderance of debt in 

this category could mean that many borrowers are unable to pay or are 

simply not responding to agency attempts to contact them. By working 

cooperatively to determine how much debt in this category is attributable 

to each of these conditions, FMS and agencies could formulate strategies on 

such matters as whether and when to apply involuntary collection tools. 

Delinquent Debt Being Repaid: Knowing how much delinquent debt is 

being voluntarily repaid is valuable information that could reflect 

improvement in timely cash receipts for specific programs. Three of the 

four agencies included in our review can track outstanding debt in 

repayment status. For example, at September 30, 1995, about 14 percent of 

Education’s delinquent portfolio was in repayment status. In general, 

fewer resources should be required to service debt in repayment status 

than to pursue delinquent accounts. Discussion among agency officials on 

successful strategies to get borrowers to voluntarily pay their debt could 

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serve as impetus for change by other agencies attempting to collect similar 

types of debt. 

Involuntary Collection Tools: Reporting on secured or unsecured 

delinquent amounts for which more aggressive collection strategies are 

underway would also be revealing. The nature of housing programs would 

suggest that housing delinquencies would normally be resolved through 

foreclosures or borrower conveyance of the property. However, individual 

program policies may slow or reduce the amount of debt in this category, 

such as forbearance programs. Learning how much debt is in this stage 

compared to other stages could help agencies decide whether any 

strategic changes are needed in the use of their collection tools. A 

preponderance of debt in bankruptcy, foreclosure, and litigation, for 

example, could indicate that all reasonable attempts to persuade 

borrowers to voluntarily pay have been exhausted. A relatively minor 

amount in this phase of the collection process could indicate that an 

agency had encountered restrictions imposed by statutes or agency 

procedures in using some of these more aggressive initiatives. 

Terminating collection: Including information on this phase in the annual 

debt collection report would offer perspective on amounts no longer being 

pursued due to death, disability, or expiration of the time limit for 

collecting the debt. Significant amounts of debt in this category may 

indicate that the agency has taken a close look at some of their older debt 

and determined that factors, such as lack of borrower assets, preclude 

collection or that future collection efforts would not be cost-effective. 

Alternatively, significant amounts in this category compared to others may 

mean that an agency may not be doing enough to collect debt. 

Use of Collection Tools	 As discussed earlier in this report, debt reporting to the Congress 

currently provides some useful information on the collections from the 

use of five tools on a governmentwide basis: tax refund offsets, 

administrative offsets, federal employee salary offsets, private collection 

firms, and litigation. Enhancing this information would provide agencies 

with a stronger basis for deciding whether all appropriate actions to 

collect a debt have been exhausted and thus whether agencies are making 

concerted efforts to collect delinquent debt. Agency automated 

information systems capture a variety of program-specific data and may 

offer potential sources of information needed for assessing the 

effectiveness of collection strategies. The agencies included in our review 

presented relatively little information on how effectively they were using 

those tools in the overviews to their fiscal year 1995 financial statements 

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under the CFO Act. Instead, the overviews focused primarily on high-level 

mission goals. 

FMS could build upon current reporting on the use of collection tools in 

several ways in order to provide useful performance information: first, it 

could increase the number of tools reported on, and second, it could offer 

data regarding tool use, success, and cost. Some options would include the 

following. 

•	 Begin reporting on rescheduling of delinquent debt and garnishment of 

wages. For the period January 1, 1995, through September 30, 1995, 

Education queried its information system and found that $353 million, 69 

percent, of the $512 million recovered by collection firms was attributable 

to rescheduled loan terms. Although the $353 million recovered is 

significant, a more complete analysis is needed to identify how much was 

spent to reschedule the debt and identify the expected and actual 

collections received under the new terms. Assessing the extent to which 

borrowers continued to pay or actually completed payments without 

further delinquencies or defaults compared to the costs of establishing 

such agreements might be a factor in agency collection policies. Relatively 

high costs of achieving or sustaining repayment agreements could suggest 

employing more aggressive collection tools sooner. This kind of 

information could enhance debt management reporting and 

decision-making by showing the extent to which this tool had been used 

and how well it was working. 

Education was authorized to use administrative wage garnishments by the 

Emergency Unemployment Compensation Act of 1991. The Debt 

Collection Improvement Act of 1996 now allows all agencies to 

administratively garnish wages. Thus, FMS may want to include information 

on this important tool in debt collection reports to the Congress as 

agencies begin to pursue wage garnishments. 

•	 Require information needed to develop debt collection performance 

measures. FMS may want to consider requiring the following information 

from agencies in order to facilitate the development of performance 

measures for tracking the use of collection tools. Our work showed that 

some information of this nature, including the following, is available at 

some agencies, but only the amount collected through tools had been 

formally reported to the Congress: 

• number of cases the tool was applied to, 

• amount of delinquent debt dollars these cases represented, 

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•	 number of cases for which the agency was successful in applying the 

tool (for example, how many “hits” were made on the cases submitted 

for offsets), 

• amount collected through the tool, and 

• cost of using the tool. 

This type of information would allow agency and governmentwide 

assessments of how actively, successfully, and cost-effectively delinquent 

debt was being pursued. These types of data elements could be used to 

develop performance measures such as the following. 

•	 How many cases and dollars of delinquent debt were submitted for each 

offset tool compared to the total delinquent debt an agency was 

attempting to collect? Tracking this measure year to year could highlight 

an agency’s progress in attempting to increase usage of the tool. 

•	 How often was the agency successful in applying each tool? Tracking this 

year-to- year could show upward and downward progress in applying a 

specific tool and therefore allow informed decisions on tool use. 

•	 How much did the agency collect versus the cost of using a tool? Tracking 

the return on investment year-to-year could highlight increasing or 

decreasing effectiveness in using a tool. 

Figure 6 illustrates how analyzing the performance of collection tools can 

assist collections of delinquent debt. 

