Federal Credit Policy on Guaranteed Loans Should Be Clarified and Enforced

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.

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.

Director: John H. Luke Team: General Accounting Office: Resources, Community, and Economic Development Division Phone: (202) 275-5091