Debt Collection Improvement Act of 1996: Department of Agriculture's Rural Housing Service Has Not Yet Fully Implemented Certain Key Provisions
Published: 2002-02-28T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The Debt Collection Improvement Act of 1996 seeks to maximize the collection of billions of dollars of nontax delinquent debt owed to the federal government. The act requires agencies to refer eligible debts delinquent more than 180 days to the Department of the Treasury for payment offset and to Treasury or a Treasury-designated debt collection center for cross-servicing. The Treasury Offset Program, includes the offset of benefit payments, vendor payments, and tax refunds. Cross-servicing involves locating debtors, issuing demand letters, and referring debts to private collection agencies. The Rural Housing Service (RHS) has initiatives to ensure the timely referral of all delinquent debt. However, the agency's failure to make the act a priority has left key provisions of the legislation unimplemented and severely reduced collection opportunities. The agency had referred no direct single-family housing (SFH) loans to the Financial Management Service for cross-servicing. Three major factors delayed implementation. First, RHS's loan-servicing system had not incorporated key features necessary to implement the act's referral provisions. Second, RHS did not refer any debts for cross-servicing while pursuing an exemption from Treasury. Third, amounts reported as delinquent and eligible for consideration for referral were materially understated. RHS had not kept the documentation needed to independently verify the accuracy and validity of the exclusion amounts in its certified fiscal year 2000 year-end report. Accordingly, GAO was unable to determine whether RHS had appropriately excluded $182 million of delinquent loans from referral for offset and for cross servicing as of September 2000.

section_title: Letter
paragraphs: On October 10, 2001, we testified before your subcommittee on selected  federal agencies’ implementation of certain key provisions of the Debt  Collection Improvement Act (DCIA) of 1996. That testimony addressed  requirements to refer older delinquent debt to the Department of the  Treasury for offset against amounts the government might owe the debtors  and for additional collection action at Treasury’s central debt-collection  facility, operated by the Financial Management Service (FMS).  Our more  recent testimony, in early December 2001, focused on progress in this area  by two Department of Agriculture agencies—the Rural Housing Service  (RHS) and the Farm Service Agency (FSA).
One of the major purposes of DCIA is to maximize collection of billions of  dollars of nontax delinquent debt owed to the federal government.  Toward  this end, DCIA requires that agencies refer eligible debts delinquent more  than 180 days that they have been unable to collect to Treasury for payment  offset and to Treasury or a Treasury-designated debt collection center for  cross-servicing.  Treasury performs payment offset through its Treasury  Offset Program (TOP), which includes the offset of certain benefit  payments, vendor payments, and tax refunds.  Cross-servicing involves  such actions as locating debtors, issuing demand letters, and referring  debts to private collection agencies.
The purpose of this report is to expand on the information provided in our  December 2001 testimony regarding RHS’s progress and to offer our  recommendations for improving the agency’s implementation of the debt- referral provisions of DCIA.  As you know, our prior reports have shown  that agencies have been slow to implement the referral requirements of  DCIA.Our testimonies referred to above offered an overview of agencies’  progress during fiscal year 2000 and fiscal year 2001 to the extent that data  were available and addressed your request for information.  For this report,  we looked at whether (1) RHS was promptly referring eligible single-family  housing (SFH) loans to Treasury’s FMS for collection action, (2) any  obstacles were hampering RHS from referring eligible SFH loans to FMS,  and (3) RHS was appropriately using exclusions from referral  requirements.
subsections: section_title: Background
paragraphs: RHS is a component of Rural Development, a mission area within  Agriculture that was created when the department was reorganized in 1994.  RHS provides a wide array of housing services to rural residents and often  offers more favorable loan terms and conditions than other federal housing  programs.  The agency delivers services through an extensive network of  field offices.  In September 1997, Rural Development completed a  conversion of its direct SFH loan servicing from a dispersed nationwide  network of more than 2,000 field offices to Agriculture’s new Central  Servicing Center.  The center is responsible for servicing the department’s  entire direct SFH loan portfolio, which totaled about $17 billion at the close  of fiscal year 2000.
