Rural Development: Rural Business--Cooperative Service's Lending and the
Financial Condition of Its Loan Portfolio (Letter Report, 01/12/99,
GAO/RCED-99-10).

Pursuant to a congressional request, GAO provided information on the:
(1) number and dollar value of business assistance loans approved by the
Department of Agriculture's Rural Business-Cooperative Service (RBS);
(2) federal government's costs associated with the agency's loans; and
(3) financial condition of the agency's loan portfolio, including the
losses incurred.

GAO noted that: (1) RBS approved more than 2,900 rural business loans
during fiscal year (FY) 1993 through the first 6 months of FY 1998; (2)
these loans totalled about $3.2 billion; (3) more than three quarters of
these loans and almost 90 percent of the total loan amount were
guaranteed business and industry loans; (4) only 2 percent of the loans
were direct government-funded business and industry loans; (5) the
remaining loans were direct loans under the intermediary relending
program and the rural economic development program; (6) the estimated
total cost of these loan programs was about $290 million during FY 1993
through FY 1997; (7) of this amount, the subsidy costs of the loans,
which primarily involve the estimates of default costs and interest rate
subsidies, were almost $195 million; (8) administrative costs, which
cover estimates of salaries and other expenses associated with operating
the programs, totalled about $95 million; (9) as of March 31, 1998, the
unpaid principal on the RBS's outstanding guaranteed and direct loans
totalled about $2.2 billion; (10) delinquent borrowers held about $116
million--$112 million on guaranteed business and industry loans and
about $4 million on direct business and industry loans and intermediary
relending loans--or 5.4 percent of the total outstanding principal; (11)
furthermore, from the start of FY 1993 through March 31, 1998, the
agency incurred loan losses totalling about $266 million: about $264
million on guaranteed business and industry loans and about $2 million
on intermediary relending loans; and (12) the agency did not experience
any losses on debt associated with direct business and industry loans or
with rural economic development loans.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-10
     TITLE:  Rural Development: Rural Business--Cooperative Service's 
             Lending and the Financial Condition of Its Loan
             Portfolio
      DATE:  01/12/99
   SUBJECT:  Direct loans
             Business assistance
             Government guaranteed loans
             Losses
             Business development loans
             Delinquent loans
             Rural economic development
IDENTIFIER:  USDA Rural Utilities Service Program
             USDA Intermediary Relending Loan Program
             USDA Business and Industry Loan Program
             USDA Rural Economic Development Loan Program
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Agriculture, House of
Representatives

January 1998

RURAL DEVELOPMENT - RURAL
BUSINESS-
COOPERATIVE SERVICE'S LENDING AND
THE FINANCIAL CONDITION OF ITS
LOAN PORTFOLIO

GAO/RCED-99-10

RBS' Rural Business Loans

(150745)


Abbreviations
=============================================================== ABBREV

  B&I - business and industry (loans)
  GAO - General Accounting Office
  IRP - intermediary relending program (loans)
  RBS - Rural Business-Cooperative Service
  RD - Rural Development (mission area)
  RED - rural economic development (loans)
  RUS - Rural Utilities Service
  USDA - U.S.  Department of Agriculture

Letter
=============================================================== LETTER


B-281089

January 12, 1999

The Honorable Larry Combest
Chairman, Committee on Agriculture
House of Representatives

Dear Mr.  Chairman: 

The Rural Business-Cooperative Service (RBS) of the U.S.  Department
of Agriculture (USDA) operates a variety of loan programs that assist
in the business development of the nation's rural areas and in the
employment of rural residents.  Specifically, the agency's

  -- business and industry loan program guarantees loans made by
     private lenders and makes direct government-funded loans at
     market interest rates to finance business projects that create
     or retain jobs in rural areas,

  -- intermediary relending program makes direct loans at a 1-percent
     interest rate for financing revolving funds from which borrowers
     relend the money for business and community development
     projects, and

  -- rural economic development program makes interest-free direct
     loans for relending for business and economic development
     projects. 

