USDA OIG report reveals problems with Farm Service Agency farm operating loans

By Jon H. Harsch

© Copyright Agri-Pulse Communications, Inc.

Washington, Aug. 20 – An audit of 71 randomly selected FSA direct farm operating loans in 36 country offices in Arkansas, Kentucky and Michigan showed a pattern of “unauthorized loan collateral dispositions.” But the USDA Office of Inspector General (OIG) report released Thursday showed no security risk to USDA's Farm Service Agency (FSA) because of another pattern: over-collateralization of FSA loans. The report notes that “FSA officials agreed with the findings and recommendations contained in this report.”

The OIG report noted that auditors “found unauthorized removals of loan collateral by 18 of the 71 borrowers we visited (25 percent). We also identified loan servicing issues that needed to be corrected by FSA officials in order to protect FSA’s interests . . . The uncorrected loan servicing issues could encourage borrowers to not follow FSA requirements when disposing of loan collateral. This, in turn, could reduce FSA’s assurance that its loans are adequately secured.”

Problems discovered in the OIG audit included:

  • FSA personnel at the county offices post-approved the loan collateral dispositions in 17 of the 183 unauthorized disposition cases identified, even though 7 of the borrowers had not met the regulatory requirements needed to justify this action.”

  • FSA county officials did not perform required inspections of loan collateral to verify the borrowers’ possession of property listed on the security documents for 15 of the 71 sample loans reviewed.”

  • We found loan collateral missing for 6 of these 15 loans. However, this missing collateral did not affect the security of the loans because the loans were over- collateralized. County officials stated they either did not have time to conduct the reviews or did not believe the borrowers were at risk to default.”

  • FSA county officials had not completed required annual assessment reviews of borrowers’ farm operations for 13 of the 71 loans reviewed.”

  • Additionally, in eight cases the FSA county officials had not properly completed the more extensive yearend analyses that were required due to the borrowers’ circumstances (such as a distressed financial condition). FSA county personnel attributed this to inadequate staff or to misinterpretations of the regulatory requirements.”

  • FSA’s oversight review processes did not disclose post-approvals of unauthorized dispositions of loan collateral for borrowers who were not eligible for such servicing, as we found during the audit. The results of District Director reviews are not accumulated or analyzed on a national basis to identify the extent of deficiencies noted by the reviews.”

  • The County Operations Review Program did not disclose post-approvals of unauthorized dispositions as a finding for fiscal year 2008, and the 27 Farm Loan Program Risk Assessment reports we analyzed disclosed that the issue of post-approvals of unauthorized dispositions were not addressed during the reviews.”

In response, FSA listed new procedures already in place to correct the problems.

OIG “concluded that FSA’s policy of over- collateralizing its loans is effective in protecting the agency’s security interest, since none of the unauthorized removals we found had resulted in FSA being under-secured.” But the report goes on to warn that “other borrowers could be encouraged to sell or otherwise dispose of loan collateral if they become aware that they can do this with no fear of consequences from FSA.” However, the FSA response to the report makes clear that new directives will ensure that the rules are enforced, with consequences for any borrowers who break the rules.

To read the 26-page OIG report on “FSA Farm Loan Security,” go to:

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