Federal Financing Bank

The Government Incurred a Cost of $2 Billion on Loan Prepayments Gao ID: AFMD-89-59 August 22, 1989

Pursuant to a legislative requirement, GAO reviewed the Federal Financing Bank's (FFB) loan prepayments, focusing on the: (1) benefits that FFB lending provided and the procedures and conditions for prepaying FFB loans; (2) FFB borrowers' costs and benefits when they prepay their loans; and (3) prepayment conditions and alternative financing measures FFB should use to balance costs and benefits.

GAO found that: (1) FFB interest rates were consistently lower than those available in the private sector; (2) the FFB prepayment policy provided borrowers with flexibility and protected the government from incurring costs; (3) FFB accepted loan prepayments at their Treasury market value, since prepayments based on interest rates specified in loan agreements, rather than on Treasury's current borrowing rate, could result in an economic gain or cost to the government; (4) between 1985 and 1988, prepaid loans had book values totalling $13.3 billion, of which $8.5 billion was prepaid at book value, as Congress directed; (5) FFB lost about $2 billion, since these loans had Treasury market values totalling about $10.5 billion; (6) some FFB borrowers had loans with interest rates substantially higher than commercial rates due to the general decline in interest rates; (7) because borrowers appealed to policymakers for relief after FFB maintained that prepayments had to be made at the loans' Treasury market value, Congress passed legislation allowing certain borrowers to prepay loans at book value; and (8) to finance and account for the government's economic costs, FFB could use the funds generated from the administrative fees it charged borrowers or Congress could provide the programming agency or FFB with an appropriation to cover the prepayment costs.

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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