Debt Collection Improvement Act of 1996

United States General Accounting Office

GAO

Testimony

For Release on Delivery
Expected at 10 a.m.
Wednesday, October 10, 2001

DEBT COLLECTION
IMPROVEMENT ACT OF
1996
Agencies Face Challenges
Implementing Certain Key
Provisions

Before the Subcommittee on Government Efficiency,
Financial Management and Intergovernmental Relations,
Committee on Government Reform, House of
Representatives

Statement of Gary T. Engel
Director, Financial Management and Assurance

GAO-02-61T

a

Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss our work on selected agencies’
implementation of certain key provisions of the Debt Collection
Improvement Act of 1996 (DCIA). Agencies have long had problems in
managing credit programs and collecting non-tax debts. As such, it is
essential that the government not only make and guarantee creditworthy
loans, but also put effective practices in place to collect amounts that are
owed. In this light, the DCIA, which was developed under the leadership of
this Subcommittee, was intended, among other things, to maximize
collection of billions of dollars of non-tax delinquent debt owed to the
government by requiring agencies to (1) notify Treasury of debts delinquent
over 180 days for purposes of administrative offset and (2) refer such debts
to Treasury for centralized collection action known as cross-servicing.
Moreover, to facilitate debt collection, the act also authorizes agencies to
administratively garnish the wages of delinquent debtors and bars
delinquent debtors from receiving federal financial assistance in the form
of certain loans, loan insurance, or loan guarantees until they resolve their
delinquencies.
My testimony today will cover selected agencies and focus on
(1) difficulties they have experienced identifying and referring eligible
debts to Treasury’s Financial Management Service (FMS) or a Treasury
designated debt collection center, (2) obstacles that have hampered
prompt referral of eligible debts, and (3) whether exclusions from referral
requirements were consistent with established criteria. Based on
information reported to Treasury on debt referrals, exclusions, and other
data, we focused our review on major programs at the Department of
Agriculture’s (USDA) Rural Housing Service (RHS) and Farm Service
Agency (FSA) and the Department of Health and Human Service’s (HHS)
Centers for Medicare & Medicaid Services (CMS).1 In addition, our review
covered the extent to which nine large Chief Financial Officers (CFO) Act
agencies use or plan to use administrative wage garnishment (AWG) to

1

On June 14, 2001, the Secretary of HHS changed the name of the Health Care Financing
Administration to the Centers for Medicare & Medicaid Services.

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collect delinquent federal non-tax debt.2 It also covered the advantages and
disadvantages of using national credit reporting agencies, the Treasury
Offset Program’s (TOP) database, and HUD’s Credit Alert Interactive Voice
Response System (CAIVRS) to promptly identify delinquent federal debtors
for the purpose of denying them federal financial assistance.
Let me first make a few overall comments about implementation of the
DCIA. We testified before this Subcommittee in June 2000 that, although
the DCIA was enacted in April 1996, FMS was still the only
governmentwide debt collection center, and that it had not yet fully
implemented the act’s cross-servicing provision.3 We emphasized that on a
governmentwide basis, the vast majority of reported debt delinquent over
180 days was being excluded by agencies from referral requirements under
exclusions allowed by the DCIA or Treasury. However, we cautioned that
the reliability of the amounts reported as excluded was not being
independently verified. We also stressed that agencies were not promptly
referring all eligible debts to FMS. The picture left with your
Subcommittee was that agency implementation would have to improve
vastly if the debt collection benefits of the DCIA were to be more fully
realized.
I am pleased to report that FMS is making progress in collecting delinquent
federal non-tax debt through TOP. As you know, TOP is a mandatory
governmentwide debt collection program that compares delinquent debtor
data to certain federal payment data. When a delinquent debtor record
matches a payment record, TOP recovers all or a portion of the delinquent
debt by offsetting some or all of the federal payment scheduled to be issued
to the debtor. During each of the last 3 years, FMS has reported collecting
over $1 billion of such debt with TOP by offsetting tax refund payments.
Tax refund offsets have been FMS’ most effective means of debt collection
and collections have increased, in part, as a result of systems changes the
agency implemented. For example, the TOP system can offset against both

2

The nine CFO Act agencies we included in our review are USDA, the Department of
Education, the Department of Energy, the Environmental Protection Agency (EPA), HHS,
the Department of Housing and Urban Development (HUD), the Small Business
Administration (SBA), the Social Security Administration (SSA), and the Department of
Veterans Affairs (VA). These agencies reported holding over 90 percent of the total
delinquent debt amounts reported by the 24 CFO Act agencies on their respective Treasury
Report on Receivables Due From the Public (TROR) as of September 30, 2000.

3

Debt Collection: Treasury Faces Challenges in Implementing Its Cross-Servicing
Initiative (GAO/T-AIMD-00-213, June 8, 2000).

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the primary and secondary taxpayer, where the previous tax refund system
could only offset against the primary taxpayer. In addition, the TOP system
can accept new debts or increased debt balances all during the year,
whereas the previous tax refund system could only accept them at the
beginning of the tax season.
While there has been important progress, our follow-up work at selected
agencies over the past several months has not allayed our concerns about
the priority agencies have placed on implementing the DCIA. As I will
highlight today, the agencies we reviewed have not taken effective actions
to ensure that all eligible delinquent debt is promptly referred to FMS or a
Treasury designated debt collection center for collection action. For
example,
• As of September 30, 2000, RHS had reported that it referred to TOP
$201 million of direct single family housing loans but had not referred
any amounts to FMS for cross-servicing primarily due to systems
limitations. Also, RHS’ reported delinquent direct single family housing
loans eligible for TOP may have been understated by about $348 million
because it did not report all amounts that were due and payable.
• FSA did not have an adequate process or sufficient controls to
adequately identify and report direct farm loans eligible for referral to
FMS as of September 30, 2000. In addition, a large portion of the
approximately $400 million of delinquent direct farm loans that became
eligible for TOP during calendar year 2000 was not likely promptly
referred because the agency refers debts to TOP only once annually
during December. Further, FSA did not refer co-debtors for the
$934 million of delinquent farm loans previously referred to TOP
because of systems limitations that had existed for years. Moreover, the
agency had referred only $38 million to FMS for cross-servicing because
it suspended cross-servicing referrals pending development and
implementation of its new cross-servicing policy.
• RHS and FSA have not referred to FMS for collection action any losses
on their guaranteed single family housing and farm loans, respectively,
even though they have experienced losses of about $132 million and
about $293 million, respectively, on such loans since the enactment of
the DCIA.
• CMS reported $4.3 billion of Medicare debt eligible for referral for
collection action as of September 30, 2000, that had not been referred.
Although CMS referred about $1.5 billion of this debt for collection
action through August 2001, the agency made the vast majority of the
referrals late in the year due to debt referral system problems, delays in

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issuing referral guidance to its contractors, and a lack of monitoring of
contractor referrals.
Moreover, agencies still have not utilized AWG as authorized by the DCIA
to collect delinquent non-tax debt even though experts have testified
before this Subcommittee that AWG can potentially be an extremely
powerful debt collection tool.4 Finally, at the present time, neither credit
bureau reports, the TOP database, nor CAIVRS provides a comprehensive
information source for federal credit agencies to use to identify all
delinquent debtors for the purpose of denying federal financial assistance.
Therefore, the effectiveness of the DCIA debtor bar provision is limited.
Simply stated, if the government is going to make significant progress in
collecting the billions of dollars of delinquent non-tax debt and preventing
delinquent debtors from obtaining additional federal financial assistance,
the debt collection provisions of the DCIA must be given a high priority by
agencies. This has not been the case at the agencies we reviewed as in
many cases the agencies are showing needed corrective actions years in
the future even though substantial amounts of eligible delinquent debt have
not been referred.
We performed our work primarily at RHS, FSA, and CMS. We conducted
interviews with agency officials responsible for the identification and
referral of eligible delinquent debts to FMS or a Treasury designated debt
collection center and reviewed pertinent policies, procedures, and reports
related to such debt referrals. We statistically selected and determined
whether loans that FSA had excluded from referral to FMS for collection
action as of September 30, 2000, were consistent with established criteria
dealing with bankruptcy, forbearance/appeals, foreclosure, and referral to
the Department of Justice (DOJ) for litigation. RHS was not able to provide
supporting documentation for certain loans it excluded from referral to
FMS for collection action as of September 30, 2000. This scope limitation
prevented us from determining whether such exclusions were consistent
with established criteria. As agreed to with staff of this Subcommittee, we
did not perform detailed testing on debts that had been excluded by CMS
from referral for collection action because of ongoing work in this area
being performed by HHS’ Office of Inspector General. We did not

4

Education has been garnishing wages of certain delinquent debtors since 1993 under
separate authority from that granted by the DCIA (Section 488A of the Higher Education Act
of 1965, as amended, 20 U.S.C. 1095a).

