FmHA, a lending agency within the U.S. Department of Agriculture (USDA), provides direct government-funded loans to farmers who are unable to obtain financing elsewhere at reasonable rates and terms. FmHA’s assistance is intended to be temporary. Once farmers have become financially viable, they are to “graduate” to commercial sources of credit. FmHA provides loan services through a highly decentralized organization consisting of a national program office in Washington, D.C.; a finance office in St. Louis, Missouri; and a nationwide structure of field offices comprising 47 state offices, about 250 district offices, and about 1,700 county offices. As we reported in April 1992, FmHA has lost billions of dollars through its farm loan program and billions more is at risk. Our report noted that, as of September 1990, about 70 percent of the agency’s direct loan portfolio of almost $20 billion was held by borrowers who were delinquent or whose loans had been restructured as a result of or to avoid delinquency. We concluded that FmHA and the Congress shared responsibility for these problems, which stem from (1) ineffective implementation of standards for loan making, loan servicing, and property management and (2) loan and property management policies, some congressionally directed, that conflict with fiscal controls designed to minimize risk. We also reported that FmHA’s problems will continue until the Congress tells the agency how to better balance its mission of assisting financially troubled farmers with its obligation to provide that assistance in a businesslike and fiscally responsible manner. Although our previous work examined certain types of loan-servicing actions that result in FmHA’s reducing portions of a borrower’s debt, we have not, until this report, specifically examined the debt relief provided through the agency’s debt settlement process. Under this process, which essentially represents the final resolution of unpaid loans, FmHA county office officials try to identify and evaluate the financial resources a borrower may have that could be used to offset loan losses. Final approval of debt relief is granted by officials in either FmHA’s state or national offices. As table 1 shows, FmHA has four options for settling debts, each of which results in writing off debt. FmHA forgave billions of dollars in loans through debt settlements without always taking aggressive action to protect the government’s interests. More specifically, although FmHA has procedures and policies intended to produce fair recoveries, FmHA’s compliance reviews of a limited number of debt settlement cases indicate that field office officials often do not follow these procedures. FmHA officials we spoke with noted that problems in adhering to the procedures stemmed from, among other things, (1) competing program objectives that create incentives to write off large amounts of delinquent loans in an attempt to “clean up” the loan portfolio and (2) limited staff resources. During fiscal years 1991 through 1993, FmHA wrote off about $3.4 billion worth of outstanding direct farm loans through debt settlements. Table 2, which summarizes the amount of debt written off by settlement type, shows that most of the debt—about $2.9 billion—was canceled or charged off with no payments to FmHA by the borrowers. The amount already written off through debt settlements may be just the tip of the iceberg because FmHA continues to have a large number of problem loans that may eventually be subject to settlement. Specifically, as of January 1994, FmHA classified $7.6 billion—about 45 percent of its $16.7 billion in outstanding principal and interest—as at risk because the loans were held by borrowers with questionable repayment ability and/or inadequate loan security. FmHA has established procedures for its field office officials to use when settling debts. These procedures, intended to reduce losses during the process, include verifying a borrower’s income and searching for undisclosed assets. However, FmHA’s internal control reviews, as well as our work, indicate that field office officials often do not follow these procedures and thus do not fully protect the government’s interests. FmHA’s Coordinated Assessment Review, referred to as CAR, is a key internal control review that includes assessing field office officials’ compliance with debt settlement policies and procedures. CARs of debt settlements consist of reviewing a small sample of completed cases, usually five per state. During fiscal years 1993 and 1994 (through May 1994), FmHA completed CARs of debt settlement cases in 15 states. As table 3 shows, the rates of noncompliance ranged from 18 to 39 percent on five key standards intended to protect the government’s interests during debt settlements. Our review of fiscal year 1993 debt settlement cases at six FmHA county offices in three states also disclosed (1) problems with adherence to these five key debt settlement standards and (2) a lack of aggressive efforts to minimize loan losses—that is, FmHA did not pursue information indicating that additional collections could have been possible during the debt settlement process. In summary, of the 57 debt settlement cases we reviewed that resulted in large losses, the federal investment may not have been adequately protected in 16, or about 28 percent. In settling these debts, FmHA recovered a total of $5,800 from these 16 borrowers and wrote off $3.7 million. The following cases illustrate these findings: Case 1. FmHA officials in Louisiana canceled $393,000 in debt with no payment by the borrower without having conducted a record search. As a result, FmHA was unaware of an inheritance of approximately 160 acres in real estate and $61,000 in certificates of deposit that possibly could have been used to offset the loan losses. The lack of a record search was particularly puzzling because the county office’s file contained a notation that the inheritance had occurred and a payment to FmHA was possible. County office officials could not explain the note, and state officials said that the failure to protect federal interests had been an oversight. Case 2. Because of what FmHA state and county officials in Texas described as an oversight, a deceased borrower’s $131,000 debt was canceled without the county office’s filing a claim with a local probate court. Our review of this case—which included reviewing the probate court’s records, comparing the amount of outstanding debt with the value of real and personal property owned by the borrower’s estate, and consulting with USDA’s Office of General Counsel—disclosed that about $47,000 was available for payment on the debt if the claim had been filed. Case 3. FmHA officials in Mississippi canceled a $202,000 debt without a payment offer from a partnership consisting of two brothers who reported a total annual income of $123,000 (about $64,500 and $58,500, respectively). Both borrowers submitted documentation claiming that they were unable to repay any part of their FmHA debt because their expenses exceeded their income. Their expense statements included the following information: Both brothers claimed over $15,000 in annual payments to other creditors and expensive gifts to charities; one brother claimed the cost of operating three automobiles, while the other claimed the cost of operating two; and one brother claimed college education costs for his son and daughter-in-law as well as living expenses for that son and his family. FmHA state officials told us that they did not consider these expenses to be excessive, and the supervisor of FmHA’s county office questioned whether the agency should require borrowers to lower their standard of living in order to repay their debt. Case 4. FmHA officials in Louisiana canceled $509,000 in debt without offsetting payments that the borrower had received from USDA’s Agricultural Stabilization and Conservation Service. These payments averaged $30,000 per year. FmHA made this decision knowing that (1) the borrower’s loan defaults could be partially attributed to excessive spending and poor management and (2) the borrower had been referred to USDA for legal action because he had failed to properly dispose of property he had pledged as security for the debt. FmHA state and county officials told us that they had chosen not to use the payments from the Agricultural Stabilization and Conservation Service to offset the loan losses because they did not want to create undue hardship for the borrower. FmHA has placed little emphasis on minimizing losses during debt settlements. FmHA’s approach is illustrated in part by internal performance goals that create work priorities and incentives that are counter to aggressive protection of the government’s interests. Specifically, FmHA’s field office staff have annual performance goals for resolving delinquent loan accounts, but they do not have balancing goals that would encourage recoveries through the debt settlement process. As a result, several officials at FmHA’s state and county offices noted that protecting the government’s interests is not a high priority among staff. Also, officials at FmHA’s national and field offices said that debt settlements are used primarily to “clean up” the loan portfolio by writing off delinquent debt. FmHA’s management has also placed little emphasis on overseeing field offices’ implementation of the agency’s policies and practices for ensuring maximum recoveries. In fact, the debt settlement process was not part of internal control review through CARs until 1993. Also, 13 of the 34 CARs of debt settlements scheduled for fiscal years 1993 and 1994 were not performed because of other higher-priority work. According to several officials in FmHA’s state and county offices, insufficient staff resources also inhibit implementing the agency’s policies and procedures on debt settlements. We did not verify the extent to which staffing was a problem.