October 9, 1979
Page 27436
Mr. MUSKIE. Mr. President, one of the most vexing problems the Congress faces in its efforts to balance the Federal budget is in the area of Federal disaster policy, particularly the disaster loan programs of the Small Business Administration and the Farmers Home Administration. In July 1977, production crop losses were declared eligible for SBA disaster loans, even though the Farmers Home Administration had been operating an agricultural disaster loan program for years.
In fiscal year 1978, the year after the decision was made, SBA disaster loan volume increased from $200 million in the preceding year to $2.5 billion. FmHA loans rose from $1.2 billion in fiscal year 1977 to $3.4 billion in 1978. Eighty-eight percent of the loans in the two programs were for production crop losses.
In an effort to understand the reasons for this enormous and disturbing expenditure increase, and to provide guidance to Congress in designing a disaster policy that would be both responsive to the needs of disaster victims and yet fiscally prudent, Senator BELLMON and I requested that the General Accounting Office conduct an audit of the fiscal year 1978 operations of the SBA and FmHA programs to determine — the causes of the increase; the nature of the beneficiaries; the extent to which loan recipients could have secured credit from non-governmental sources; and what the loans were used for.
The results of that audit are now available, and I call the findings to the attention of the Senate, for they have an important bearing upon a major issue confronting the conferees on S. 918, the Small Business Amendments of 1979. Mr. President, I ask that a summary of the GAO report entitled, "Farmers Home Administration and Small Business Administration Natural Disaster loan programs: Budget implications and Beneficiaries" (CED- 79-111) , be printed in the RECORD at the conclusion of my remarks.
SBA LEGISLATION NOW IN CONFERENCE
Mr. President, a distressing situation has developed in the Senate-House conference on S. 918. This important legislation provides congressional guidance on Federal policy toward the small business sector of the economy. It also reauthorizes programs that supply much-needed financial and technical assistance to small businesses. Mr. President, I am deeply concerned that passage of this bill is now jeopardized because of efforts to alter disaster loan provisions that have already been agreed to by both the Senate and the House.
Both bodies have passed bills this year that would resolve the impasse over agricultural disaster lending. Both the Senate- and House-passed versions of S. 918 provide that an agricultural enterprise would not be eligible for an SBA physical disaster loan other than for a residence or personal property unless the enterprise was declined for emergency loan assistance from FmHA.
This agreement was the product of a long and delicate compromise worked out over a period of time by the administration, the House, and the Senate.
The compromise involved not only the issue of which Federal agency should be the primary provider of agricultural disaster loans but also issues of interest rates and credit elsewhere tests. Senators NELSON, HUDDLESTON, and WEICKER deserve ample credit for their roles in the difficult negotiation that led to the agreement, which — although it contains some provisions that I would prefer to see modified — was the best that could be accomplished considering the diverse interests that had to be accommodated.
S. 918, as passed by both Senate and House, would cause all but a very small proportion of agricultural disaster lending to be carried out by the Farmers Home Administration. It would also liberalize FmHA's lending program. Now that the bill is in conference, some of the House conferees are attempting to insert language that, if accepted, could lead the Small Business Administration to continue making large numbers of disaster loans. If this language is accepted, then the whole compromise involving not only agricultural disaster lending but also credit elsewhere and interest rate issues, would come undone. Mr. President, both the Senate and House have expressed their acceptance of the compromise by voting overwhelmingly for the legislation.
The conference committee should not materially change these provisions upon which both bodies have already spoken in identical terms.
FINDINGS OF GAO REPORT
One look at some of the findings of the GAO report, Mr. President, should convince any reasonable person that Farmers Home should be the provider of agricultural disaster loans.
In a number of areas, SBA's inexperience in agricultural matters is painfully obvious. This is no fault of the Small Business Administration, which is simply not an agricultural agency. In contrast, the Farmers Home Administration has over 3,000 field offices located throughout the United States whose sole purpose is to serve agriculture.
There is a fundamental difference between agricultural production crop losses due, for example, to drought, and physical property losses, such as a factory building being destroyed in a hurricane or flood. In agriculture, crop yields vary from year to year due to normal variations in the weather or for other ordinary reasons. FmHA takes such normal variation into account through its requirement that a minimum loss be incurred before a farmer is eligible for a disaster loan. In contrast, SBA has no such requirement, and treats physical property losses and crop production losses almost identically.
Another important difference is that FmHA looks at total farm income in computing loan amounts, because a farm may have lower than normal crop production in one crop as a result of weather conditions that is offset by higher than average income in another crop. SBA does not consider this.
