Rural Housing Service: Progress on GAO Recommendations and Preliminary Observations on Loan Guarantee Risk Management
Published: 2015-05-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: RHS, an agency within USDA, administers a number of direct loan, loan guarantee, and grant programs that support affordable housing and community development for rural residents. According to USDA financial and budget data, RHS manages a portfolio of almost $120 billion in housing loans and loan guarantees and administers more than $1 billion in rental assistance payments each year. GAO issued three reports since March 2011 on RHS housing assistance programs (see GAO-11-329 , GAO-12-554 , and GAO-12-624 ) and has ongoing work in this area.
This testimony is based on those three reports and ongoing GAO work. It discusses (1) prior GAO findings on the extent to which the housing programs of RHS and HUD overlap and related implications for program collaboration and consolidation; (2) the status of GAO recommendations on the rental housing assistance program and farm labor housing loan and grant program; and (3) preliminary observations from the ongoing review of risk-management practices for the single-family loan guarantee program. To update the status of recommendations, GAO reviewed RHS policies, procedures, and reports. For its ongoing work, GAO reviewed federal requirements and leading practices for risk management and compared them with RHS policies, procedures, and practices. GAO also interviewed RHS officials.
GAO makes no new recommendations in this testimony, but may consider making additional recommendations once its ongoing work is complete.
section_title: What GAO Found
paragraphs: Overlap in housing assistance programs—particularly those of the Department of Agriculture's (USDA) Rural Housing Service (RHS) and the Department of Housing and Urban Development (HUD)—highlight opportunities for increased collaboration and consolidation. GAO's August 2012 report found overlap in the products offered and populations (income groups) and geographic areas served by RHS and HUD single-family mortgage guarantee programs. GAO also found selected multifamily housing programs served similar purposes. The report made three recommendations to RHS. RHS generally agreed with the recommendations and implemented one by formalizing collaborative efforts with other federal agencies on single-family housing programs. However, RHS and other federal housing agencies have not yet taken other recommended steps to build on interagency efforts—for example, by evaluating specific opportunities for consolidating similar housing programs, including those that would require statutory changes.
RHS generally agreed with and has addressed some of GAO's prior recommendations for the rental assistance and farm labor housing programs, but others require further attention. Specifically, RHS implemented three of the seven recommendations GAO made in May 2012 to enhance the agency's efforts to identify and reduce improper rental assistance payments. Additional steps are needed to implement the remaining recommendations, which address shortcomings in the way RHS estimates and reports on improper payments. RHS also addressed three of the seven recommendations GAO made in March 2011 on oversight of the farm labor housing program. Further actions are required to implement the other four, which address weaknesses in RHS controls for ensuring tenant eligibility, among other issues.
Ongoing GAO work indicates that aspects of RHS's risk management for the single-family mortgage guarantee program broadly align with federal requirements, while others are not fully consistent with requirements and leading practices. For example, RHS has policies and procedures for a number of risk- management functions addressed in Office of Management and Budget guidance (such as determining borrower creditworthiness and overseeing lenders). However, GAO's ongoing work indicates that, contrary to federal internal control standards, RHS does not have written policies and procedures for a committee responsible for evaluating credit quality issues and addressing them through policy changes. Also, certain benchmarks RHS uses to help assess the performance of its guaranteed portfolio have limitations that diminish their value for assessing risk and are not fully consistent with leading practices for successful performance measures. These shortcomings may limit the effectiveness of RHS's risk-management efforts.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work on the Rural Housing  Service (RHS), a component of Rural Development within the Department  of Agriculture (USDA). Among other responsibilities, RHS provides  housing assistance to low- and moderate-income rural Americans through  a number of direct loan, loan guarantee, and grant programs. These  programs support homeownership, promote the development and  rehabilitation of rental properties, and help make rents affordable.  According to RHS financial and budget data, the agency manages a  portfolio of almost $120 billion in single- and multifamily housing loans  and loan guarantees and administers more than $1 billion in rental  assistance payments each year.