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independently verify the reliability of certain information provided to us by
RHS, FSA, and CMS (e.g., debts reported as over 180 days delinquent).
In addition, we surveyed nine large CFO Act agencies on their use and
planned use of AWG and their debt reporting practices. Although we
discussed with agency officials certain responses provided on the surveys,
we did not independently verify the reliability of all the information that
was provided. In addition, we conducted interviews with officials from
several national credit reporting agencies and HUD regarding credit bureau
reports and CAIVRS, respectively.
We also conducted interviews with FMS officials and officials of Treasury’s
designated debt collection center at HHS and reviewed pertinent
documents provided by these officials regarding agency debt referral
practices. We performed our work in accordance with generally accepted
government auditing standards from November 2000 to September 2001.

RHS’ Direct Single
Family Housing Loan
Program

RHS administers a Direct Single Family Housing (SFH) Loan Program to
help low-income individuals or households purchase homes in rural areas.
As of September 30, 2000, RHS reported having about $17 billion
outstanding in direct SFH loans. As shown in table 1, RHS reported
$383 million of direct SFH loans over 180 days delinquent including debts
classified as Currently Not Collectible (CNC) on its TROR as of
September 30, 2000. 5

5

CNC debts are debts the agency has written off for accounting purposes but has not
discharged. Collection action can still be taken on such debts.

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Table 1: RHS’ Direct Single Family Housing Loans
Debt amounts (in
millions of dollars)
Debts over 180 days delinquent including debts in CNC

Less: exclusions allowed by DCIA

$383

a

182

Debt eligible for Treasury offset

201

Debt referred for offset

201

Debt referred for cross-servicing
a

0

Exclusions were for bankruptcy, forbearance/appeals, and foreclosure.

Source: TROR fourth quarter 2000 (September 30, 2000).

RHS excluded $182 million of this delinquent debt from referral to FMS for
TOP and cross-servicing. In addition, RHS had not referred any debts to
FMS for cross-servicing as of September 30, 2000, based, in part, on an
exemption proposal which RHS stated, in its TROR as of the same date, had
been approved by Treasury. However, Treasury officials told us that
Treasury never approved a proposal to exempt RHS loans from crossservicing. Accordingly, opportunities to collect these loans through
Treasury’s cross-servicing program are being missed.

Support for Not Referring a
Significant Amount of
Delinquent Direct SFH
Loans Not Maintained

The DCIA requires federal agencies to refer all legally enforceable and
eligible non-tax debts that are more than 180 days delinquent to Treasury
for collection through administrative offset and cross-servicing.6 We found
that RHS did not maintain supporting documentation for direct SFH loans
it excluded from such referral as of September 30, 2000. Consequently, we
were not able to determine whether the agency’s exclusion of $182 million
of delinquent debt was based on relevant legislative and regulatory criteria.
FMS officials told us that it is their expectation that agencies would retain
the applicable data needed to justify not referring delinquent debt for
collection action. Furthermore, the Comptroller General’s Standards for
Internal Controls in the Federal Government states that all transactions

6

Federal agencies may, at their discretion, refer valid, legally enforceable debts for
administrative offset and cross-servicing that are less than 180 days delinquent.

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and other significant events need to be clearly documented and that the
documentation should be readily available for examination. 7

Systems Limitations
Hampered Referral Activity

According to RHS officials, since implementing a new automated
centralized loan servicing system in fiscal year 1997, RHS has been unable
to readily identify direct SFH loans that are eligible for referral to FMS for
cross-servicing. Essentially, the system does not contain sufficient data to
differentiate loans eligible for cross-servicing from those that are not.
Although RHS plans system enhancements for the third quarter of fiscal
year 2002, which the agency believes will facilitate loan identification for
cross-servicing, RHS officials advised us that relatively few referrals to
FMS will likely be made in the near term. While we were performing our
fieldwork, RHS began an interim process to manually identify such loans
eligible for cross-servicing. According to RHS’ debt referral plan, because
the interim process is tedious and labor intensive, only about 100-200 loans
will be referred per month to Treasury beginning in May 2001. RHS
officials said that all direct SFH loans eligible for TOP will have to be
reviewed for cross-servicing eligibility. RHS reported 23,032 direct SFH
loans eligible for TOP as of September 30, 2000. The agency intends to
refer about 30 percent of eligible direct SFH loans to cross-servicing in
fiscal year 2002.

Exemption Request Denied

According to RHS officials, nothing had been done prior to our review to
manually identify delinquent direct SFH loans for referral to FMS for crossservicing because the agency had requested a Treasury exemption from
cross-servicing for direct loans made under the SFH Loan Program. RHS
had requested that it be allowed to continue to internally service the loans
for up to 1 year after liquidation of the collateral, which, in some cases,
could be years after the loans became delinquent. Treasury officials told us
that Treasury had not approved the request, either formally or informally,
and stated that Treasury discouraged RHS from making the request, which
was not submitted to Treasury until November 2000. Treasury formally
denied RHS’ exemption request for the direct SFH Loan Program on May
14, 2001. The declination was based, in part, on the fact that similar loans
were being referred for cross-servicing by other agencies and RHS had not

7
Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, Nov.
1999).

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identified any new or unique collection tools applicable to direct SFH
loans.

RHS May Have Significantly
Understated Direct SFH
Loans Eligible for Referral

When a debtor becomes delinquent 91 days on an installment payment for a
direct SFH loan, RHS notifies the debtor via certified mail that the entire
debt balance is accelerated and is due and payable. As shown in table 1,
RHS reported $201 million of direct SFH loans as eligible for TOP as of
September 30, 2000. However, this amount may have been understated by
about $348 million because it only included the delinquent installment
portion of the loans. According to FMS, the entire accelerated balance of
the debt should be reported as delinquent and, absent any exclusions
allowed by the DCIA or Treasury, should be reported as eligible for referral
to FMS for collection as well.

FSA’ s Direct Farm
Loan Program

FSA provides, among other things, temporary credit to farmers and
ranchers who are high-risk borrowers and are unable to obtain commercial
credit at reasonable rates and terms. FSA reported having about
$8.7 billion in direct farm loans as of September 30, 2000, and as shown in
table 2, the agency reported about $1.7 billion of direct farm loans over 180
days delinquent including debts in CNC as of September 30, 2000.

Table 2: FSA’s Direct Farm Loans
Debt amounts (in
millions of
dollars)
Debts over 180 days delinquent including debts in CNC

$1,666

Less: exclusions allowed by DCIAa
Debt eligible for Treasury offsetb

732

Debt referred for offset

934

Debt referred for cross-servicing

934
38

a

The vast majority of the reported exclusions were for bankruptcy, forbearance/appeals, foreclosure,
and DOJ/litigation.

b

In addition, other exclusions from referrals to FMS for cross-servicing, including internal offset, were
reported by FSA as of September 30, 2000.
Source: TROR fourth quarter 2000 (September 30, 2000).

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FSA excluded substantial amounts of this debt from referral to FMS for
TOP and cross-servicing. In addition, FSA officials told us that only
$38 million was referred to FMS for cross-servicing as of September 30,
2000, because FSA suspended all cross-servicing referrals in April 2000
pending development and implementation of new cross-servicing
guidelines for the agency.

Effective Process and
Controls Lacking for
Determining Eligibility for
Referral of Direct Farm
Loans

FSA did not have a process or sufficient controls in place to adequately
identify direct farm loans eligible for referral to FMS. Certain types of
debts were automatically excluded from referral without any review for
eligibility. In other cases, FSA’s Program Loan Accounting System did not
contain information from the detailed loan files located at the FSA field
offices that would be key to determining eligibility for referral. In addition,
FSA did not have any monitoring or review procedures in place to help
ensure that FSA personnel routinely updated the detailed debt files.
Consequently, amounts of direct farm loans FSA reported to Treasury as
eligible for referral were not accurate.
Excluded amounts for bankruptcy, forbearance/appeals, foreclosure, and
DOJ/litigation totaled about $694 million, or about 95 percent of the
$732 million that was excluded from referral to FMS for TOP and crossservicing. Of this amount, $295 million was for DOJ/litigation and was
comprised of judgment debts. According to FSA officials, deficiency
judgments--court judgments requiring payment of a sum certain to the
United States--are eligible for TOP and should be referred to FMS.
However, FSA’s Finance Office in St. Louis automatically excluded all
judgment debts for direct farm loans from referral to FMS because
automated system limitations precluded staff from identifying deficiency
judgments. Our inquiries caused FSA officials to initiate a special project
in May 2001 to identify all deficiency judgment debts for direct farm loans
so that such debts could be referred to FMS.
Determinations as to whether direct farm loans are in bankruptcy,
forbearance/appeals, or foreclosure and, therefore, excluded from referral
to FMS, are made by FSA personnel in numerous FSA field offices across
the country. Personnel in the FSA field offices we visited did not routinely
update the eligibility status of farm loans in FSA’s Program Loan
Accounting System as was evident by the selected excluded loans we
reviewed. Using statistical sampling, we selected and reviewed supporting
documents to determine whether farm loans that selected FSA field offices
located in California, Louisiana, Oklahoma, and Texas had excluded from

