The Department of Agriculture lost $1.1 billion on direct loans made by the Farm Service Agency last year, according to a General Accounting Office report released Tuesday.

The Farm Service Agency, which provides credit to farmers and ranchers who cannot obtain funds at reasonable rates elsewhere, makes direct loans as well as government-guaranteed loans through commercial lenders. The agency lost $42 million on guaranteed loans, the GAO said.

As of Sept. 30, delinquent borrowers held $3.6 billion, or 34%, of the farm agency's outstanding principal on direct loans. That was down from about $4.6 billion, or 41%, in the previous year, the report said.

Just more than half of agency's losses on direct loans came from borrowers in four states: California, Mississippi, Texas, and Louisiana.

Some $280 million, or 4.4%, of the guaranteed loans were delinquent last year, up from $218 million, or 3.7%, in 1995. Borrowers from two states, Louisiana and Oklahoma, caused the highest losses on guaranteed loans.

The GAO, the investigative arm of Congress, noted that the Federal Agriculture Improvement and Reform Act of 1996 modified or eliminated risky Farm Service Agency lending policies, but the changes have not had enough time to take effect.

"However, we believe that they should go a long way to reducing the risk associated with the farm loan programs and to improving their operations," the GAO said.

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