Legislation Needed To Establish Specific Loan Guarantee Limits for the Economic Development Administration

FGMSD-78-62: Published: Jan 5, 1979. Publicly Released: Jan 5, 1979.

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The business loan guarantee program of the Economic Development Administration (EDA) has operated for many years without specific statutory monetary limitations. Since its creation in 1965, EDA has guaranteed over $197 million in loans of which $131 million is outstanding as of spring 1978. Four of the unpaid loans, totaling $75 million, were made to one company which is experiencing financial difficulties. EDA does not have sufficient reserves available in the event of a default by that company. The fiscal 1979 Appropriation Act limits the amount of obligations for direct loans and guarantees to $75 million. Separate limits for loans and loan guarantees would strengthen congressional control as does the $75 million ceiling.

Since 1965, the size of EDA's guarantee program and the individual guarantees has greatly increased, with 60 percent of the entire program aiding two shipbuilding firms. Should two companies with larger loans or even one of the shipbuilding companies default, EDA may not have enough reserves to meet its commitment. Congressional control of EDA's loan guarantee program needs to be strengthened. The program has one obligation limit which Congress intended would control loans, but guarantees are not recorded as obligations when they are made. Congressional control could be strengthened by treating direct loans and guarantees separately. Obligation authority could be limited for direct loans, but loan guarantees could be limited by a total annual dollar amount authorized in a fiscal year. GAO believes that the amounts of individual guarantees should be limited and adequate reserves established.

Matter for Congressional Consideration

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: Congress should establish control over EDA's loan guarantee program by setting a permanent ceiling in the enabling legislation and/or by setting an annual ceiling in the appropriation act on the total amount of loans. Congress should also establish a limit on financial assistance to an individual borrower for loan guarantees, either by including restrictive language in EDA's appropriation act, or by amending its enabling legislation. The provisions could be such that guarantees in excess of the limit could be made with the approval of either the appropriations or legislative committees or both.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Commerce should direct the Head of EDA to annually reassess the reserve needs for potential loan guarantee losses and adjust the reserve accordingly.

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