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referral to FMS were consistent with established criteria dealing with
bankruptcy, forbearance/appeals, foreclosure, and DOJ/litigation.8 Based
on the results of our sample, we estimate that about 575, or approximately
one-half of the excluded loans in the 4 selected states, had been
inappropriately placed in exclusion categories by FSA as of September 30,
2000.9 Because of these numerous errors, we did not test other reported
exclusions from referral to FMS for cross-servicing, such as loans being
internally offset.
One of the most frequently identified inappropriate exclusions pertained to
amounts discharged in bankruptcy, which should not have been included in
delinquent debt. Fifty-two bankruptcies that we reviewed as part of our
sample had been discharged in bankruptcy court prior to September 30,
2000. In fact, many had been discharged several years prior to that date.
For example, one loan with a balance due of about $325,000 was reported
as a delinquent debt over 180 days and excluded from referral requirements
because of bankruptcy. However, a review of the loan file at the FSA field
office showed that a bankruptcy court discharged the debt in 1986 and,
therefore, the debt should not have been included in either the delinquent
debt or exclusion amounts reported to Treasury as of September 30, 2000.
According to Farm Loan Managers in some of the FSA field offices we
visited, they have not written off many direct farm loans discharged in
bankruptcy because making new loans has been a higher priority use of
their resources. In addition, FSA did not provide sufficient oversight to
help ensure that field office personnel adequately tracked the status of
discharged bankruptcies and updated the loan files and debt records in the
Program Loan Accounting System. Also, it is important to note that delays
in promptly writing off discharged bankruptcies not only distort the TROR
for debt management and credit policy purposes, but also distort key
financial indicators such as receivables, total delinquencies, and loan loss
data. This makes the information misleading for budget and management
decisions and oversight. Aside from erroneously inflating reported loans

8

Field offices in these four states serviced about $272 million, or about 39 percent, of the
total debts excluded from referral to FMS as of September 30, 2000, for bankruptcy,
forbearance/appeals, foreclosure, or DOJ/litigation.

9

We estimate that 48.5 percent plus or minus 15.7 percent of the population were
inappropriately reported as exclusions from referral to TOP. When projecting these errors
to the population of 1,187 loans, we are 95-percent confident that the errors in the
population are between 389 and 761 loans.

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receivables and delinquent loans, failure to process loan write-offs delays
reporting closed-out debt amounts to the Internal Revenue Service (IRS) as
income to the debtor.10

Referrals of Direct Farm
Loans for Cross-Servicing
Suspended

As previously mentioned, only $38 million of direct farm loans were
reported by FSA as having been referred for cross-servicing because the
agency suspended such referrals in April 2000 pending development and
implementation of a new policy to refer to FMS for cross-servicing only
debts where the 6-year statute of limitations has not expired. FSA issued
revised guidelines in July 2001 to incorporate the 6-year statute of
limitations and the agency is now in the process of reviewing loans at over
1,000 FSA field offices to determine eligibility for referral to Treasury under
the new policy. FSA plans to resume referrals to FMS for cross-servicing
by the end of calendar year 2001.
According to FSA officials, FSA decided to adopt the new policy because
they believed that FMS informed them that accounts for which the 6-year
statute of limitations had expired should not be referred for crossservicing. However, FMS officials told us that FMS had not provided such
guidance to FSA. FMS officials emphasized that FMS will accept debts that
are older than 6 years because, although the debts cannot be referred to the
DOJ for litigation, collection can still be attempted through other debt
collection tools such as referral to private collection agencies.

Co-Debtors Not Referred for
TOP

Even though FSA reported having referred $934 million of direct farm loans
to FMS for TOP as of September 30, 2000, the agency has lost and continues
to lose opportunities for maximizing collections on this debt because it
does not refer co-debtors. According to FSA officials, the vast majority of
direct farm loans have co-debtors, who are also liable for loan repayment.
However, FSA’s automated loan system cannot record more than one
debtor because the system modifications necessary to accept Taxpayer
Identification Numbers (TINs) for multiple debtors have not been made.
According to a FSA official, the need to have co-debtor information in the
system to facilitate debt collection was initially determined in 1986.
However, we were told that to date, higher priority systems projects have
10
The Federal Claims Collection Standards--which were last updated in November 2000--and
OMB in its Circular A-129 both require agencies, in most cases, to report closed-out debt
amounts to the IRS as income to the debtor.

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precluded FSA from completing the necessary systems enhancements to
allow the system to accept more than one TIN per debt. In other words,
although FSA recognized years ago the need to take action, the agency has
not considered this to be a high enough priority. According to FSA
officials, FSA has now incorporated this requirement in the new Farm Loan
Program Information Delivery System scheduled for implementation in
fiscal year 2005.

Eligible Debt Not Promptly
Referred to TOP

According to data provided by FSA officials, about $400 million of new
delinquent debt became eligible for TOP during calendar year 2000.
Although FSA officials stated that the debts became eligible relatively
evenly throughout the year, debts eligible for TOP are referred by FSA only
once annually, during December. Consequently, a large portion of the
$400 million of debt likely was not promptly referred when it became
eligible. As we have previously testified, industry statistics have shown
that the likelihood of recovering amounts owed decreases dramatically
with the age of delinquency of the debt.11 Thus, the old adage that “time is
money” is very relevant for referrals of debts to FMS for collection action.
FSA officials told us that the agency agrees that quarterly referrals could
enhance possible collection of delinquent debts by getting them to Treasury
earlier and has plans to start a quarterly referral process in fiscal year 2003.

RHS and FSA Have Not
Referred Losses on
Guaranteed Loans to
FMS

Since the DCIA was enacted in April 1996, RHS and FSA have also missed
opportunities to potentially collect millions of dollars related to losses on
guaranteed loans. As of September 30, 2000, neither RHS nor FSA treated
such losses resulting from the SFH Program and the Farm Loan Program,
respectively, as non-tax federal debts. Consequently, neither agency had
policies and procedures in place to refer such losses to Treasury for
collection through FMS’ TOP or cross-servicing programs.
Guaranteed SFH loans and farm loans, as well as related losses, have been
significant since the inception of the guaranteed programs. The RHS
guaranteed SFH program has been expanding in recent years. The
outstanding principal due on the guaranteed SFH portfolio grew from
about $3 billion in fiscal year 1996 to over $10 billion as of September 30,
2000, and RHS has paid out losses of about $132 million on the guaranteed

11

GAO/T-AIMD-00-213, June 8, 2000.

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SFH program since fiscal year 1996. The outstanding principal due on
guaranteed farm loans was about $8 billion as of September 30, 2000, and
FSA has paid out about $293 million in losses since fiscal year 1996.
In January 1999 and June 2000, USDA’s Office of Inspector General (OIG)
first reported that RHS’ and FSA’s guaranteed losses, respectively, were not
being referred to Treasury for collection. The OIG recommended that both
agencies recognize the losses as federal debt and begin referring such debt
to FMS for collection.
Although RHS has recently initiated action to begin developing policies for
referring losses on guaranteed loans to FMS for collection action in the
future, its efforts to make necessary regulatory and policy changes have
not been fully completed resulting in continuing missed opportunities to
potentially collect losses on guaranteed loans. FSA, on the other hand, has
recently initiated action to begin implementing new policies for referring
losses on all new guaranteed loans to FMS for collection action. Because
these guaranteed loan programs are significant to RHS and FSA, the
agencies’ development as well as implementation of policies and
procedures to promptly refer eligible amounts to Treasury for collection
action is critical.

CMS’ Medicare
Program

Most of CMS’ debts stem from overpayments made by its 55 claims
administration contractors to Medicare providers and beneficiaries under 2
programs--Part A, Hospital Insurance, and Part B, Supplemental Insurance.
Because of the ongoing business relationship with providers, the
contractors are able to collect most Medicare debt by offsetting subsequent
Medicare payments. However, for debts for which offset is not
accomplished, the unpaid balances not collected within 180 days
delinquent are subject to the debt referral requirements of the DCIA.
As shown in table 3, CMS reported that about $6.4 billion of delinquent
Medicare debt was eligible for referral for collection action as of
September 30, 2000.

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Table 3: CMS’ Medicare Debts
Debt amounts (in
millions of dollars)
Debts over 180 days delinquent including debts in CNC
a

$6,604

Plus: other (unfiled cost reports)

1,591

Less: bankruptcy, appeals, litigation

1,809

Debt eligible for referral for collection action

6,386

Debt referred for collection action

2,046

a

Certain Medicare institutional providers (MIPs) are paid interim amounts throughout the year based
on historical service to Medicare beneficiaries. These MIPs are required to file cost reports each year
that show actual costs incurred to provide Medicare services so that CMS can determine whether the
MIPs have been overpaid or underpaid. MIPs that do not submit cost reports owe CMS the entire
amount they received from the agency during the year. Because CMS does not recognize amounts
associated with unfiled cost reports greater than 180 days delinquent as receivables for financial
reporting purposes, it adds such amounts to the debts over 180 days delinquent that are reported on
the TROR.
Source: Medicare Trust Fund TROR for fourth quarter 2000 (September 30, 2000).