RHS is one of several federal agencies—including the Departments of  Housing and Urban Development (HUD), Veterans Affairs (VA), and  Treasury—with programs or activities that support housing. For example,  HUD insures mortgages for single- and multifamily properties through the  Federal Housing Administration (FHA) and administers rental assistance  programs. The fragmented and overlapping nature of federal housing  assistance stems partly from distinctions between urban and rural areas  that existed when federal housing programs were created. However, the  rural America of today is different than when the federal government first  began to provide housing assistance to rural residents in the 1930s.  Today’s constrained budget environment makes it especially important  that federal housing programs adapt to changing conditions, reduce  waste, and effectively manage risk in order to deliver housing assistance  as efficiently and effectively as possible.
My testimony today is based primarily on three reports we issued  between March 2011 and August 2012, as well as an ongoing study that  we are conducting at the request of this Subcommittee. (For a list of  recommendations from the three issued reports and their status,   see app. I.)  This body of work addresses both program-specific issues  and broader issues affecting multiple housing programs. I will discuss (1)  our prior findings on the extent to which there is overlap in the single- and  multifamily housing programs of RHS and HUD, including geographic  areas served, and related implications for program collaboration and  consolidation; (2) the status of our recommendations on RHS’s Section  521 Rental Assistance Program and Section 514 and 516 Farm Labor  Housing Loan And Grant Program; and (3) preliminary observations from  our ongoing assessment of risk management practices for RHS’s Section  502 Single Family Housing Guaranteed Loan Program.
To conduct our previously issued work, we relied on several analytical  methods, including analyzing RHS budget, financial, and program data;  reviewing RHS policies and procedures and comparing them to federal  requirements; and comparing the geographic locations and populations  benefiting from RHS programs to those benefiting from other selected  housing agency programs. We also interviewed RHS and other  government officials and industry representatives. Our prior reports each  include a detailed description of our scope and methodology. To update  the status of our prior recommendations, we reviewed updated RHS  policies, procedures, and reports. For this testimony, we also reviewed  information on RHS’s estimates of improper rental assistance payments  reported in fiscal years 2013 and 2014. To conduct our ongoing work, we  reviewed federal requirements and leading practices for risk management  and compared them with RHS policies, procedures, and practices. We  also interviewed RHS officials. We performed the work on which this  testimony is based in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The federal government plays a major role in supporting housing. Federal  housing assistance includes, but is not limited to, the following categories:
Homeownership programs, often called single-family housing  programs, provide mortgage insurance, loan guarantees, and direct  loans to support the purchase or refinance of a home, as well as  grants or loans for home repairs or modifications.
Rental housing programs, often called multifamily programs, provide  loans, interest rate subsidies, loan guarantees, tax incentives, or a  combination of these to promote the development and rehabilitation of  privately owned rental properties.
Rental assistance programs, which make rents affordable to eligible  households by paying the difference between the unit’s rent and 30  percent of a household’s adjusted income. These programs include  (1) tenant-based rental assistance that provides vouchers for eligible  tenants to rent privately owned apartments or single-family homes  and can be applied to different properties if tenants move, and (2)  project-based rental assistance that is attached to specific properties  and available to tenants only when they are living in units at these  properties.
In the 1930s, when most rural residents worked on farms and rural areas  generally were poorer than urban areas, Congress authorized separate  housing assistance for rural areas and made USDA responsible for  administering it. Specifically, in 1937 the Bankhead-Jones Farm Tenant  Act authorized USDA to provide long-term, low-interest loans to farm  tenants and sharecroppers so that they could purchase and repair farms,  including homes on farms. The Housing Act of 1949 authorized new rural  lending programs through USDA and made farm owners eligible for  assistance for dwellings and other farm buildings. Amendments added in  1961 made nonfarm properties eligible for single-family loans and created  the farm labor housing program. A 1962 amendment created the rural  rental housing program.
The housing programs that RHS currently administers include, but are not  limited to, the following:
The Section 502 Single Family Housing Guaranteed Loan Program  (single-family guarantee program) provides guarantees on mortgage  loans to households with low and moderate incomes in rural areas.
The Section 521 Rental Assistance Program (rental assistance  program) provides rental subsidies to help very low- and low-income  rural tenants afford decent rental housing. The properties in which  the tenants live were created through other RHS programs that  provide low-interest loans for the development of multifamily housing.
