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Chapter 4 Account Servicing

Servicing Government Loans

Accurate and complete documentation is critical to providing

proper servicing of debt, pursuing collection of delinquent debt,

and in the case of guaranteed loans, processing claim payments. 

Once credit has been extended or a financial obligation to repay an

administrative debt established, an agency becomes responsible for

servicing or controlling the account. This Chapter describes

Federal loan and debt servicing requirements as described in

Office of Management and Budget (OMB) Circular No. A-129

“Policies for Federal Credit Programs and Non-Tax Receivables,”

which may be found online at: www.whitehouse.gov/omb or

www.fms.treas.gov. 

The Federal Government can efficiently meet its servicing

responsibilities and reduce its costs in several ways. First, under

loan guarantee programs, credit servicing provided by private

sector lenders tends to be more efficient and result in lower

portfolio management costs than direct servicing by Federal

agencies. Second, under certain conditions, an agency may find it

advantageous to sell loans or other debts, thus allowing the agency

to shift staff resources from servicing to mission critical functions. 

Finally, an agency may contract with a private sector firm for all or

some of its servicing activities, as best meets the agency’s needs.

Basic servicing activities include:

C billing the debtor;

C processing and crediting payments;

C monitoring the account;

C documenting servicing action;

C timely responding to borrower inquiries;

C providing agency management with regular aggregate

reports on receivables; and

C providing central regulatory agencies with required

receivables and debt collection reports.
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Billing the Debtor

An agency shall ensure that invoices are routinely sent to

borrowers/debtors and that efficient mechanisms are in place to

collect and record payments. Where appropriate, borrowers should

be encouraged to use agency systems established by the

Department of the Treasury (Treasury) which collect payments

electronically, such as pre-authorized debits, credit cards, and

electronic payments via the Internet (see, for example,

www.Pay.gov). The billing cycle established by a repayment

agreement should be the same as that used by private lending

institutions for equivalent types of debts, generally monthly. The

billing cycle will contain all of the regular mechanisms needed to

bill debtors, collect and apply payments to appropriate accounts,

and document account activity. 

For housing and other long-term real estate loans, an agency or its

lender/servicer should establish, at the time of loan origination,

escrow accounts to process tax and insurance deposits. Agency

servicing systems must process tax and insurance payments

through escrow accounts. 

For installment loans, the agency or its lender/servicer should

initiate the billing process upon the first regular payment due from

the debtor. In the case of administrative debt, the agency should

initiate the billing process when it determines that the debt exits,

e.g., the debtor owes a fine or penalty or has received an

overpayment. 

The initial billing notice or invoice for an administrative debt

should include:

C the amount of the debt;

C the basis of the indebtedness;

C the opportunities available to the debtor to dispute the debt,

obtain copies of documents related to the debt, and enter

into a repayment agreement acceptable to the agency if the

debtor is unable to pay the debt in full;
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C the date on which payment is due, usually 30 days after the

date of the billing. The billing notice should also indicate

the agency’s policies with respect to the assessment of

interest, administrative costs, and penalties, and that if

payment is not received on or before the due date, the

agency will begin assessing such charges as stated;

C the steps the agency will take to enforce collection, such as

reporting a debt to a credit bureau; referring the debt to

Treasury for collection actions, including offset; referral to

a private collection agency; administrative wage

garnishment; and litigation (see Chapter 6, Delinquent Debt

Collection). The agency cannot threaten to take collection

action it is not authorized or does not intend to take;

C if not previously provided by the debtor, the request that

the debtor provide his/her/its taxpayer identification

number, either through the submission of a Form W-9,

"Request for Taxpayer Identification Number and

Certification" available through the Internal Revenue

Service website at www.irs.gov/formspubs, or on any

payment or returned correspondence if legally authorized to

do so; and

C the name, phone number, and address of an individual to

contact within the agency. It is important for a debtor to be

able to contact a person knowledgeable about the agency’s

billing and collection policies and practices and who can

respond promptly to the debtor’s concerns.

