Detailed Information on the
Agricultural Credit Insurance Fund Direct Loans Assessment

Evaluating all program costs, including loan making and servicing, to identify opportunities to improve efficiencies.

Define long-term outcome measures that focus on a key goal of the program ?? improving the economic viability of farmers and ranchers through strategic planning efforts and an in-depth program evaluation currently underway.

Amend servicing options to reduce the administrative burden without impacting the effectiveness of the program.

Implement FSA's new Farm Business Plan in the fall of 2004 which will improve the agency??s ability to collect detailed performance information.

Measure: Increased revenue and profit of farms and ranches

Explanation:FY 2004 actual is an anomaly. It is important to note that the economic market fluctuations will lead to variances outside of FSA's control on this measure. NOTE: The data source is the USDA Economic Research Service (ERS). ERS compiles the components of farm income statistics from a wide variety of sources. Many components are not available until well after the completion of the year thus the "actuals" are not available until August of the following year.

Measure: Increased percentage of farm ownership by racial and ethnic minorities and women farmers (Targets under development).

Explanation:To FSA's best knowledge this measure not included in the final PART as data is unavailable.

Measure: Direct loan loss rate

Explanation:Reduced losses indicate that borrowers are experiencing greater success in meeting their finanical obligations, an indicator of financial strength and viability. (Baseline FY 1998: 5.4%)

Measure: Graduate direct borrowers to the guarantee program

Explanation:Graduating farmers from the direct loans to guarantee loans is an indicator of their progress toward achieving commercial credit status. (Baseline: 33%; new baselines under development as strategic plan is finalized).

Measure: Percentage of farm loans targeted to beginning and socially disadvantaged farmers/ranchers.

Explanation:FSA provides assistance to beginning and socially disadvantaged farmers in greater amounts than comercial lenders. Although both direct and guaranteed loan programs have targeting requirements, beginning and socially disadvantaged farmers make more use of direct loans. (Note: The results of this measure include the effect of the guaranteed loans made.) (Baseline FY 1996: 32.5%; new baselines under development with new strategic plan)

Measure: Decrease in average processing time (measured in number of days).

Explanation:FSA's mission involves providing a safety net for America's farmers and ranchers. Financial resources and other assistance are provided timely when the need arises. Baseline FY 2000: 46 days

Measure: Administrative cost per loan

Explanation:This measure will assess the administrative expenses associated with loan making and servicing.

Measure: Loan Delinquency rate

Explanation:Decreasing the loan delinquency rate is a measure of the ability of borrowers to better meet their financial obligations.

Is the program purpose clear?

Explanation: The program allows family farmers who could not otherwise obtain agricultural credit to obtain needed credit directly from FSA.

Evidence: Consolidated Farm and Rural Development Act, as amended (CONACT) clearly outlines the program.

Does the program address a specific and existing problem, interest or need?

Explanation: FSA's direct farm loans help to resolve imperfections in credit markets and to address concerns regarding social equity. Due to the economic uncertainty concerning the production of agricultural commodities, some farmers have difficulty demonstrating their creditworthiness to lenders, especially farmers that lack sufficient experience, credit history, and/or have limited incomes. Because special skills may be needed to evaluate farm loans, and because much farm production occurs in geographically isolated areas that have few lenders, some farmers may face less competitive markets for their loans that can result in higher rates, less favorable terms, and/or no access to loan funds. Consequently, farmers may face a competitively limited market for their loans that can result in higher rates, unfavorable terms, and a shortage of loan funds. FSA direct loans facilitates the provision of credit which can help support low farm family incomes, assist minority and beginning farmers, or help farmers adopt new technology that will make their farming operations more economical.

Evidence: The share of total farm debt owed to directly to FSA is small, but for high credit risk groups, such as beginning and socially disadvantaged farmers, FSA's market share is much higher. An analysis of USDA's Agricultural Resource Management Survey (ARMS) for 2001 and 2002 indicates direct program share of total farm debt was 3 percent , but that market share increased to 6 percent for farms with debt-to-asset ratios above 0.70. Recipients of FSA direct loans are more financially stressed than farmers able to obtain commercial credit. FSA direct borrowers were less solvent and had less cash flow coverage than farmers receiving commercial loans. In fiscal 2003, nearly 17,700 direct loans (operating, ownership, Indian land and Boll Weevil eradication loans) totaling nearly $1.05 billion were obligated. Without these loans, many of these borrowers would have been unable to obtain necessary credit, even if guaranteed, to begin or maintain their farming or ranching operations.

