Borrower Loan Prepayments

In response to a congressional request, GAO evaluated certain aspects of loan prepayment programs that allowed borrowers to pay off their loans at less than the amounts owed, focusing on: (1) statutory authority for prepayment programs; (2) program costs and benefits; (3) differences between loan prepayment programs and collateralized loan sales; (4) the ability of the programs to achieve credit reform objectives; and (5) the adequacy of the Office of Management and Budget's (OMB) guidelines for loan prepayment requirements.

GAO reviewed five fiscal year 1987 loan prepayment programs and found that: (1) agencies had statutory authority to accept less than the unpaid principal balances when borrowers prepaid their loans; (2) in some cases, prepayment program costs exceeded their financial benefits; (3) the government lost from $51 million to $80 million by allowing prepayments based on commercial rates, rather than Treasury interest rates; (4) collateralized loan asset sales achieved the administration's credit management reform objectives better than the loan prepayment programs; (5) agencies primarily worked with their own staffs and were not exposed to private sector credit management policies, practices, and techniques; (6) loan prepayment and loan asset sale net proceeds are incomparable because loan sales involved disposition of a package of loans, while the prepayment programs involved limited, potentially more creditworthy borrowers that elected to prepay their loans; and (7) the OMB prepayment requirements guidelines failed to address methodologies for determining the costs and benefits of prepayment and loan sale programs or when prepayments or asset sales should be used.

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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