Page 29 GAO/AIMD-97-48 Debt Collection 
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Figure 6: Using Tax Refund Offsets at Education 

Of 2.2 million delinquent accounts that Education submitted for IRS tax 

refund offset, it was able to collect amounts for 25 percent of the accounts 

(554,000). The average offset was $936 against an average delinquent 

account balance of $3,000--almost a third of the amount owed. In the 

aggregate, it collected roughly $518 million and paid $7 per hit, about 

$3.9 million. According to an Education official, the agency's tax refund 

offset experience suggests that a significant percent of individuals who are 

delinquent in paying student loans are employed and could also be good 

candidates for wage garnishment procedures. Considering how wage 

garnishment procedures are applied, there is more assurance that amounts 

will be routinely collected until the debt is repaid. In many respects, a 

combination of wage garnishment plus tax refund offset is preferable to 

reliance solely on tax refund offset which relies on debtors being owed a 

tax refund in future years. 

This example suggests that offsets are highly cost effective. Analysis of 

cost-effectiveness, preferably couched in terms of unit cost per result, 

would be a highly relevant measure of agency efforts. Measures of the 

comparative costs and yields from the use of different collection 

techniques would be useful for managing collection activities at the 

agencies. 

Providing Additional Agencies are required to report on their gross receivables in debt 

Information on Amounts of collection reports, which is conceptually the same information that is 

Delinquencies Being Pursued currently reported in the footnotes to the financial statements (gross 

receivables, including the associated interest). Because some agencies 

continue to pursue other relevant amounts, we believe that reporting to 

the Congress on debt collection should be augmented to include 

(1) principle and interest that has been written off but that is still being 

pursued and (2) accrued interest on delinquent debt, presumed 

uncollectible, that is still being pursued. This additional information is 

necessary to provide a better picture of what debt is outstanding and 

amounts that agencies are attempting to collect. 

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In terms of financial reporting, it is fundamental that agencies make 

realistic assessments of what they expect to collect.11 However, agencies 

also have a duty to have an effective debt management program. 

Therefore, it is not unexpected that the amount an agency is estimating to 

be collectible on its financial statements would be different than the 

amount it is trying to collect on.12 

This is particularly relevant for student loan debt since Education does not 

have time limitations for collecting delinquent student loans and continues 

efforts to collect for extended time frames. In concept, Education could 

even offset a portion of the social security benefits of delinquent 

borrowers. Consequently, the financial reporting number used to report to 

the Congress reflects the agency’s gross receivables, not the amount that 

Education is still pursuing. At the time of our review, Education was still 

trying to collect $3.6 billion not included in the amounts reported to the 

Congress. 

We believe focusing upon amounts which remain in the collection process 

would be beneficial primarily because it would offer the Congress a better 

picture of both what borrowers owe and agencies’ debt collection efforts. 

These data also provide a better basis for calculating recovery rates for 

delinquent debt. For example, to calculate Education’s Debt Collection 

Service recovery rate, one would compare the amount of collections to the 

$9.2 billion on which Education was attempting to collect, not to the 

$5.6 billion that is recorded as a receivable. 

Aggregating Information An additional enhancement that should be considered in the annual debt 

According to Similar Program collection report to the Congress is aggregating the credit data by program 

Characteristics characteristics to more appropriately portray program differences and to 

11This is in accordance with Statement of Federal Financial Accounting Standards Number 1, 

Accounting for Selected Assets and Liabilities, which states that in preparing financial statements, no 

interest should be recognized on accounts receivable that are determined to be uncollectible unless 

the interest is actually collected, and also states that until the interest payment requirement is officially 

waived by the government entity or the related debt principle is written off, interest accrued on 

uncollectible accounts receivables should be disclosed. 

12Writing off a debt from financial records does not preclude an agency from taking advantage of offset 

possibilities or other means of collection, should they become available. An agency can write off debts 

from its receivables but at the same time maintain them in debt collection records when the potential 

exists for offsets against wages or future benefits to the debtor, but the possibility of offset is so 

uncertain that it does not warrant retaining the debt as a receivable or asset on the financial 

statements. 

An agency determines, as part of its program management, how long it intends to maintain information 

on its borrowers and how frequently accounts will be reviewed for final disposition. Agencies are 

required, in accordance with FMS guidance, to report the amount of debt that has been written off but 

is still being pursued for debt collection. 

Page 31 GAO/AIMD-97-48 Debt Collection 
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focus on collection challenges that are applicable to similar programs. The 

annual debt collection report to the Congress includes governmentwide 

data by combining data from over 24 agencies and also reports certain 

data by agency. Grouping governmentwide data into categories similar to 

those areas used in the annual budget (Analytical Perspectives), which 

presents an analysis by education, housing agencies, business and rural 

development, and insurance programs, would provide a better basis for 

evaluating agency performance and finding alternative solutions for 

decreasing delinquent debt. Programs providing credit for similar 

purposes may be experiencing the same types of collection problems and 

therefore may seek similar strategies or innovations for contacting 

borrowers and collecting delinquent debt or other functions, such as 

disposing of properties acquired through foreclosure. For example, 

housing and other credit programs with secured debt have sought 

economies of scale in disposing of real property. The interagency 

Government Owned Real Estate Program conducts joint agency real estate 

fairs and auctions to facilitate the management and disposal of real 

property, which has helped reduce individual agency disposition costs. 

Resolving Inconsistencies 

in Classification of 

Delinquent Debt 

Agencies classify previously delinquent debt on which borrowers are 

currently making payments differently. Some reclassify such debt as 

“current” but others keep it in a delinquent category regardless of the 

current payment status. Such inconsistencies do not offer an accurate 

view of loan portfolios. While such classification practices may be suitable 

internally, they make it difficult to compare agency performance or 

aggregate data for similar programs. Examples of inconsistent reporting of 

these loans are listed below. 

•	 VA loans maintain their delinquent status until the delinquency is repaid or 

written off. Once the delinquency has been repaid and payments are being 

made according to the original terms of the loan, the loan is reclassified as 

current. 

•	 FHA reclassified single family delinquent loans as in a current repayment 

status when borrowers complied with forbearance terms, which typically 

included making partial mortgage payments for up to 3 years. More 

significantly, FHA officials told us that the agency had reported $2.3 billion 

as delinquent at September 30, 1995, but these officials advised us that 

their systems did not produce delinquency data consistent with the FMS 

criteria. They stated that amounts reported as delinquent would have been 

significantly higher under those guidelines. 

