Credit Reform:

Key Credit Agencies Had Difficulty Making Reasonable Loan Program Cost Estimates

AIMD-99-31: Published: Jan 29, 1999. Publicly Released: Jan 29, 1999.

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Pursuant to a legislative requirement, GAO provided information on the Small Business Administration's (SBA), the Department of Education's, the Department of Housing and Urban Development's (HUD), the Department of Veterans Affairs' (VA), and the Department of Agriculture's (USDA) abilities to reasonably estimate the cost of their loan programs, focusing on: (1) whether they used practices identified by the Credit Reform Task Force as being effective in making these estimates; and (2) the status of the agencies' efforts to ensure that computer systems used to estimate the cost of credit programs are year 2000 compliant.

GAO noted that: (1) the problems agencies faced in making credit subsidy estimates as required by Federal Credit Reform Act and federal accounting standards stemmed largely from their lack of: (a) reliable historical data upon which to base estimates of future loan performance; (b) adequate systems that have the capability to track the required information; (c) sound cash flow models; and (d) appropriate policies and procedures for ensuring the accuracy of data used to generate the estimates; (2) SBA was one of the two agencies able to make reasonable estimates of the cost of its loan programs in its fiscal year (FY) 1997 financial statements, primarily because the agency maintained reliable records of historical loan performance data; (3) however, SBA made significant errors in calculating its reestimates of loan program costs; (4) these errors were adjusted for in SBA's draft financial statements, thereby allowing for an unqualified audit opinion on those statements; (5) Education was able to prepare reasonable credit program estimates for its FY 1997 financial statements based on information obtained through a significant data gathering effort from its guaranty agencies; (6) however, the audited estimates differed significantly from the estimates based on data from Education's database, which raises questions about the validity of Education's database; (7) HUD was unable to provide adequate supporting data for its FY 1997 financial statement estimates of its loan program costs, which resulted in a qualified audit opinion from HUD's Inspector General on those financial statements; (8) HUD has developed an action plan to address identified financial management issues related to the loan cost estimation process; (9) VA faced significant problems performing routine accounting for its loan programs including loss of accountability over certain loans transferred to an outside servicer; (10) USDA was unable to make reasonable financial statement estimates of its loan programs' costs because it had not maintained the necessary historical data and continued to use computer systems that were not appropriately configured to capture the data necessary to make such estimates; (11) the five key credit agencies also face the challenge of addressing the year 2000 problem related to systems used in the loan cost estimation process; and (12) according to agency officials, for the 10 loan programs reviewed, all of the mission critical systems are either year 2000 compliant or are scheduled to be compliant by March 31, 1999.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: USDA documented the regulatory requirements of most of its credit programs and revised or developed new cash flow models based on available data. As cash flow models were developed, regulatory and legislative requirements were considered to ensure that the cash flow models reasonably represented the cash flows of the credit programs based on the laws and regulations that govern them. As the new cash flow models were developed, documentation of the logic flow and mechanics of the models was prepared. In addition, sensitivity analysis was performed and documented for most of the material credit programs to identify the key cash flow assumptions. The sources of data and calculation methods were documented for these key cash flow assumptions. Procedures were also performed to assess the quality of data in the accounting systems supporting the key cash flow assumptions through statistical samples. All of these procedures and documentation should provide support for the key assumptions of the loan programs.

    Recommendation: The Secretary of Agriculture or his designee should ensure that the key cash flow assumptions in existing cash flow models are documented, including comparisons to program requirements.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: A CFO-led working group, with the assistance of outside contractors where necessary, has reviewed the various loan systems to ensure they are configured to capture data required to estimate and reestimate the costs of USDA's credit programs, as well as provide the data necessary for financial statement disclosure requirements. The CFO-led working group has also established a process to ensure that in the future loan systems are updated as necessary to continue to capture the required data.

    Recommendation: The Secretary of Agriculture or his designee should ensure that once all mission-critical systems are year 2000 compliant, computer systems are updated to capture the data necessary to reasonably estimate loan program costs.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Implemented

    Comments: An outside contractor was hired to analyze existing cash flow data for RD's housing direct loan programs to determine if the systems contain the appropriate data to reasonably estimate future loan performance and identify alternative data if necessary. CCC has developed and issued a statement of work to hire contractors to evaluate and document its cash flow models and identify potential streamlining procedures.

    Recommendation: The Secretary of Agriculture or his designee should consider hiring outside contractors to assist in gathering sufficient, relevant, and reliable data as a basis for credit program estimates.

    Agency Affected: Department of Agriculture

  4. Status: Closed - Implemented

    Comments: HUD completed the work with the independent contractors to accumulate sufficient, relevant, and reliable data to estimate the cost of credit programs for the 1998 FHA financial statements, which received an unqualified opinion. Where appropriate, the processes established for the 1998 audit are being institutionalized for future years' audit and budget activity. FHA will continue work with contractors in fiscal year 1999, to establish and document procedures for developing the necessary data.

    Recommendation: To help ensure that HUD is able to reasonably estimate the cost of its loan programs, the Secretary of Housing and Urban Development or his designee should complete efforts to work with independent contractors to accumulate sufficient, relevant, and reliable data to estimate the cost of credit programs.

    Agency Affected: Department of Housing and Urban Development

  5. Status: Closed - Implemented

    Comments: Comparison of actual to estimated data has been done as part of the effort to document the budget models and to complete the materials for the fiscal year (FY) 1998 audit, including reestimates. Efforts in FY1999 will be directed toward working with contractors to institutionalize the information and processes developed for comparing actual to estimated data for the 1998 audit.