The Section 514 and 516 Farm Labor Housing Loan and Grant  Program (farm labor housing program) provides direct loans and  grants for the development of on-farm and off-farm housing for  farmworker tenants. The farm labor housing program is the only RHS  program that does not have to meet rural eligibility criteria—that is, it  funds properties in both urban and rural areas.
section_title: Opportunities Exist to Increase Collaboration and Consider Consolidation of RHS and HUD Programs
paragraphs: Our prior work assessing fragmentation, overlap, and duplication in  selected housing programs concluded that increased collaboration or  even consolidation of certain housing programs (including RHS  programs) could make the programs and program administration more  effective.
In an August 2012 report, we found that overlap exists between selected  single-family federal housing programs—particularly those of RHS and  HUD—in the products offered and populations (income groups) and  geographic areas they served. For instance,
RHS, HUD, and VA all guarantee single-family mortgage loans for  homeowners.
According to fiscal year 2009 loan data, 74 percent of HUD borrowers  fell into the low- to moderate- income category and therefore met the  income eligibility requirement for the RHS single-family guarantee  program in fiscal year 2009.
Also according to fiscal year 2009 data, HUD served a larger number  of low- and moderate-income households in nonmetropolitan  counties, including those parts of the county considered by USDA’s  Economic Research Service to be rural or completely rural (see fig.  1).
HUD and VA single-family programs are not restricted geographically. In  contrast, eligible areas for RHS programs are “rural,” as defined by  statute. However, in our August 2012 report, we found that RHS can  operate in virtually all areas of the United States, and 37 percent of the  population as of 2011 was eligible for rural housing programs on the basis  of geography alone. Over the years, we have found that the methods for  identifying eligible areas results in similar areas being treated differently.  For example, in our August 2012 report, we reiterated a finding from a  2004 report that the definition of rural used to determine eligibility for rural  housing programs can lead to similar areas receiving different eligibility  determinations. Our 2004 report recommended that Congress consider  certain changes to the definition to better ensure that RHS made more  consistent eligibility determinations for rural housing programs. We  maintain that these changes would improve the consistency with which  RHS determines eligibility for such programs. In addition, the changes  would help target the programs to more rural areas—for instance, by  eliminating “grandfathered” eligibility for places that had become part of  metropolitan areas.
Agencies have started to work on better coordinating their single-family  programs. In February 2011, the administration announced a task force to  evaluate the potential for coordinating or consolidating homeownership  loan programs at HUD, USDA, and VA. But, in our August 2012 report,  we found that opportunities existed to increase collaboration among the  agencies and potentially realize efficiencies. The single-family task force’s  efforts as of 2012 had not yet incorporated key collaborative practices we  identified in previous work. We concluded that practices, such as  identifying goals and resources and defining strategies and outcomes,  would be important as the task force moved forward. We recommended  that HUD, USDA, and VA, and the Director of the Office of Management  and Budget (OMB) take steps to establish a more rigorous approach to  collaboration. For example, as a first step, agencies could define and  articulate goals or common outcomes for their collaborative efforts. HUD,  USDA, and VA generally agreed with the recommendation; however,  HUD and OMB stated that actions should wait until after the housing  markets stabilized. In 2014, representatives from HUD, USDA, VA, and  other agencies addressed our recommendation by signing a Joint Federal  Housing Agencies Working Group Organization Charter. The charter  stated that the purpose of the working group included promoting  coordination and consistency in federal housing programs. It also set  membership rules, voting procedures, and meeting schedules.
Our August 2012 report also found overlapping purposes in selected  RHS, HUD, and Treasury multifamily programs, but differing products,  areas served, and delivery methods. For example, RHS, HUD, and  Treasury provide financing for development and rehabilitation of  multifamily housing for low- and moderate-income households, but RHS- financed properties were more concentrated in rural areas, while  properties financed through HUD and Treasury programs were more  concentrated in urban and suburban areas. But for rental assistance  programs, while RHS had a much higher proportion of assisted units in  small town rural zip codes and isolated rural zip codes (rural zip codes)  than HUD had in those areas, HUD had a greater number of assisted  units in rural zip codes than RHS. Specifically, as of 2012, HUD  provided assistance to 235,828 units in rural zip codes and RHS to  176,957 (see fig.2).