Through its SFH programs, RHS provides highly subsidized direct loans to  rural households with very low and low incomes, guaranteed loans to  households with low and moderate incomes, and grants and direct loans  for housing repairs to households with very low incomes. Under the  guaranteed SFH loan program, RHS agrees to reimburse approved private  lenders for up to 90 percent of the principal advanced to a borrower in the  event the borrower defaults.  In recent years, RHS’s guaranteed SFH loan  program has expanded, with the reported outstanding principal due on the  guaranteed SFH loan portfolio increasing from about $3 billion in fiscal  year 1996 to more than $10 billion at the end of fiscal year 2000.
section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine whether (1) RHS was promptly referring  eligible SFH loans to FMS for collection action, (2) any obstacles were  hampering RHS from referring eligible SFH loans to FMS, and (3) RHS was  appropriately using exclusions from referral requirements.
To determine whether RHS is promptly referring eligible SFH loans to FMS  for collection action, we interviewed officials responsible for identifying  eligible SFH loans and referring them to FMS.  We also reviewed pertinent  policies, procedures, and reports related to RHS loan referrals, including  Treasury instructions for preparing the TROR and RHS internal  delinquency reports.  To determine whether any obstacles were hampering  RHS from referring eligible SFH loans, we interviewed RHS officials and  obtained and reviewed relevant documents, including the agency’s debt- referral schedule and Agriculture’s request to Treasury to exempt  delinquent SFH loans from referral for cross-servicing for up to a year after  liquidation of collateral.  We also reviewed responses to questions about  RHS’s debt collection practices that you submitted to the deputy secretary  of agriculture in October 2001.  We used information from the responses to  clarify or augment our report, where appropriate.
A scope limitation prevented us from determining whether RHS’s  exclusions of about $182 million of direct SFH loans from referral  requirements were appropriate.  RHS officials told us that the agency did  not retain supporting documentation (a list of individual loans, including  loan amounts, for each exclusion category) for the $182 million of direct  SFH loans excluded from referral to FMS.  Without such documentation,  we could not independently verify that amounts excluded for forbearance  or appeals, bankruptcy, and foreclosure were accurate or met established  criteria.
We conducted our review from November 2000 through October 2001 in  accordance with U.S. generally accepted government auditing standards.  We did not independently verify the reliability of certain information that  RHS provided to us (e.g., debts more than 180 days delinquent and debts  classified as currently not collectible (CNC) and information in RHS’s  loan-accounting and loan-servicing systems).
We requested written comments on a draft of this report from the secretary  of agriculture or her designated representative.  Rural Development  provided Agriculture’s response and Rural Development’s letter is reprinted  in appendix I.
section_title: RHS Has Referred a Minimal Amount of Delinquent Direct SFH Loans for Cross- Servicing
paragraphs: Since the passage of DCIA in April 1996, RHS has referred a minimal  amount of direct SFH loans to FMS for cross-servicing.  As of September  30, 2000, RHS reported about $383 million of direct SFH loans delinquent  more than 180 days.  Because of a software deficiency that prevented  automated identification of direct SFH loans eligible for cross-servicing  and an agency plan to obtain an exemption from referring direct SFH loans  for cross-servicing, RHS had referred virtually no delinquent SFH loans for  cross-servicing as of September 30, 2000.  However, as of the same date,  RHS reported having referred about $201 million of direct SFH loans to  FMS for TOP.
Beginning in April 2001, RHS began manually referring a small number of  direct SFH loans—approximately 100 a month—to FMS for cross-servicing.  However, this effort, discussed in more detail later in this report, is an  extremely limited measure and results in referrals of only a small fraction  of the agency’s eligible delinquent SFH loans.
section_title: Several Obstacles Have Impeded RHS’s Implementation of DCIA Referral Requirements
paragraphs: Since DCIA’s enactment, several obstacles have seriously impeded RHS’s  implementation of the act’s referral requirements.  Because of a software  deficiency that has existed since fiscal year 1997, Agriculture’s automated  loan-servicing system cannot identify loans that are eligible and should be  referred for cross-servicing.  As a result, RHS referred virtually no direct  SFH loans to FMS for cross-servicing through September 30, 2000, and only  minor amounts through September 30, 2001.  An additional obstacle was  RHS’s application for—and unrealistic expectation of receiving—an  exemption from Treasury that would have allowed the agency to delay  referring direct SFH loans to FMS for cross-servicing for up to a year after  liquidation of a loan’s collateral.  Based on its expectation that the  exemption request would be approved on an after-the-fact basis, RHS  classified all of its delinquent direct SFH loans as excluded from referral  requirements in its September 30, 2000, TROR.  Finally, RHS understated  loan amounts that are eligible for referral in two respects.  First, the agency  included in its reporting of delinquent debts only the delinquent portions of  installment loans rather than the total unpaid loan balances as required by  Treasury.  Second, RHS did not take action until recently to recognize  losses on guaranteed SFH loans as nontax federal debt.  Until these steps  are completed, RHS cannot use the collection tools provided under DCIA  to pursue collection directly from debtors on guaranteed SFH loans.
