Rural Housing Service:

Update of Data on High-Interest Direct Loans

RCED-00-214R: Published: Jun 7, 2000. Publicly Released: Jun 7, 2000.

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Stanley J. Czerwinski
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Pursuant to a congressional request, GAO followed up on its report on the high-interest direct loans made by the Rural Housing Service (RHS), focusing on whether a significant number of borrowers continue to pay above-market interest rates on direct single-family housing loans.

GAO noted that: (1) RHS makes both direct and guaranteed housing loans to rural Americans who generally cannot obtain credit elsewhere; (2) the direct loan program is designed to promote homeownership for rural households with low incomes by providing direct mortgage loans for single-family housing, and depending on the borrowers' incomes, interest subsidies to lower the monthly mortgage payments; (3) the direct loans are meant to provide temporary credit--borrowers are required to graduate from the direct loan program when their incomes are sufficient for them to afford private credit; (4) the guaranteed loan program is designed primarily to assist rural households with moderate incomes; (5) in guaranteeing a single-family housing loan, RHS agrees, in the event that a borrower defaults, to reimburse a commercial lender for an amount up to 90 percent of the principal advanced to the borrower; (6) because qualifying for private credit without a government guarantee is more difficult than qualifying with a guarantee, movement from a direct loan to a guaranteed loan is a logical progression for borrowers whose financial condition has improved but is still not sufficient to qualify for nonguaranteed private credit; (7) however, RHS is statutorily prohibited from refinancing direct single-family housing loans using the guaranteed program; (8) GAO found that as of September 30, 1994, 92,000 nonsubsidized direct single-family loans were held by borrowers who were paying interest rates of 9.5 percent or higher on an outstanding principal balance of $2.2 billion; (9) the prevailing rate for the guaranteed loan program at the time of GAO's 1994 report was 9.5 percent; (10) about 13,000 of these direct loans were carrying interest rates of 13 percent or higher; (11) as of May 31, 2000, over 65,000 nonsubsidized direct single-family loans were still being held by borrowers who were paying interest rates of 9.5 percent or higher on an outstanding principal balance of almost $1.5 billion; (12) about 9,100 of these direct loans carry rates of 13 percent or higher; (13) an additional 11,500 borrowers receive $50 or less in interest subsidies each month but still pay an effective interest rate of 9.5 percent or higher; (14) a significant number or borrowers continue to hold RHS single-family direct loans with interest rates at or above the 9.5 percent guaranteed rate that was prevailing at the time of the 1994 report; and (15) under today's prevailing guaranteed rate of 8.75 percent, the number of borrowers that would be eligible to refinance their loans using the guaranteed loan program would be even greater.

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