GAO found that the average size of SBA loans was almost 20 percent greater and that the average length of an SBA loan was about 13 percent longer than FmHA loans. GAO concluded that these differences are due at least in part to less stringent SBA requirements. The effect is to increase the cost of agricultural disaster lending above what it would be if Farmers Home alone administered the program.
Mr. President, I have farmers in my State, as does every member of this body. No Senator wants to take any action that would result in farmers being treated unfairly in relation to other small businessmen. But to argue, as some do, that the disaster loan programs of the Small Business Administration and the Farmers Home Administration must be identical is to ignore the basic differences between the farm and the non-farm business sectors of our economy, and particularly to differences between agricultural production losses due to normal variations in weather conditions versus physical property destruction due to floods, tornadoes, or hurricanes.
Not unexpectedly, GAO auditors found that the existence of duplicative programs has created opportunities for abuse or fraud which have not gone unexploited. First, loan applicants were able to apply to both agencies and "shop" for the largest loan. While not illegal, the opportunity to shop for larger loans is evidence of poor program design. Second, and far worse, Mr. President, the duplicative programs opened the door to fraud. GAO auditors found numerous cases in which applicants estimated higher losses and more acres planted when they applied for SBA loans than when they applied for FmHA loans.
In a typical example, one applicant first applied to FmHA and then later to SBA for a crop loss loan. The SBA application showed more acres planted and a more severe loss. As a result, SBA approved a $43,000 loan while FmHA would have limited the amount to $32,000. Finally, GAO uncovered examples of the ultimate abuse of redundant programs: borrowers who had obtained loans from both SBA and FmHA for the same disaster loss. GAO believes that this situation will continue as long as both agencies make disaster loans to farmers.
Further, Mr. President, anyone who believes that this program benefits primarily the little people will be disabused of that notion by looking at the GAO findings. The average SBA farm borrower has a gross income of $102,000 per year and a net worth of $272,000. I insert at this point a table showing the average financial profiles of disaster loan borrowers.
[Table omitted]
Many of the borrowers are individuals of great wealth. And each of them received loans subsidized by taxpayers with far less wealth. I note several examples:
One businessman who operates several farms reported an annual gross income of $950,000, $42 million in total assets, and a net worth of $38 million. He received a $408,000 loan from SBA.
The taxpayer subsidized this individual to the tune of $33,000 on the subsidized SBA loan.
Another agricultural borrower, with a net worth of $1.1 million, obtained an 8-year, $81,000 SBA disaster assistance loan. He paid $15,000 of the loan to a bank to reduce existing debt and invested the remainder in a certificate of deposit. The Government's subsidy of the loan amounts to $22,000.
The president and principal owner of a multimillion-dollar corporation, with a personal net worth of $4.8 million, received a $500,000 SBA farm loan. This borrower made every effort to hold the low interest money as long as possible, including a successful appeal to extend the life of the loan from 15 to 20 years, even though the SBA loan officer noted that the farming losses did not reflect the overall operations of the borrower and that a 15-year repayment should be no problem. When the first annual installment was due, the individual sent SBA a check for the interest only, and requested a 1-year deferral of the principal amount due. This time SBA ruled against him. The Government subsidy of this man's loan amounts to $247,000.
Many other similar cases are described in the GAO report. Mr. President, loans of this type represent questionable use of scarce Government dollars. GAO concluded that "other credit sources could have loaned money to many recipients of SBA and FmHA disaster assistance loans." In fact, many of the loans that GAO describes were probably made improperly, because the Farmers Home Administration is authorized to make loans only in cases where the applicant cannot obtain credit elsewhere. SBA has no credit elsewhere test for disaster loans. GAO concluded that the credit elsewhere test mandated by law "was generally not used at all or received only cursory attention ... even in some areas where a credit elsewhere test was used, we found it to be weak."
In one State, a letter from the State FmHA office to the county and district offices stated that:
It is to be assumed when an applicant applies for a disaster assistance loan that he cannot obtain other credit on terms satisfactory to his needs.
This was apparently interpreted to mean that no credit elsewhere test needed to be used. In another case an applicant produced a credit-denial letter from his bank which read as follows:
This is to inform you that the (bank) has carefully considered your application for a loan, and we declined your application per your request.
I draw two conclusions from these findings, Mr. President. First, Congress should seriously consider limiting eligibility in both programs only to borrowers who cannot obtain credit from other sources. And second, the credit elsewhere test must be implemented in a sound and sensible manner. The disregard of congressional intent in the implementation of this requirement by the Farmers Home Administration is very disturbing, and I hope that the Agriculture Committee will take steps to correct this abuse.
