Federal Financing Bank:

The Government Incurred a Cost of $2 Billion on Loan Prepayments

AFMD-89-59: Published: Aug 22, 1989. Publicly Released: Aug 22, 1989.

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Jeffrey C. Steinhoff
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Pursuant to a legislative requirement, GAO reviewed the Federal Financing Bank's (FFB) loan prepayments, focusing on the: (1) benefits that FFB lending provided and the procedures and conditions for prepaying FFB loans; (2) FFB borrowers' costs and benefits when they prepay their loans; and (3) prepayment conditions and alternative financing measures FFB should use to balance costs and benefits.

GAO found that: (1) FFB interest rates were consistently lower than those available in the private sector; (2) the FFB prepayment policy provided borrowers with flexibility and protected the government from incurring costs; (3) FFB accepted loan prepayments at their Treasury market value, since prepayments based on interest rates specified in loan agreements, rather than on Treasury's current borrowing rate, could result in an economic gain or cost to the government; (4) between 1985 and 1988, prepaid loans had book values totalling $13.3 billion, of which $8.5 billion was prepaid at book value, as Congress directed; (5) FFB lost about $2 billion, since these loans had Treasury market values totalling about $10.5 billion; (6) some FFB borrowers had loans with interest rates substantially higher than commercial rates due to the general decline in interest rates; (7) because borrowers appealed to policymakers for relief after FFB maintained that prepayments had to be made at the loans' Treasury market value, Congress passed legislation allowing certain borrowers to prepay loans at book value; and (8) to finance and account for the government's economic costs, FFB could use the funds generated from the administrative fees it charged borrowers or Congress could provide the programming agency or FFB with an appropriation to cover the prepayment costs.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress will probably not take action on this observation unless FFB loan prepayments become a major issue in the current administration. According to the FFB manager, bank loan prepayments have subsided considerably since the report was issued. Therefore, this recommendation should be closed out.

    Matter: In considering legislative proposals to allow selected FFB borrowers to prepay their loans at book value rather than at current Treasury market value, as called for in FFB policy, Congress should consider providing the programming agencies or the FFB with appropriations to cover the costs of authorizing loan prepayments at book value.


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