Failure of a debtor to respond to the billing notice or indicate a

desire to negotiate a reasonable repayment agreement or

compromise should lead the agency to renew the demand for

payment and proceed into the full collection process described in

Chapter 6, Delinquent Debt Collection. 
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Reporting Account Information to Credit Reporting Agencies

An agency or its lender/servicer must be able to identify and report

non-delinquent and delinquent debts to credit reporting agencies

(also known as “credit bureaus”) in accordance with the

requirements of 31 U.S.C. 3711(e), OMB Circular No. A-129, and

the “Guide to the Federal Credit Bureau Program” published by

the Treasury’s Financial Management Service (FMS). Copies of

the statute, OMB Circular, and guide are available on FMS’s web

site at www.fms.treas.gov. 

C Credit extension by lenders. Under the Debt Collection

Improvement Act of 1996 (DCIA), an agency must, as a

condition for insuring or guaranteeing any loan, financing,

or other extension of credit under any law to a person,

require that the lender provide information relating to the

extension of credit to credit bureaus. Credit extension

reporting provides a true picture of the borrower’s

outstanding obligations with respect to Federal direct and

indirect loan assistance.

C Federal agency debts. OMB Circular No. A-129 requires

agencies to report to credit bureaus all non-tax, non-tariff

commercial accounts (current and delinquent). In addition,

the DCIA requires agencies to report all delinquent nontax, non-tariff consumer accounts. Agencies may report

current consumer debts to credit bureaus as well and are

encouraged to do so. The reporting of current debts (in

addition to any delinquencies) provides a truer picture of a

borrower’s outstanding indebtedness while simultaneously

reflecting accounts that the borrower has maintained in

good standing.

There is no minimum dollar threshold below which debts cannot

be reported, i.e., accounts for as low as $5 may be reported to a

credit bureau. For detailed information on credit bureau reporting,

including information concerning the required agency procedures

for reporting delinquent consumer debts, agencies should refer to 

FMS’s “Guide to the Federal Credit Bureau Program.”
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Account Monitoring

An agency or its lender/servicer is responsible for monitoring each

of its accounts. As a primary means for monitoring account

activity for administrative debts in particular, the billing system

should enable the agency to "flag" or "mark" overdue payments for

special attention. With overdue payments, the agency should

contact the debtor by telephone or letter, in accordance with its

collection procedures and strategies.

A loan classification (or risk rating) system is designed to assist an

agency in monitoring and assessing loan performance. Such a

system allows the agency to mark for special monitoring those

loans which have been identified as potentially or actually weak. 

Any loan classification system established by the agency should be

the same as, or comparable to, the system established by the

Comptroller of the Currency.

Systematic monitoring of individual accounts provides an agency

with a mechanism for:

C identifying and correcting potential problems before

accounts go into default;

C evaluating the overall quality of its portfolio; and

C identifying trends, such as deficiencies in account

documentation.
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Consumer

Problemless “good” loan 

Substandard delinquent loan/ 

 Possible loss 

Loss “bad” 

 (uncollectible) loan 

Commercial

Problemless “good” loan 

Program Standard limited risk 

Substandard possible loss 

Doubtful “probable” loss 

Loss “bad” 

 (uncollectible) loan

Loan Classification

When using a loan classification system, the agency will reassess

and reclassify each loan in its portfolio annually. It should

periodically examine all accounts within each classification to

ensure that they meet the standards for that classification. It

should further ensure that each classification accurately reflects the

agency’s historical experience with accounts in that program area.

The following factors should be evaluated in classifying an

account:

C the debtor’s ability to manage an income-generating

activity (particularly relevant for some types of commercial

loans);

C the debtor's financial position and history, including

employment history and financial responsibility;

C the type of business and ability to generate profits (for

commercial entities only);

C the structure of the loan and its purpose; and

• the condition and adequacy of the loan's collateral.
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Consumer Loan Classification

An agency will use a three-tiered classification system for

consumer accounts. Substandard and loss categories are adverse

classifications with respect to potential or actual loss to the Federal

Government. The classifications are:

C Problemless - a loan on which payments are consistent

with the terms of the agreement. Thus, it does not pose an

abnormal credit risk to the Federal Government.

C Substandard - a loan which is 90 to 119 days delinquent. 

If the deficiencies are not corrected, there is a distinct

possibility the Federal Government will sustain some loss.