    Recommendation: To help ensure that HUD is able to reasonably estimate the cost of its loan programs, the Secretary of Housing and Urban Development or his designee should implement plans to compare estimated cash flows to actual cash flow experience to validate the quality of estimates as part of the annual reestimation process.

    Agency Affected: Department of Housing and Urban Development

  6. Status: Closed - Implemented

    Comments: FHA was able to implement its revised reestimate approach to reasonably estimate the costs of its guarantee programs for its fiscal year (FY) 1999 financial statements, which received an unqualified audit opinion, in time to be included in its FY2001 budget submission.

    Recommendation: To help ensure that HUD is able to reasonably estimate the cost of its loan programs, the Secretary of Housing and Urban Development or his designee should implement its revised reestimate approach that will result in timely credit subsidy reestimates for both financial statements and budget submissions.

    Agency Affected: Department of Housing and Urban Development

  7. Status: Closed - Implemented

    Comments: FHA has completed major efforts in this area, including formal documentation of data for the budget models. Users' guides have been completed for the GI/SRI multifamily cash flow models and the MMI Fund cash flow model. Written policies and procedures have been developed and adopted by the agency, which include sources of data, documentation requirements and a formal supervisory review process that is focused on assumption calculations. Contractors assisted in these documentation efforts.

    Recommendation: To help ensure that HUD is able to reasonable estimate the cost of its loan programs, the Secretary of Housing and Urban Development or his designee should implement existing plans to develop written policies and procedures including a formal supervisory review process for estimating the cost of credit programs.

    Agency Affected: Department of Housing and Urban Development

  8. Status: Closed - Implemented

    Comments: VA engaged a contractor to construct a new model for estimating and reestimating the subsidy for direct and guaranteed loans. The contractor computed the estimates and reestimates for VA's Budget and VA's fiscal year 1999 financial statements. VA compared the estimated cash flows to reported actual cash flow experience to validate the quality of the estimates.

    Recommendation: Once VA's basic accounting issues are resolved, in order to correct the deficiencies that GAO identified in VA's direct and guaranteed loan program cost estimation processes, the Secretary of Veterans Affairs or his designee should compare estimated cash flows to actual cash flow experience to validate the quality of the estimates as part of the annual reestimation process.

    Agency Affected: Department of Veterans Affairs

  9. Status: Closed - Implemented

    Comments: VA developed an operating procedures guide for Central Office accounting and reporting operations, and a manual for credit reform budgeting that include a formal supervisory review process and coordinated approach between program, budget, and accounting staff for estimating the cost of credit programs.

    Recommendation: Once VA's basic accounting issues are resolved, in order to correct the deficiencies that GAO identified in VA's direct and guaranteed loan program cost estimation processes, the Secretary of Veterans Affairs or his designee should develop and implement written policies and procedures that include a formal supervisory review process and a coordinated approach between program, budget, and accounting staff for estimating the cost of credit programs.

    Agency Affected: Department of Veterans Affairs

  10. Status: Closed - Implemented

    Comments: In fiscal year 1999, VA used sensitivity analysis as a tool to identify key cash flow assumptions.

    Recommendation: Once VA's basic accounting issues are resolved, in order to correct the deficiencies that GAO identified in VA's direct and guaranteed loan program cost estimation processes, the Secretary of Veterans Affairs or his designee should use sensitivity analysis as a tool to identify key cash flow assumptions.

    Agency Affected: Department of Veterans Affairs

  11. Status: Closed - Implemented

    Comments: USDA made significant improvements with credit reform procedures, documentation, and timing of reestimates primarily due to a CFO-led working group that was organized to resolve the department's credit reform problems. The working group developed a detailed credit reform implementation plan which included procedures to (1) compare estimates to actuals, (2) resolve reestimate timing and frequency issues with OMB, and (3) develop written policies and procedures. The working group, which included members from OMB and the USDA IG, developed a process to prepare timely reestimates of USDA's credit programs for the financial statements and the budget; implemented written policies and procedures, including a coordinated approach between program, budget, and accounting staff, as well as a formal supervisory review process; and updated the estimating methodology to be based on actual historical loan performance that will also be used for reestimates. As this new methodology to estimate and reestimate the costs of USDA's credit programs was developed, estimated cash flows were compared to actual loan performance data to validate the process. As a result these and other accomplishments of the working group, USDA's IG removed the credit reform issue as a reason for the disclaimer of opinion on USDA's consolidated financial statements for fiscal year 2001.

    Recommendation: The Secretary of Agriculture or his designee should implement the action plan to address deficiencies in estimating the cost of loan programs in a timely manner, including: (1) comparing estimated cash flows to actual cash flow experience to validate the quality of the estimates as part of the annual reestimation process; (2) reestimating loan program costs timely and including them in the current year's financial statements and budget submissions; and (3) developing and implementing written policies and procedures that include a formal supervisory review process and a coordinated approach between program, budget, and accounting staff for estimating the cost of credit programs.

    Agency Affected: Department of Agriculture

  12. Status: Closed - Implemented

    Comments: In fiscal year 1999, VA's contractors developed the necessary data and completed the development of a model to estimate and reestimate the subsidy for the liability for loans sold with a guarantee. VA's liability for the guarantees was recorded in its financial statements.

    Recommendation: Once VA's basic accounting issues are resolved, in order to correct the deficiencies that GAO identified in VA's direct and guaranteed loan program cost estimation processes, the Secretary of Veterans Affairs or his designee should continue efforts, with the assistance of contractors, to create and use a model and develop the necessary data to calculate the liability for the guarantee on sold loans and record the related liability in the financial statements.

    Agency Affected: Department of Veterans Affairs

 

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