We also found that agencies had been working to coordinate multifamily  programs. More specifically, HUD, USDA, and Treasury had been  working to consolidate and align requirements in rental housing programs  through the Interagency Rental Policy Working Group established by the  White House’s Domestic Policy Council in 2010. Although the working  group’s efforts were consistent with many key collaborative practices, our  August 2012 report found that the group had not taken full advantage of  opportunities to reinforce agency accountability for collaborative efforts or  expanded the scope of its evaluation to include proposals that would  require statutory action. We recommended that the Rental Policy  Working Group take steps to document collaborative efforts in strategic  and annual plans to help reinforce agency accountability for these efforts.  As of May 2015, this recommendation has not been implemented, and  RHS indicated that it was seeking ways to formally document the results  of interagency collaboration.
We also found that consolidation of similar RHS and HUD housing  programs may offer an effective means for achieving long-term cost  savings. We first suggested in 2000 that Congress consider requiring  USDA and HUD to examine the benefits and costs of merging programs  serving similar markets and providing similar products. In our August  2012 report, we found that in subsequent years, certain aspects of the  RHS and HUD homeownership programs grew more alike (for example,  as RHS shifted from single-family direct loans toward loan guarantees).  However, we indicated that the current statutory framework imposed  additional challenges on the agencies’ ability to consolidate similar  programs. For example, HUD has noted that without legislative changes,  any efforts to merge the programs likely would result in a more  cumbersome delivery system. Thus, any evaluations of which programs,  products, systems, and processes to retain, revise, consolidate, or  eliminate would involve complex analyses, trade-offs, and difficult policy  decisions. We concluded that the single-family task force offered  opportunities for these agencies to identify potential areas for  consolidation or greater coordination and which actions would require  statutory change. We recommended that to build on efforts already under  way to coordinate, consolidate, or improve housing programs, and help  inform Congress’s decision-making process, HUD, Treasury, USDA, and  VA should evaluate and report on the specific opportunities for  consolidating similar housing programs, including those that would  require statutory changes. HUD, USDA, and VA generally agreed with the  recommendation. However, the recommendation has yet to be  implemented.
section_title: Additional Actions Are Needed to Address GAO Recommendations on Improper Rental Assistance Payments and Oversight of Farm Labor Housing
paragraphs: In our prior work on RHS’s rental assistance and farm labor housing  programs, we concluded that RHS could take additional steps to enhance  program oversight and efficiency. Our May 2012 report on improper  rental assistance payments made seven recommendations to RHS, three  of which are implemented. In a March 2011 report on oversight of the  farm labor housing program, we made seven recommendations to RHS,  three of which are implemented. Further actions are needed to address  the remaining recommendations. The following discussion addresses  selected recommendations from these reports. (See app. I for a full list of  the recommendations from these reports and their status.)
subsections: section_title: Improper Rental Assistance Payments
paragraphs: In our May 2012 report, we found that RHS had made annual estimates  of improper payments in its rental assistance program and taken steps to  reduce such payments. RHS generates these estimates as part of  annual improper payment audits. From fiscal years 2007 through 2010,  RHS reduced its reported error rate (total amount improperly paid divided  by program outlays) from 3.95 percent (representing $35 million in errors)  to 1.48 percent (representing $15 million in errors). RHS’s error rates  reported in fiscal years 2013 and 2014 were 1.79 and 1.99 percent,  respectively.
However, we also found that RHS’s reported error rates might understate  the magnitude of the problem for several reasons, including the following:
RHS had not estimated improper payments due to unreported tenant  income because it lacked the authority to match data on tenant  income against federal wage and benefits databases.
RHS had not estimated improper payments made on the behalf of  deceased tenants because it had not completed steps to gain access  to the Social Security Administration’s (SSA) Death Master File, which  could be used to match data to detect such payments.
In 2008, RHS began excluding improper payments of less than $100  from estimated error rates. However, RHS did not submit this change  to OMB, which is responsible for approving agency methodologies for  estimation.
Our May 2012 report also found that RHS had not fulfilled all OMB  reporting requirements for improper payments. For example, USDA’s  Performance and Accountability Reports (1) did not contain a description  of steps the agency took to ensure managers were accountable for  reducing and recovering improper payments; and (2) did not fully discuss  whether the agency had the internal controls, human capital, information  systems, and other infrastructure to reduce improper payments.