Of the $6.4 billion of debt eligible for referral, CMS reported that about
$4.3 billion of debt had not been referred to Treasury or a Treasury
designated debt collection center.12 Non-Medicare Secondary Payer (MSP)
debt, which is primarily related to cost report audits, comprised about
$2.6 billion of the debt not referred. The remainder was comprised of MSP
debt, which occurs when Medicare pays for a service that subsequently is
determined to be the responsibility of another payer.13
CMS’ goal was to refer $2 billion of such debt in fiscal year 2001 and the
remainder in fiscal year 2002. According to documents provided by HHS’
Program Support Center (PSC), a Treasury designated debt collection
center,14 CMS has referred to the PSC about $1.5 billion in fiscal year 2001

12
Based on our review of CMS’ TROR as of September 30, 2000, all of the $4.3 billion of
eligible debt that had not been referred was reported as eligible for referral to TOP. In
addition, of the $6.4 billion, CMS reported that about $3 billion was eligible for referral to
FMS for cross-servicing and about $1.8 billion of such debt had not been referred.
13

MSP debts include certain cases in which beneficiaries (1) have other health insurance
coverage provided by their employer or their spouse’s employer, (2) have occupational
injuries or illnesses that would be covered by workers’ compensation, or (3) have injuries
which are covered by liability insurance or a settlement arising from an accident.
14

In 1999, Treasury designated the PSC a debt collection center for MSP debts and unfiled
cost report debts.

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through August 31, 2001. However, for reasons we will discuss, the vast
majority of these referrals were not made until late in the fiscal year.
In September 2000, we reported that CMS had not fully implemented the
DCIA. CMS had implemented pilot projects to begin referring Medicare
debts delinquent over 180 days to the PSC.15 Five contractors participated
in the non-MSP pilot project and 15 contractors in the MSP pilot project.
Under the pilot projects, the contractors were responsible for sending
DCIA intent letters to debtors up to 6 years delinquent indicating that
nonpayment would result in referral of the debt to a Treasury designated
debt collection center. Once referred, the PSC was then responsible for
reporting the debts to FMS for TOP and referring certain debts for crossservicing. However, we reported that under these pilot projects,
contractors referred only large-dollar-value, aged Medicare debts while
leaving out a large amount of debt. In addition, we reported that collection
prospects for large-dollar-value aged debts are much less than for newer
debts involving smaller amounts. Thus, we recommended that CMS
immediately refer all Medicare debts to the PSC as soon as they become
over 180 days delinquent and were determined to be eligible, and refer the
backlog of eligible debt as quickly as possible.

Suspension of Debt Referral
System Hampered Referrals
of Non-MSP Debts

Although CMS experienced some success in referring non-MSP debts to the
PSC under its non-MSP pilot project, problems with its debt referral system
and late guidance to contractors on debt referral thwarted efforts to refer
such debt. Almost all of the $2 billion of debt that had been referred to the
PSC as of September 30, 2000, was comprised of such debts. However,
about $2.6 billion in non-MSP debt had not been referred. CMS’ referrals of
non-MSP debt were limited during the first 9 months of fiscal year 2001
mainly because the agency suspended the debt referral system in
November 2000. A CMS official responsible for non-MSP debt referrals
stated that the agency suspended the debt referral system to identify and
correct numerous discrepancies found in the system’s data (e.g., duplicate
debts, differences in debt amounts between debt tracking systems, and
debt referral systems) and the placement of additional edits in the system
so that these types of errors would not occur in the future. CMS resumed
referring non-MSP debts to the PSC through the debt referral system in
June 2001.
15
Medicare: HCFA Could Do More to Identify and Collect Overpayments
(GAO/HEHS/AIMD-00-304, Sept. 7, 2000).

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CMS’ suspension of its debt referral system operations not only limited the
five contractors that participated in the non-MSP pilot from referring debts
to the PSC but also significantly delayed CMS from bringing all of its
contractors into its debt referral program. In addition, late guidance to
contractors also contributed to delayed referrals. Initially, CMS intended to
have all of its contractors referring non-MSP debts to the PSC by October
2000. However, the agency did not issue program memoranda to each of its
contractors providing them updated instructions for identifying and
referring non-MSP debts to the PSC until April 2001.
In its guidance, in response to our recommendation in September 2000,
CMS expanded the criteria for referring non-MSP debts to include Part B as
well as Part A debts and lowered the referral threshold from $600 to $25.
Subsequent to making the debt referral system operational and expanding
the referral requirements to all contractors, CMS referred, through
August 31, 2001, about $1.4 billion of non-MSP debts to the PSC.
CMS officials stated that the limited amount of non-MSP debt referrals
through the first 9 months of the fiscal year was not a significant concern to
them because they have a goal of $2 billion of referrals for fiscal year 2001,
and they intend to meet that goal by the end of the fiscal year. A CMS
official recently informed us that this fiscal year goal was met. However, as
previously mentioned, the prompt referral of delinquent debts is critical
because the likelihood of recovering amounts owed decreases dramatically
with the age of delinquency of the debts.

Several Factors Contributed
to Little Progress in
Referring MSP Debts

CMS’ eligible MSP debt totaled about $1.8 billion, which was about 40
percent of the approximately $4.3 billion of Medicare debt that had not
been referred for collection as of September 30, 2000. Although CMS began
referring MSP debts to the PSC in March 2000, the PSC’s records indicate
that CMS had referred only about $51 million, or 3 percent, as of August 31,
2001. This is particularly troubling since CMS was taking no other active
collection actions on these debts.16
Limited contractor efforts, coupled with inadequate monitoring of
contractor performance by CMS, contributed to the slow progress in
referring MSP debts. None of the three large contractors we reviewed that
16

For most MSP debts, contractors were only required to send initial demand letters to the
employer and/or insurance company and follow up on any inquiries from them.

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participated in the MSP pilot project promptly identified all eligible MSP
debts and/or referred those debts to the PSC. 17 For example, one
contractor held $255 million of Part A MSP debt over 180 days delinquent
as of September 30, 2000. This contractor reported initiating the
identification and referral process for only about $33 million, or about 13
percent, of this debt. The contractor official responsible for MSP debts
stated that the contractor was under the impression that it needed to only
make two file queries in February 2000 covering debts incurred from March
1997 through August 1998 to fulfill its requirements under the pilot project.
However, CMS documentation indicated that the pilot project was to cover
all MSP debts that were no more than 6 years old and CMS officials
responsible for MSP debts stated that they had never instructed the
contractor to limit its file queries.
Another contractor held about $61 million of Part A MSP debt over 180
days delinquent as of September 30, 2000. The contractor official
responsible for MSP debts stated that the contractor believed that the MSP
pilot project ended in August 2000, and as such did not perform any
reviews of its MSP debt portfolio to identify additional MSP debts to refer
between September 2000 and December 2000. Moreover, the contractor’s
records indicated that about $6.2 million, or approximately 48 percent, of
the $12.8 million of debts for which it had sent DCIA intent letters prior to
September 2000 had not been referred to the PSC. The contractor official
responsible for MSP debts could not readily provide an explanation for why
these debts had not been referred for collection action.
In addition, CMS did not develop and implement policies and procedures
for monitoring the contractors’ referral of MSP debts. Consequently, CMS
did not monitor the extent to which contractors referred specific MSP
debts to the PSC and did not identify specific contractors, such as those
mentioned above, that were not identifying and referring all eligible debts
so that it could take prompt corrective action. The Comptroller General’s
Standards for Internal Control in the Federal Government states that
17

We reviewed the debt referral processes at four of the larger Medicare contractors. The
Medicare contractors were selected based on the size of their debt portfolios and their
participation in the pilot projects. The contractors we reviewed had $2.8 billion of debt,
representing about 39 percent of all debts at the contractors. Three of the four contractors
participated in the pilot project for MSP debts and two of the four contractors participated
in the pilot project for non-MSP debts. The three contractors we reviewed that participated
in the pilot project for MSP debts combined held about $357 million of Part A MSP debts or
about 37 percent of the total Part A MSP debts over 180 days delinquent at CMS as of
September 30, 2000.