C Loss - a loan which is 120 days or more delinquent. This

class of loan is judged uncollectible and of such little value

that continuing to record it as a loan receivable is not

warranted even though partial recovery may be possible in

the future.

Agencies should consider using the following more stringent

criteria when classifying single family housing loans:

C Problemless - a loan which is less than or equal to 30 days

delinquent;

C Substandard - a loan which is 31 to 90 days delinquent;

and

C Loss - a loan which is more than 90 days delinquent.

The reason for using more stringent criteria for single family

housing loans is because the amount of the monthly mortgage

payment must be considered when determining the risk of these

loans. The size of typical mortgage payment is usually about 25 to

30 percent of the household's disposable income. When a

borrower becomes delinquent by more than 30 days, the likelihood

of full repayment under the original loan terms decreases

significantly; the agency may wish to move such loans into the

substandard category earlier than other types of loans.
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Commercial Loan Classification

Commercial loans will be classified using the categories defined

below. Substandard, doubtful, and loss categories are deemed

adverse classifications with respect to potential or actual loss to the

Federal Government.

C Problemless - a loan which is performing as expected. 

Payments are current; the borrower is in general

compliance with the terms of the loan; and projected

receipts and expenses show that repayment is very likely. 

The loan does not pose an abnormal credit risk to the

Federal Government.

C Program Standard - the loan does not presently expose

the Federal Government to a sufficient degree of risk to

warrant an adverse classification; however, it poses

sufficient credit risk to deserve more attention than a

problemless loan. Included in this category are loans with

inadequate collateral, inadequate written agreements, or

other deficiencies indicating deviations from prudent

lending practices which expose the Federal Government to

a higher than normal credit risk.

C Substandard - a loan in which the borrower's paying

capacity and/or the collateral pledged, if any, jeopardizes

payment of the debt in full. If the deficiencies are not

corrected, there is a distinct possibility the Federal

Government will sustain some loss.

C Doubtful - a loan in which liquidation of an asset(s) for full

value is improbable and the possibility of loss, based on

currently known facts, is highly probable. However,

certain conditions exist that may positively affect the

asset(s) and increase the possibility of recovery.

C Loss - a loan that is uncollectible and of such little value

that continuing to record it as a loan receivable is not

warranted even though partial recovery may be possible in

the future.
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The classification of commercial loans involves a more detailed

analysis than that for consumer loans since commercial loans have

different characteristics such as:

C unstable repayment due to heavy impact of economic

factors;

C potential for large dollar loans; and

C shorter repayment periods, with larger monthly payments.

In making a loan classification decision, there are a number of

significant factors which should be considered when evaluating the

potential viability of a business:

C cash flow and budget projections;

C past income performance; and

C future economic conditions.

Delinquency, however, remains a key indicator when classifying a

commercial loan. (See Appendix 3 for a list of early warning signs

of potential problems.)

Allowance Accounts

An agency shall recognize and record its projected debt losses by

setting up allowance accounts, such as a “loan loss reserves”

account. Separate accounts should be established for accounts and

loans receivable. The agency should establish the amounts in the

allowance accounts based on any one of the following:

C Portfolio condition and composition. For loan portfolios,

the aggregate totals of all loans classified in the "loss"

category and a percentage of those considered to be in the

"doubtful" and "substandard" categories should be placed

in the allowance account. The agency should determine

what proportion of its "doubtful" and "substandard" loans

can be reasonably projected as a loss.
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For administrative debt, the agency should consider the

type of debt (e.g., fines, fees, penalties, etc.) and its

experiences with collecting a given type of debt, such as

the likelihood of the courts enforcing repayment of punitive

charges.

C Historical experience with losses. Using past account

records, the agency should determine the number and

percentage of its accounts that can reasonably be

considered uncollectible.

C Actual write-offs taken in the preceding year or groups

of years.

By accurately estimating its potential losses and putting that

amount in its allowance accounts, an agency is recognizing that it

is unlikely to effect recovery on a portion of its portfolio and that

the estimated uncollectible amount constitutes a "bad debt"

expense to the Government. The agency must subsequently

recognize amounts it deems uncollectible as write-offs against the

allowance account.