Page 32 GAO/AIMD-97-48 Debt Collection 
B-275282 

•	 Education did not reclassify most delinquent loans that were in repayment 

status as current loans. The majority of loans in repayment status 

maintained their delinquent status until the loan was repaid.13 

Improving Data Reliability	 None of the data submitted to OMB had been validated by financial 

statement audits because agencies were required to submit data to OMB 

before their annual financial statement audits were concluded. Three of 

the four agencies, including FHA, VA, and RHS, submitted unaudited data for 

fiscal year 1995.14 While the data from Education were audited, 

Education’s independent accountant disclaimed an opinion due to the 

unreliability of FFEL Program student loan data. Because there are limited 

or no assurances concerning the accuracy of the data under these 

circumstances, appropriate annotations that the data were not audited 

would alert users of the reports to the limitations. For example, FHA’s 

reported gross receivables after completion of its audit were $800 million 

more than the amount provided for governmentwide reporting on debt 

collection. 

Our audits, those by the inspectors general, and others have consistently 

disclosed serious weaknesses in agency systems used to account for and 

manage receivables. Audits have shown that the information for credit and 

debt management is not always accurate or complete. Our audits also 

found that long-standing weaknesses in agency financial management 

systems used to produce information on credit programs continue to 

diminish the reliability of amounts being reported to the Congress. The CFO 

Act is providing the impetus to begin resolving these reliability problems. 

Reliable data are not only fundamental for good credit management, it 

would also permit more accurate estimates of the costs of the credit 

programs in accordance with the Federal Credit Reform Act of 1990. 

Conclusion	 Improvements in the availability and reporting of data and relevant 

performance measures are critical to answering the call for a greatly 

13Some loans that achieved repayment status were restructured and became direct loans. Other loans 

that achieved repayment status were consolidated and refinanced by a private sector lender with a 

new loan guarantee. As such, these new direct or refinanced loans were deleted from Education’s 

report to OMB on the status of defaulted guaranteed loans and included in Education’s report on direct 

loans or outstanding guaranteed loans. 

14FHA received an unqualified (clean) audit opinion after the data were submitted to OMB. RHS 

received a qualified opinion (as a component of the Rural Economic and Community Development 

consolidated financial statements) because of insufficient support for credit receivables and other 

accounts. VA received a qualified opinion due to the inadequacy of hospital system accounting records 

for net receivables and property plant and equipment. 

Page 33 GAO/AIMD-97-48 Debt Collection 
B-275282 

enhanced debt collection environment. As FMS assumes its managerial and 

governmentwide reporting responsibilities under the 1996 Debt Collection 

Improvement Act, it has a good opportunity to make debt reporting more 

useful to the Congress as well as to those with line management 

responsibility who are attempting to collect the delinquent debt. Through 

such improvements, FMS can also ensure that it has reliable and cogent 

agency data to use for making its own decisions regarding how to proceed 

with its enhanced management and governmentwide reporting role. 

Recommendations	 We recommend that the Secretary of the Treasury require the Assistant 

Commissioner for FMS’ Debt Management Services, in conjunction with 

major credit agencies and OMB, to revise the framework and data 

requirements for agency reporting on debt collection to ensure that 

reports to the Congress do the following. 

(1)Provide complete reporting on the status of agency efforts to collect 

delinquent debt. FMS should clearly specify the reporting framework, such 

as the one discussed in this report, and ensure that it is uniformly followed 

by reporting agencies. Effective status reporting will offer a clear picture 

of agency progress in collecting delinquent debt and highlight any 

significant backlogs in resolution phases meriting administrative action or 

legislative consideration. 

(2)Offer an evaluation of agency use of individual collection tools. This 

evaluation should include agency and governmentwide assessments of 

how actively, successfully, and cost effectively agencies are pursuing 

delinquent debt. At a minimum, data should be available concerning the 

collection tools predominantly used including (a) the number of cases and 

the amount of delinquent dollars against which each tool was applied, (b) 

the number of cases for which the agency was successful in applying the 

tool, and (c) the cost of using the tool in relation to the dollars collected. 

(3)Report amounts that agencies are actually trying to collect. This would 

include the gross receivable and interest receivable amounts that are 

currently included in the footnotes to their financial statements, plus (a) 

principle that has been written off but that is still being pursued and (b) 

accrued interest on delinquent debt that is still being pursued. The report 

should also explain differences between these amounts. 

Page 34 GAO/AIMD-97-48 Debt Collection 
B-275282 

(4)Provide information that is reliable based on independent audits and 

disclose information about the reliability of pertinent account balances 

that are questioned through audits. 

(5)Report delinquent debt consistently from agency to agency or disclose 

inconsistencies. 

(6)Aggregate the credit data by similar program characteristics and 

provide explanatory information where necessary in order to more 

appropriately portray program differences and focus on collection 

challenges unique to similar programs. 

In commenting on a draft of this report, officials from the Department of Agency Comments the Treasury, the Office of Management and Budget, and the agencies and Our Evaluation included in our review generally agreed with our factual material, 

conclusions, and recommendations. 

Treasury’s Deputy Assistant Commissioner for Debt Management Services 

informed us that an action plan was being drafted and will include the 

establishment of an interagency task force in June 1997. She stated that 

one of the first projects the task force will work on is the development of 

governmentwide reporting criteria so that delinquency rates can be more 

fairly and accurately computed and analyzed. 

Agencies also provided a number of other comments, including the 

following. 

•	 Management of the entire credit process—extending credit, account 

servicing, and recovering delinquent debt—is important and, as our report 

states, each activity can affect credit program costs. 

•	 Agency data need to be improved in order to accurately assess agency 

collection performance, evaluate current default rates, or draw 

comparisons between similar loan programs. 

•	 Consistent application of governmentwide debt collection reporting 

criteria is essential. 

•	 There are differences in how credit programs operate—for example, 

secured debt has better recovery options than unsecured debt. Therefore, 

as our report recommends, governmentwide reports should aggregate data 

for programs with similar characteristics in order to more appropriately 

compare agency collection performance. 

