Strengthen Debt Collection Programs

Strengthen Debt Collection Programs

Background

The federal government would be able to collect an additional $2.5 to
$10 billion over the next five years by strengthening its approach for
pursuing seriously delinquent debt. Lending and collection programs
could be improved substantially and a fairer financial presentation
could be made if agencies:

--were provided with incentives to cover the cost of collection and
allowed to share in the additional recoveries;

--could fully use other agencies on a reimbursable basis and/or
collection agencies to hold down the growth of delinquent debt;

--were provided with expanded authority and flexibility to use special
assistant U.S. attorneys, agency counsel, or private counsel to litigate
delinquent debt; and

--were required to re-evaluate their allowances for doubtful accounts.

The federal government was owed about $241 billion in non-tax debt at
the end of 1992, of which $47 billion was delinquent [Endnote 1]. The
Debt Collection Act of 1982 and OMB Circular A-129 require agencies to
establish an aggressive but fair program to collect delinquent debt and
establish mechanisms "to collect and record payments and provide
accounting and management information for effective stewardship."

Each year, thousands of borrowers from the federal government default on
loans from programs administered by a variety of federal agencies.
After engaging in their own collection efforts, including referral to
private collection contractors, the use of the salary offset program for
delinquent Federal employees, and the tax refund offset program, certain
agencies refer unpaid debts to the Department of Justice for collection.
Justice attorneys also sue to collect unpaid criminal and civil fines
and assessments.

Need for Change Most agencies perform routine servicing of debt
adequately, collecting about $87 billion in fiscal year 1992 [Endnote
2]. However, their performance in collecting seriously delinquent
non-tax debt in a timely manner is very poor. Agencies consider the
collection of debt as a secondary function to loan origination and other
program functions. In addition, they do not have the systems and staff
to pursue delinquent debt. The following are examples of the current
obstacles facing program agencies attempting to collect delinquent debt.

--The missions of program agencies are to provide services to their
clients. Program staffs, therefore, are sensitive to their clients'
needs and reluctant to press for repayment of debt. Agency staffs have
excellent knowledge and skills for delivering the program; they do not
always have the skills or training to track and collect debt in a timely
fashion. Although agencies are required to refer debt more than six
months past due to contractors, the average age of debt referred to
collection contractors exceeds two years [Endnote 3].

--Because resources are scarce, many agencies have not made the
necessary investments in specialized debt collection systems, equipment,
and personnel. There is no reward for most agencies for collecting debt,
i.e. increased debt collection does not easily translate into increased
program budget authority. One exception is the Department of Veterans
Affairs (VA), which was given the flexibility to cover its
administrative costs from debt recoveries.  VA increased its medical
care cost recovery from $23.9 million in fiscal year 1987 to $520
million in fiscal year 1993. The pivotal factor in this accomplishment
was the establishment of the Medical Care Cost Recovery (MCCR) Program
and the gradual expansion of its authorities. Although VA has been
authorized by statute to cover certain costs since 1986, collection
remained relatively low until the MCCR Program was expanded in 1990 to
allow administrative costs to be funded for the succeeding year from the
current year's collections [Endnote 4]. A similar example is at the
Department of Education where the use of collection revenues to pay
expenses associated with collections is authorized under the Higher
Education Act. The Department has used this authority to pay private
collection agency costs. All other debt collection costs are funded out
of Education's operating budget. The idea of using collection revenues
to pay expenses associated with collections could also be expanded to
franchising or cross-servicing debt collection activities. Given the
various sizes of agencies and staffing patterns, debt servicing could be
handled by clusters of agencies working together or by franchising to
establish a critical mass of expertise.

--Restrictions prevent the use of private collection agencies for the
recovery of taxes and tariffs as well as debt from certain loan
programs. For example, Farmers Home Administration has been prohibited
by provisions in appropriations laws from using private collection
agencies. Referral restrictions also exist on the Social Security
Administration (SSA), Customs Service, and IRS debt.

--Department of Justice has exclusive authority for litigation of most
delinquent debt cases. The U.S. Attorney's financial litigation units
recovered $345 million in non-tax debts last year out of an inventory of
approximately $6 billion. Critics of the U.S. Attorneys' debt collection
activities contend that the U.S. Attorneys' Offices attach low priority
to debt collection because it is less glamorous than their criminal and
civil caseload. To improve its efforts in debt collection, Justice has a
pilot program involving the use of private debt collection counsel
currently ongoing in eight judicial districts.