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internal control should be designed to assure that ongoing monitoring
occurs in the course of normal operations. It should be performed
continually and ingrained in the agency’s operations.18

Some Action Taken to Get
MSP Debt Referrals Back on
Track

In May 2001, CMS issued a Program Memorandum to each of its
contractors that required them to identify delinquent MSP debts and refer
the debts to the PSC. Although issued 8 months after our September 2000
recommendation to do so, CMS expanded the criteria for selecting MSP
debts for referral to include Medicare Part B debts, as well as Part A debts.
The required dollar threshold for referral will be reduced in phases from
$5000 to $25 so that the contractors will eliminate the backlog of higher
dollar debt as well as refer the current debts so that another backlog is not
created. The CMS Branch Manager stated that the memorandum was not
issued sooner, in part, because CMS had to respond to contractor concerns
about needing additional funding to automate their respective debt referral
processes. However, the manager stated that after much consideration,
CMS concluded that referrals could be done manually and that seeking
additional funding for such referrals would likely cause further delays in
referring MSP debts to the PSC.
In response to our work, CMS officials stated that they began to review
MSP debt referrals at selected contractors. In addition, the CMS Branch
Manager for MSP stated that the 10 CMS regional offices would in the
future assume a more active role in ensuring that the contractors promptly
refer eligible MSP debts to the PSC. However, CMS has not yet formalized
a written strategy that includes precisely how contractor monitoring will be
performed.

CMS Missed Opportunities
to Collect Certain MSP
Debts Through TOP

Missing information has also slowed collection efforts. According to a PSC
official, a recent evaluation on PSC’s performance in collecting certain
types of debt found that only $13.9 million, or less than 40 percent, of the
$36 million of MSP debt CMS contractors referred to the PSC in fiscal year
2000 could be sent to TOP. Other debts could not be sent to TOP for
collection because they lacked TINS. TINS are necessary for FMS to match
delinquent debts with federal payments to be offset.

18

GAO/AIMD-00-21.3.1.

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According to PSC and CMS officials responsible for debt collection, no
written requirements were in place to help ensure that the Medicare
contractors, the PSC, or the PSC’s private collection agency obtained TINs
for all MSP debts referred for collection. The PSC official stated that the
PSC began to send letters to the debtors in August 2001 requesting TINs so
that the debts can be referred to TOP and are also discussing with CMS
officials how to effectively obtain TINs for MSP debts in the future.

Lack of Complete and
Accurate Debt Information
Hampers CMS’ Debt
Referral Monitoring

CMS will need to effectively monitor the debt referral practices of its 55
contractors to help ensure that all eligible Medicare debts are promptly
identified and referred for collection, but it lacks a centralized database for
all MSP debts at its various contractors. Therefore, the agency cannot
effectively monitor the extent to which its various contractors promptly
identify and refer the debts to the PSC for collection. Although CMS is in
the process of developing a system that is to include a database of all MSP
debts, CMS plans to phase the system in at the contractors, and the system
is not scheduled to be fully implemented until fiscal year 2007.
In addition, CMS has identified problems with its contractors maintaining
accurate debt information in its non-MSP debt tracking system, which is
critical for monitoring contractor debt referral practices. CMS performed
Contractor Performance Evaluations (CPEs) on 25 contractors and found
that 19 of the contractors were not adequately updating information in the
agency’s debt tracking system for non-MSP debt. For five of these
contractors, CMS considered the problems to be significant enough to
require a written performance improvement plan.
Our work at the two selected contractors involved in the non-MSP pilot
project corroborated CMS’ own findings. During the non-MSP pilot project,
CMS periodically sent the two pilot contractors we reviewed a listing of
eligible debts from the agency’s debt tracking system for possible referral
to the PSC. Of the $1.3 billion of debt CMS selected in its debt listings for
the two non-MSP pilot project contractors we reviewed, the contractors’
personnel determined that $289 million, or about 23 percent, was actually
ineligible for referral due to bankruptcy, appeals, or fraud. In addition, at
one of the two non-MSP pilot project contractors we reviewed, we
identified $21 million of debt misclassified as bankruptcy on the debt
tracking system and therefore excluded from the referral requirements.

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Because these debts were actually dismissed from the bankruptcy
proceedings, they should have been reported as debt eligible for referral.19
It is also important to note that CMS’ systems for debt tracking do not
currently have the capability to provide information as to whether its
contractors are promptly entering non-MSP debts into the debt referral
system after they mail intent letters. We noted at one of the two non-MSP
pilot project contractors we reviewed that CMS did not identify $5.2 million
of debts that were pending referral for at least 9 months. In response to our
work, CMS officials stated that they are in the process of modifying the
debt tracking system so such monitoring will be done in the future.
Moreover, because CMS’ Medicare debt comprises a significant portion of
delinquent debt governmentwide, such debt must be reported accurately if
the governmentwide debt information is to be useful to the President, the
Congress, and OMB in determining the direction of federal debt
management and credit policy. The eligible debt amounts reported by CMS
to Treasury as of September 30, 2000, were not reliable. As previously
discussed, certain contractors did not update their debt tracking systems
for non-MSP debts. These tracking systems are the same ones used by
CMS in determining the exclusion amounts for bankruptcy and appeals. In
addition, CMS inappropriately excluded $149 million of non-MSP debts that
had been referred to CMS regional offices for collection.20 Also, CMS
officials stated that CMS did not report any exclusion amounts for MSP
debts. We noted that certain MSP debts were involved in litigation but no
exclusions for litigation were included for such debts in the report to
Treasury. In response to our work, CMS officials stated that CMS no longer
reports the debts referred to regional offices as exclusions and is in the
process of identifying and reporting exclusion amounts for MSP debts.

Problems Noted In CMS’
Debt Referral Strategy

Finally, although CMS has issued Program Memoranda to each of its
contractors instructing them to refer non-MSP and MSP debts, we

19

The contractor did not update its internal systems for $8 million of these debts and thus
was not pursuing any collection action on these debts after the dismissal. For the remaining
$13 million, the contractor was pursuing collection action but did not properly update the
tracking system.

20

Prior to the DCIA referral process, contractors were required to transfer receivables to the
regional offices for collection.

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identified the following issues relating to the agency’s current debt referral
strategy.
• CMS chose as its first priority the referral of about $500 million of
eligible non-MSP debts stemming from unfiled cost reports. CMS’
Technical Advisor for debt collection stated that CMS focused on these
debts because they involved high dollar amounts. However, the priority
placed on referring such debts does not appear to coincide with
prospects for collecting the debts, as the historical collection rate
associated with such debt has been almost nonexistent. For example, of
the $547 million of unfiled cost report debt that was referred through
fiscal year 2000, the PSC collected only about $9,000. This low
collection rate is due, in part, to the fact that such debt is often adjusted
downward significantly, or even eliminated, upon submission of a cost
report by the provider. 21
• In February 2001, CMS issued guidance to its contractors to
methodically terminate collection action or close out MSP debts
delinquent more than 6 years and 3 months.22 Because CMS will close
out these debts, they will not be reported to FMS for TOP, which is FMS’
most effective debt collection tool. 23 The CMS branch manager for MSP
stated that she was not aware of any assessment performed to
determine the expected dollar amount of the closed-out debts. CMS had
already approved about $86 million of MSP debts for close-out at the
contractors we reviewed. About $85 million of these debts were less
than 10 years delinquent, and thus could still be referred to PSC for

21

Although unfiled cost report debts are referred to TOP, the main goal of the PSC and its
private collection agency for these types of debts is to resolve them by getting the providers
to submit cost reports. If the PSC or its private collection agency is successful, the cost
report is sent to CMS to determine if a Medicare overpayment actually exists.

22
CMS officials stated that the 6-year, 3-month criterion was chosen because debts could not
be litigated by DOJ for collection action beyond 6 years.
23

According to documents provided by Treasury, it has collected over $1 billion of federal
non-tax debt during each of the last 3 calendar years through TOP by offsetting tax refund
payments. This by far is more than that collected by any other of FMS’ debt collection tools.
In addition, Treasury has found that the collection rate for the small amount of MSP debt
that has been reported to TOP is about 10.5 percent, which is higher than the average rate of
TOP collections.

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reporting to TOP.24 The CMS branch manager for MSP stated that
collection efforts on older debts are not cost effective. However, CMS
officials could not provide any documentation to support the assertion
that it was not cost effective to attempt to collect older MSP debts with
TOP.
• The Federal Claims Collection Standards--which were last updated in
November 2000--and OMB in its Circular No. A-129 require agencies, in
most cases, to report closed-out debt amounts to the IRS as income to
the debtor. CMS has not yet established a process, including providing
authorization to the PSC, to report closed-out MSP debt amounts to the
IRS. CMS officials stated that CMS and its Office of General Counsel are
currently discussing the reporting of closed-out MSP debts to the IRS.
In addition, while the recently issued Program Memoranda cover referral
requirements for most of CMS’ Medicare debts, the memoranda did not
cover all Medicare debts including the following types.
• MSP Liability: MSP liability debts cover accidents, malpractice, and
other non-Group Health Plan debts where Medicare is not the primary
payer.
• Part A Claims Adjustments: Part A claims receivables are created by an
adjustment of a previously paid claim. Some reasons for claims
adjustments are duplicate processing of charges and/or claims, payment
of noncovered items and services, or incorrect billing. These debts are
not tracked on the CMS debt tracking system. These debts are generally
offset from subsequent Medicare payments, and thus no further
collection action is needed. However, there are no requirements for
Medicare contractors to perform any other collection action on these
debts, such as the issuance of a demand letter, should subsequent
Medicare payments not be available for offset.
CMS was not able to provide a dollar amount for such types of debts over
180 days delinquent. However, as of September 30, 2000, we found that the
four contractors we reviewed held about $9.6 million of MSP liability debts
and $10.7 million of debt related to Part A claims adjustments. CMS

24

Except for certain types of debts, 31 U.S.C. 3716(e)(1) provides that administrative offset
is available for claims that have not been outstanding for more than 10 years. 31 C.F.R. 285.2
(d)(1), provides that TOP is available to collect non-tax debts referred within 10 years after
the agency’s right of action accrued.