subsections: section_title: System Limitations Hampered Identification and Referral of Loans for Cross-Servicing
paragraphs: During fiscal years 1996 and 1997, RHS converted its loan-servicing system,  which serviced a portfolio of more than 700,000 direct SFH loans, from a  decentralized servicing network of more than 2,000 field offices to a single,  automated loan-servicing location—Agriculture’s Central Servicing Center.  The main automated system is a commercial off-the-shelf loan-servicing  system that required modification if it was to perform the unique functions  associated with the direct SFH loan program, such as identifying direct  SFH loans eligible for cross-servicing.  If the system is to perform this  function, it must, for example, be capable of determining the status of any  collateral, because all collateral must be liquidated prior to a loan’s referral  to FMS for cross-servicing.  According to RHS officials, RHS has been  unable since the conversion to readily identify direct SFH loans that are  eligible for referral to FMS for cross-servicing because the necessary  software was not completed prior to conversion.  RHS nevertheless  completed the conversion in fiscal year 1997 because the agency did not  want to delay implementation of the new system.  RHS plans to complete  the system software in April 2002 and has stated that the software  modifications will facilitate identification of loans for cross-servicing.
In April 2001, while we were performing our fieldwork, RHS began an  interim process to manually identify direct SFH loans eligible for cross- servicing.  Agency officials advised us, however, that relatively few  referrals for cross-servicing are likely to be made before completion of the  software because the interim manual process is tedious and labor- intensive.  According to RHS’s debt-referral schedule, only about 100 to 200  loans are to be referred each month, and as of September 30, 2001, the  agency had referred 599 direct SFH loans to FMS for cross-servicing.  The  current manual process creates an overwhelming challenge for the agency  because of the large volume of loans potentially eligible for cross-servicing.  RHS officials said that all direct SFH loans eligible for TOP will have to be  reviewed for cross-servicing eligibility.  As of September 30, 2000, RHS had  referred 23,032 direct SFH loans to FMS for TOP.  According to RHS’s debt- referral plan as of the completion of our fieldwork, the agency intends to  refer about 30 percent of eligible direct SFH loans to FMS for cross- servicing in fiscal year 2002.  The 30 percent referral level takes into  account the increased rate of referrals RHS expects will result from the  planned April 2002 completion of loan-servicing software that will permit  automated identification of direct SFH loans eligible for cross-servicing.
section_title: RHS Delayed Direct SFH Loan Referrals while Seeking an Exemption
paragraphs: RHS made no attempts prior to April 2001 to manually identify and refer  direct SFH loans eligible for cross-servicing.  According to agency officials,  RHS did not attempt manual identification because the agency was in the  process of requesting an exemption from Treasury that would allow it to  service direct and guaranteed SFH loans internally for up to 1 year after  liquidation of collateral.  Liquidation could, in some cases, occur years after  a loan became delinquent.
Treasury officials told us that the department had informal discussions  with Agriculture officials concerning the planned request.  They said  Treasury discouraged Agriculture from submitting a formal request  because Treasury did not believe an exemption was warranted.  Nevertheless, Agriculture submitted a formal request for an exemption on  behalf of RHS in November 2000.  Although Treasury officials stated that  the department had never formally or informally approved the request,  RHS reported in its September 30, 2000, TROR that Treasury had approved  the request.  In the TROR, RHS classified all eligible direct SFH loans as  exempted by Treasury from cross-servicing.
