Statement of Jan E. Shadburn
Former Administrator, Housing Programs
Before the House Subcommittee on Government Management, Information and Technology
Committee on Government Reform and Oversight
March 30, 1998
Mr. Chairman and members of the Subcommittee, thank you for this opportunity to testify today on debt collection and credit management activities at the Housing Programs (Housing Programs) within the U.S. Department of Agriculture (USDA) and the progress that we have made in implementing the Debt Collection Improvement Act of 1996 (DCIA).
Mr. Chairman, I will present my testimony to you in two parts. First, I will briefly describe the housing and community facility programs administered by the Housing Programs and this Agency's efforts to improve service delivery to rural America. Second, I will summarize the Agency's implementation of DCIA to date.
The Housing Programs was established under the Department of Agriculture Reorganization Act of 1994, succeeding the Farmers Home Administration.
We provide rural people and communities with: access to credit -- which, as you know, is often limited in rural areas; grants, subsidized loans and rents; and technical assistance and support to complete their community development efforts. A very important part of the service we provide is "supervised credit."
We deliver our programs and necessary technical assistance through a network of State and local offices, many of which are, or will be, collocated with other USDA agencies in USDA one-stop Service Centers.
We invest in two of our most vital assets- our people and our small rural communities- and enable them to have a part of the American Dream. Our assistance literally allows individuals, families and communities to turn their lives around and become self sufficient. The impact on the community and the individual goes far beyond the tens of thousands of construction related jobs, the millions of dollars generated each year in building and associated trades, the more than $1 billion boost in State and local taxes, and the actual physical shelter provided.
The section 502 single family direct and guaranteed loan programs offer rural people and their families the most basic piece of the American Dream -- the chance to own their homes. The section 502 direct single family program reduces the interest rate down to as low as 1 percent based on income with an average interest rate of around 3 percent. This program serves low- and very low-income residents under 80 percent median income and 50 percent median income respectively.
The section 502 guaranteed single family housing program guarantees loans to low- and moderate-income residents under 115 percent median income. This program allows 100 percent financing for individuals who could not obtain credit from the commercial sector.
In addition, Housing Programs makes section 504 repair loans and grants to finance necessary repairs for substandard units to remove health hazards. One-percent loans are made to very low-income applicants for not more than $20,000 for a period not to exceed 20 years. Housing Programs also administers a section 504 grant program limited to elderly applicants under which individuals can receive up to $7,500 in their lifetimes for repairs. A loan and grant combination can also be used if the applicant is very low-income and has repayment ability.
Section 523 Mutual and Self-Help Housing grants are made to nonprofit and Government agencies to provide technical assistance to small groups that average 6 to 10 families in constructing their own homes.
The Mutual Self-Help Grant program enables low- and very low-income rural families to become homeowners through the efforts of their "sweat equity" contribution while simultaneously building and stabilizing their communities. The sweat equity contributed by these families not only builds communities, but also reduces the cost of the mortgage and enables Housing Programs to reach a lower-income customer. The majority of the mortgages are provided by the section 502 direct loan program which allows the interest rate to be subsidized down to as low as 1 percent based on income. These self-help borrowers have exceptional track records--both lower delinquency rates and better graduation. Over half have paid off their loans in full or graduated to private credit.
We are continuing to carry out the Congressionally mandated escrow of taxes and insurance for our section 502 direct single family borrowers. This involved the transfer of over 700,000 loans from the field offices across rural America to one centralized unit in St. Louis. The Centralized Servicing Center (CSC) is providing state-of-the-art servicing comparable with any other system available to homeowners across the Nation. Our system is unique because of the Congressional mandated "supervised credit" that is available to our borrowers to preserve homeownership through economic or other hardships individuals and families may experience. For this reason, we have had to modify the private sector software we purchased to ensure these servicing options were handled in a consistent and efficient manner. These servicing features include: 7-day-a- week, 24-hours voice response for detailed information on loans; nationwide consistency for servicing, including payment assistance, moratorium, reamoritization and other services; centralized cash management providing fiduciary control; a monthly statement sent to each borrower; escrow of taxes and insurance; and expanded (7:00am-6:00pm) customer service representatives to handle more complex issues for our borrowers.
In addition to the single family housing programs, Housing Programs administers multi-family housing programs to assist rural residents who cannot afford to own a home. The section 515 rural rental housing program makes direct loans to developers to provide affordable rental housing for low- and very low- income families and elderly individuals in rural communities. Subsidies are provided through as low as 1 percent financing and rental assistance for almost half of tenants. Rental assistance is a unit-based subsidy that allows low- and very low-income residents to pay only 30 percent of their income toward rent.