This report provides information on the Rural Business-Cooperative
Service's lending.  In particular, we are providing information on
(1) the number and dollar value of loans approved by the agency, (2)
the federal government's costs associated with the agency's loans,
and (3) the financial condition of the agency's loan portfolio,
including the losses incurred.\1 We also are providing information on
the geographic dispersion of these loans and the level of pending
applications for guaranteed business and industry loans.  The
information on the number and dollar value of loans, the financial
condition of the portfolio, and loan losses covers 5.5 fiscal
years--including fiscal 1993 through the first half of fiscal 1998
(Mar.  31, 1998).  The information on the federal government's cost
of these loan programs is based on USDA's cost estimates and covers
fiscal year 1993 through fiscal 1997, the year of the latest cost
information readily available when we conducted our work. 


--------------------
\1 RBS operates loan programs formerly administered by other USDA
agencies.  In this report, we refer to these loans and programs as
RBS' loans and programs. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The Rural Business-Cooperative Service approved more than 2,900 rural
business loans during fiscal year 1993 through the first 6 months of
fiscal 1998; these loans totaled about $3.2 billion.  More than three
quarters of these loans and almost 90 percent of the total loan
amount were guaranteed business and industry loans; only 2 percent of
the loans were direct government-funded business and industry loans. 
The remaining loans were direct loans under the intermediary
relending program and the rural economic development program. 

The estimated total cost of these loan programs was about $290
million during fiscal year 1993 through fiscal 1997.  Of this amount,
the subsidy costs of the loans, which primarily involve the estimates
of default costs and interest rate subsidies, were almost $195
million.  Administrative costs, which cover estimates of salaries and
other expenses associated with operating the programs, totaled about
$95 million. 

As of March 31, 1998, the unpaid principal on the Rural
Business-Cooperative Service's outstanding guaranteed and direct
loans totaled about $2.2 billion.  Delinquent borrowers (those that
are at least 30 days past due on scheduled payments) held about $116
million--$112 million on guaranteed business and industry loans and
about $4 million on direct business and industry loans and
intermediary relending loans--or 5.4 percent of the total outstanding
principal.  Furthermore, from the start of fiscal year 1993 through
March 31, 1998, the agency incurred loan losses totaling about $266
million:  about $264 million on guaranteed business and industry
loans and about $2 million on intermediary relending loans.  The
agency did not experience any losses on debt associated with direct
business and industry loans or with rural economic development loans. 


   BACKGROUND
------------------------------------------------------------ Letter :2

RBS operates loan programs that are intended to assist in the
business development of the nation's rural areas and the employment
of rural residents.  Within USDA, RBS is located in the Rural
Development (RD) mission area.  The agency's national office in
Washington, D.C., provides policy direction and guidance on the loan
making and servicing aspects of the programs, and reviews and
approves certain loans.  Many of the loan making and servicing
functions are performed by RD mission area staff who are physically
located in field offices throughout the country.\2

RBS operates the following loan programs:  the business and industry
(B&I) program, the intermediary relending program (IRP), and the
rural economic development (RED) program.  The following is a general
description of each program. 

B&I loans.  A B&I loan can be either a direct government-funded loan
or a loan made by another lender on which RBS guarantees repayment in
the event of a loss.  These loans are made to finance almost any
business project that creates or retains jobs in rural areas and to
finance projects in all segments of the economy, such as mining,
manufacturing, and wholesale and retail sales.  There are only a few
activities for which B&I loans cannot be used, such as funding
gambling facilities, race tracks, and golf courses.  Additionally,
RBS' regulations, which, according to the agency's officials, are
being revised, provide that direct B&I loans cannot be used for
constructing hotels and motels, and tourism and recreational
facilities.  However, guaranteed B&I loans can be used for those
purposes.  The interest rate on a direct loan is based on the prime
rate that was in effect in the quarter of a year prior to the quarter
in which the loan is made.  The interest rate on a guaranteed loan is
the rate agreed to by the lender making the loan and the borrower. 
According to RBS officials, this rate is generally the lender's prime
rate--the rate a lender charges its best customers--plus 1 to 1.5
additional percentage points. 