Page 35 GAO/AIMD-97-48 Debt Collection 
B-275282 

We are sending copies of this report to relevant congressional committees


and subcommittees, the Director of the Office of Management and Budget,


the Secretary of the Treasury, the Secretary of Agriculture, the Secretary


of Housing and Urban Development, the Secretary of the Department of


Veterans Affairs, the Secretary of the Department of Education, and other


interested parties. We will send copies to others upon request.


If you have any questions or wish to discuss the issues in this report,


please contact me at (202) 512-9450. Major contributors to this report are


listed in appendix VII.


Sincerely yours,


Jeffrey C. Steinhoff


Director of Planning and Reporting


Page 36 GAO/AIMD-97-48 Debt Collection 
Page 37 GAO/AIMD-97-48 Debt Collection 
Contents


Letter 1


Appendix I 

Scope and 

Methodology 

Appendix II 

Information on 

Guaranteed Loans 

Appendix III 

Summary of Efforts to 

Improve Debt 

Collection 

Appendix IV 


The Debt Collection


Improvement Act of


1996


Appendix V 


Tools Tracked and


Reported


Appendix VI 


Amount of Reported


Delinquent Debt by


Agency at September


30, 1990 and


September 30, 1996


Page 38 GAO/AIMD-97-48 Debt Collection 

42 

45 

49 

52 

56 

57 
Contents 

Appendix VII 58


Major Contributors to


This Report


Tables Table 1: Credit Receivables Reported by OMB for Fiscal Years 

1992 Through 1996 

Table 2: Credit Receivables Reported by Lending Agency 

Table 3: Credit Receivables for Programs Reviewed for Fiscal 

Year 1995 

Table 4: Delinquent Credit Receivables Reported by OMB for 

Fiscal Years 1992 Through 1996 

Table 5: Distribution of FHA’s Delinquent Debt as of 

September 30, 1995 

Table 6: Distribution of VA’s Delinquent Debt as of September 30, 

1995 

Table 7: Distribution of RHS’ Delinquent Debt as of September 30, 

1995 

Table 8: Distribution of Education’s Delinquent Debt as of 

September 30, 1995 

Table IV.1: Key Provisions Affecting Federal Agencies 

Figures	 Figure 1: Credit Management Functions and Risks 5 

Figure 2: Major Debt Collection Activities 14 

Figure 3: Distribution of Housing Delinquent Debt as of 16 

September 30, 1995 

Figure 4: Distribution of Education’s Delinquent Debt as of 21 

September 30, 1995 

Figure 5: Reported Collections on Delinquent Debt Using 24 

Prescribed Tools, Fiscal Year 1995 

Figure 6: Using Tax Refund Offsets at Education 30 

Figure 2.1: Reported Governmentwide Trend in Guaranteed 45 

Loans 

Figure 2.2: Cumulative Balances of Guaranteed Loan Programs 46 

From 1992 to 1995 at FHA, RHS, VA, and Education 

Page 39 GAO/AIMD-97-48 Debt Collection 

9 

10 

10 

11 

17 

18 

19 

22 

54 
Contents 

Abbreviations 

CFO chief financial officer


FASAB Federal Accounting Standards Advisory Board


FFEL Federal Family Education Loan


FHA Federal Housing Administration


FMS Financial Management Service


GAO U.S. General Accounting Office


GMRA Government Management Reform Act


GPRA Government Performance and Results Act


HUD Department of Housing and Urban Development


IRS Internal Revenue Service


JFMIP Joint Financial Management Improvement Project


OMB Office of Management and Budget


PLUS Parent Loans for Undergraduate Students


RHS Rural Housing Service


SLS Supplemental Loans to Students


VA Department of Veterans Affairs


Page 40 GAO/AIMD-97-48 Debt Collection 
Page 41 GAO/AIMD-97-48 Debt Collection 
Appendix I 

Scope and Methodology


As agreed with the House Committee on the Budget, our work 

concentrated on the debt collection phases and did not focus on the credit 

extension and account servicing phases of federal credit management or 

on credit reform requirements. We focused on lending program debt at 

four federal credit agencies, including HUD’s Federal Housing 

Administration Single, Multifamily, and Title I Programs, Education’s 

Federal Family Education Loan Program, the Department of Veterans 

Affairs’ Guaranty and Vendee Loan Programs, and the Department of 

Agriculture’s Rural Housing Service Direct Loan Programs. 

For each program, we identified significant applicable legislative and 

regulatory provisions. We also reviewed recommendations made under the 

National Performance Review, direct and guaranteed loan system 

requirements issued by the Joint Financial Management Improvement 

Program,1

 and recently published federal government accounting 

standards for direct and guaranteed loans.2 

To determine the extent of changes in receivables, guaranteed loans, 

defaults on guaranteed loans, and delinquencies from fiscal years 1992 to 

1995—the most recent data available at the program-level at the time of 

our review—we analyzed data in (1) the annual status reports to the 

Congress on credit management and debt collection (referred to as annual 

debt collection reports), (2) OMB’s annual Federal Financial Management 

Status Report and Five-Year Plan, and (3) individual agency and FMS 

governmentwide summary Reports on Receivables Due from the Public 

(formerly the SF 220-9)3

 and the Reports on Guaranteed Loans (formerly 

the SF 220-8).4

 Preliminary information on fiscal year 1996 debt collection 

activity became available in February 1997, and we incorporated it in this 

1

The Joint Financial Management Improvement Program (JFMIP) is a joint cooperative undertaking of 

the Office of Management and Budget, the General Accounting Office, the Department of the Treasury, 

and the Office of Personnel Management that aims to improve and coordinate financial management 

policies and practices throughout the government. 

2

FASAB publishes recommended accounting standards after considering the financial and budgetary 

information needs of the Congress, executive agencies, other users of federal financial information, 

and comments from the public. OMB, Treasury, and GAO then decide whether to adopt the 

recommended standards; if they do, the standard is published by GAO and OMB and becomes 

effective. 

3

The Report on Receivables Due from the Public covers the status of outstanding receivables including 

unpaid principal on direct loans and defaulted guaranteed loans acquired by the government, changes 

for the period, use of debt collection tools, adjudication activity, and other information. 

