Federal Credit Policy on Guaranteed Loans Should Be Clarified and Enforced

RCED-83-22: Published: Nov 4, 1982. Publicly Released: Nov 4, 1982.

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GAO reviewed the effectiveness of Office of Management and Budget (OMB) Circular A-70 by measuring federal program compliance with the circular's basic principles that: (1) recipients of credit assistance should pay a fee for such assistance; (2) private lenders should share part of the risk on loans receiving guarantees; (3) agencies should prohibit excessive interest rates on guaranteed loans; and (4) guarantees should not be extended to tax-exempt obligations.

GAO reviewed 11 programs and found that 8 did not charge fees high enough to recover all of the program costs; programs increased the government's financial risk by millions by not requiring lenders to bear any risk on guaranteed loans; and 2 programs increased federal tax losses by guaranteeing tax-exempt obligations. The inconsistencies created by noncompliance with the circular's principles also created inequities because some lenders or borrowers receive the same federal assistance as applicants in other programs, but on more favorable terms. GAO found that inconsistencies between agencies, and even within different programs administered by the same agency, lowered the participation rate of the banking community and created a generally negative atmosphere around federal loan guarantees. As a result of OMB lack of emphasis on the circular and its principles, agency officials were generally not aware of it, and nearly all who were did not use it. Officials stated that centralized guidance would be helpful to them and that they could follow the circular's principles, but OMB would have to provide more leadership. OMB officials acknowledged the noncompliance but said that corrective action must be postponed further.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director, OMB, should reissue the circular to: (1) state directly the executive branch policies on charging guarantee fees, requiring lender coinsurance, controlling interest rates, and guaranteeing tax-exempt obligations, and amend it to include additional policy guidance as soon as practicable; (2) state assertively that agencies developing credit assistance legislation and agencies administering existing programs, where existing statutes permit, are required to follow the principles contained in the circular; and (3) provide sufficient emphasis on the circular to allow for effective oversight and enforcement. Should such reissuance be determined to be impractical at this time, as an interim step, OMB should send a memorandum to the heads of executive agencies and establishments providing policy guidance on the four principles discussed in this report.

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


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