We are entering the first year, after two-year pilot, with the section 538 guaranteed multi-family rental housing program which guarantees loans made by certified lenders for multi-family housing projects available to moderate- and low-income rural residents.
The section 514/516 domestic farm labor housing loan and grant program provides assistance to build and maintain rental housing for migrant and year-round farm laborers. The loan rates can be as low as 1 percent with rental assistance also available. The companion grant program can provide up to 90 percent of the development costs for farm labor units.
Our community facilities program provides funding for essential facilities such as health care centers, fire stations, municipal buildings and day care centers. Direct and guaranteed loans are made to public bodies and nonprofit organizations to provide essential community facilities to rural residents in communities of not more than 50,000 residents. There is a small grant component to the program that assists communities that experience high poverty. These facilities allow rural communities to improve the quality of life for their citizens and remain competitive in attracting jobs and businesses.
Protecting the Government's Interest
Housing Programs has taken many steps, both administratively and through legislative changes to protect the Government's interest in the administration of all our programs.
Housing Programs and the USDA's Office of Inspector General (OIG) are working on a joint initiative to identify section 515 rural rental housing projects and participants where the potential for financial abuse may exist.
The OIG has previously reported a number of cases where tenant household income information provided to Housing Programs was incomplete or unreliable. As a result, both tenant and owner received subsidies to which they were not entitled.
The Agency is pursuing legislation that would allow access to the National Database for New Hires. This data would be used to verify income information provided by tenants renting rural multi-family housing units and applicants for, or borrowers and grantees of, rural housing loans or grants administered by the Agency.
Other examples of actions to protect the Government's interest include implementation of a series of reforms to the section 515 program that were enacted by Congress as part of the Agriculture, Rural Development, Food and Drug Administration and Related Agencies Appropriations Act for fiscal year 1997. The regulations implementing the reforms were published as an interim rule on May 7, 1997 and as a final rule on December 23, 1997. In developing these rules, Housing Programs worked extensively with stakeholders representing for-profit and non-profit developers as well as housing advocacy groups, state housing finance agencies, the OIG and other interested parties.
As a result of this Congress' and the Administration's efforts to provide the necessary tools to provide the proper oversight and management, the section 515 multi-family housing portfolio is healthier and safer today. The tenants' and Government's interest are protected. But we're not stopping there.
I'll turn now to the Agency's implementation of the DCIA.
As described above, the Housing Programs programs consist of a variety of loan, loan guarantee, and grant programs, plus technical assistance, in the areas of housing and community facilities. The basic tenet of these programs is that they are not to compete with private credit, but rather supplement that credit. Although faced with these challenges, Housing Programs protects the interest of the Government by requiring adequate security for the loans in the form of real estate mortgages, assignments of income, personal and corporate guarantees, and liens on revenues.
In fulfilling our responsibilities to our constituents and the American taxpayer, we believe that each and every debt should be repaid in accordance with the requirements under which the loan was made, including proper exercise of the repayment and servicing provisions specified by the enabling legislation that created specific programs.
Housing Programs, through it's predecessor Agency has long used all available tools to collect delinquent debt and, in fact, implemented several of the provisions of DCIA (the Act) as far back as 1985 including: reporting of delinquent consumer debts and all commercial debts to credit bureaus, and reporting write-offs to the IRS for inclusion in debtors' taxable income.
Housing Programs was also an active participant in the IRS offset program and in the salary offset program, both of which were predecessors to the Treasury Offset Program (TOP). For the period 1987 through 1997, Housing Programs collected in excess of $7.2 million from IRS offset.
Housing Programs and other USDA agencies are working with Treasury to resolve a number of operational and policy issues that impact on the implementation of the various provisions of the Act. Housing Programs has made significant progress with implementing provisions of the Act in a time when resources were limited and demands for automation support were at an all time high because of our commitment to having all of our automated systems Year 2000 compliant.
The following outlines Housing Programs activities in implementing the provisions of DCIA.
Treasury Administrative Offset Program (TOP)
The Act requires Agencies to refer any debt over 180 days delinquent to Treasury for inclusion in TOP. Because TOP enables Housing Programs to collect funds from Tax Refund Offset, Administrative Offset, and Salary Offset, we placed a high priority in complying with this part of the Act. In September 1997, Housing Programs identified accounts to be reviewed for referral to Treasury, borrowers who were more than 90 days delinquent and were not excluded by statute for reasons including pending litigation or foreclosure. In addition, based on Treasury's guidance we also excluded borrowers who were in bankruptcy from our file of borrowers who could be referred for Treasury offset. The borrowers that we identified during this process were then notified and given an opportunity to either pay their delinquent debt or provide us with evidence that would preclude us from reporting them. After 60 days had elapsed, we reviewed each borrowers' account and if they remained delinquent, the account was referred to Treasury.