Treasury issued a formal denial of the exemption request on May 14, 2001.  The denial was based in part on the fact that other agencies with similar  delinquent loans were referring the loans for cross-servicing and that RHS  had not identified any new or unique collection tools applicable to its SFH  loans that would justify different treatment.  RHS officials said that they  contacted Treasury in January 2001 to acknowledge that the statement  regarding the approval of the exemption request in the September 30, 2000,  TROR was incorrect.  However, in subsequent quarterly TROR submissions  through June 30, 2001, RHS continued to report significant direct SFH loan  amounts as exempted by Treasury from cross-servicing.
RHS Did Not Consider the  Full Range of Debt for DCIA	 DCIA referral requirements in two important areas.  First, RHS reported as  RHS did not consider the full range of debt that should have been subject to  delinquent debt only the delinquent portion of installment loans rather than  the total unpaid loan balances.  Second, RHS did not take the necessary  steps to recognize losses on guaranteed SFH loans as nontax federal debt  and therefore did not report them and could not attempt to collect on them  using tools authorized by DCIA.
subsections: section_title: RHS Did Not Report Accelerated Loan Balances as Delinquent Debt
paragraphs: When a direct SFH installment loan becomes more than 90 days delinquent,  RHS notifies the debtor by certified mail that the entire loan balance is  accelerated and that the full outstanding loan balance is due and payable.  The notice also stipulates RHS’s intent to foreclose on the loan unless the  agency receives full payment of the indebtedness within 30 days of the date  of the letter.  According to instructions for preparing the TROR that  Treasury provided to all agencies subject to DCIA requirements, the entire  amount of the debt is to be recorded as delinquent if any part of it has been  delinquent more than 180 days, provided the debtor has been notified that  the entire amount is due (or accelerated).  Absent any exclusions allowed  by DCIA or Treasury, Treasury’s instructions call for agencies to report the  entire unpaid loan amount as eligible for referral for collection action.
However, RHS reports only the delinquent installment portion of the loans  as delinquent in its TROR and does not report the accelerated loan  balances as delinquent debt.  Similarly, RHS reports only the delinquent  installment portion as eligible for referral to TOP.  RHS officials said they  do not believe it is appropriate to refer more than the delinquent portion of  direct SFH loans to FMS.  They said they are concerned that if RHS referred  amounts greater than the delinquent installments before liquidation of  collateral at foreclosure, the agency would risk collecting amounts in  excess of those due from borrowers.  This situation should not arise,  however, because DCIA allows any debt to be temporarily excluded from  referral if its collateral is being liquidated as part of foreclosure  proceedings.  Therefore, under its practices and Treasury’s requirements,  RHS should report all amounts due and payable and refer them to FMS for  collection action unless the loans are in foreclosure or meet other  exclusion criteria.
As previously stated, at the end of fiscal year 2000, RHS reported that about  $383 million of direct SFH loans were more than 180 days delinquent and  that approximately $201 million of the loans were eligible for and had been  referred for offset through TOP.  Based on our review of RHS’s internal  delinquency records, by not including accelerated loan balances RHS may  have understated delinquent direct SFH loan amounts reported to Treasury  by about $849 million and direct SFH loan amounts eligible for offset  through TOP by about $348 million.  Underreporting delinquencies distorts  the TROR for debt management and credit policy purposes.  It also distorts  key governmentwide financial indicators, including total delinquencies  outstanding, on which the president, the Congress, and the Office of  Management and Budget rely to make important budget and management  decisions.  In addition, by underreporting direct SFH loan amounts eligible  for referral for offset through TOP, RHS is forgoing opportunities to  maximize the collection of delinquent debt.
section_title: RHS Did Not Refer Losses on Guaranteed SFH Loans to Treasury for Collection
paragraphs: Guaranteed SFH loans—as well as related losses—have been significant  since the enactment of DCIA in 1996.  In recent years, the program has  expanded, with the reported outstanding principal due on the guaranteed  SFH loan portfolio increasing from about $3 billion in fiscal year 1996 to  more than $10 billion at the end of fiscal year 2000.  The reported amount  paid out in losses over the same period rose from about $3.2 million in  fiscal year 1996 to about $60.5 million in fiscal year 2000.