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: At the Federal level there are no other agencies that have the same specific goals and objectives as FSA direct loan programs. While the Small Business Administration (SBA) also has a loan programs for the farm sector, much of SBA's loans to farmers are to provide capital for farm-related businesses which FSA cannot finance. Although there are several State Governments that have established programs with goals and objectives similar to the FSA direct loan program, there is no such program that is national in scope.

Evidence: FSA direct loans accounted for over 3 percent of all outstanding farm loan volume in 2003, whereas SBA supplied less than 0.5 percent of total farm operator credit needs according to the 2001 and 2002 ARMS. About 35 states had some type of farm finance program on the books in 1999, when the last available inventory was taken. These program delivery mechanisms include Aggie Bonds, loan guarantees, direct loans, and commercial loan interest rate subsidies. Most state farm finance programs receive limited or sporadic funding and have relatively narrow objectives. Over half of these programs are focused on assisting in the first time purchase of a farm or ranch. Some state programs are self funding, which means they must maintain low default and operating costs to keep the programs operational.

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: The program's delivery mechanism is consistent with program objectives and there is no evidence of any other approach or mechanism that would be more effective in assisting minority and beginning farmers in obtaining credit to sustain a family farm. The program is designed to provide a temporary source of credit until such time as the family farmer is able to utilize the private sector for their financing needs. Some steps have been taken to eliminate design flaws, although some more minor concerns still remain. As a result of collapse of the farm economy in the 1980s, changes were made to the program to allow borrowers to restructure their loans, which at the time was found to be more cost-efficient than liquidation. However, borrowers were able to abuse this system, a problem that resulted in FSA's placement on GAO's high-risk list in 1990. This problem was amended in 1996 and borrowers with more than one write-down are ineligible for other capital loans. As a result of substantial improvements in reducing delinquent debt and loan losses, FSA was removed from GAO's high-risk list in January 2001.

Evidence: Program eligibility requirements prohibit loans to farmers otherwise able to obtain credit. USDA data indicates the program plays a significant role in assisting this target group. In 2003, over 9000 direct operating and ownership loans, for over $512 million, were provided to beginning or SDA farmers and ranchers. FSA has undertaken several initiatives to reduce the administrative burden, including: (1) A proposed rule has been issued to cease offering the Softwood Timber program through the loan servicing process. The Softwood Timber program requires a heavy administrative effort for only a few eligible borrowers. (2) The requirements for borrowers to comply with building standards have been simplified. FSA has published a proposed rule to eliminate burdensome construction standards for farm building and improvements financed with loan funds. Instead of imposing separate standards and requiring employees to assure that standards are met, the Agency will rely on local building codes and inspectors to assure sound construction. (3) FSA is reducing the number of forms. FSA Farm Loan program has used over 498 forms. Of the 498 forms, over 42% have either been deemed obsolete or are currently being reviewed for obsolescence.

Is the program effectively targeted, so that resources will reach intended beneficiaries and/or otherwise address the program's purpose directly?

Explanation: Each year FSA allocates a share of loan funding for use by beginning and socially disadvantaged (SDA) groups. State's lending allocation for beginning farmers (those who have less than 10 years of farming history) are reserved until September 1 each year. Annual targeting levels are 35 percent for direct operating loans and 70 percent for direct farm ownership loans. FSA targets SDA groups (including racial and ethnic minorities, and women) by setting aside a share of funding for these applicants. Thirty-five percent of FSA direct borrower caseload is either beginning or SDA farmers. In comparison, racial and ethnic minorities make up less four percent of total U.S. farms, with beginning farmers constituting less than one percent (1997 Census of Agriculture).

Evidence: Each year a high percentage of direct FSA loans are used by groups targeted by the programs. In fiscal 2003, nearly 39 percent of direct OL and nearly 69 percent of direct FO funding went to beginning farmers. Socially disadvantaged farmers in fiscal 2003 received 13 percent of direct OL lending volume, whereas nearly 20 percent of direct FO volume went to these targeted borrowers. These percentages are high given that racial and ethnic farmers accounted for less than 3 percent of total farm debt in 1999; the most recent year Agricultural Census data is available. Analysis of USDA's Agricultural Resource Management Study for 2002, reveals only about 8% of total farm debt is owed by beginning farmers.

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: Current measures focus on maintaining a low loss rate of direct loans, an integral part of the cost of providing credit, and on increasing the percentage of loan funds going to targeted groups. Although current long-term measures are adequate, improvements are still warranted. Current measures do indicate whether the program is providing adequate coverage of the intended market or whether the program is having an impact on improving the economic viability of farmers and ranchers. FSA is currently revising its strategic plan, which will include a new long-term outcome measure focused on "improving the economic viability of farmers and ranchers." New measures will be informed by the results of a program evaluation currently being conducted and supported by information gathered through borrower's business plans, which will be required for all new borrowers this fall. New long-term outcome measures will be included in the Department's FY 2006 Budget. Performance measures being considered relate to changes in the financial strength of borrowers, assessing the extent to which the program is reaching targeted groups, and the added value to communities as a result of the loan programs.