IRP loans.  IRP loans are direct government-funded loans made for
relending, mostly to nonprofit community development organizations,
and, to a lesser extent, to other borrowers, such as for-profit and
nonprofit cooperatives.  Specifically, the IRP loan funds are
deposited into a revolving fund that an RBS borrower--an
intermediary--has established.  The intermediary relends the money to
its borrowers--which may be individuals, public or private
organizations, or any other legal entity--for financing business or
community development projects in rural areas.  IRP loan funds are
not allowed for certain purposes, including funding gambling
facilities, race tracks, and golf courses.  RBS' approval is required
for the intermediary's relending of the IRP loan funds.  RBS charges
its borrowers a 1-percent interest rate on IRP loans.  The interest
rate on a loan from the revolving fund is the rate agreed to by the
intermediary and its borrower.  RBS does not specify what this rate
should be. 

RED loans.  RED loans are also direct loans made for relending.  The
loans are made only to borrowers that have outstanding electricity or
telecommunications loans from USDA's Rural Utilities Service (RUS)
and to former RUS borrowers that repaid their electricity loans early
at a discount.  Unlike IRP loans, a RED loan, when approved, is
targeted to a specific project.  The RED loan funds are deposited
into a fund that the RUS borrower has established.  The RUS borrower
relends the money to other borrowers, which may be any public or
private organization or other legal entity, for an economic
development and job creation project.  These projects include new
business creation, existing business expansion, community
improvements, and infrastructure development.  RED loan funds cannot
be used for certain purposes, including the RUS borrowers'
electricity or telecommunications operations or a community's
television system or facility, unless tied to an educational or
medical project.  RED loans are interest free, and RBS requires that
loan funds be relent interest free. 

(App.  I provides more descriptive information on each of RBS' loan
programs.)


--------------------
\2 In this report, we refer to the RD mission area's field offices
and staffs who operate RBS' loan programs as the agency's field
offices and staffs. 


   INCREASING TOTAL VOLUME AND
   VALUE OF LOANS IN RECENT YEARS
------------------------------------------------------------ Letter :3

RBS approved more than 2,900 rural business loans during fiscal year
1993 through the first half of fiscal 1998.\3 The total amount of
these loans was more than $3.2 billion,\4 or approximately $1.1
million, on average, per loan.  Specifically, RBS approved the
following loans during this 5.5-year period: 

  -- 2,299 guaranteed B&I loans totaling almost $2.9 billion and
     averaging $1.2 million, and 58 direct B&I loans totaling about
     $17 million and averaging about $300,000 and

  -- 315 IRP loans totaling about $280 million and averaging about
     $900,000, and 256 RED loans totaling about $70 million and
     averaging about $275,000. 

The total number and value of rural business loans approved by RBS
increased during these years.  In fiscal year 1993, RBS approved 298
loans totaling about $234 million, while in fiscal 1997, it approved
788 loans totaling $878 million.  Most of the increase in loans stems
from increases in guaranteed B&I loans, which rose by almost 250
percent over this period. 


--------------------
\3 In this section of the report, loans approved refers to those
loans on which obligations were established in USDA's financial
records. 

\4 The total dollar amount of loans in constant 1998 dollars is about
$3.4 billion. 


      LARGE INCREASE IN GUARANTEED
      B&I LOAN ACTIVITY
---------------------------------------------------------- Letter :3.1

At almost $2.9 billion, guaranteed B&I loans constituted the largest
category of loans approved by RBS during the period of fiscal year
1993 through March 31, 1998.  Furthermore, the level of guaranteed
B&I loan activity increased substantially during this 5.5-year
period.  For example, RBS approved 190 guaranteed B&I loans in fiscal
year 1993 with a total value of more than $187 million.  As table 1
shows, this compares with 663 loans in fiscal year 1997 and 377 loans
in the first half of fiscal 1998, which have total values of more
than $816 million and about $540 million, respectively. 