In accordance with our established target dates, Housing Programs in December 1997, referred over $65 million in delinquent debt to TOP. As of March 9, 1998, we have collected about $7.2 million from the TOP referrals. Housing Programs is in compliance with TOP and we are updating the list of referred debt as borrowers either become current or go delinquent.
It took some time to comply with provisions in the Act and refer debt to TOP, because Housing Programs had to revise systems and procedures as follows:
In addition, because Treasury is in the process of updating its TOP system to allow for the submission of multiple debts for a single borrower and to accept information related to co- borrowers, Housing Programs will be required to modify its automated systems to take advantage of the capabilities afforded by Treasury's new Grand TOP program. Also, once we complete the changes needed in the due process letter needed to comply with legal requirements, we will be able to begin participating in Treasury's pilot salary offset program.
Cross-Servicing of Delinquent Debt
Housing Programs is currently reviewing its delinquent debt to determine which accounts are eligible for cross- servicing. Not all of the accounts over 180 days delinquent are eligible for cross-servicing because of statutory loan servicing requirements that include moratoriums and workout agreements. Also, many of the accounts are in foreclosure, bankruptcy or other litigation which precludes the use of a cross-servicer. System modifications to provide required data to a cross- servicer are much more extensive than the modifications that were necessary for TOP reporting. I anticipate that Housing Programs will refer its first debt to Treasury for cross-servicing in June 1998 if all legal requirements have been met. We will continue to refer more debt as system modifications are made.
Taxpayer Identification Numbers (TIN)
Housing Programs already collects TINs from most of its vendors, borrowers, and other clients. The TINs are required in the application process prior to loan or grant approval. Housing Programs does experience some problems verifying TINs; however, we recognize the collection of TINs will improve the collection of delinquent debts by allowing full participation in TOP and assuring that any subsequent discharges of indebtedness are reported to the IRS.
Reporting of Write-offs to IRS on Form 1099-C
Housing Programs has been reporting write-offs to the debtor and to the IRS on Form 1099-C for inclusion in the debtor's income since 1990. For 1997, we reported write-offs totaling more than $82 million.
Civil Monetary Penalties
The USDA has developed and published in the July 31, 1997, Federal Register, a Final Rule pertaining to civil monetary penalties which incorporates inflation adjustments. Housing Programs has adopted the Department's rules.
Use of Private Collection Agencies
Until recently, Housing Programs was prohibited from using collection contracts. The Agency uses many tools to collect delinquent debt and the use of private collection agencies will be considered. We will continue to refer delinquent debts to the Department of Justice for litigation when appropriate.
Barring Delinquent Debtors
Housing Programs supports the Act's provision to bar delinquent debtors from obtaining additional Federal loans or loan insurance guarantees. During the application process, Housing Programs uses credit reports as a tool in determining the credit worthiness of individuals, businesses, or other organizations who are applying for loans and grants.
Electric Funds Transfer (EFT)
DCIA requires Housing Programs to make all disbursements by electric funds transfer (EFT) by 1999. The Agency has initiated the system design changes necessary to comply with this requirement.
Housing Programs's guarantees of single-family loans are different from many federal guarantee programs in that we do not take back loan collateral or the loan upon borrower default. Therefore, we do not have DCIA issues with our guarantees.
Credit programs administered by the Housing Programs vary significantly in their objectives and goals. As a result, the programs differ in the type of credit, payment schedules, interest rates, payback provisions, and servicing they require. Although these differences must be considered when pursuing debt collection, we believe that every debt should be repaid in accordance with the conditions under which the loan was made.
We will make every effort to implement the additional provisions of the Act as the rules and requirements are identified by Treasury for such features as Wage Garnishment and Gainsharing. The Act provides us with many new tools to assist us in the efficient and effective management of our loan portfolios. We look forward to working with the Office of Management and Budget, Treasury, other Federal Departments and agencies, through the Federal Credit Policy Working Group and the Chief Financial Officers Council to coordinate initiatives that reduce the amount of delinquent debt owed to the Federal Government.
Thank you for the opportunity to testify today and discuss the progress we have made in the implementation of the Debt Collection Improvement Act. I would be delighted to answer any questions that you may have at this time.
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