Evidence: The Farm Service Agency (FSA) has four long-term goals for its Farm Loan Programs: (1) improve the economic viability of farmers and ranchers, (2) reduce losses in farm loan programs, (3) respond timely to loan making and servicing requests, and (4) provide maximum financial and technical assistance to underserved groups. Long-term performance measures include maintaining a low loss rate on direct loans, and increasing the percent of loans to beginning and socially disadvantaged farmers/ranchers. FSA is currently evaluating performance measures that would indicate whether the program is improving the economic viability of borrowers. New measures will be included in USDA's FY 2006 Performance Budget.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: Efforts have been underway for a number of years that have already resulted in significant improvements in program performance. While targets and timeframes for long-term measures may not seem ambitious based on recent history, this program has made great progress over the last 20 years working toward its performance targets. Established timeframes, baselines and targets support FSA's long-term measures for this program. Targets are established for long-range planning purposes and are measured with short-term milestones. The targets are reviewed annually to determine if adjustments are needed. FSA also has other measurements to determine program performance. One method is to divide the portfolio into different risk categories based on the amount of the debt and the age of the delinquency in order to more effectively manage higher risk accounts and better implement the DCIA requirements.

Evidence: The total loan portfolio has substantially improved. Day-to-day management and oversight authority given to the field offices has resulted in lower losses and lower delinquency rates, as FSA continues to work toward reaching its goals. During the past 5 years, the number of delinquent large loans has been greatly reduced. The Agency had 338 delinquent non-judgment large loan cases at the end of Fiscal Year (FY) 1998, and 106 delinquent non-judgment and judgment large loan cases at the end of FY 2003. The reduction is in large part due to the identification of these cases for closer scrutiny and placing a priority on their resolution.

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: FSA's annual performance measures are designed to monitor the program's progress towards achieving its long-term goals. Annual performance measures include: (1) loss rate on direct loans, (2) average loan processing times, (3) borrowers graduated from direct loans to guaranteed loans, and (4) direct loan delinquency rate. While the loss rate indicator is also used to assess financial performance of the loan portfolio over time, FSA also tracks loss rates on its direct portfolio on an annual basis. FSA is also working with other USDA credit programs to define an efficiency measure, which will capture the administrative expenses associated with loan making and servicing. Currently, FSA is tracking decreases in loan processing times as an indicator of increased efficiency. However, this measure coupled with one that captures the administrative burden will provide a more complete picture of program efficiencies.

Evidence: The first measure helps FSA assess the "economic viability of farmers and ranchers" by looking at how economic conditions and interest rates affect the extent to which borrowers are able to meet their financial obligations, and to measure the risk of this program to the government. The second measure supports the overall goal of improving the efficiency of loan making, servicing, and quality of customer service. The third measure, which focuses on graduation rates out of the direct lending program, supports the long-term goal of improving the economic viability of farmers and ranchers. It also supports the goal of providing the right level of financial assistance to farmers and ranchers to help them maintain profitable farming operations. This directly measures the extent to which FSA is able to help farmers and ranchers improve their financial management practices in order move out of direct credit assistance and towards obtaining private sector credit. The fourth measure, is an indicator of producers' ability to make timely loan payments, which makes them less likely to cease farming.

Does the program have baselines and ambitious targets for its annual measures?

Explanation: Established baselines and clear timeframes and targets support FSA's annual measures for this program. FSA is currently using the annual measure: "maintain the percentage of guaranteed loans made to direct borrowers." As indicated by this measure, targets have remained at the same level over the last couple of years. This is a reflection of past performance, anticipated program demand, and borrower creditworthiness. FSA re-evaluates the target annually to determine if it should be increased. Baselines and targets are currently being evaluated and will be revised as necessary for the FY 2006 budget.

Evidence: The FY 2005 FSA Performance Budget describes the targets and timeframes for the performance measures established for the direct loan program. The budget shows three year performance targets for the period of FY 2003 through 2005.

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: Direct loans are intended to serve as a temporary source of credit for family farmers until they are able to obtain commercial credit. To facilitate this transition to other credit sources, FSA provides incentives for the family farmer to obtain a portion of their credit needs from other sources. In the direct farm ownership program, participation loans (at least 50 percent of credit needs obtained from commercial source) provide a fixed 5 percent rate for a 40 year term. In addition, under the "down payment" provision (10 percent of real estate purchase provided by farmer) of the direct ownership program, a fixed 4 percent rate is furnished. Loans are subordinated to other lenders where appropriate, to allow those lenders to provide credit. Borrower accounts are reviewed annually to ascertain if a commercial lender could supplant FSA credit, in whole or part.