                                          Table 1
                          
                           Number and Dollar Amount of Guaranteed
                           B&I Loans Approved by RBS, Fiscal Year
                           1993 Through the First Half of Fiscal
                                         Year 1998

Loan
information     1993\a        1994      1995        1996    1997\b      1998\b       Total
------------  --------  ----------  --------  ----------  --------  ----------  ----------
Number of          190         179       327         563       663         377       2,299
 loans
Total dollar    $187.4      $249.6    $423.6      $638.4    $816.3      $539.6  $2,854.9\c
 amount of
 loans (in
 millions)
Average           $986      $1,394    $1,295      $1,134    $1,231      $1,431      $1,242
 dollar
 amount of
 loans (in
 thousands)
Dollar range    $22 to      $57 to    $20 to      $24 to     $8 to      $62 to       $8 to
 of loans       $5,350      $7,300    $9,000      $9,000    $9,000      $9,000      $9,000
 (in
 thousands)
------------------------------------------------------------------------------------------
\a Includes 94 loans totaling $87.4 million that were approved in
fiscal year 1993 under an emergency supplemental appropriation
authorization. 

\b Includes 2 RBS guaranteed loans totaling approximately $900,000
that were approved in fiscal year 1997 and 12 loans totaling
approximately $8 million that were approved in the first 6 months of
fiscal 1998.  These loans were made in conjunction with the North
American Development Bank under the terms of the North American Free
Trade Agreement. 

\c The total dollar amount of loans in constant 1998 dollars is
$2,964.5 million. 

Source:  RBS' loan reports and GAO's analysis of records from the RD
mission area's Finance Office. 

While guaranteed B&I loans were approved for borrowers in every
state, a large number of the approved loans were concentrated in a
few states.  Specifically, 33 percent of the loans approved during
this 5.5-year period were for borrowers in eight states; these loans
accounted for 38 percent of the $2.9 billion loan amount.  In each of
the top three states--California, Florida, and North Carolina--more
than 100 loans were approved.  In total, 400 loans with a total value
of approximately $508 million were approved in these three states. 


         LEVEL OF PENDING
         APPLICATIONS
-------------------------------------------------------- Letter :3.1.1

On top of the rapid growth in guaranteed B&I loans, RBS reported, in
its appropriation request for fiscal year 1999, having a large
amount--about $935 million--of pending guaranteed B&I loan requests
as of September 30, 1997.  However, our review disclosed that many of
these requests were not ready to be approved or funded. 
Specifically, a large part of the backlog consisted of
preapplications for loans; these are cases in which lenders expressed
an interest in applying for loans and submitted some documentation
but had not submitted formal applications.  There were 363
preapplications, which accounted for about 71 percent of the more
than 500 requests reported as pending and about 72.5 percent of the
total loan amount.  These preapplications included 166 cases in which
the preapplicants had been told to develop and submit an application;
however, in 60 cases, the notifications to submit applications were
more than 6 months old, including some that were almost 3 years old. 

Additionally, in mid-1998, RBS found that 127 loan requests
(preapplications and applications) that it had on hand, which totaled
$259.6 million, were inactive.  An inactive loan request is one in
which, among other things, additional information that had been
requested from the lender and/or the borrower had not been provided;
the loan request would not be approved because, for example, the
project as proposed was not eligible for loans in the program; or the
borrower no longer wanted the loan. 


      RELATIVELY FEW DIRECT B&I
      LOANS WERE MADE
---------------------------------------------------------- Letter :3.2

RBS' experience with direct B&I loans is quite different from its
experience with guaranteed B&I loans.  Specifically, RBS did not
approve any direct loans during fiscal years 1993 through 1996
because USDA's appropriation acts did not authorize it to do so. 
However, as table 2 shows, in fiscal year 1997 and the first half of
fiscal 1998, the agency approved 58 loans valued at $17.2 million. 



                                Table 2
                
                 Number and Dollar Amount of Direct B&I
                Loans Approved by RBS, Fiscal Year 1997
                 Through the First Half of Fiscal Year
                                  1998

Loan information                      1997          1998         Total
----------------------------  ------------  ------------  ------------
Number of loans                         33            25            58
Total dollar amount of loans         $12.4          $4.8       $17.2\a
 (in millions)
Average dollar amount of              $376          $191          $296
 loans (in thousands)
Dollar range of loans (in           $50 to         $6 to         $6 to
 thousands)                         $2,100          $500        $2,100
----------------------------------------------------------------------
\a The total dollar amount of loans in constant 1998 dollars is $17.4
million. 

Source:  RBS' loan reports and GAO's analysis of records from the RD
mission area's Finance Office. 

