As the government’s lender of last resort to the nation’s farmers, FSA lends federal funds directly to farmers who are unable to obtain financing elsewhere at reasonable rates and terms. It also guarantees loans made by other agricultural lenders. The emergency disaster loan program—in operation since 1949—is one of several FSA loan programs. Emergency disaster loans cover actual physical and production losses so that farmers can return to normal farming operations. The emergency loan program consists entirely of subsidized loans, offered at interest rates below those offered by other federal farm loan programs. As of January 1996, the emergency loan interest rate was 3.75 percent, while rates for other types of loans, such as operating and farm ownership loans, were 6.5 percent and 7.0 percent, respectively. Emergency loans are made available in specific counties when disasters are declared by the President, the Secretary of Agriculture, or the FSA Administrator. Farmers may use loan funds for a variety of purposes, including land restoration, farm operating costs, family living expenses, and debt refinancing. Under the Food Security Act of 1985, applicants are ineligible for emergency loans for crop losses if they did not purchase insurance for crops planted or harvested after December 31, 1986, assuming it was available. However, in most years, the Congress has waived this requirement. Currently, the maximum emergency loan assistance available to a farmer for any single disaster is the amount necessary to restore the farm to its condition preceding the disaster, not to exceed (1) the sum of 80 percent of the production losses plus 100 percent of the physical losses not reimbursed by other sources or (2) $500,000, whichever is less. Farmers can qualify for additional emergency loans following subsequent disasters. There is no limit on the total amount of emergency loan debt that a farmer may accrue. Over the years, changes have occurred in the emergency disaster loan program. The program was expanded in the 1970s to achieve objectives other than the recovery from actual disaster losses, such as helping farmers survive during periods of financial stress or make major adjustments in their farming operations. However, during the 1980s, restrictions were placed on the availability of emergency loans, including the $500,000 limit for each disaster. As shown in table 1, the number and total value of emergency loans have varied greatly. Problems with FSA’s farm loan portfolio are not new. In 1990, we identified FSA’s farm loan programs as one of 17 high-risk areas especially vulnerable to waste, fraud, abuse, and mismanagement. In 1992, we reported that the taxpayers’ interests were not being protected in these programs, the agency had evolved into a source of continuous farm credit for many borrowers, and billions of dollars in debt were being written off. Large losses continue to plague the programs. We also issued two reports that focused specifically on emergency disaster loans. In November 1987, we reported that delinquencies in the emergency disaster loan program were increasing, and we suggested that the Congress consider whether credit, particularly less restrictive credit, was the proper vehicle for providing disaster relief and whether a proper balance of risk existed between the farmer and the government. In September 1989, we reported on the federal government’s strategies for responding to natural disasters affecting agriculture—direct cash payments, subsidized loans, and subsidized insurance (crop insurance).We concluded that crop insurance was the most effective of the three disaster assistance strategies in part because it could minimize the government’s costs. Although the amount of the outstanding emergency loan principal and the amount owed by delinquent borrowers have declined, FSA’s emergency loan program continues to exhibit the problems that we first identified in 1987. From 1989 through 1995, the program has lost over $6.1 billion in debt forgiveness. Moreover, much of the remaining portfolio is at high risk of failure. As shown in table 2, from fiscal years 1989 through 1995, FSA forgave over $6.1 billion in principal and interest held by over 35,000 borrowers who did not meet their payment obligations. In commenting on this report, agency officials noted that many of the past losses, as well as much of the risk in the current portfolio, are primarily attributable to past lending policies that have since been changed (see further discussion in the agency comments section). Also, they noted that the federal government’s overall exposure to risk has decreased because the size of the program has declined. Although FSA has forgiven billions of dollars in emergency loans to borrowers who have had problems repaying their debt, the portfolio continues to present a high risk of substantial losses to the government. Much of the portfolio is held by borrowers who are delinquent or who have previously had difficulty repaying emergency or other types of FSA loans. Furthermore, borrowers