Since DCIA was enacted in 1996, none of the approximately $132 million in  such losses on RHS’s guaranteed SFH loan program have been referred to  FMS for collection action. According to RHS officials, the agency could not  pursue recovery from the debtor or utilize DCIA debt-collection tools  because under the SFH guaranteed loan program, no contract existed  between the debtor and RHS.  As a result, the agency did not recognize the  losses that it paid to guaranteed lenders as federal debt and could not apply  DCIA debt-collection remedies to them.
In January 1999, Agriculture’s Office of Inspector General (OIG) reported  that RHS was not referring its losses on guaranteed SFH loans to FMS for  collection.  At that time, the OIG identified the need for RHS to recognize  the losses as federal debts and begin referring them to FMS for collection.  However, as of September 30, 2000, RHS still had no policies and  procedures to recognize losses on guaranteed SFH loans as federal debts  and to refer such debts to FMS for TOP and cross-servicing.  As a result,  RHS has missed opportunities to collect millions of dollars the agency has  paid to lenders to cover guaranteed losses.
RHS officials told us that the agency is now working with Agriculture’s  Office of General Counsel and OIG to amend program regulations and has  recently initiated action to develop policies for future referral of losses on  guaranteed SFH loans to FMS for collection action.  However, RHS’s efforts  to make necessary regulatory changes and modifications to lender  agreements are still under way and have yet to be implemented.  Therefore,  RHS continues to miss opportunities to collect from borrowers the  amounts it has paid to cover losses on guaranteed SFH loans.  Because the  size of the guaranteed SFH loan program and related losses are significant  and growing, it is critical that RHS promptly complete development and  begin implementation of policies and procedures to refer eligible  guaranteed SFH loan debts to FMS for collection action.
section_title: RHS Did Not Maintain Documentary Support for Excluding Delinquent Debts
paragraphs: DCIA permits debts to be excluded from referral for cross-servicing and  offset if they are in forbearance, under appeal, in litigation at the  Department of Justice, in bankruptcy, or in foreclosure.  In August 2000, we  reported that governmentwide, agencies were excluding from referral the  vast majority of debts reported delinquent more than 180 days under DCIA  or Treasury exclusion criteria.  We cautioned that the reliability of the  amounts reported as excluded needed to be independently verified on a  periodic basis.
FMS officials said that they expect agencies to retain applicable  information to justify exclusions of debt from referral.  In addition, the  Comptroller General’s Standards for Internal Controls in the Federal  Government states that all transactions and other significant events need  to be clearly documented and that the documentation should be readily  available for examination.
When we attempted to verify RHS’s reported exclusions from referral as of  September 30, 2000, RHS officials told us that supporting documentation (a  list of individual loans and loan amounts that were excluded in each  exclusion category) for the $182 million of direct SFH loans excluded from  referral for offset through TOP had not been saved.  In addition, the chief of  the financial accounting branch said she was not aware of any requirement  to retain such data.  Because we had no information on which individual  loans had been excluded, we were unable to determine whether the  agency’s reported exclusions for bankruptcy, forbearance/appeals, and  foreclosure met relevant legislative and regulatory criteria.
section_title: Conclusions
paragraphs: Through its failure to comply fully with DCIA debt collection requirements,  RHS continues to miss opportunities to maximize collection on delinquent  SFH loans. Although more than 5 years have passed since DCIA’s  enactment, RHS has referred a minimal amount of its direct SFH loans for  cross-servicing and has yet to refer any losses on its growing guaranteed  SFH loan program.  RHS has identified and referred direct SFH loans  eligible for TOP but significantly understated loan amounts eligible for  referral by not including accelerated direct SFH loan balances.  RHS also  did not take the steps necessary to recognize losses on guaranteed SFH  loans as federal debt subject to the provisions of DCIA.  In addition, RHS’s  failure to retain a listing of specific loans and loan amounts excluded from  referral for offset through TOP effectively eliminates the possibility of  independent verification of excluded debt—a critical internal control  technique.
section_title: Recommendations for Executive Action
paragraphs: To improve RHS’s compliance with DCIA, we recommend that the  secretary of agriculture direct the administrator of RHS to take the  following actions:
Work together with FMS to resolve any inconsistencies between RHS’s  reporting of delinquent debts on its TROR and Treasury’s instructions  for such reporting.  Absent any modifications to Treasury’s instructions  for preparing the TROR, report the entire accelerated balance of  delinquent direct SFH loans to FMS as delinquent debt and, absent any  allowable exclusions, as debt eligible for referral to FMS for collection  action.
