Rural Utilities Service

Pursuant to a congressional request, GAO provided information on the Rural Utilities Service's (RUS) loan origination policies and procedures for making generation and transmission (G&T) loans, focusing on: (1) what RUS' loan origination policies and procedures are for making G&T loans and whether these policies and procedures are effectively designed to mitigate future loan losses to the government; and (2) whether these loan origination policies and procedures for G&T loans have been changed since fiscal year (FY) 1994 to prevent problems with the existing loan portfolio from occurring in the future.

GAO noted that: (1) RUS' loan origination policies and procedures for G&T loans are in RUS regulation 7 C.F.R. 1710 General and Pre-Loan Policies and Procedures Common to Insured and Guaranteed Electric Loans; (2) this regulation requires RUS to obtain, among other things, basic information for loan approval such as the borrower's ability to secure and repay the loan, borrower's financial ratios and projections, service area information, construction work plans, and a statement on pending litigation; (3) RUS summarizes its assessment of the borrower's loan application and recommends the loan for approval to RUS' loan committees; (4) once recommended by the loan committees, the loan request is forwarded to the Assistant Administrator, Division Director, or Administrator for approval; (5) once approved, the approving official certifies that the security for the loan is adequate; (6) while RUS' loan origination policies outlined in 7 C.F.R. 1710 are reasonably designed to mitigate future loan losses to the government and are generally consistent with banking industry standards, RUS lacks implementing procedures in certain key areas to carry out its policies for determining whether to make G&T loans; (7) RUS does not have implementing procedures on how to assess and approve the borrower's construction work plans and financial forecasts which must be prepared by the borrower to support the loan application; (8) guidance on how to document the loan assessment and recommendation that a loan be approved is also lacking; (9) internal training does not consist of a written curriculum, but rather, senior level staff provide on-the-job training to new staff responsible for various loan origination functions; (10) because RUS lacks implementing procedures to carry out its G&T loan origination policies in certain key areas, misinterpretation and inconsistent implementation of the loan origination policies could occur; (11) RUS' loan origination policies and procedures did not change significantly from FY 1994 through 1999; and (12) however, RUS stated that since FY 1994, it has made one change to its loan origination policies and procedures to mitigate future loan losses to the government.

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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