Evidence: During FY 2003, 400 participation loans were made, 122 "down payment" loans were made. Combined, joint financing was involved in 36 percent of the FO loans made. During FY 2003, 5.0% of the direct loans were graduated to private credit.

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: An independent evaluation is being conducted by the University of Arkansas. This study will evaluate the program's effectiveness and the relationship between providing direct loan assistance and improving the financial strength of eligible borrowers. Financial status of borrowers will be described and compared with the status of borrowers not in the program. Data will be obtained from loan applications in field offices as well as information about current financial and occupational status. Regression analysis will relate default costs to borrower financial characteristics, outcomes such as graduation, program cohort, and type of enterprise. Information from this study will also be used to refine performance goals, targets and timeframes and help determine the appropriate role of the Federal government in financing farming and ranching operations. This exercise is scheduled for completion in 2005, and the recommendations on how to improve the program's performance will be used in the formulation of the FY 2006 budget. Numerous reviews are also conducted to evaluate program integrity and management. These reviews largely focus on loan portfolio performance and lender servicing.

Evidence: The independent evaluation currently being conducted focuses on (1) characteristics of farm loan program (FLP) borrowers and examine how direct FLPs serve family farms and targeted groups, (2) measuring the effectiveness of the programs in assisting various borrower groups to become economically and financially viable and able to graduate to private sector credit, and (3) measuring subsidy values borrowers receive over time and determination of ways to reduce those subsidies. Other evaluations that are conducted include National Internal Reviews, OIG audits, GAO audits and reports by USDA's Economic Research Service (ERS). The National Internal Review completes an annual review of each County Office that processes direct loans. Biennially, the National Office completes a quality assurance review of every State Office. Every County Office has a County Office Review, on average, once every 4 years. These reviews are managed by independent offices with no credit responsibilities. In addition, management reviews are conducted as needed.

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: Long-term goals include improved economic viability of farmers and ranchers, reduced loan losses, and targeted assistance to beginning and socially disadvantaged farmers. However, demand for direct loans is the major driver in the budget request, with access to capital primarily measured in the budget as the??loan level required to meet the demand of qualified farmers and ranchers.?? However, in many cases, the program has limited resources to meet all demand. Thus, questions remain regarding the level of resources needed to provide sufficient access to capital, encourage graduation to guaranteed and private credit, and ensure that the needs of targeted groups are met. While loss rates on the FSA portfolio are key to determining resource needs, the program lacks adequate outcome measures that get at whether the program is having an impact on improving the economic viability of farmers and ranchers. The program is currently being evaluated by an independent third party and recommendations from the evaluation should help FSA determine the appropriate role of the farm loan programs. Furthermore, the 2006 budget request will be aligned and explicitly tied to the new FSA Strategic Plan, which will tie resource requests to the annual and long-term goals of the program.

Evidence: ?? Resource needs for this program are presented in the budget in accordance with the Federal Credit Reform Act and include all program and administrative costs associated with delivery of the program.?? While at this time, budget requests are largely driven by program demand, significant efforts are underway to better align budget requests with long-term and annual goals. The FSA FY06 budget request for this program will be aligned and explicitly tied to the new FSA Strategic Plan.?? Resource needs for this program are aligned to Strategic Goal 1 - Viable and Productive Farms and Ranches.?? This goal will be accomplished through the FSA strategy of Expanding Access to Capital and Improving the Business Practices of Farmers and Ranchers.?? Several intermediate measures and outputs have been developed and will be used to??justify the resources needed to implement this strategy and meet the long term and annual goals of this program.????Among these measures/goals are increasing the??percentage of loans to beginning and socially disadvantaged farmers, decreasing the??percentage of approved loans not funded by FSA, and reducing the average loan processing time from receipt of application to decision.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: FSA has made significant improvements in correcting its strategic planning deficiencies. FSA is currently developing a new strategic plan, which emphasizes outcome-oriented goals and measures. The new plan is scheduled to be completed in Sept. 2004. The budget request for FY 2006 will be explicitly tied to FSA's Strategic Goal??of Viable and Productive Farms and Ranches.?? The budget request is aligned/ tied to this goal through??program requests and actions that improve access to capital for those producers in need.?? In addition, a program evaluation is underway, which will evaluate the program's effectiveness and the relationship between providing direct loan assistance and improving the financial strength of eligible borrowers. Results from this evaluation, coupled with a revised Strategic Plan, will also improve the link between the program's intended outcomes and the resources required to meet those needs.