CONCLUSION
Mr. President, the enormous increase in spending under the SBA disaster loan program imperils congressional efforts to balance the budget. Limiting agricultural disaster lending to the Farmers Home Administration makes good sense according to both budgetary and program design criteria. It would insure that farmers are well served by a Federal agency with expertise in agricultural lending. At the same time, both bills include provisions that liberalize the Farmers Home Administration disaster loan program.
I call upon the conferees on S.918 not to alter legislative provisions which both the Senate and the House have already overwhelmingly endorsed. Having come so far on these difficult issues of Federal. disaster policy, I find it difficult to understand why any member of the conference committee would risk what has been achieved by altering the compromise provisions in a manner that will delay agreement on basic issues that appeared to have been resolved, that will seriously threaten our efforts to balance the budget, and that will, at the same time, needlessly jeopardize the passage of the entire SBA reauthorization bill — with its important policy guidance and program reauthorization provisions. I hope that the legislation will soon be reported from conference with the Senate- and House-passed agricultural disaster loan provisions intact.
The summary follows:
SUMMARY OF GAO REPORT CED-79-111:
"FARMERS HOME ADMINISTRATION AND SMALL BUSINESS ADMINISTRATION NATURAL DISASTER LOAN PROGRAMS: BUDGET IMPLICATIONS AND BENEFICIARIES"
In fiscal year 1978, the Small Business Administration (SBA) disaster assistance loan volume increased from $200 million in fiscal year 1977 to a record $2.5 billion, and Farmers Home Administration (FmHA) disaster assistance loans increased from $1.2 billion in fiscal year 1977 to $3.4 billion. The increase caused a severe impact on the SBA budget but had little impact on the FmHA budget. This was due primarily to the different means used to finance the programs.
Three factors primarily accounted for thethe increase in Federal disaster assistance loan activity in fiscal year 1978.
Widespread extreme weather conditions, especially drought, affected much of the Nation and drove up farm disaster assistance loan activity.
Lowering of interest rates provided borrowers a strong incentive for obtaining the SBA and FmHA disaster assistance loans rather than obtaining the loans from their usual credit source.
A broadening of SBA's disaster assistance loan program to include farmers' crop production losses.
Eighty-eight percent of the disaster assistance loans in fiscal year 1978 went to farmers.
Borrowers were from every State but, naturally, more loans went to agricultural areas. An estimated $3 billion of the disaster assistance loans in fiscal year 1978 were made at a 3-percent interest rate while the Government cost of money, based on FmHA's average, was 8.3 percent.
GAO could not determine what correlation existed between disaster severity and the amount of loans made because a uniform factor for measuring severity could not be found.
The need for SBA to make natural disaster assistance loans to farmers seems questionable since FmHA has developed an expertise for dealing with farmers' unique needs, such as crop production losses. FmHA's and SBA's different methods in dealing with farm production losses have created a situation where farmers can shop for the most lucrative deal. For instance, FmHA required a minimum loss, while SBA did not.
GAO reviewed a sample of loans and found the average net worth was $180,000 for the sampled FmHA farm borrowers and $270,000 for the sampled SBA farm borrowers. Farm size averaged about 750 acres for the FmHA borrowers and 850 acres for the SBA farm borrowers, including rented land.
Many loans in GAO's sample apparently went to borrowers who could get credit from other sources. This was true for both SBA and FmHA disaster assistance loans, even though FmHA has a test to screen out those who can get credit elsewhere. GAO found the FmHA test was widely ignored or received only cursory attention. FmHA loan recipients who can get credit elsewhere should be referred to other sources to refinance their loans.
Generally, little or no assurance exists that disaster assistance loans are not used in frivolous ways, particularly by wealthier borrowers. Limiting the disaster assistance loans to borrowers unable to obtain credit elsewhere could target the loans to disaster-related needs.
In conjunction with this study, GAO compiled a list of other Federal disaster assistance programs available to farm and non-farm businesses and individuals describing eligibility requirements and benefits offered.
PREVIOUSLY MADE RECOMMENDATIONS STILL VALID
On. May 25, 1978, GAO issued a report (CED-78-118) which included the following recommendations regarding the FmHA and SBA disaster assistance loan programs. The problems that prompted the recommendations in the earlier report still exist. Accordingly, these recommendations are still valid.
The Small Business Act should be amended so that SBA would no longer be authorized to make disaster assistance loans to farmers.