Finalize and implement necessary regulatory changes and modifications  to lender agreements to recognize losses on guaranteed SFH loans as  federal debt and promptly refer such debt to FMS for collection action.
Complete development of the software enhancements that will allow  automated identification of loans eligible for cross-servicing, and  promptly refer all such loans to FMS for cross-servicing.
Maintain supporting documentation, in an appropriate level of detail  that can be made readily available for independent verification, for all  SFH debts reported and certified to Treasury as excluded from referral  for collection action.  At a minimum, the documentation should include,  for each exclusion category (e.g., foreclosure), the total amount  reported as excluded on the certified TROR and a listing of the identities  and dollar amounts of the specific loans excluded.
Agency Comments and 	 A draft of this report was provided to the secretary of agriculture for her or  Our Evaluation 	 a designee’s review and comment.  Agriculture’s Rural Development mission area, which includes RHS, provided the department’s comments.  The following discussion highlights Rural Development’s most significant  comments and our evaluation.  Rural Development’s letter is reprinted in  appendix I.
Rural Development disagreed with our findings that RHS has failed to make  DCIA a priority and delayed implementation of certain key provisions.  Our  position remains unchanged.  The details in the body of our report  demonstrate RHS’s lack of progress.  Most importantly, 5 years after the  passage of DCIA, RHS had not established an adequate framework or  systems capacity to effectively carry out its responsibilities.
Rural Development stated that the department and the agency were  committed to fully implementing the recommendations provided by GAO  and that it had already established an aggressive schedule for doing so. The  agency specifically stated that it had implemented or was in the process of  implementing three of our four recommendations. Rural Development  disagreed with our recommendation to report the entire accelerated  balance of delinquent direct SFH loans to FMS as delinquent debt  consistent with Treasury’s instructions for preparing the TROR.  Rural  Development stated that the inclusion of only the delinquent portion of  collateralized installment loans is consistent with industry standards for  delinquency reporting and reporting the entire amount accelerated would  not represent the amount legally collectible, and would distort actual risk  of loss.
Rural Development’s response is not consistent with either RHS’s own  governing debt collection policy and practices or Treasury’s instructions to  federal agencies for reporting accelerated debt balances on the TROR.  As  stated in this report, when a direct SFH installment loan becomes more  than 90 days delinquent, RHS is to notify the debtor by certified mail that  the entire loan balance is accelerated and that the full outstanding loan  balance is due and payable.  The notice also stipulates RHS’s intent to  foreclose on the loan unless the agency receives full payment of the  indebtedness within 30 days of the date of the letter.  According to  instructions Treasury provided to all agencies subject to DCIA  requirements, the entire amount of the debt is to be recorded as delinquent  if any part of it has been delinquent more than 180 days, provided the  debtor has been notified that the entire amount is due (or accelerated).  By  failing to follow instructions developed by Treasury for reporting  accelerated debt balances, RHS is forgoing opportunities to maximize the  collection of delinquent direct SFH loans.
Beyond the requirements of DCIA debt collection initiatives, RHS’s  underreporting of debts that are due and payable and delinquent more than  180 days distorts the TROR for debt management and credit policy  purposes.  Such underreporting distorts key governmentwide financial  indicators, including total delinquencies outstanding, on which the president, the Congress, and OMB rely to make important budget and management decisions.  Therefore, RHS should report on the TROR all debt amounts more than 180 days delinquent that are due and payable.
As agreed with your office, unless you announce its contents earlier, we  plan no further distribution of this report until 30 days after its issuance  date.  At that time, we will send copies to the chairmen and ranking  minority members of the Senate Committee on Governmental Affairs and  the House Committee on Government Reform and to the ranking minority  member of your subcommittee.  We will also provide copies to the  secretary of agriculture, the inspector general of the Department of  Agriculture, the administrator of the Rural Housing Service, and the  secretary of the treasury.  We will then make copies available to others upon request.
If you have any questions about this report, please contact me at (202) 512- 3406 or Kenneth Rupar, assistant director, at (214) 777-5714.  Arthur W. Brouk was also a key contributor to this assignment.
section_title: Comments from Rural Development
paragraphs: The following are GAO’s comments on Rural Development’s letter dated  January 29, 2002.
subsections: section_title: GAO Comments
paragraphs: 1.