4

The Report on Guaranteed Loans covers the status of guaranteed loans, defaulted loans and claims 

submitted by lenders, the age of and collection probability of outstanding guaranteed loans, and 

information activities to certify, review, and sanction lenders participating in loan guarantee programs. 

Also included are real property inventories held by the agencies resulting from loan defaults. 

Page 42 GAO/AIMD-97-48 Debt Collection 
Appendix I 


Scope and Methodology


report to the extent practical. We also identified the amount of delinquent 

debt by agency at September 30, 1990, and September 30, 1996, as 

separately requested by your office. See appendix VI. 

We also obtained information from program and/or agency financial 

statement audit reports. We used information in the Analytical 

Perspectives section of the Budget of the United States Government, 

Fiscal Years 1997 and 1998, and other selected program data used by 

agencies to manage their credit programs. 

To determine progress toward resolving outstanding delinquent debt by 

the programs reviewed, we reviewed data provided by agency officials 

describing actions taken to resolve delinquent debt. We reviewed federal 

debt collection policies, procedures, and guidance including FMS’ Managing 

Federal Receivables and OMB Circular A-129, Policies for Federal Credit 

Programs and Non-tax Receivables. We identified the debt collection 

authorities and tools being used for each program we reviewed, and 

discussed these procedures and actions being taken to resolve delinquent 

debt with cognizant program officials. 

During the course of our review, the Congress passed the Debt Collection 

Improvement Act of 1996. (See appendix IV for more about this act). We 

reviewed this act and assessed its governmentwide and agency-level 

implications on debt collection efforts. 

We conducted our work from October 1995 through March 1997 in 

accordance with generally accepted government auditing standards. We 

did not verify the accuracy of the information provided to us by OMB, FMS, 

or the four agencies included in our review. We did however review the 

results of financial statement audits, as well as seek to determine whether 

the agencies included in our review reported debt collection information 

on a consistent basis. 

We requested comments on a draft of this report from the Department of 

the Treasury, the Office of Management and Budget, and the agencies 

included in our review. At a joint meeting on April 17, 1997, we received 

Page 43 GAO/AIMD-97-48 Debt Collection 
Appendix I 


Scope and Methodology


oral comments from those agencies. The agency representatives who 

provided comments on the draft are listed below. 

Agency Official providing comments 

Department of the Treasury Deputy Chief Financial Officer 

Deputy Assistant Commissioner for Debt Management 

Services 

Office of Management and Senior Advisor for Debt Collection and Credit and Cash 

Budget Management 

Department of Education	 Special Assistant to the Chief Financial Officer 

Director of Debt Collection Service 

Department of Housing and Director of the Office of Financial Services


Urban Development, Federal


Housing Administration


Department of Agriculture, Director of Fiscal Policy of the Office of the Chief Financial 

Rural Housing Service Officer 

Senior Loan Specialist, Rural Housing Service 

Veterans Administration Director of Cost and Debt Management Service 

Deputy Chief Financial Officer for the Veterans Benefits 

Administration 

Page 44 GAO/AIMD-97-48 Debt Collection 
Appendix II 

Information on Guaranteed Loans


673 660 

694 

Guaranteed loan programs grew about 13 percent—from $673 billion in 

fiscal year 1992 to $760 billion in fiscal year 1996. Increased demand for 

student, housing, and other loans contributed to this growth along with 

lower interest rates for some programs and funds appropriated by the 

Congress for marginal program expansion. The government is liable for 

the risk that it assumes on guaranteed loans. Most loans are guaranteed 

for a specified maximum based on the loan purpose and amount. Figure 

2.1 illustrates the growth of guaranteed loan programs. Figure 2.2 

discusses the extent of loan program growth at the agencies we reviewed.1 

Figure 2.1: Reported Governmentwide


Trend in Guaranteed Loans Billions of dollars


800 760 737 

700 

600 

500 

400 

300 

200 

100 

0 

1992 1993 1994 1995 1996 

Fiscal years 

Source: Debt Collection Reports and FMS. 

1

Our review focused on selected programs at FHA, VA, RHS, and Education, and for those programs, 

fiscal year 1995 amounts were the most recent available data. Therefore, reported fiscal year 1995 

amounts are used for the program-level data throughout this report. 

Page 45 GAO/AIMD-97-48 Debt Collection 
Appendix II 


Information on Guaranteed Loans


Figure 2.2: Cumulative Balances of Guaranteed Loan Programs From 1992 to 1995 at FHA, RHS, VA, and Education 

FHA Increased from $379 billion to $404 billion. This growth was primarily 

due to an increase in single family housing loans caused by higher 

demand resulting from lower interest rates. 

RHS Increased from $100 million to $1.9 billion. The growth at RHS was 

due to continued emphasis on guaranteed loans to encourage lending 

by the private sector. 

VA Increased from $160 billion to $179 billion. VA loan programs are 

entitlement programs, which means that anyone who applied for the 

programs and met eligibility requirements received a guaranteed loan. 

The growth in entitlement programs is not limited by annual 

appropriations. Instead, appropriations are made as needed to cover 

demand. 

Education Federal Family Education Loan (FFEL) Program guaranteed loans 

grew from $63 billion to $93 billion. Under the FFEL Program, 

students meeting eligibility requirements can receive a guaranteed loan, 

provided they find a lender willing to initiate the loan. Like VA loans, 

the growth in this entitlement program is not limited by annual 

appropriations. 

Collecting on Delinquent When guaranteed loans become delinquent, the lending institution, not the 

Guaranteed Loans	 government, is required to contact the borrower initially and carry out 

certain procedures to give the borrower the opportunity to resume making 

timely payments. If the lender still cannot collect, the loan is considered in 

default. Once a guaranteed loan defaults, several actions may take place, 

depending on the nature of the program. If the guaranteed loan is secured, 

Page 46 GAO/AIMD-97-48 Debt Collection 
Appendix II 


Information on Guaranteed Loans


the lender would normally initiate foreclosure action.2 The foreclosed 

property would generally be either (1) sold by the lender, with the 

government paying the lender for the guaranteed portion of any difference 

between the amount recovered on the sale and the uncollected portion of 

the loan principal and interest or (2) turned over to the government, with 

the government paying the lender for the guaranteed portion of any 

uncollected loan principal and interest. 

