Request for Legal Opinion Concerning Public Works and Economic Development Act of 1965

GAO was requested by the Economic Development Administration (EDA) to give a legal opinion concerning the scope of the private borrower-private lender requirement set forth in the Public Works and Economic Development Act of 1965. EDA has the authority under the Act to guarantee up to 90 percent of guaranteed loans made to private borrowers by private lending institutions and is presently considering a proposal to allow the sale of the guaranteed portion of these loans in the secondary money market. Thus, the question arises as to whether the private lender requirement of the statute extends to subsequent parties to the loan transaction, such as secondary market purchasers. EDA contends that if it is unaware of any proposal to involve nonprivate lenders when it guarantees a loan, secondary market trading of such guarantees that might result in a purchase by a public lender should be permissible. However, GAO has held that the purchaser of a guaranteed note in the secondary market in effect becomes the lender of the guaranteed loan; therefore, whether or not the sale of a guaranteed note to the public lender is contemplated from the beginning of a transaction, once the public lender purchases the guaranteed note it becomes the source of the funds covered by the EDA guarantee. GAO held that the arrangement would allow EDA to indirectly do something that it could not do directly: guarantee a loan by a nonprivate lender. Accordingly, since public lenders are not eligible to participate as secondary market purchasers of EDA guaranteed loans, the proposal exceeds the authority granted to EDA by the Act.