RHS’s comments misrepresent its system’s ability to identify and  promptly refer eligible debts to FMS for collection purposes.  As stated  in this report, RHS officials told us that RHS has been unable since  converting to a commercial off-the-shelf loan-servicing system during  1996 and 1997 to readily identify direct SFH loans that are eligible for  referral to FMS for cross-servicing because the necessary software was  not completed prior to conversion.  In order for RHS’s automated  system to identify direct SFH loans eligible for cross-servicing, it must,  for example, be capable of determining the status of any collateral  because, according to RHS’s requirements, all collateral must be  liquidated prior to a loan’s referral to FMS for cross-servicing.  It was  for this reason that RHS had to initiate an interim manual process,  which RHS officials characterized as tedious and labor-intensive, to  identify direct SFH loans eligible for cross-servicing until planned  completion of loan-servicing software in April 2002 that is intended to  permit automated identification of direct SFH loans eligible for cross- servicing.
Rural Development’s contention that RHS did not proceed earlier with  the required systems enhancements needed to promptly refer eligible  debts to FMS for cross-servicing because negotiations were taking  place with Treasury over possible approval as a Debt Collection Center  is not consistent with Treasury’s perspective on allowing RHS to  service its own loans.  As stated in this report, according to Treasury,  Treasury/FMS received a formal request to exempt SFH loans from  cross-servicing from Agriculture in November 2000.  However, prior to  the submission of the formal request to Treasury, FMS had informal  discussions with Agriculture officials concerning the request, wherein  FMS did not encourage the submission of the formal request because it  was felt an exemption was not warranted.  According to Treasury  officials, Treasury never approved a proposal to exempt RHS SFH loans  from cross-servicing, either formally or informally.
2.
RHS acknowledges that the supporting documentation for the  September 30, 2000, TROR was not available. Although RHS contends  that the missing documentation was a one-time event due to changes  that were being implemented in Rural Development’s reporting  process, we could not consider reviewing other time periods because,  as agreed with the requester, we were asked to review exclusions as of  September 30, 2000, the most recent period as of the date of our  fieldwork for which data were certified as accurate by the agency.
We could not consider the alternative techniques suggested by Rural  Development personnel, such as study the software program logic used  to create the December 2000 TROR, because none of the suggested  techniques would result in a list of individual loans that were included  in each exclusion category as of September 30, 2000.  Such a list was  needed in order for us to select a statistical sample of loans to test for  the appropriateness of exclusions that the agency certified as accurate  as of that date.  3.	 As stated in this report, DCIA was enacted in 1996 and through the  completion of our fieldwork, none of the approximately $132 million in  losses incurred on RHS’s guaranteed SFH loan program have been  referred to FMS for TOP and cross-servicing.  The agency recognizes  the opportunity to recover such losses using the remedies available  through DCIA and has begun the process to promulgate rules to  recognize such losses as federal non-tax debts.  However, as of  September 30, 2000, RHS still had no policies and procedures to  recognize losses on guaranteed SFH loans as federal debts and to refer  such debts to FMS for TOP and cross-servicing.  4.	 We did not provide an estimate of the amount of guaranteed losses that  may be recovered through TOP and cross-servicing.  Rather, as stated  in this report, RHS continues to miss opportunities to collect from  borrowers the amounts it has paid to cover losses on guaranteed SFH  loans.  Moreover, such lost opportunities not only involve collection  through cross-servicing but TOP as well, which, according to Rural  Development in its response, involved collections of $31 million in 2001  on debts other than guaranteed losses.  5.	 See our discussion in the “Agency Comments and Our Evaluation”  section.  6.	 This example provided by Rural Development is not consistent with  RHS’s procedures for accelerating direct SFH loans and Treasury’s  instructions for reporting accelerated debts on the TROR.  See our  discussion in the “Agency Comments and Our Evaluation” section for  additional details.  In view of RHS’s response on this matter, we have  modified our first recommendation to RHS to include working together  with FMS to resolve any inconsistencies between RHS’s reporting of  delinquent debts on its TROR and Treasury’s instructions for such  reporting.  7.  See comment 2.
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