have already had difficulty repaying recent loans, which reflect the most current changes to the agency’s emergency lending policies and practices. As of September 30, 1995, FSA had over $3 billion in outstanding emergency loan principal to 42,093 borrowers. Of that amount, about $1.8 billion, or 58.6 percent, was held by borrowers who were delinquent on emergency loans, a percentage that has been fairly consistent over the last several years, as shown in table 3. Payment status alone, however, does not provide a complete measure of the potential risk associated with the portfolio. This indicator excludes borrowers who may be current on emergency loan payments but who have previously had problems repaying emergency loans or other types of FSA farm loans. These problems required FSA to restructure payment schedules or forgive debt. As of September 30, 1995, such borrowers held approximately $665 million, or 21.8 percent, of the outstanding emergency loan principal. When this principal is combined with the principal owed by delinquent borrowers, about $2.5 billion, or 80.4 percent, of the outstanding emergency loan principal is held by borrowers who are at risk. This overall picture of potential risk in the emergency loan portfolio reflects both past and present lending policies and practices. To better assess the risk associated with current loans, we examined the status of loans made during fiscal years 1992 through 1994. FSA made 6,302 emergency loans totaling $279 million to 5,753 borrowers during this period. Although these loans are relatively new—from 1 to 4 years old—repayment problems have already surfaced. Through September 30, 1995, FSA had forgiven $1.2 million in uncollectible principal and interest on 41 of these loans. In addition, on the basis of our sample of 600 loans, we estimate that payments were delinquent on approximately 25 percent of the loans as of January 10, 1995. The likelihood that farmers will repay emergency loan debt is diminished by the nature of the loans. Emergency loans are inherently riskier than other types of farm loans because they are made to help farmers recover from losses rather than generate new income. This problem is compounded by weak lending policies and the agency’s failure to implement existing lending requirements. Three lending policies expose the government to potential losses by allowing borrowers who have poor credit histories or are in a very weak financial position to obtain loans. First, the provisions of the Consolidated Farm and Rural Development Act as amended (P.L. 87-128, Aug. 8, 1961) do not prohibit borrowers who received prior FSA debt forgiveness from obtaining additional farm loans, including emergency loans. We identified 293 borrowers who obtained $11.6 million in emergency loans during fiscal years 1992 through 1994 after having about $51 million in unpaid debt forgiven. As of September 30, 1995, 27 percent of these borrowers were already experiencing problems repaying the recent emergency loans. The following example illustrates this problem: A New York vineyard owner, an FSA farm loan borrower since 1978, received a 1993 emergency loan of $9,640 for crop losses resulting from a drought. FSA made this loan after having forgiven approximately $207,000 on five other farm loans in 1990. In January 1995, the borrower was delinquent on the 1993 emergency loan. FSA classified this borrower as being unlikely to repay the loan. Second, FSA’s method for determining an applicant’s ability to repay a loan does not provide for contingencies. The current “cash flow” lending criterion requires only that an applicant have an estimated income equal to the estimated expenses in order to qualify for a loan. It does not provide a cushion for any unanticipated expense that may occur during the life of the loan. On the basis of our sample of loans made during fiscal years 1992 through 1994, we estimate that FSA made about 62 percent of the emergency loans to borrowers whose anticipated income exceeded their expenses by less than 10 percent. Furthermore, about 17 percent of these borrowers attained these minimal cash flows only because FSA rescheduled or forgave debt on which the borrowers had failed to honor repayment schedules. As of September 30, 1995, approximately 37 percent of the borrowers with cash flow margins of less than 10 percent were behind on their loan payments or had required debt restructuring or forgiveness after receiving their emergency loans. For borrowers with cash flow margins of 10 percent or more, this percentage dropped to about 28 percent. The following example shows the kinds of problems that can arise when cash flow margins are minimal: A Michigan fruit producer applied for a 1992 emergency loan because of freeze damage. FSA approved the application, even though the applicant—an FSA borrower since 1985—had a poor payment history and a projected income exceeding his projected expenses by only $2. This borrower’s cash flow margin was low even after FSA rescheduled existing loans on which he could not make payments.