Depending on the nature of the guaranteed loan program, funds for 

covering some or all losses come from loan guarantee or insurance fees 

charged to borrowers and/or appropriations. For example, the Mutual 

Mortgage Insurance Fund, which represents almost 80 percent of FHA’s 

basic single-family home ownership program, is required to be fully 

self-supporting from fees charged to borrowers. In contrast, Education 

and most other credit agencies receive annual appropriations to cover 

estimated defaults and other costs. 

Payments to lenders for default claims generally result in the 

establishment of receivables for unsecured loans. When the government 

makes a payment to a lending institution for a defaulted loan guarantee, 

the government records a receivable for the amount of the payment and 

then tries to collect from the borrower, generally using the same methods 

used for direct loans. If borrowers do not voluntarily resume making 

timely payments, agencies may use involuntary debt collection tools such 

as federal salary offset, IRS tax refund offset, and litigation. The tools 

tracked by OMB are described in appendix V. 

If the government is unable to fully collect the amounts it guaranteed and 

paid, actual program costs3

 are incurred. Under legislation governing the 

FHA and VA housing programs, which assess insurance fees to cover losses, 

proceeds from disposition of assets are considered to fully satisfy the debt 

and the government does not pursue residual amounts due from the 

borrower. Receivables are recognized when a borrower fraudulently 

2

Not all defaulted guaranteed housing loans have gone into foreclosure. For example, historically, for 

about 25 percent of the FHA-insured single family loans that have defaulted, borrowers were given an 

opportunity to avoid foreclosure by qualifying for FHA’s Assignment Program. In these cases, FHA 

paid the mortgage debt owed to the lender, acquired the mortgage from the lender, and developed a 

new repayment plan for the borrower under which monthly mortgage payments were reduced or 

suspended for up to 36 months. The loans were included in governmentwide receivables as defaulted 

guaranteed loans. However, the Congress suspended this program in April 1996 because it was not 

cost-effective. For more information, see Homeownership: Mixed Results and High Costs Raise 

Concerns About HUD’s Mortgage Assignment Program (GAO/RCED-96-2, October 18, 1995). 

3

The Federal Credit Reform Act of 1990 requires agencies to estimate these costs each fiscal year and 

budget for them before credit is extended. The agency is to reestimate subsidy costs, generally 

annually, to incorporate the most recent data on actual and estimated losses and other cost factors. 

Page 47 GAO/AIMD-97-48 Debt Collection 
Appendix II 


Information on Guaranteed Loans


obtained a loan, or when an agency, such as FHA, sought to avoid certain 

foreclosures by acquiring loans from the lender and managing the loans 

itself. 

Page 48 GAO/AIMD-97-48 Debt Collection 
Appendix III 

Summary of Efforts to Improve Debt 

Collection 

This appendix summarizes (1) legislative and other efforts taken in the 

past 15 years to strengthen agencies’ debt collection capabilities and to 

minimize losses, (2) other important initiatives undertaken over the past 

decade which establish a framework for the credit agencies to strengthen 

financial management and better measure the results of their operations, 

and (3) our previous work on debt collection. The most recent legislative 

effort—the Debt Collection Improvement Act of 1996—is discussed in 

detail in appendix IV. 

Debt Collection	 Debt Collection Act of 1982 and Amendments: This is one of the most 

significant pieces of legislation affecting credit management and debt Initiatives	 collection. Among other things, the act, which was passed largely in 

response to our findings and recommendations on debt collection 

•	 clarified federal agencies’ authority to use debt collection tools available 

in the private sector; 

•	 established many of the fundamental credit management practices still in 

place today—for example, reporting delinquent debtors to consumer 

reporting agencies and contracting for collection services; and 

•	 established a requirement for OMB to submit an annual report to the 

Congress on the management of the federal government’s debt collection 

activities. 

OMB and Treasury efforts: Following the 1982 act, OMB and the Department 

of the Treasury increased their focus on and level of involvement in 

federal credit management programs. In 1986, OMB and Treasury agreed 

that Treasury would be primarily responsible for overseeing agency credit 

management activities, while OMB would continue to establish credit 

management policy, including setting standards for extending credit, 

managing lenders participating in guaranteed loan programs, servicing 

credit and nontax receivables, and collecting delinquent debt. Treasury 

develops and disseminates operational guidelines for agency compliance 

with governmentwide credit management and debt collection policy. 

OMB’s nine point credit management program: Also in 1986, OMB set out a 

nine-point credit management program targeted at further improving 

federal debt collection practices, reducing delinquencies, and improving 

management of receivables. The nine-point program required agencies, 

unless prohibited by legislation, to implement initiatives in each phase of 

the credit management cycle—loan origination, account servicing, 

collection, and write-offs. The nine initiatives required the use of 

Page 49 GAO/AIMD-97-48 Debt Collection 
Appendix III 


Summary of Efforts to Improve Debt


Collection


(1) screening of loan applicants for credit-worthiness, (2) account 

servicing to provide information on the results of credit program 

operations, (3) credit bureau reporting, (4) private collection contractors, 

(5) IRS tax refund offset, (6) federal salary offset, (7) loan asset sales, 

(8) litigation, and (9) write-offs. 

Other Legislative and 

Financial 

Management 

Initiatives 

The Chief Financial Officers Act of 1990 and the Government 

Management Reform Act of 1994: These acts provide the underpinning for 

identifying and correcting financial management weaknesses and reliable 

reporting on the results of financial operations. Moreover, the CFO Act sets 

up expectations for 

•	 the deployment of modern systems to replace existing antiquated, often 

manual, processes; 

• the development of better performance and cost measures; and 

•	 the design of results-oriented reports on the government’s financial 

condition and operating performance by integrating budget, accounting, 

and program information. 

