Credit Reform:

Case-by-Case Assessment Advisable in Evaluating Coverage and Compliance

AIMD-94-57: Published: Jul 28, 1994. Publicly Released: Jul 28, 1994.

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Pursuant to a congressional request, GAO reviewed the implementation of the Federal Credit Reform Act of 1990, focusing on whether: (1) the Government National Mortgage Association's (GNMA) budget proposal conformed to credit reform requirements; (2) credit subsidy reduction costs should be considered in determining total credit subsidy costs; (3) Farmers Home Administration (FmHA) rental assistance program costs should be added to the cost of the FmHA section 515 direct loan program; and (4) it is appropriate to exclude the credit activities of the Resolution Trust Corporation (RTC) and Federal Deposit Insurance Corporation (FDIC) from credit reform requirements.

GAO found that: (1) the GNMA budgetary treatment did not conform to all credit reform requirements in fiscal years 1992 through 1994 because GNMA did not use the guarantee date when it recorded transactions in credit financing; (2) it is appropriate for a credit program to capture the costs of a closely linked cross-subsidy program; (3) cross subsidies decrease borrower default by either increasing their income or decreasing their costs; (4) credit program subsidy costs may be understated if cross subsidies are not closely linked to these programs; (5) the FmHA section 515 program would not be affected if closely linked cross-subsidy program costs were included in the costs of related credit programs; (6) no cross-subsidy program in the 1994 budget meets the criteria to be considered closely linked to the 515 program; (7) a supplemental table showing the size and cost of cross-subsidy programs and their effect on the credit subsidy rate would provide decisionmakers with more complete data on programs that do not meet the closely linked criteria; (8) it is appropriate to exclude FDIC and RTC credit activities from credit reform requirements when their only purpose is to resolve and dispose of the assets of failed financial institutions; and (9) it would be appropriate to impose credit reform requirements on RTC and FDIC credit programs, since they fulfill other key objectives which do not always require RTC and FDIC to seek maximum returns in disposing of assets.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: OMB concurred with the GAO recommendation that including the costs of cross-subsidies would provide a better measure of the government's cost of extending credit, but has not yet proposed an amendment to the Credit Reform Act. In addition, given action on credit reform taken in 1997, GAO does not anticipate congressional action on this point.

    Matter: Congress may wish to consider amending the Credit Reform Act to include in the cost of credit programs the costs of closely linked cross subsidies.

  2. Status: Closed - Not Implemented

    Comments: RTC operations were absorbed into FDIC in December 1995. Changes in budgetary treatment to the two affordable housing programs are not anticipated.

    Matter: Congress may wish to consider amending the Credit Reform Act to exclude from credit reform requirements only those FDIC and RTC programs whose sole purpose is the resolution and disposition of the assets of failing and failed financial institutions.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: OMB and GNMA continue to discuss changes to the budgetary treatment of GNMA's credit programs. Recent discussions have included the need for cohort budgeting/accounting to enable GNMA to re-estimate the cost of outstanding credit. Current estimates show that GNMA's credit program will be fully in the financing account by the end of 1999. Therefore GAO's recommendation would not be relevant. However, GNMA's budget treatment for credit programs still does not satisfy credit reform requirements.

    Recommendation: To appropriately implement credit reform, the Director, Office of Management and Budget (OMB), should require GNMA to budget for guarantees using the issuance dates of its guarantees to determine whether the cost of the guarantee should be included in the financing account or the liquidating account.

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

  2. Status: Closed - Not Implemented

    Comments: OMB has considered including in the Budget Appendix supplemental information about the size and effect of cross-subsidies, but GAO believes it does not intend to do so.

    Recommendation: For cross subsidies that do not meet the criteria for being closely linked to a credit program, the Director, OMB, should include a supplemental table in the Budget Appendix for the associated credit programs showing, for each cross subsidy, the size, cost, and effect on the credit subsidy rate.

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


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