Rural Development

The Guaranteed Business and Industry Loan Program guarantees the repayment of bank loans for almost any business project that creates or retains jobs in a rural area. As of June 1999, the program had more than 1,980 borrowers and $2.6 billion in outstanding loan principal and 130 delinquent borrowers who owed $167 million. GAO examined the Service's experience with business and industry guaranteed loans made during fiscal years 1994 through 1998 on which the Service paid losses. GAO found that the level of losses associated with the loan program has been relatively low in recent years, compared with the size of the entire loan portfolio.

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

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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