The Government Performance and Results Act of 1993: The act places 

emphasis on managing for results and pinpointing opportunities for 

improved performance and increased accountability. As noted in this 

report, in crafting the act, the Congress recognized that to be useful, 

agency performance reports would not only need to document 

performance levels, but also explain and describe the reasons for any 

unmet goals and new plans for achieving those goals. 

The Federal Credit Reform Act of 1990: Budgetary and accounting 

requirements for federal credit programs were significantly revised under 

the Federal Credit Reform Act of 1990. The Federal Credit Reform Act’s 

goals are 

• measuring more accurately federal credit program costs, 

•	 placing the costs of credit programs on a budgetary basis equivalent to 

each other and to other federal spending, 

•	 encouraging the delivery of benefits in the form most appropriate to the 

needs of beneficiaries, and 

•	 improving the allocation of resources among credit programs and between 

credit and other spending programs. 

Page 50 GAO/AIMD-97-48 Debt Collection 
Appendix III 


Summary of Efforts to Improve Debt


Collection


Federal Accounting Standards Advisory Board: Accounting standards for 

federal credit programs were revised in 1993 in accordance with 

recommendations by the Federal Accounting Standards Advisory Board 

(FASAB). The revised standards are consistent with provisions of the 

Federal Credit Reform Act, and require that direct and guaranteed loans 

be accounted for on a present value basis, fully recognizing actual and 

expected credit program costs. 

Statement of Federal Financial Accounting Standards Number 2, 

Accounting for Direct Loans and Loan Guarantees, states that because 

credit programs provide interest subsidies and sustain losses caused by 

defaults, the costs of these programs are significant. Accounting 

information called for in this standard provides the basis for evaluating 

program performance by comparing actual accounting data with estimated 

budget data for direct loans and loan guarantees. 

GAO Work on Federal	 GAO has issued numerous reports in the past on federal debt collection 

activities. In two of our reports on debt collection—Debt Collection: Debt Collection	 Billions Are Owed While Collection and Accounting Problems Are 

Unresolved (GAO/AFMD-86-39, May 23, 1986) and Credit Management: 

Deteriorating Credit Picture Emphasizes Importance of OMB’s Nine-Point 

Program (GAO/AFMD-90-12, April 12, 1990)—we reported that despite 

increased emphasis by the administration and individual agencies on debt 

collection activities, the government’s overall credit picture had 

deteriorated, with delinquencies and losses on federal loan and loan 

guarantee programs continuing to increase. We also reported that agency 

debt collection efforts were being hampered by accounting systems which 

often did not provide management with current and accurate information 

on the status of outstanding debt. 

Despite progress in some areas and continued efforts on the part of OMB, 

Treasury, and the Congress to strengthen overall debt collection 

procedures, in our September 1995 testimony, Financial Management: 

Legislation to Improve Governmentwide Debt Collection Practices 

(GAO/T-AIMD-95-235, September 8, 1995), we again concluded that many 

federal credit program agencies continued to face long-standing problems 

in collecting debt. 

Page 51 GAO/AIMD-97-48 Debt Collection 
Appendix IV 

The Debt Collection Improvement Act of 

1996 

The Debt Collection Improvement Act of 1996, passed by the Congress and 

signed into law by the President in April 1996, provides significant 

opportunities for improving agencies’ and FMS’ ability to collect delinquent 

debt. Key provisions of this act affecting FMS and agencies are summarized 

below. 

• FMS has authority to coordinate debt collection efforts across the federal Key Provisions government. Affecting FMS •	 FMS has the authority to service the debt of other agencies in-house, 

designate debt collection centers or private collection contractors to 

service the debt, or to refer the debt to the Department of Justice for 

litigation. The centers it can designate to service debt are responsible for 

centrally administering an array of activities, including debt servicing, 

collection, compromise, or termination. 

This represents a major change from the existing practice in which 

agencies handle the debt from origination through resolution, regardless 

of their success or the time involved. The act requires agencies to transfer 

delinquent debts to FMS after 180 days. Several noncredit programs, 

including the Nuclear Regulatory Commission and Federal Trade 

Commission, have already transferred their delinquent debt to FMS for 

collection. Some credit agencies expressed reluctance in turning their debt 

over to FMS during our review. However, since the completion of our work, 

all four credit agencies included in our review said that they were either in 

the process of negotiating or were considering the transfer of debt to FMS. 

•	 Responsibilities for reporting on debt collection to the Congress are 

transferred from the Director of OMB to the Secretary of the Treasury 

(FMS). The act states that the agencies will now report annually to FMS. The 

act states that within 3 years of the act, the Secretary of the Treasury is 

required to report on collection services provided by FMS and other entities 

collecting on behalf federal agencies. The act also gives the Secretary joint 

responsibility—with the Attorney General—for program regulations (the 

Federal Claims Collection Standards), which was previously a joint duty 

between the Comptroller General and the Attorney General. 

•	 The act also provides resources to FMS and agencies to resolve delinquent 

debt. FMS is authorized to charge fees for collecting delinquent debt. The 

act allows for payment of collection fees for delinquent debt to be taken 

out of amounts collected. In addition, the act provides authority for 

agencies to retain a portion of collections to be used for improving debt 

collection activities. The act calls for these amounts to be available to 

Page 52 GAO/AIMD-97-48 Debt Collection 
Appendix IV 


The Debt Collection Improvement Act of


1996


reimburse agencies for certain debt collection and related expenses. But 

under the act, the availability of the funds is subject to appropriation, and 

it is too soon to tell whether this provision will achieve its intent of 

providing incentives to agencies to increase the collection of delinquent 

debt. 

Page 53 GAO/AIMD-97-48 Debt Collection 
Appendix IV 


The Debt Collection Improvement Act of


1996


Table IV.1: Key Provisions Affecting Federal Agencies 

Requirements of the Debt Collection Act 

of 1982 and amendments 

Requirements of the Debt Collection Improvement Act 

Subject of 1996

Contracting for debt 

collection services. 

Agencies were generally authorized to 

contract for debt collection services 

through the General Services 

Administration. 

Treasury is required to maintain a schedule of private 

sector contractors and agencies are required to use 

those contractors. 

