Rural Development:

Rural Business-Cooperative Service Business Loan Losses

RCED-99-249: Published: Aug 25, 1999. Publicly Released: Sep 27, 1999.

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Pursuant to a congressional request, GAO provided information on the reasons for the losses being incurred by the Guaranteed Business and Industry Loan Program, focusing on the Rural Business-Cooperative Service's experience with business and industry guaranteed loans made during fiscal year (FY) 1994 through FY 1998 on which the Service paid losses.

GAO noted that: (1) the level of losses associated with the Rural Business-Cooperative Service's Guaranteed Business and Industry Loan Program has been relatively low in recent years, compared with the size of the entire loan portfolio; (2) nevertheless, the Service did not follow its own requirements in making guarantees on loans to 18 of the 24 borrowers, thereby contributing to the losses; (3) specifically, the loans to these 18 borrowers did not meet the Service's guarantee requirements because 11 loans were missing feasibility studies--thoughtful evaluations of prospective borrowers' business proposals--that Service officials should have obtained, 3 others had feasibility studies with significant flaws, and 4 were questionable, given the business risk and the potential for loss of collateral; (4) for the remaining six borrowers, the information GAO obtained from the Service's loan files was insufficient to pinpoint problems; (5) Service field officials said that they had not obtained feasibility studies and other documentation when information provided by lenders and borrowers about the businesses and business plans appeared to provide an adequate basis for their guarantee decisions; (6) they also said that they have been operating in an environment that occasionally fosters lending to riskier businesses in order to achieve the program's goals of maintaining or increasing jobs in rural areas and that they occasionally feel pressure to use all of the loan guarantee authority allocated to their offices; (7) GAO's findings are similar to the results of internal quality control reviews performed by the Service of its guarantee decisions in 13 states during FY 1997 and FY 1998; and (8) through these reviews, the Service found that its offices had made guarantee decisions without feasibility studies and other required documents, such as business plans.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: On January 13, 2000, USDA's Rural Business Cooperative Service issued an Administrative Notice to its state office directors clarifying when feasibility studies are required, and calling attention to the importance of carefully evaluating these studies prior to making lending decisions. The agency also stated that it plans to incorporate this instruction in the federal regulations for the program.

    Recommendation: The Secretary of Agriculture should direct the Rural Business-Cooperative Service to clarify when it expects feasibility studies to be obtained.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: USDA provided training for its Rural Business Service field staff in a nationwide meeting on August 3-4, 1999. The training session was attended by those responsible for administration of USDA's Business and Industry Guaranteed Loan Program, including USDA Rural Development State Office Directors, Program Directors, and Loan Specialists. The agency stated that during the training session, agency officials discussed the importance of feasibility studies for evaluating businesses that had applied for loans. This training session also included training in the evaluation of feasibility studies, and how to distinguish between a properly completed feasibility study and a business plan.

    Recommendation: The Secretary of Agriculture should direct the Rural Business-Cooperative Service to emphasize to its field offices the importance of carefully evaluating these studies before making lending decisions.

    Agency Affected: Department of Agriculture

 

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