Borrower Loan Prepayments:

OMB Guidelines Need to Be Strengthened

AFMD-89-19: Published: Jan 11, 1989. Publicly Released: Feb 15, 1989.

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In response to a congressional request, GAO evaluated certain aspects of loan prepayment programs that allowed borrowers to pay off their loans at less than the amounts owed, focusing on: (1) statutory authority for prepayment programs; (2) program costs and benefits; (3) differences between loan prepayment programs and collateralized loan sales; (4) the ability of the programs to achieve credit reform objectives; and (5) the adequacy of the Office of Management and Budget's (OMB) guidelines for loan prepayment requirements.

GAO reviewed five fiscal year 1987 loan prepayment programs and found that: (1) agencies had statutory authority to accept less than the unpaid principal balances when borrowers prepaid their loans; (2) in some cases, prepayment program costs exceeded their financial benefits; (3) the government lost from $51 million to $80 million by allowing prepayments based on commercial rates, rather than Treasury interest rates; (4) collateralized loan asset sales achieved the administration's credit management reform objectives better than the loan prepayment programs; (5) agencies primarily worked with their own staffs and were not exposed to private sector credit management policies, practices, and techniques; (6) loan prepayment and loan asset sale net proceeds are incomparable because loan sales involved disposition of a package of loans, while the prepayment programs involved limited, potentially more creditworthy borrowers that elected to prepay their loans; and (7) the OMB prepayment requirements guidelines failed to address methodologies for determining the costs and benefits of prepayment and loan sale programs or when prepayments or asset sales should be used.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: On November 25, 1988, OMB revised its requirements for Managing Federal Credit Programs, Circular A-129, to require agencies to complete appropriate cost benefit analyses.

    Recommendation: The Director, OMB, should revise OMB loan asset sale guidelines to require agencies to complete appropriate cost-benefit analyses to determine: (1) what monetary and nonmonetary benefits can be received from loan asset sales and prepayment programs; (2) when the government should hold loans to term or dispose of them through asset sales or prepayments; and (3) which disposal method, sales or prepayments, should be used if the loans are not held to term.

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


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