Offsetting salaries of federal Authority provided but not required under Requires agencies to participate in an annual matching of 

records to identify federal employees delinquent on 

federal debts. 

employees who owe 

delinquent debt. 

the 1982 act. 

Reporting information on an This was authorized but not mandatory in Agencies are required to report information about an 

individual’s delinquent debt the 1982 act and only covered delinquent individual’s delinquent debts. Agencies have the option to 

to credit bureaus. debt. report nondelinquent individual debt and all commercial 

debt to credit reporting agencies. 

Using administrative offsets. This was authorized but not mandatory Provides authority for disbursing officials to conduct 

under the 1982 act. offsets and requires referral of debts over 180 days 

delinquent to Treasury for offset. 

Using administrative wage Not specifically authorized. Specifically authorized and required, as appropriate. 

garnishment. 

Screening loan applicants. Authority provided but not required.	 Agencies are required to deny credit to those who owe 

delinquent debt to the federal government. With certain 

exceptions, such as a borrower with outstanding IRS 

debt, agencies must refuse credit to a delinquent credit 

applicant. 

Referring delinquent debts Agencies were required to refer delinquent Agencies are required to refer delinquent debts to FMS 

for IRS tax refund offset. debts to IRS at least annually.	 for the purpose of offsetting any payments, including tax 

refunds. 

Closing out debt to IRS as 

income to the debtor. 

Required of federal executive agencies. All agencies may close out debts through FMS. 

Requiring taxpayer Required for those borrowing from credit Required from all those doing business with the federal 

identification numbers. agencies. government.

Publicly disseminating Not specifically authorized. Specifically authorized by statute.


information regarding the


identity of a person and the


delinquent nontax debt.


Allowing the Departments of Not specifically authorized. Specifically authorized by statute.


Labor and Health and Human


Services to release


information to agencies and


their agents on employer and


government data for the


purpose of collecting and


reporting delinquent debt.


As was the case for the 1982 legislation, the 1996 act does not apply to IRS, Applicability of the Customs Service, or Social Security Administration debt; however, these Act 

Page 54 GAO/AIMD-97-48 Debt Collection 
Appendix IV 


The Debt Collection Improvement Act of


1996


entities are participants in assisting agencies to collect debt. The 1982 act 

covered the executive and legislative branch agencies, and the 1996 act 

also includes the judicial branch. 

Page 55 GAO/AIMD-97-48 Debt Collection 
Appendix V 

Tools Tracked and Reported


This appendix provides more information about the involuntary collection 

tools tracked by agencies and included in the annual debt collection report 

to the Congress. 

Tax Refund Offset	 Tax refund offsets resulted in $965 million in collections for fiscal year 

1995—40 percent of the total collections of the five tools. This program Program	 allows income tax refunds to be offset against delinquent amounts owed 

to the federal government. Since the tax refund offset began in 1986, the 

government has recovered more than $6 billion. 

Litigation resulted in $553 million in collection for fiscal year 1995— Litigation	 23 percent of the total collections of the five tools. Delinquent debts which 

cannot be collected through other means can be referred to the 

Department of Justice for litigation. In addition to the $553 million in 

collections, agencies reported $121 million in non-monetary settlements 

recovered by Justice. 

Private Collection 

Firms 

Administrative Offset 

Program 

Federal Employee 

Salary Offset 

Private collection firms brought in $533 million in fiscal year 1995— 

22 percent of the total of the five tools. Of the $533 million collected, 

$512 million pertained to collections on student loans. 

Administrative offsets resulted in $330 million in collections in fiscal year 

1995—14 percent of the total for the five tools. Agencies are authorized to 

collect delinquent debt on behalf of other agencies by withholding or 

offsetting payments due to, or monies held by, the federal government for 

the debtor. 

Federal employee salary offsets resulted in $21 million in collections in 

fiscal year 1995—just 1 percent of the total for the five tools. Under this 

program, delinquent accounts are matched against the federal personnel 

rosters to identify employees delinquent on federal debts. Where matches 

are made, 15 percent of a federal employee’s disposable income, less 

amounts required by law to be withheld, may be offset against delinquent 

amounts due. 

Page 56 GAO/AIMD-97-48 Debt Collection 
Appendix VI 

Amount of Reported Delinquent Debt by 

Agency at September 30, 1990 and 

September 30, 1996 

Dollars in millions 

Department/Agency 

Delinquencies 

9/30/90 

Delinquencies 

9/30/96 

Change from 

1990 to 1996 

U.S. Department of 

Agriculture $16,695 $8,758 $-7,937 

Department of Commerce 294 97 –197 

Department of Defense 1,667 3,369 1,702 

Educationa 9,882 19,156 9,274 

Department of Energy 1,518 2,377 

Health and Human Services 1,123 3,783 2,660 

Social Security Administration b 331 

Department of Housing and 

Urban Development 2,206 2,282 

Department of the Interior 527 438 –89 

Department of Justice 324 101 –223 

Department of Labor 239 95 –144 

Department of Transportation 923 160 –763 

Treasury (less IRS) 383 508 

Department of Veterans 

Affairs 3,851 2,462 –1,389 

Agency for International 

Development 860 794 –66 

Small Business Administration 1,870 2,031 

Export-Import Bank 1,773 2,451 678 

All other 1,290 2,077 787 

Total $45,425 $51,270 $5,845 

aBecause of the nature of the Federal Family Education Loan Program, almost all of Education’s 

receivables are at least 270 days delinquent when acquired from guaranty agencies. 

bThe Social Security Administration was part of Health and Human Services at September 30, 

1990. 

Source: OMB Debt Collection Reports and FMS. This information was not independently verified 

by GAO. 

Page 57 GAO/AIMD-97-48 Debt Collection 

859 

331 

76 

125 

161 
Appendix VII 

Major Contributors to This Report


Julie S. Tessauro, Assistant Director Accounting and Mary Ellen Chervenic, Assistant Director Information Linda J. Sellevaag, Communications Analyst 

Management Division, Cristina T. Chaplin, Communications Analyst 

Washington, D.C. 

Office of the General Franklin D. Jackson, Senior Attorney 

Council 

(918896) Page 58 GAO/AIMD-97-48 Debt Collection 
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