When agencies extend credit to individuals who are already delinquent on
another federal debt, these new loans are likely to result in future
losses. The Credit Alert Interactive Voice Response System (CAIVRS) is a
Department of Housing and Urban Development (HUD) system used to screen
new HUD loan applicants through telephone access of a database of
debtors delinquent on HUD loans. CAIVRS has been immensely successful
and should continue to be expanded by adding the delinquent debtors of
other federal agencies to the database, and by making the CAIVRS system
available to other agencies for the screening of their loan applicants.

The success of the VA's MCCR Program is an example of how recoveries
could be improved if an agency's administrative costs are funded by the
recoveries. Collection activities would further improve if the agency
could share in any additional recoveries and could use some of these
recoveries for other purposes. Also, full and consistent participation
by all agencies in an automated loan screening system such as CAIVRS is
needed to realize the maximum savings.

Agencies know that many of the receivables on the books are not going to
be collected. Yet, for various reasons, they do not feel comfortable
writing the debt off. Agencies seem to equate writing the debt off with
not trying to collect it. They fail to understand that writing the debt
off does not mean that the agency cannot continue collection activities.
Many agencies do not develop and record a meaningful allowance for
doubtful accounts. For example, the IRS net receivables at the end of
fiscal year 1992 were $28 billion [Endnote 5] After a financial audit
the General Accounting Office (GAO) determined that the net receivables
number was about $22 billion [Endnote 6]. This example points out that
agencies need to do a better job estimating the allowance for doubtful
debt so that a fair presentation can be made on their financial
statements and reports to Treasury.

Federal loan programs should be managed in a way that empowers agency
managers and recognizes both the similarities and differences among the
government's many direct and guaranteed loan programs. OMB, in
consultation with the Federal Credit Policy Working Group, should ensure
that agencies have the governmentwide policies and tools necessary to
effectively manage their programs. OMB should recognize that the
agencies should have the flexibility to implement the policies and use
the tools in the manner most appropriate for each loan program. Thus
empowered, managers should be held accountable for the results of their
programs, rather than the extent to which they use particular tools or
techniques to achieve the results.

To avoid unnecessary losses and efficiently collect any debts owed the
government, agencies should adopt strategies that would be expected to
do the following:

--For credit extension, follow central guidance for tools that are
applicable governmentwide. OMB should approve exemptions when justified.

--For servicing and collecting debt, adopt the most effective approach
for each loan program by developing meaningful loss mitigation
procedures and by using available debt collection tools in a timely and
efficient manner. Agencies should also look for opportunities to
consolidate, cross-service, or contract out activities.

--For uncollectible debt, implement write-off policies that provide for
determining in a timely, cost-effective manner whether delinquent debt
is uncollectible and for writing off the uncollectible debt as quickly
as possible.

Agencies that attain their established goals and can show productivity
improvements that result in cost savings by reducing losses or
increasing collections should be eligible for "gainsharing," that is,
retaining some portion of their collections.

Cross-references to Other NPR Accompanying Reports
Department of Justice, DOJ04: Improve Department of Justice Debt
Collection Efforts.

Endnotes 

1. U.S. Office of Management and Budget, "Status Report on Credit
Management and Debt Collection," Washington, D.C., August 1993, p. 1.

2. U.S. Office of Management and Budget, "Options to Improve Performance
for Federal Debt Collection," June 1, 1993. (Draft paper.)

3. Ibid., page 6.  

4. U.S. Department of Veterans Affairs, "Medical Care Cost Recovery,"
Department of Veterans Affairs Annual Report (Washington, D.C., 1992).

5. U.S. Office of Management and Budget, "Chief Financial Officer Annual
Report," Fiscal Year 1992, Note 2, Federal Tax Receivables, Washington,
D.C. 1993.

6. U.S. General Accounting Office, Financial Audit: Examination of IRS'
Fiscal Year 1992 Financial Statements (Washington, D.C.: U.S.  General
Accounting Office, June 1993).