Servicing Documentation

To monitor its accounts successfully, the agency needs to maintain

and update, in each account file, all information pertaining to an

account. During the account servicing phase, the agency or

lender/servicer servicing a loan account should simply build upon

the documentation generated during credit extension.

The agency which is servicing an administrative debt begins its

process of documenting account activity in the account servicing

phase. It is, therefore, critical that the agency document any

contact with the debtor since such contacts may be needed to

support the legitimacy or legality of the debt.
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LOAN CLASSIFICATION 

1

0

1

1

Account File for 

Joe E. Doe 

9 Credit Extension Document 

9 Account Servicing Documents 

PAYMENT HISTORY

$1000.....................................5/1/00 

$1000.....................................6/1/00 

$1000.....................................7/1/00 

$1000.....................................8/1/00 

$1000................................9/1/00 

$1000..............................10/1/00 

$1000..............................12/1/00 

Account Servicing Documentation

Information to be incorporated into the account file should include:

C the basis for the creation or establishment of the debt,

including any loan documents; or, for administrative debt,

assessment of a fine or penalty, a copy of the invoice that

was overpaid, the supporting payment schedule, and/or any

other documentation that would substantiate and support

the debt; 

C payment history and schedules, including delinquencies

and defaults and subsequent deferrals, rescheduling, or

refinancing, if any;

C loan classification or risk rating, if any;

C documentation of each contact between the servicing

official and borrower/debtor including demand letters; and

C reports submitted to the agency for monitoring the account,

such as financial statements for commercial loans.
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Agencies should maintain the originals of any documents

generated which indicate that the debtor was aware of the loan or

debt obligation, such as the loan commitment or repayment

agreement, since such documents may be required in any future

actions involving litigation to enforce collection. The agency may

use an automated system to maintain the account and create the

account history and documentation as the account ages (see

Appendix 2 for servicing checklist).

Contract Servicing

Depending upon the size of the portfolio and the cost of

automating its functions, it may be cost effective for an agency to

have a cross-servicing agreement with another Federal agency or

contract out its account servicing functions. If the agency

contracts out its account servicing, it is also responsible for

developing standards consistent with its needs and with the

reporting requirements of OMB and FMS.

Each agency should establish penalties for any contractor that fails

to conduct operations in accordance with the established standards. 

For example, the agency can require a contractor to absorb any

delinquencies caused by negligent servicing.

The agency must ensure that the contractor fully documents all

servicing undertaken and require the contractor to promptly

communicate information on delinquent accounts so that the

agency may initiate action. The agency must establish a means to

move and store the servicing information for delinquent accounts

into its debt collection activities.
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Treasury Report on Receivables 

Federal agencies are required to regularly provide information

concerning their non-tax receivables and delinquent debts to FMS

for inclusion in the “Treasury Report on Receivables” (TROR). 

See 31 U.S.C. 3719.

The TROR is the Treasury’s only comprehensive means for

periodically collecting data on the status and condition of the

Federal Government’s non-tax debt portfolio. The information

contained in the report is disseminated to Congress, OMB, agency

Chief Financial Officers, the Federal Credit Policy Working

Group, other officials and representatives of Federal and state

organizations, private sector organizations, and the public.

The TROR serves as a management report which informs Federal

decision-makers of the gross book value of the debts held by the

Federal Government and the actions taken to enforce collection of

the Government’s receivables. Thus, the debt amounts listed in an

agency’s receivables report are not necessarily identical to the

amounts reported on an agency’s financial statements, which are

presented in accordance with Credit Reform guidance, i.e., using

net present value. Agencies are, however, required to reconcile

their TROR reporting with the receivables data reported on their

financial statements.

To assist agencies in properly reporting receivable and debt

information to FMS, FMS has published an “Instructional

Workbook for Preparing the Treasury Report on Receivables.”

The workbook and contact information are available on FMS’s

website at www.fms.treas.gov/debt. 

For further information on this chapter, please contact the Agency

Enterprise Solutions Division, Federal Finance, at 202-874-6875. 

For information on the TROR, please contact the Agency Liaison

and Reporting Division, Debt Management Services, at

202-874-6660.