Evidence: FSA has developed a preliminary Logic Model to organize information on outcome goals and measures. The model is the foundation of the new strategic plan. As a result of strategic planning efforts and an in-depth program evaluation currently underway, FSA will be able to define long-term outcome measures that focus on a key goal of the program--"improving he economic viability of farmers and ranchers." A description of the program evaluation is documented in the response to question 2.6.

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: The Agency regularly collects and updates loan performance information. The Agency tracks individual loan data to identify whether loan target goals to beginning and socially disadvantaged farmers and ranchers are being met. Annual goals are reviewed monthly to measure progress towards achieving strategic goals and management initiatives. Monitoring this performance helps the Agency identify where to place additional emphasis or make improvements, as appropriate. Annual end-of-year reviews also assess whether borrowers are now eligible for private credit and/or identify steps needed to improve creditworthiness. The agency uses performance information to identify program management deficiencies in particular states, and to identify processes or requirements that need to be stream-lined or re-engineered. The monthly management report has been an extremely effective management tool in two regards. First, it has improved the quality of state's loan portfolios; and has determined which states need additional assistance. Once a state problem area has been identified, a variety of additional assistance is provided to the state. For example: clarification concerning regulations, program objectives, program goals, training, on-site assistance from a detailed national office specialist to monitor the state's progress. The monthly management summary tool has assisted in reducing the loan loss rate, delinquency rate and number of properties held in FSA's inventory.

Evidence: Management reviews reports on an ongoing basis and identifies anomalies, then requests explanation or corrective action as appropriate. Field reviews, individual loan reviews, and in-depth analysis of data is completed to verify the explanation and corrective action. By using the monthly management report to identify where improvement is needed in each state, and providing additional assistance where needed, FSA has reduced its loan loss rate from 14.9% in 1990 to 5.1% in 2003. FSA has reduced its loan dollar delinquency rate from 23.8% in 1995 to 11.2% in 2003. The number of inventory properties has decreased from 1,799 properties totaling 598,414 acres in 1995 to 210 properties totaling 36,704 acres in 2003. Each month FSA monitors classes of higher-risk debt, such as large loans, judgments and cases where there appear to be delays in the loan servicing process. In cases that warrant special action, the national office assigns an expert to provide additional assistance to ensure that necessary actions are taken to resolve the issue(s) noted. Loan processing time-frame data was used as a basis to initiate a program for reduced documentation requirements for small loans and repeat loans to seasoned borrowers. This program was implemented in 2002. FSA's new Farm Business Plan (FBP) will be implemented in the fall of 2004 and will improve FSA's ability to collect detailed performance information. The FBP allows borrowers to document and track cash flow, debts, assets, and other financial information. FSA will track the success of a borrower's business to see how the producer is progressing towards private credit. In addition, FSA farm loan officers can share information more quickly with guaranteed lending partners and other FSA farm loan officials. This improved system of data sharing will speed up processing time.

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: National performance indicator goal levels are developed for each annual performance measure. Each state is then assigned a goal level to achieve for each annual performance indicator. FSA has tied SES and GS14/15 managers' performance standards to Agency performance in farm loan programs. Agency managers are responsible for implementing, improving, and monitoring program activities. They are also responsible for demonstrating expertise in such key areas as originating and servicing agricultural loans, maintaining adequate internal controls and minimizing risk of loss to the Government.

Evidence: Senior program managers in each state are accountable for reaching the goal levels. As of June 8th 2004, all FSA SES and GS 14/15 managers responsible for farm loan programs performance have had elements of program performance added to their performance appraisal elements. Goals and performance reports are sent periodically to the management officials in the field for review and action. Each State has performance goals to meet. These goals are passed to field office levels, by goal setting for individual offices. The ability to meet or not meet goals is often reflected in individual performance evaluations.

Are funds (Federal and partners') obligated in a timely manner and spent for the intended purpose?

Explanation: The Agency monitors the timeliness of loan approval as a performance measure. The use of funds are monitored through internal reviews and management oversight. Funding is allocated and activity monitored constantly to ensure optimum utilization of available funds.

Evidence: Accounting records which reflect loan purposes are maintained and audited. All funds are obligated prior to disbursement and validated to confirm compliance with the program's purpose. Obligation records indicate that less than 1 percent of the available funds remained unobligated at the end of FY 2003. The emphasis on rapid loan processing reduced time frames to 11 days, well below the 60 day statutory requirements. Because of this excellent performance, we are also tracking the time it takes from first submission of application to final disposition. This measure is showing significant progress. There were no audit findings on erroneous payments, loss claims, or anti-deficiency violations in the last two audits.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: The agency has undertaken a number of initiatives to improve efficiencies and effectiveness of program execution. The Loan Operations Division has undergone a competitive sourcing study to determine the most efficient organization. Although the study was complete, in January 2004, legislation was enacted that affected FSA's ability to implement and conduct competitive sourcing studies. In addition, the program has procedures to measure and achieve efficiencies and cost effectiveness. The Electronic Funds Transfer (EFT) system for Farm Loan Program was implemented in 1999, and the field was authorized to use the system for direct loans in 2001. The Cash Collection process for Farm Loan Program cash receipts implemented in January 1997, increased the efficiency and timely entry of payments processed to the accounting system.