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officials stated that CMS intends to refer MSP liability debts as well as Part
A claims adjustments to the PSC in the future.

Most Agencies Have
Not Used AWG to
Collect Delinquent
Debt

The DCIA authorizes both federal agencies that administer programs that
give rise to delinquent non-tax debts and federal agencies that pursue
recovery of such debts, such as FMS, to administratively garnish up to 15
percent of a debtor’s disposable pay until the debt is fully recovered.25
None of the nine CFO Act agencies we surveyed used AWG as authorized
by the DCIA to collect delinquent non-tax debt as of the date of completion
of our fieldwork, over 5 years after the DCIA went into effect. Together
these agencies reported holding about $40 billion of delinquent non-tax
debt as of September 30, 2000, including $23 billion in consumer debt,26
which is typically comprised of debts by individuals, many of whom are
employed.27 This is not to imply that AWG could be used to collect all such
consumer debt because circumstances such as bankruptcy or appeals
could limit the application of this debt collection tool.
Agencies identified various reasons for the delay in implementing AWG,
including the need to focus priorities on the mandatory provisions of the
DCIA and develop the required regulations or administrative hearing
procedures to implement AWG. This is disappointing in light of the large
population in the country’s labor force and the fact that debt collection
experts testified before this Subcommittee in 1995, prior to the enactment
of the DCIA, that AWG can be an extremely powerful debt collection tool,
as the mere threat of AWG is often enough to motivate debtor repayment.

Treasury’s Role in AWG

Treasury issued regulations for AWG in May 1998 and agency guidance for
issuing wage garnishment orders in November 1998 and February 1999.
25

Disposable pay means that part of the debtor’s compensation (including, but not limited
to, salary, bonuses, commissions, and vacation pay) from an employer remaining after the
deduction of health insurance premiums and any amounts required by law to be withheld.

26

The agencies held over $25 billion in debts classified as CNC, which was not broken out by
consumer and commercial debts on the agencies’ TRORs. Although CNC debts are written
off by the agencies for accounting purposes, AWG could be applicable to significant
amounts of such debts.

27

Consumer debt is more likely to be subject to AWG because the debtor is often an
individual who is employed. Certain commercial debts could involve individual debtors,
guarantors, or co-debtors and AWG may be applicable to such debtors.

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The regulations are silent regarding when agencies can initiate AWG in the
collection cycle. According to these regulations, prior to initiating AWG, an
agency must give the debtor 30 days notice that includes, among other
things, an opportunity to receive a hearing concerning the existence or
amount of the debt or the terms of the proposed repayment schedule under
the garnishment order. In addition, the regulations specify that agencies
must issue garnishment orders to employers within specified timeframes
that depend on whether the debtor responded to the notice in a timely
manner.28 Of course, before garnishment orders can be sent, the debtor’s
employer must be identified and located.
According to FMS, it has been working with its private collection agency
(PCA) contractors to incorporate AWG into its cross-servicing program.
On April 26, 2001, the PCAs were provided with the AWG PCA Operations &
Procedures Manual, and in May 2001, the PCAs received the contract
modification, which authorizes them to begin to use AWG once they sign
and return the modification. Under FMS’ procedures, the PCAs will be
responsible for locating the debtor’s employer if not already identified;
requesting FMS’ approval to send AWG notices to debtors; and obtaining
garnishment orders, signed by FMS, to send to employers. FMS has
requested all agencies that refer debts for cross-servicing to formally
authorize FMS to use AWG as part of cross-servicing.

Future Implementation of
AWG by Federal Agencies

Although none of the nine CFO Act agencies we surveyed were using AWG
as authorized by the DCIA, all these agencies except EPA told us that they
intend to implement this debt collection tool within the next 5 years. EPA
stated that it is unsure whether it will implement AWG because most of its
debts are commercial debts and the current volume of individual debts
does not support using AWG.29 Education, HHS, SBA, and SSA indicated
that they plan to implement AWG themselves, while USDA, Energy, HUD,
and VA indicated that they plan to rely solely on FMS to implement AWG as

28

According to Treasury regulations, the agency shall send a withholding order to the
debtor’s employer within 30 days after the debtor fails to make a timely request for a hearing
(i.e., within 15 business days after the mailing of the notice), or, if a timely request for a
hearing is made by the debtor, within 30 days after a final decision is made by the agency to
proceed with garnishment.
29

EPA’s commercial debts are comprised of debts issued under the Superfund program that
provides federal clean-up authority and funds to address problems posed by abandoned or
uncontrolled hazardous waste sites.

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part of cross-servicing, including identifying the debtors’ employers and
sending notices and garnishment orders.30
According to agency responses to our survey and follow-up discussions
with agency officials, HHS plans to implement AWG under the DCIA
authority by the end of the calendar year 2001, SBA after March 2002,
Energy after April 2002, Education during fiscal year 2002, and SSA in fiscal
year 2003. The other three agencies we surveyed that are planning to
implement AWG had not established specific dates for implementing AWG.
Of the nine agencies we surveyed, only HUD, SBA, and SSA had a written
plan for implementing AWG. SSA provided a written implementation plan
for AWG that addresses the major milestones that must be accomplished as
well as a project scope agreement that outlines how the process will work.
Our review of the other plans provided by HUD and SBA showed that they
represented little more than a general timeline for AWG implementation
rather than a clear description and strategy for how the agency will actually
perform AWG or when AWG will be fully implemented. For example, the
two plans do not include the types of debts that will be subject to AWG or
the policies and procedures for administering AWG. Further, none of the
plans identified the processes the agencies will use to conduct hearings.
Consequently, it is not clear when these agencies will be able to fully
incorporate AWG into their debt collection processes.

Education Has Successfully
Used Wage Garnishment
Under Separate Authority

Education has been garnishing wages of certain delinquent debtors since
1993 under separate authority from that granted by the DCIA.31 Under this
authority, Education may garnish debtors’ wages up to 10 percent of
disposable pay to collect defaulted student loans. According to Education,
since the agency started garnishing wages, the collection of defaulted
student loans has increased dramatically, and the agency has reported
using wage garnishment to collect over $306 million of principal and
interest on defaulted student loans for fiscal year 1997 through March 2001.
Education uses its PCAs to perform collection activities, which include
locating debtors and their employers. However, Education directly sends

30

Education and HHS stated that they would authorize FMS to perform AWG for certain
debts referred for cross-servicing, while SBA and SSA stated that debts referred for crossservicing would be eligible for AWG.

31

Section 488A of the Higher Education Act of 1965, as amended, 20 U.S.C. 1095a.

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the official garnishment documents and orders to the employers. In 1999,
authority to access the National Directory of New Hires (NDNH), which is
maintained by HHS’ Office of Child Support Enforcement (OCSE), was
expanded from delinquent child support debt to also include defaulted
student loans.32 The NDNH includes information from state and/or federal
agencies on employers’ new hires, quarterly wages, and unemployment
insurance.33 Education officials stated that, going forward under the DCIA,
no changes are planned regarding when AWG is initiated during the
collection cycle and that Education will continue to send garnishment
orders to employers.34 The officials also stated that prior to implementing
AWG under the DCIA, Education must, among other things, publish a
public notice.

Certain Factors Could Limit
FMS’ Use of AWG

Although FMS’ incorporation of AWG into the cross-servicing program
would undoubtedly improve its collection success and make the FMS
collection program more comprehensive, certain factors could limit its use.
First, all delinquent debt reported by agencies as eligible for cross-servicing
is not currently being promptly referred to FMS. Second, as of the date of
completion of our fieldwork, none of the nine CFO Act agencies we
surveyed had given FMS authorization to use AWG as part of crossservicing.
Although debt referred for cross-servicing was not reported to Treasury
separately by consumer and commercial debt, the four agencies of the nine
CFO Act agencies we surveyed that plan to rely exclusively on FMS for
AWG implementation (i.e., USDA, Energy, HUD, and VA) together reported
having referred only $288 million of about $690 million of all types of debt
that were reported as eligible for cross-servicing as of September 30, 2000.35

32

Section 453 of the Social Security Act, as amended, 42 USC 653(j).

33

The purpose of the NDNH is to provide a national repository of employment and
unemployment insurance information that will enable State Child Support Enforcement IVD agencies to be more effective in locating noncustodial parents; establishing child support
orders; and enforcing child support orders, especially across state lines.

