Need To Improve Servicing of Direct Loans Under the Business Development Assistance Program

FGMSD-78-34: Published: May 15, 1978. Publicly Released: May 15, 1978.

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The Economic Development Administration (EDA) attempts to create permanent jobs in high unemployment areas by assisting businesses to expand or locate new facilities in affected areas. The assistance includes direct loans and guarantees of loans with private lending institutions and is administered primarily through six regional offices. Loan servicing is undertaken by regional offices to ensure loan repayment and detect weaknesses in the borrower's repayment ability.

As of June 30, 1977, EDA had about $306 million receivable on 439 loans and a contingent liability of $148 million on 46 loan guarantees. At that date, 29 percent of the loans outstanding were in arrears or renegotiated. This percentage could be reduced if loan servicing were improved to correct the following shortcomings: (1) a large proportion of borrowers were not promptly contacted when repayments were late; (2) field visits to borrowers were infrequent in spite of procedures which emphasize this activity; (3) borrowers' financial statements were not regularly obtained and analyzed; and (4) management and technical assistance was seldom offered to borrowers in difficulty. EDA officials stated that inadequate loan servicing resulted from greater emphasis on new loan application approval than on loan servicing.

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