To address limitations in RHS’s detection and estimation of improper  payments, in our May 2012 report we suggested that Congress consider  amending the Social Security Act to grant RHS access to the National  Directory of New Hires database (New Hires database) for purposes of  verifying tenant incomes. Although USDA drafted legislation to obtain  this access, and a bill was introduced in the 113th Congress (2013–2014)  to provide access, these proposals were not enacted. We continue to  believe that providing RHS with this access would strengthen the  accuracy and integrity of RHS’s payment process.
In addition, we recommended that USDA do the following:
Draft proposed legislation to grant RHS access to SSA benefits data  for income verification purposes. USDA has not yet drafted this  legislation. USDA officials told us that they wanted to obtain access to  the New Hires database before pursuing access to the SSA benefits  data.
Complete steps to use SSA’s Death Master File to identify improper  payments made on behalf of deceased tenants. RHS officials told us  in March 2015 that they now conduct prepayment checks against the  Death Master File to avoid making improper payments to deceased  tenants and that they planned to use the file to help detect improper  payments in future audits.
Submit RHS’s methodology for estimating improper payments,  including the use of the $100 exclusion threshold, to OMB for review.  As of March 2015, RHS officials said they had prepared a draft  request to USDA’s Office of the Chief Financial Officer to request an  OMB review of the methodology. However, RHS has yet to submit the  methodology to OMB for review.
Our May 2012 report also made two recommendations to address  shortcomings in RHS’s reporting on improper payments. First, we  recommended that RHS complete steps to ensure agency manager  accountability for reducing and recovering improper payments and  include a discussion of these steps in USDA’s Performance and  Accountability Reports. RHS addressed this recommendation in USDA’s  fiscal year 2012 Annual Financial Report (AFR)—the report in which  USDA now reports improper payment information. Second, we  recommended that RHS discuss internal controls, human capital,  information systems, and other infrastructure in USDA’s Performance and  Accountability Reports. However, RHS has not included this discussion in  the AFRs. In March 2015, RHS officials told us that the discussion was  not applicable to the rental assistance program because the improper  payments stem from the actions of private property managers (who  request RHS rental subsidies on behalf of tenants), not from insufficient  RHS resources for internal controls and infrastructure. We disagree that  RHS internal controls and resources are not applicable to the rental  assistance program because RHS has processes, people, and data that it  uses to prevent and detect improper payments. We maintain that RHS  should provide the required discussion in the AFR to better inform  Congress and OMB of its capability to reduce improper payments.
section_title: Oversight of Farm Labor Housing Program
paragraphs: In a March 2011 report, we found that RHS could strengthen its  management processes in several areas to more effectively implement  and oversee the farm labor housing program. As the only federally  assisted source of housing for farmworkers, the program plays an  important role in constructing and rehabilitating housing. However, we  concluded that a number of RHS management processes hindered the  agency’s ability to provide farmworkers with access to decent and safe  housing and ensure compliance with program requirements, as follows:
The enforcement mechanisms RHS used may not be effective in  bringing borrowers—that is, the recipients of the program’s loans and  grants—into compliance in a timely manner. Forms of borrower  noncompliance varied in severity—from mortgage default or health  and safety violations on a property to failure to submit annual budget  documentation. We concluded that some RHS enforcement actions  were too mild (servicing letters), and others too severe (acceleration  of the loan payments) to have the intended effect of returning  borrowers to compliance. We recommended that RHS implement  enforcement actions that could be tailored to the severity of the  borrower’s noncompliance. The agency agreed with this  recommendation and published a proposed rule to establish civil  money penalties as a “mid-level” enforcement mechanism. But  according to USDA, a regulatory change is needed before Rural  Development can use the services of USDA Administrative Law  Judges to adjudicate civil money penalty cases.
Although RHS staff must ensure that borrowers (or their management  agents) verify tenants’ income levels, the processes RHS used for  verifying income were inconsistent among state offices that help  implement the program. For example, some state offices used third- party income verification systems, such as a wage matching system,  while other states did not have access to these verification tools. We  recommended that USDA seek legislative authority to gain access to  the New Hires database for data matching purposes and noted that  we first recommended granting such access in 2004. USDA agreed  with our 2011 recommendation and, as discussed previously,  proposed legislation to obtain this access. Although the legislative  proposals have not been enacted, we maintain that providing RHS  access to the database would improve management of the program.