34

Certain administrative debts that total less than one-half of 1 percent of Education’s total
delinquent debt amount will be eligible for AWG at FMS through cross-servicing.

35

According to FMS’ Performance Summary Report for July 2001, only 63 percent of debt
reported by federal agencies as eligible for cross-servicing governmentwide as of
September 30, 2000, had been referred to FMS.

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As discussed previously, the USDA agencies we reviewed, RHS and FSA,
have not identified and promptly sent debts to FMS for cross-servicing.
Consequently, if AWG were to have been attempted using only those
delinquent debts reported as referred for cross-servicing for fiscal year
2000, substantial amounts of delinquent debt would not have been subject
to this debt collection tool.
Moreover, agencies relying on FMS to conduct AWG must first authorize
FMS to perform AWG as part of its cross-servicing program after
establishing the required hearing procedures and publishing the required
regulations. As of the date of completion of our fieldwork, according to
FMS, only two small agencies not included in our review, the Railroad
Retirement Board and the James Madison Foundation, have provided FMS
the authority to use AWG as part of cross-servicing. In addition, although
most agencies support the use of AWG, according to FMS, the agencies are
concerned about being able to handle the hearings that debtors may
request. It is important to note, however, that the DCIA does not require
hearing officials to be independent of the agency and certain agencies can
provide hearing services for a fee. For example, VA provides hearing
services to other federal agencies on federal salary offset for about $100
per hearing and, according to a VA official, the agency anticipates a similar
fee to provide AWG hearings. Moreover, Education’s experience for
defaulted student loan debt is that relatively few debtors request a hearing
compared to the number of AWG notices sent.36

36

In fiscal year 2000, Education issued 90,658 Notices of Intent and only 8,921 debtors, or
about 9.8 percent, requested a hearing.

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Comprehensive
Information Source
For Denying Federal
Financial Assistance Is
Lacking

Current law bars certain delinquent federal non-tax debtors from obtaining
federal financial assistance in the form of federal loans, loan insurance, or
loan guarantees until the debtor resolves the delinquency.37 This debtor bar
provision does not expire as the debt ages, and it applies even if the
creditor agency has suspended or terminated collection activity on the
debt.38 Thus, it can be used to bar such assistance for indefinite periods.
For purposes of denying federal financial assistance, a debt is in delinquent
status if it has not been paid within 90 days of the payment due date.39
During the hearing on DCIA implementation held by this Subcommittee in
June 2000, concerns were raised that there were federal non-tax debtors
who were delinquent on more than one federal debt. To help ensure that
federal financial assistance is denied to delinquent debtors as required by
the DCIA, federal credit agencies must have access to delinquent debtor
information that (1) includes all debtors delinquent 90 days or more on
federal non-tax debts, and (2) is maintained and updated until the
delinquency is resolved under Treasury regulations. Although credit

37

Section 3720B of title 31, United States Code, as amended by Section 845(a) of the
Agriculture Appropriations Act, FY 2001, Public Law No. 106-387 (2000), bars delinquent
federal non-tax debtors from obtaining federal financial assistance in the form of federal
loans, loan insurance, or loan guarantees, except for disaster loans or a marketing loan or a
loan deficiency payment under subtitle C of the Agricultural Market Transition Act.
According to Treasury regulations, for the purpose of denying federal financial assistance, a
person’s delinquent debt is resolved only if the person (1) pays or otherwise satisfies the
delinquent debt in full; (2) pays the delinquent debt in part if the creditor agency accepts
such part payment as a compromise in lieu of payment in full; (3) cures the delinquency
under terms acceptable to the creditor agency in that the person pays any overdue
payments, plus all interest, penalties, late charges, and administrative charges assessed by
the creditor agency as a result of the delinquency; or (4) enters into a written repayment
agreement with the creditor agency to pay the debt, in whole or in part, under terms and
conditions acceptable to the creditor agency.

38

According to Treasury regulations, for the purpose of denying federal financial assistance,
a debt is not in delinquent status if (1) the person seeking federal financial assistance has
been released by the creditor agency from any obligation to pay the debt, or there has been
a determination that such person does not owe or does not have to pay the debt; (2) the
debtor is the subject of, or has been discharged in, a bankruptcy proceeding, and if
applicable, the person is current on any court authorized repayment plan; or (3) the
existence of the debt or the delinquency of the debt is being challenged under an ongoing
administrative appeal and the appeal was filed by the debtor in a timely manner.

39

Treasury has established 90 days delinquent as the trigger for denying federal financial
assistance because it (1) allows sufficient time for debts to be referred to credit bureaus,
and (2) is consistent with standard lending practices which classify a loan as nonperforming at 90 days past due.

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bureau reports, FMS’ TOP database, and CAIVRS each contains certain
information on delinquent federal non-tax debtors, for reasons we will
discuss, none of them currently provides such all-inclusive and permanent
data that could serve as an adequate data source for successfully barring
future financial assistance to those currently delinquent or who did not
meet their obligations in the past. In general, the constraints relate to
scope of reporting, adequacy of the data for this purpose, and the fact that
data are subject to being routinely purged from these data sources after a
specified number of years. In view of these constraints, we continue to be
concerned about delinquent federal non-tax debtors obtaining federal
financial assistance.

Credit Bureau Reports

The DCIA requires federal agencies to report consumer and commercial
non-tax debts to credit bureaus.40 Related Treasury guidance states that
federal agencies should report consumer debts monthly and commercial
debts quarterly. Credit bureau reports include critical information for the
debtor bar provision, including the number of days a debt is delinquent and
whether the debtor is involved in bankruptcy.41 As such, credit bureau
reports are a relatively good information source for identifying certain
delinquent federal non-tax debtors. However, the information that credit
bureaus are currently able to provide is limited for the purpose of denying
federal financial assistance because (1) certain agencies do not report all
non-tax debt that is 90 days delinquent, which is the trigger associated with
the bar provision; and (2) by law, certain adverse credit information can be
retained and reported by credit bureaus for only 7 years.
In response to our survey of nine CFO Act agencies, which together
reported holding about $40 billion of delinquent non-tax debt as of
September 30, 2000, eight of the nine agencies indicated that they did not
report to credit bureaus about $9.8 billion of their delinquent debt. Over
$5.2 billion of the debt was not reported to credit bureaus because it is
exempted from the credit bureau reporting requirement by statute;
however, this is Medicare debt, and it is subject to the delinquent debtor

40

31 U.S.C. 3711(e).

41

As previously mentioned, according to Treasury regulations, a debt is not delinquent for
purposes of denying federal financial assistance if the debtor is the subject of, or has been
discharged in, a bankruptcy proceeding.

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bar provision.42 In addition, about $3.4 billion is not reported because the
debts are guaranteed loans made by USDA’s Commodity Credit
Corporation to foreign governments. Agency officials stated that reporting
foreign debt to credit bureaus would serve no useful purpose and,
therefore, would not be cost effective. Other reasons cited by the agencies
for not reporting delinquent debt included (1) lack of automated capability
or system limitations to report to credit bureaus and (2) the validity of the
debt could not be firmly established.
Seven of the nine CFO Act agencies we surveyed indicated that they rely on
FMS to actually report certain debts to credit bureaus as part of crossservicing.43 However, we noted that, as of September 30, 2000, these seven
agencies together reported about $1.4 billion of debt eligible for crossservicing but had referred only about $330 million to FMS. Consequently, a
significant amount of delinquent debt is not likely being captured by credit
bureaus, which limits federal credit agencies’ use of credit bureau reports
to identify delinquent federal non-tax debtors for the purpose of denying
federal financial assistance.
The problem with relying on FMS to report delinquent debts to credit
bureaus as part of cross-servicing is that the debts would typically not be
reported until well beyond the 90-day delinquency trigger for denying
federal financial assistance. Agencies are not required to refer eligible
debts to FMS for cross-servicing until they are delinquent over 180 days.
Once FMS receives the debts, in order to give debtors notice of credit
bureau reporting and an additional opportunity to repay their debts, FMS
waits at least 30 days for commercial debts and 60 days for consumer debts
before reporting these debts to credit bureaus. Based on the reported debt
referral practices of the seven agencies we surveyed that indicated they
rely on FMS to report certain debts to credit bureaus, debts would seldom,
if ever, be referred to FMS for cross-servicing in sufficient time for FMS to
report the debts to credit bureaus at 90 days delinquent. Moreover, as
discussed previously, we have testified before this Subcommittee that
many debts at FMS for cross-servicing were delinquent over 4 years when
they were initially referred by federal agencies.

42

Medicare debt is exempted by 31 U.S.C. 3701(d) from the credit bureau reporting
requirements imposed by 31 U.S.C. 3711(e). However, Section 3701(d) does not exclude
Medicare debt from the debtor bar provision in 31 U.S.C. 3720B.

43

Two of the nine agencies we surveyed responded that they do not rely on Treasury’s crossservicing for reporting any of their debts to credit bureaus.