If the Small Business Act is not amended in this manner, the Congress should require that the two agencies work together to achieve consistency between their programs to avoid overlapping and duplicating efforts.
To avoid unnecessary costs and interference with traditional sources of agricultural credit, the Congress should maintain FmHA's credit-elsewhere requirement and, if SBA is to continue making disaster assistance loans to farmers, enact legislation to impose a similar requirement on SBA's program.
The Secretary of Agriculture should direct FmHA to propose legislation to the Congress revising the agency's minimum loss eligibility criteria so that the percent of loss determining eligibility is applied to the gross income from all farm enterprises and the loan is made only for the amount of the loss which exceeds that percentage.
At the time of GAO's previous report, SBA had no strong feelings about whether farm borrowers should be unable to obtain credit elsewhere, but it believed non-farm business disaster assistance loans should be exempt from this criterion. SBA has continued to make disaster loans, regardless of the availability of credit elsewhere. However, in a statement before the Senate Select Committee on Small Business on April 24,1979, SBA's Deputy Administrator revised the
agency's position by proposing a test for credit elsewhere on SBA's disaster assistance loan program for businesses similar to that applied by FmHA on its borrowers.
FmHA's enabling legislation limits eligibility for disaster assistance loans to farmers unable to obtain credit elsewhere. However, as noted earlier, GAO found the FmHA test was widely ignored or received only cursory attention.
The Department of Agriculture has not proposed legislation to implement GAO's recommendation for changing the agency's minimum loss eligibility criteria. In response to the previous GAO report, FmHA stated that the Congress, in its best judgment, determined that the disaster assistance loan eligibility criteria would not be changed.
Under procedures soon to be implemented, FmHA will deduct 10 percent of production losses from disaster assistance loan amounts. In taking this action, FmHA recognized the need to consider normal variations in crop production from year to year; however, this action does not fully implement the GAO recommendation.
RECOMMENDATION TO THE CONGRESS
In view of the Department of Agriculture's reluctance to propose legislation to change the minimum loss eligibility criteria, the Congress should strengthen the criteria in the FmHA program in the manner described in the previous GAO report. The Congress needs to take this action if it wishes to restrict disaster loans to the amount of loss that exceeds drops in farm income in 1 year that would normally be expected in a farm operation.
Further, if SBA continues to make disaster assistance loans to farmers, the Congress should also establish in this program the same minimum loss eligibility criteria that was recommended in the previous report for the FmHA program.
RECOMMENDATIONS TO THE SECRETARY OF AGRICULTURE
The Secretary should direct the FmHA Administrator to clarify FmHA's test for credit elsewhere for all county supervisors and review all disaster assistance loans made in fiscal year 1978 for possible referral to other credit sources.
AGENCY COMMENTS
In commenting informally on this report, FmHA and SBA officials agreed that SBA should be out of the farm disaster assistance loan business. FmHA officials stated, however, that they did not want SBA's farm disaster assistance loan portfolio of existing borrowers to be transferred for servicing to FmHA. FmHA officials further stated that since the SBA loans were made according to laws and regulations different from FmHA's, collecting and servicing the SBA accounts would be a difficult task. SBA officials expressed no strong opinion concerning the transfer of the SBA portfolio of farm disaster assistance loans to FmHA and felt a satisfactory arrangement could be worked out between the two agencies.
FmHA officials did not fully support GAO's recommendation for revising the minimum loss eligibility criteria because they believed more time-consuming calculations would be required. However, FmHA was going ahead with its plans to deduct 10 percent of production losses from disaster assistance loan amounts. FmHA officials recognized that this step would not fully implement the GAO recommendation.
GAO believes its recommendation for revising the minimum loss eligibility criteria for the disaster assistance loans will not delay loan processing to any significant degree. FmHA already requires its applicants to provide most of the information needed to carry out the recommended approach.
SBA officials agreed that if FmHA has minimum loss eligibility criteria for farm production losses, then SBA should also have criteria which is consistent with FmHA's.
FmHA officials agreed with GAO's recommendation for clarifying for all county supervisors. the test for credit elsewhere. Although they believe the present method of implementing the test is good and workable, they acknowledge that the problems GAO noted do exist in isolated cases and recognize the need to clarify the procedures. FmHA officials also agreed to review disaster assistance loans made in fiscal year 1978 for possible referral to other credit sources.
STUDY OF DESIGN OF FEDERAL DISASTER ASSISTANCE POLICY
GAO was asked also to conduct an inquiry into the basic design of Federal disaster assistance policy and recommend program changes. GAO plans to answer this portion of the request in a separate report.