Although borrowers must verify the legal residency of tenants, we  found inconsistencies in the methods RHS used to ensure borrower  compliance. The Citizenship and Immigration Services division of  the Department of Homeland Security operates the Systematic Alien  Verification for Entitlements (SAVE) program, which provides an  online service for verifying legal residency documentation. This  service is available, upon request, to all federal, state, and local  benefit-granting agencies. As part of supervisory reviews of  borrowers, we found that staff from some RHS state offices used  SAVE to check whether borrowers were verifying residency status,  while staff from several other offices either did not or were unaware of  the program. We recommended that to better ensure that  requirements for tenant eligibility were met, RHS should require staff  to use the SAVE program to verify tenants’ residency status during  supervisory reviews. As of April 2015, RHS had not implemented this  recommendation.
section_title: Preliminary Observations on Risk Management of RHS’s Single-Family Loan Guarantee Program
paragraphs: As requested by this Subcommittee, we are conducting ongoing work on  RHS that focuses on RHS’s methods of estimating credit subsidy costs  and risk-management practices for its single-family guarantee program.  In relation to risk management, we have been examining the extent to  which RHS’s practices are consistent with key federal requirements,  including those in OMB Circular A-129 (Policies for Federal Credit  Programs and Non-Tax Receivables) and federal internal control  standards. Overall, our work as of May 2015 indicates that while  aspects of RHS’s risk-management practices broadly align with selected  federal requirements, other aspects are not fully consistent with  requirements and leading practices. Our preliminary observations are  summarized below.
RHS has policies, procedures, and practices for a number of risk- management functions addressed in OMB Circular A-129. Examples  include the following:
RHS has procedures for determining borrower creditworthiness,  including an automated underwriting system that helps lenders  determine whether applicants qualify for an RHS-guaranteed  mortgage. The procedures also require RHS field staff to perform  several steps. For example, RHS field staff must review every loan  application and associated loan documentation (such as the property  appraisal) before the lender closes the loan. If the documentation is  satisfactory, RHS issues a conditional commitment to guarantee the  loan, which may require the lender to satisfy certain conditions before  proceeding to loan closing. Once the lender closes the loan and  submits the closing package to RHS, RHS field staff must conduct a  final review to determine whether the lender met the conditions before  issuing the loan guarantee.
RHS has policies and procedures for overseeing lenders that  underwrite or service RHS-guaranteed mortgages. For example,  lenders must meet eligibility standards prescribed in regulation and  apply to RHS for approval. RHS procedures require RHS field and  contractor staff to conduct periodic desk or on-site reviews of lenders  and servicers, and RHS has developed risk-based criteria to guide the  selection of lenders and servicers for review. RHS staff must prepare  written reports on their findings, and the lenders and servicers must  respond in writing to any report recommendations. RHS also has  documented procedures for reviewing lender loss claims on  guaranteed loans that have defaulted.
RHS has established a risk appetite—the amount and type of risk an  organization is willing to accept in pursuit of its objectives—for the  single-family guarantee program. According to RHS officials, the  program’s risk appetite is expressed primarily through the goal of  making each annual cohort of loan guarantees “subsidy-neutral,”  while keeping guarantee fees at a level affordable to low- and  moderate-income households. In the budgetary context, subsidy- neutral means that, initially, the present value of lifetime estimated  cash inflows (for example, guarantee fees) equals the present value  of lifetime estimated cash outflows (for example, loss claims).
Our ongoing work indicates that RHS also has been making a number of  enhancements to its risk-management practices. Chief among these is  the development of an econometric model intended to support analysis of  RHS’s guaranteed portfolio and help estimate credit subsidy costs for the  single-family guarantee program. According to RHS officials, the model  will help the agency better estimate the effects of market and policy  changes on portfolio performance and improve management of program  risks. RHS expects that development of the model will be completed in  December 2015. RHS also has proposed regulations that would  strengthen its authority to require lenders to indemnify (compensate) RHS  for loss claims on defaulted loans that were not properly underwritten.  Current regulations authorize RHS to seek indemnification within 24  months of loan closing when RHS concludes that the lender did not  comply with the agency’s underwriting standards. In March 2015, RHS  issued a proposed rule that, among other things, would increase the  indemnification period to 5 years. Additionally, Rural Development is  exploring the appointment of a Chief Risk Officer, in response to a  congressional report directive and consistent with OMB Circular A-129  requirements.
