Loan Asset Sales:

OMB Policies Will Result in Program Objectives Not Being Fully Achieved

AFMD-86-78: Published: Sep 25, 1986. Publicly Released: Sep 25, 1986.

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In response to a congressional request, GAO provided information on the Office of Management and Budget's (OMB) objectives and guidelines for agencies to follow in selling loan assets.

GAO found that OMB guidelines for loan asset sales: (1) require that all sales be made without future recourse to the federal government; (2) require that purchasers assume responsibility for collecting and servicing loan assets when such assets are sold; (3) would treat the loan asset sales proceeds as borrowings if sales are made with recourse to the government, which would be contrary to normal budgetary treatment of guarantees; and (4) will not assist in accurately measuring credit program subsidies, which is one of the program's objectives. GAO believes that: (1) the guidelines will not protect the government's best interest, since the government will not be maximizing net proceeds on the sale of certain loan portfolios; (2) the proposed budgetary treatment of loan asset sales with limited recourse does not reflect the actual and potential economic consequences of such sales, and is incorrect budgetary treatment; and (3) several of the requirements will result in overstating the subsidies associated with credit programs and, therefore, OMB will not fully achieve its objectives.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: OMB revised its loan asset sale and prepayment guidelines in OMB Circular A-129 to permit agencies to sell loans in a manner that results in the maximum net proceeds to the government. The revised guidelines will allow credit enhancements such as overcollateralization. The circular was revised on November 25, 1988.

    Recommendation: To fully maximize loan sale net proceeds and fulfill the objectives of its loan asset sale program, the Director, OMB, should revise OMB guidelines for sale of loan assets to permit agencies to sell loan assets on a structured basis, which would include some form of future recourse to the government, or other credit enhancement, and permit servicing of sold loans by an entity other than the purchaser.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  2. Status: Closed - Not Implemented

    Comments: This recommendation is being closed because it has been open over 2 years, and OMB has repeatedly stated that it will not change its position on this matter.

    Recommendation: To fully maximize loan sale net proceeds and to fulfill the objectives of its loan asset sale program, the Director, OMB, should classify, for budget purposes, the government's maximum contingent liability under limited-recourse loan sales as borrowings and the unencumbered sale proceeds as receipts.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  3. Status: Closed - Implemented

    Comments: In the Administration's Credit Reform Proposal for the 1989 budget, OMB has dropped loan sales as a requirement for measuring subsidies. Loan sales are considered one way of capturing subsidies, but are no longer mandatory. Justification for this decision will be included in the budget documents for the 1990 budget.

    Recommendation: The Director, OMB, should not implement the OMB-proposed policy for determining subsidies under the pilot loan assets sale program, but should revise the policy by considering the two methodologies discussed in this report. In addition, the Director should report to Congress on the method selected and include an appropriate justification for the selection.

    Agency Affected: Executive Office of the President: Office of Management and Budget

 

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