Evidence: The Program Loan Accounting System (PLAS) has built in checks and balances to assure that the accounting controls, customer service efforts and the PLAS is continually being monitored and upgraded due to new legislation. Disbursements are processed more efficiently and in a shorter timeframe through EFT. Disbursements through EFT are received in 2 days versus paper checks mailed from Treasury which are not mailed until the 2nd day and then require an additional 3-7 days mail time for delivery. Cash receipts are processed more efficiently and in a shorter timeframe through system 36. Cash receipts are recorded in the accounting system within 2-3 days of date of entry. In addition, cash receipts are more efficiently researched. PLAS also is moving to ad-hoc reporting and electronic transfer of reports.

Does the program collaborate and coordinate effectively with related programs?

Explanation: The Agency collaborates and coordinates with related programs through several different mechanisms. Many real estate loans are made in conjunction with loans from state beginning farmer or farm finance programs. The Agency also operates a farm ownership loan participation program, which provides a small interest rate reduction when a commercial lender provides at least 50 percent of the financing. In addition, the Agency operates a beginning farmer down-payment program, where FSA lends up to 40 percent of the purchase price in conjunction with a down-payment and outside financing for the remainder of the purchase price. There are few similar programs with similar goals and objectives, and none with the scope of FSA direct loan programs. The Direct Loan Program is managed collaboratively with FSA Farm Programs, which provides various benefits to farmers, in assisting borrowers to achieve a positive cash flow for their farming operations. Farm Loan Programs and Farm Programs share office space making it easier for farmers to apply for program benefits. Farm loan personnel are trained to provide basic information on farm programs. There are relatively few similar programs with similar goals and objectives.

Evidence: FSA has 17 MOUs in place with 17 state farm finance programs. The MOUs provide that FSA will participate with the state program to finance beginning farmers that meet FSA eligibility requirements. FSA has successfully collaborated with state programs and the private sector to leverage limited farm ownership funds. In FY 2003, of the $168 million program level, $44 million was used through the participation loan program, and an additional $8 million through the down payment program, all in conjunction with private sector financing.

Does the program use strong financial management practices?

Explanation: The Farm Loan Program is executed in compliance with legislative, regulatory and authoritative administrative guidelines. Procedures are in place to safeguard payments through an automated appropriation/fund control system. The Program Loan Accounting System (PLAS) has system edits to mitigate the risk of: (1) overpayment and duplicate payments; (2) cancellation of a loan or grant obligation for an amount greater than the unliquidated obligation balance; (3) disbursing loan or grant funds for unauthorized assistance; (4) unauthorized loan and grant disbursements; (5) routing loan and grant funds via electronic funds transfer (EFT) to an incorrect financial institution; (6) duplicate disbursement schedules being certified to Treasury for payment; (7) Treasury processing the same disbursement schedule twice and issuing duplicate disbursements. In addition, FSA is currently updating financial and performance systems to ensure better integration.

Evidence: No material weaknesses were cited by auditors in their fiscal year 2002 or 2003 financial statement audits of the FSA Farm Loan Program. These audits include a review of credit reform re-estimates and other processes required by the Federal Credit Reform Act of 1990. In addition, per FMFIA reports, Farm Loan Programs was 98% compliant. The program has referred debt to Treasury for offset on direct loans since the mid 1980s. Additionally, substantial improvements have been made since the Debt Collection Improvement Act (DCIA) was enacted September 1996 and the General Accounting Office (GAO) audit 02-463. These improvements have resulted in a drop in the dollars delinquent from 19.03% in FY 1996 to 7.86% in FY 2003. This significant drop in dollars delinquent has resulted in GAO's removal of Farm Loan Program from its high-risk list.

Has the program taken meaningful steps to address its management deficiencies?