Based on our ongoing work, we have found elements of RHS’s risk  management that are not fully consistent with federal requirements and  leading practices, which may limit the effectiveness of RHS’s overall risk- management efforts. Examples include the following:
Limitations in performance benchmarks. While RHS uses a  number of benchmarks to assess the performance of its guaranteed  portfolio, two key benchmarks have limitations that diminish their  usefulness. In particular, these benchmarks are not fully consistent  with certain attributes of successful performance measures—such as  objectivity and reliability—that we identified in prior work. According  to RHS officials, since 2004, they have compared the overall  delinquency and foreclosure rates for RHS’s portfolio with  corresponding rates for FHA’s insured portfolio of 30-year fixed-rate  mortgages. RHS has established performance goals stating that  RHS should be within a specified range of FHA’s delinquency and  foreclosure rates at the end of each fiscal year. Although RHS  generally has met these goals, using FHA’s performance as a  benchmark may not provide objective and reliable information for risk  management. The weakness in the benchmark is two-fold. First, a  simple comparison of two portfolios ignores potential differences in  their composition—for example, in the age and geographic distribution  of loans—that may influence loan performance and make  comparisons of the portfolios invalid. Second, it implies that FHA  has been effectively managing its risk. However, FHA has at times  exhibited shortcomings in this area. For example, in a 2006 report, we  found that FHA had not developed sufficient standards and controls to  manage risks associated with the substantial proportion of FHA- insured loans with down-payment assistance.
Lack of formal procedures for a key committee. RHS does not  have written procedures for a key part of its risk-management  structure. Specifically, since 2009 RHS has had a Credit Policy  Committee that, according to RHS officials, meets regularly to detect,  discuss, and analyze credit quality issues and address them through  policy changes. According to federal internal control standards,  agencies should have effective control activities, including policies  and procedures, to help mitigate risks and should document  significant events. However, the Credit Policy Committee operates  without policies and procedures describing its purpose, scope,  membership, or decision-making process. RHS also has not defined  the roles and responsibilities of committee members and does not  prepare minutes of meeting discussions and results.
Key relationships not documented. RHS has not documented the  relationships between the agency components that have risk- management functions and responsibilities. OMB Circular A-129  states that federal credit agencies should codify clearly defined lines  of authority and communication. RHS’s risk-management structure is  decentralized and complex. According to RHS officials, it involves  staff in 47 state offices; the Centralized Servicing Center and National  Financial and Accounting Operations Center in St. Louis, Missouri;  and USDA headquarters. Although RHS has basic organizational  charts for these components of the risk-management structure, it has  not documented the lines of authority or communication among them.
As we complete our ongoing work, we will determine whether additional  actions are needed by RHS to rectify these issues. We will consider  making recommendations, as appropriate, in our final report.
In conclusion, our reviews of RHS housing assistance programs since  2011 have identified a number of areas in which RHS could strengthen its  program oversight and enhance collaboration and consolidation efforts.  RHS has made progress in implementing some of our recommendations,  but additional actions are needed to address others. Additionally, our  ongoing work has identified shortcomings in certain aspects of RHS’s risk  management for the single-family guarantee program. To operate as  efficiently and effectively as possible, it will be important for RHS to  sustain the improvements it has made, implement outstanding audit  recommendations, and address any future recommendations we may  make in a timely manner.
Chairman Luetkemeyer, Ranking Member Cleaver, and Members of the  Subcommittee, this concludes my prepared statement. I would be happy  to respond to any questions that you may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact me at 202- 512-8678 or sciremj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this testimony  include Steve Westley, Assistant Director; Melissa Kornblau, Analyst-in- Charge; Alexandra Martin-Arseneau; Andy Finkel; John McGrail; Marc  Molino; Barbara Roesmann; and Julie Trinder-Clements.
section_title: Appendix I: Content and Status of Relevant GAO Recommendations
paragraphs: The following table summarizes the status of our prior recommendations  to USDA from our August 2012, May 2012, and March 2011 reports that  discuss RHS housing assistance programs. We classify each  recommendation as either open (the agency has either not taken or  completed steps to implement the recommendation) or implemented. The  recommendations are listed by report.