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Aside from the fact that not all delinquent federal non-tax debts are
reported to credit bureaus, it is important to note that, under the Fair
Credit Reporting Act, adverse credit information for consumer debts can
generally only be reported by credit bureaus for up to 7 years. Therefore,
credit agencies cannot rely on such reports to identify debtors with older
delinquent consumer debts for the purpose of denying federal financial
assistance. Further, we noted that one of the nine agencies we surveyed
indicated that it requests the removal of certain debtors from credit
bureaus when the agency discharges debts, even though discharged debts
do not meet Treasury’s criteria for debt resolution for the purpose of
denying federal financial assistance.

FMS’ TOP Database

FMS’ TOP database is currently not available to agencies to identify
delinquent debtors for the purpose of denying federal financial assistance.
FMS is designing a new Internet-based program, known as the Barring
Delinquent Debtors Program, to assist agencies in identifying delinquent
debtors. The program will allow agencies to initiate a search of the TOP
database to determine whether applicants for direct or guaranteed loans
owe delinquent federal non-tax debt. Currently, FMS anticipates that the
new program will be implemented during fiscal year 2002. Various legal
and technical issues may influence implementation of the Barring
Delinquent Debtors Program, including making the data available to
(1) appropriate agency personnel and (2) authorized private lending
institutions involved in federal lending activities, while maintaining
systems and data security.
Ostensibly, the TOP database could provide federal credit agencies with
pertinent information about delinquent debtors for the purpose of denying
federal financial assistance. The TOP database includes the date
delinquency began for each debt; therefore, the number of days a debt is
delinquent can be readily determined. In addition, FMS allows agencies to
continually update their debt information in the TOP database.
The TOP database’s downside as an information source for identifying all
delinquent federal non-tax debtors for the purpose of denying federal
financial assistance is that a significant amount of delinquent debt eligible
for TOP is not promptly reported to FMS. Specifically, as of September 30,
2000, the nine agencies we surveyed reported referring to FMS only about
$24 billion of about $28 billion of debt eligible for TOP as of September 30,
2000. It is also important to note that debts that meet the criteria for at
least one exclusion from referral to TOP, debts in foreclosure, are

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nevertheless considered to be delinquent debts for the purpose of denying
federal financial assistance. Therefore, debts in foreclosure, although
delinquent debts for the debtor bar provision, would not be eligible for
referral to TOP. Six of the nine agencies we surveyed reported having
collectively about $1 billion of debts in foreclosure as of September 30,
2000. Such debts were excluded from TOP eligibility.
In addition, agencies are not required by the DCIA to report eligible debts
for administrative offset until they are over 180 days delinquent. This is
well beyond the 90-day trigger for the purpose of denying federal financial
assistance.
Moreover, debt information in the TOP database lacks permanence for the
purpose of denying federal financial assistance. Generally, debt
information can be maintained in the TOP database for only up to 10
years.44 In addition, TOP does not maintain debt information on debts that
agencies discharge because agencies are prohibited from taking further
collection action on them when they are reported to the IRS as income.
Further, we noted that four of the nine agencies we surveyed indicated that
they request the removal of certain debts from TOP when the debts are
written off. Therefore, given the lack of permanence of the non-tax debt
information in the TOP database, agencies could not rely solely on such
information to identify all debtors with certain older delinquent non-tax
debts for the purpose of denying federal financial assistance. According to
Treasury officials, Treasury does not plan to alter the type of information
currently maintained in the TOP database to include discharged debts or
debts over 10 years delinquent.

CAIVRS

Currently, CAIVRS has limitations as an information source for identifying
delinquent non-tax debtors for the purpose of denying federal financial
assistance. First, agencies are not required to report delinquent debts to
CAIVRS. Only five of the nine agencies we surveyed indicated that they
report certain of their delinquent debts to CAIVRS. Specifically, these five
agencies indicated that they report to CAIVRS about $23 billion, or about 58
percent, of the $40 billion of total delinquent debt the nine agencies
reported holding as of September 30, 2000. Second, CAIVRS contains
limited information on delinquent debts. For example, CAIVRS does not
44

The statute of limitations for administrative offset is 10 years for most federal non-tax
debt.

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include the date of delinquency or the number of days the debt is
delinquent, which is critical for denying federal financial assistance under
the authority of the DCIA. Also, each agency that reports debts to CAIVRS
can use its own discretion as to how long debts stay in the system. For
example, three of the five agencies that we surveyed which report debts to
CAIVRS indicated that they remove certain debts from CAIVRS at the time
they are written off, and all five of these agencies indicated that they
remove certain debts at the time they are discharged.

Delinquent Child
Support Obligors

Another issue that may eventually have to be considered in implementing
the debtor bar provision involves delinquent child support obligors. We are
not aware of any governmentwide legal authority that expressly authorizes
agencies to deny federal financial assistance in the form of loans, loan
insurance, or loan guarantees to individuals owing past-due child support.45
However, proposed legislation, H.R.866, the Subsidy Termination for
Overdue Payments Act of 2001, would, if enacted, generally preclude
agencies from providing federal financial assistance to an applicant
without first obtaining a self-certification that the applicant is not more
than 60 days delinquent in the payment of any child support obligation, or if
so, is in compliance with an approved repayment plan.
Going forward, if an additional means beyond self-certification is
contemplated to identify delinquent child support obligors for the purpose
of denying federal financial assistance, it is important to note that only two
of the three aforementioned information sources we reviewed--credit
bureau reports and FMS’ TOP database--contain information on delinquent
child support obligors. In addition, a single credit bureau may not have
information for all delinquent child support obligors and, as previously
discussed, information in the TOP database is not currently available to
agencies for the purpose of denying federal financial assistance.

45

Section 4(f) of the Small Business Act, as amended, 15 U.S.C. 633(f), requires applicants
for financial assistance under the act to certify that they are not more than 60 days
delinquent in child support payments. In addition, Executive Order No. 13019 advises
federal agencies that federal financial assistance to child support obligors subject to
administrative offset should be denied to the extent permitted by law.

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All states are required to report certain delinquent child support obligations
to credit bureaus.46 An official from HHS’ OCSE told us that none of the
states have requested a waiver from this requirement. However, OCSE has
not audited the states’ credit bureau reporting activities and does not know
if the states report to the large national credit bureaus, as there is no
requirement for them to do so. Based on our review of information
provided by three national consumer credit bureaus, all states are not
reporting child support obligors to all of these credit bureaus.47 Therefore,
the accessibility of complete information on persons with delinquent child
support obligations could be limited for federal credit agencies.
Also, all states are required to participate in tax refund offset as a means of
collecting delinquent child support. On behalf of the states, OCSE sends
delinquent child support information to FMS for inclusion in the TOP
database each week.48 According to FMS, the TOP database includes child
support debt from all 50 states. According to FMS officials, once the
Barring Delinquent Debtors Program is available to federal credit agencies
for the purpose of identifying delinquent federal non-tax debtors,
information on delinquent child support obligors in the TOP database will
also be available.
In summary, as we have discussed, agencies have not demonstrated a sense
of urgency in integrating certain provisions of the DCIA into their debt
collection processes. Many challenges lie ahead for agencies to
successfully implement such provisions of the act. As a result, until these
provisions are fully implemented, agencies will continue to miss
opportunities to collect billions of dollars of delinquent federal non-tax

46

Section 466(a)(7) of the Social Security Act, as amended, 42 U.S.C. 666(a) (7) requires
states to report periodically to consumer credit bureaus the name of any noncustodial
parent who is delinquent in the payment of support and the amount of overdue support
owed. According to OCSE officials, each state sets its own criteria for reporting thresholds.

47

We included Equifax, Experian, and Trans Union in our review of consumer credit
bureaus, and Dun & Bradstreet and Experian in our review of commercial credit bureaus.
Treasury recommends these credit bureaus in its Memorandum of Understanding with
federal agencies regarding reporting delinquent debt for collection action.

48

According to Treasury regulations, states include delinquent child support obligations for
tax refund offset that are over $150 and delinquent for 3 months or longer for Temporary Aid
to Needy Families (TANF) and over $500 for non-TANF. According to OCSE officials,
although states are required to update their delinquent child support information monthly,
most update more frequently because updated information enables them to potentially
collect more through offset.

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debt and the risk of delinquent federal debtors obtaining additional federal
financial assistance is increased. To assist in addressing such challenges,
we will be separately providing recommended actions to the respective
agencies.
Mr. Chairman, this concludes my prepared statement. I would be pleased
to respond to any questions you or other Members of the Subcommittee
may have.

Contacts and
Acknowledgments

For information about this testimony, please contact Gary T. Engel at
(202) 512-3406. Major contributors to this testimony include Arthur W.
Brouk, Richard T. Cambosos, Michael D. Hansen, Michael S. LaForge,
Kenneth R. Rupar, Linda K. Sanders, Tanisha D. Stewart, Gladys E. Toro,
and Matthew F. Valenta.

(901827)

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