Explanation: Program management effectiveness is regularly reviewed through the National Internal Review (NIR) and the County Operations Review (COR) process and adjustments are made as needed. A major streamlining package is in proposed rule stage that addresses many previously identified deficiencies. FSA has made progress with its eLoans initiative within USDA and in coordination with the other 4 major credit Agencies. Also, an independent evaluation that will examine how well the program is accomplishing its mission and meeting its long-term goals has been undertaken. This exercise is scheduled for completion in 2004. This study will evaluate the extent to which the program is 'improving the economic viability of eligible farmers and ranchers' and reaching targeted farming populations. The study will also evaluate performance measure options that can be used to set appropriate performance goal targets and timeframes. FSA will also be implementing its "Farm Business Plan" program, which will collect key financial information from borrowers and use that information to assess their financial progress.

Evidence: Deficiencies are identified during the annual review of performance and development of coming annual goals. Adjustments are made to improve strategic planning deficiencies--for example, the performance goal of "reduce average processing time" was modified to measure the time from receipt of an application until decision on the application. Previously, the measure was from receipt of a "complete" application until decision on the application. This change increased accountability and should improve overall service. Comprehensive changes are being implemented with a major streamlining and revision of program regulations currently in proposed rule status. The eLoans initiative resulted in sound business cases for the major credit agencies.

Is the program managed on an ongoing basis to assure credit quality remains sound, collections and disbursements are timely, and reporting requirements are fulfilled?

Explanation: The Agency uses several different methods to ensure credit standards are maintained. Information is used to ensure collection and disbursements are timely and to monitor borrower repayment streams. Every state participates in a Quality Assurance Review every other year where files in 12 review categories are sent to the National Office for Review. Every state also completes a National Internal Review Report (NIR) every year, and various states are selected each year for a NIR review conducted in their state. The National Office also uses an internal Monthly Management Report to monitor each state's loan activity and disbursements, assess the progress states are making toward their goals, monitor loan servicing activity, write downs, and delinquency rates. The NIR is currently being re-evaluated and redesigned to become more of a credit risk assessment tool. The revised internal review process will use performance indicators, individual borrower and portfolio information to identify service centers and portfolio segments which appear to exceed acceptable risk levels and/or fail to meet performance goals. These locations and segments will be thoroughly reviewed and analyzed to identify deficiencies and contributing factors; corrective action plans will then be developed, implemented and monitored until completed. The Agency has also developed and is in the process of implementing a new electronic lending tool called Farm Business Plan. It will allow for electronic sharing of financial information, electronic signatures, and electronic loan approval. The Farm Business Plan will ensure that certain criteria are met before a loan can be approved.

Evidence: National Internal Review Reports; Monthly Management Reports; Farm Business Plans. For each weakness that is identified at any level of management, corrective actions are developed. Progress in implementing corrective action plans is monitored through completion as needed. Weaknesses within and among states are analyzed and compared to determine where additional guidance and instruction is needed. For example, when it became apparent that FSA was not in compliance with the Debt Collection Improvement Act (DCIA), a task force was formed which included representatives from every level of management in the field offices and the National Office. The task force identified all areas where improvement was needed, interim instructions were developed to provide guidance concerning specific actions needed to be taken and revisions to the automation system were made. Today, Farm Loan Programs is in full compliance with DCIA. In addition, regulations, Agency instructions, and notices are revised to provide clarification and address any weaknesses in program delivery. Review questions are routinely analyzed, critiqued, and revised to ensure that all review items are relevant and effective. The Agency uses first year default levels as an indicator of credit quality. First year delinquency rates are used as a performance measure and each state office is assigned a performance goal for first year delinquencies. Agency managers at the state and headquarters levels monitor and analyze performance, identify management, training, or policy issues and take corrective actions.

Do the program's credit models adequately provide reliable, consistent, accurate and transparent estimates of costs and the risk to the Government?

Explanation: FSA changed the credit model used to calculate subsidy for direct loans during FY 2001. Even with use of the revised model, there have been inconsistencies between fiscal years for one of the material programs, direct ownership. FSA has now developed a similar model using a database application which will eliminate many of the manual processes associated with the current model. This improvement, coupled with enhanced version and configuration control, should provide more reliable, consistent and accurate estimates beginning with the FY 2006 President's Budget.

Evidence: Based on OIG's annual audit of the financial statements, there were no material findings in regard to the reestimates for direct loans in 2001, 2002 and 2003.

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: FSA has achieved two of its three long-term performance goals for this program. However, as stated in questions 2.1 and 2.2, the program is developing measures to assess the long-term goal of "improving the financial viability of eligible farmers and ranchers, " and targets are not as ambitious as they should be. Although there is concern that making targets more ambitious is untenable given the uncertainties of the farm economy, other similar programs have "benchmarked" to private credit sources as a way to account for economic fluctuations.

Evidence: FSA has demonstrated progress toward maintaining a low loss rate on direct loan portfolio and decreasing the delinquency rate. The percent of dollars delinquent decreased from 23.8% in 1995 to 11.2% in 2003. However, targets should be reassessed to determine if For example, FSA maintains a target of 15% for loan delinquency rates, although actual rates have decreased to 12.3% in 2003 and averaged approximately 11.6% between 2001 and 2003.

Does the program (including program partners) achieve its annual performance goals?

Explanation: FSA has met its annual performance goals for this program: 1) maintain a low loss rate, 2) decrease average loan processing time and 3) maintain the percentage of guaranteed loans made to direct borrowers and 4) increase percentage of loans to beginning and social disadvantaged producers. However, more is needed to ensure that targets are ambitious, particularly for those measuring graduation rates and targeting goals. FSA is currently working on revising its strategic plan. NOTE: while maintaining a low loss rate is long-term goals of the program, progress is also assessed on an annual basis.

Evidence: Since FSA's mission involves providing a safety net for America's farmers and ranchers, it is important that financial resources and other assistance are provided timely when the need arises. The average processing time for direct loans has decreased from 46 days in FY 2000 to 40 days in FY 2003. This 13% decrease can be attributed to the ongoing streamlining process, improved monitoring through automation, and a renewed focus on customer service. Graduating farmers from direct loans to guarantee loans is an indicator of their progress towards ultimately moving to commercial credit. The percentage of guaranteed loans made to direct borrowers has been approximately 33% for the period of FY 1999 through FY 2003, which is consistent with the targets established for the program. FSA has demonstrated progress in providing maximum financial and technical assistance to underserved groups, providing assistance in greater amounts than commercial lenders. FSA has been successful in consistently increasing the amount of loans to these groups, due in part to improved outreach and targeting efforts. FSA loans to beginning and SDA farmers increased from 24.8% of total obligation in FY 1999 to 33% in FY 2003. Through a variety of efforts and initiatives, the Agency has reduced average loan processing time from 16 days in FY 2001 to 11 days as of April, 2004. In an effort to better measure the total time required by both the applicant and the Agency, in FY 2005 the Agency will be moving to measuring the total time to process a loan, not just the time form when an application is completed to a final decision. The Agency has also reduced first year defaults from over 20 percent in 1990 to 15.8 percent in FY 2003.

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: A comprehensive streamlining effort in underway, regulations have been formulated and are out as a proposed rule for comment. The eLoans initiative identified several value-added and cost-cutting opportunities to improve program access and efficiencies. FSA is also in the process of developing an efficiency measure, which will help the agency assess the administrative burden of the direct loan program.

Evidence: Several joint Agency initiatives which were outlined in the USDA business case, including online loan application capability and online inventory property listing, have been implemented. Applications are processed in a shorter period of time as evidenced through the Agency's loan processing timeliness measure.

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: While the Small Business Administration (SBA) provides direct loans--Section 7m microloans, the mission of this program is only somewhat comparable to direct FLPs. SBA does provide physical disaster business loans that are comparable to FLP's emergency disaster loan program. Also, a total of 17 states in 1999 offer some type of direct loan program for farmers. Although some of these are very targeted, such as for environmental abatement, and appear to be inactive due to funding constraints, some have the mission of assisting beginning farmers, particularly for first- time purchase of farmland, and so their mission in many cases can be quite comparable to direct FLPs. Yet, some state programs are self funding, which means they must maintain low default and operating costs to keep making new loans.

Evidence: A "large extent" was warranted given that few federal programs have the same mission and State programs that share the same purpose are much smaller in scope. The subsidy rate for the SBA disaster loan program is 12.96 percent in FY 2005, whereas FSA's emergency disaster loan program is 12.94 percent in FY 2005. For the state programs, the actual size and performance of the programs could be researched and documented and used to compare to FLP mission and performance, but it is not clear whether the utility of the comparison outweighs the time and resources needed to conduct the study. Instead, a performance review is being conducted by an independent third-party, which may consider attributes of FSA's program and how they compare to private credit.

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: No recent independent and comprehensive studies have been completed which evaluate long-term performance. Special studies of the programs are conducted periodically. A peer-reviewed 2003 study produced results which were generally consistent with overall program objectives. This study examined the variability in county-level use of the direct loan programs and found that use of FLP loan programs was greater in areas characterized by less availability of private sector commercial credit and poorer regional and farm economic conditions.

Evidence: An independent study to be completed in 2004 by the University of Arkansas will evaluate the extent to which the program is 'improving the economic viability of eligible farmers and ranchers' and reaching targeted farming populations. The study will evaluate performance measure options that can be used to set appropriate performance goal targets and timeframes. The 2003 study is: Dodson, C. & S.Koenig. 'Explaining County-Level Variability in Farm Service Agency Farm Loan Programs.' Agricultural Finance Review 63 (Fall 2003).