The direct B&I loans that RBS approved during this 1.5-year period
were for borrowers located in 24 states, Puerto Rico, and the Western
Pacific Islands.  Five states and Puerto Rico accounted for 60
percent of the loans and 52 percent of the loan obligations. 
Missouri was the top state in terms of the number of loans--12--and
Puerto Rico had the highest dollar amount of loans--$2.5 million. 
The other four states were Arkansas, Hawaii, South Carolina and
Texas. 


      IRP LOAN ACTIVITY MIXED
---------------------------------------------------------- Letter :3.3

IRP loans accounted for the second largest category of loans that RBS
approved during fiscal year 1993 through the first half of fiscal
1998.  Fiscal year 1995 was the peak year for IRP loans, when 89
loans, which totaled more than $85 million, were approved.  Since
then, as table 3 shows, the total value of IRP loans approved each
year has declined. 



                                          Table 3
                          
                           Number and Dollar Amount of IRP Loans
                             Approved by RBS, Fiscal Year 1993
                           Through the First Half of Fiscal Year
                                            1998

Loan
information       1993        1994      1995        1996      1997        1998       Total
------------  --------  ----------  --------  ----------  --------  ----------  ----------
Number of           43          71        89          47        53          12         315
 loans
Total dollar     $33.7       $77.4     $85.2       $37.6     $37.2        $8.2    $279.2\a
 amount of
 loans (in
 millions)
Average           $784      $1,090      $957        $801      $701        $683        $886
 dollar
 amount of
 loans (in
 thousands)
Dollar range   $250 to     $250 to    $50 to     $200 to   $140 to     $200 to      $50 to
 of loans       $1,300      $2,000    $2,000      $2,000    $2,000      $1,000      $2,000
 (in
 thousands)
------------------------------------------------------------------------------------------
\a The total dollar amount of loans in constant 1998 dollars is
$297.5 million. 

Source:  RBS' loan reports and GAO's analysis of records from the RD
mission area's Finance Office. 

Many of the IRP loans were for borrowers in only a few of the 43
states, Puerto Rico, and the U.S.  Virgin Islands, where loans were
approved.  Specifically, 109 of the 315 loans, or almost 35 percent,
were for borrowers in six states.  These 109 loans totaled over $106
million, which is over 38 percent of the total value of all IRP loans
approved during this 5.5-year period.  Two states--Minnesota and
Oregon--accounted for 51 of these loans and $50.9 million.  The other
four states, which accounted for 58 loans and $55.6 million, were
Arkansas, California, Maine, and Mississippi. 


      RED LOANS HAVE BEEN
      DECREASING
---------------------------------------------------------- Letter :3.4

RED loans ranked third in terms of the number of loans and value
approved during fiscal year 1993 through the first half of fiscal
1998.  The number of RED loans approved declined each year during
this period, from 65 loans in fiscal year 1993 to 39 in fiscal 1997,
and to 19 in the first half of fiscal 1998.  However, as table 4
shows, the total dollar value of loans was relatively stable, ranging
from more than $12 million to $13.5 million for the full fiscal years
during the period. 



                                         Table 4
                         
                          Number and Dollar Amount of RED Loans
                            Approved by RBS, Fiscal Year 1993
                          Through the First Half of Fiscal Year
                                           1998

Loan
information      1993        1994      1995        1996      1997        1998       Total
-----------  --------  ----------  --------  ----------  --------  ----------  ----------
Number of          65          46        45          42        39          19         256
 loans
Total           $12.4       $13.5     $12.3       $13.1     $12.3        $6.8     $70.4\a
 dollar
 amount of
 loans (in
 millions)
Average          $191        $293      $274        $312      $315        $359        $275
 dollar
 amount of
 loans (in
 thousands)
Dollar         $36 to      $50 to    $24 to      $80 to    $21 to     $100 to      $21 to
 range of        $400        $400      $400        $400      $400        $750        $750
 loans (in
 thousands)
-----------------------------------------------------------------------------------------
\a The total dollar amount of loans in constant 1998 dollars is $74.5
million. 

Source:  RBS' loan reports and GAO's analysis of records from the RD
mission area's Finance Office. 

RBS approved a total of 256 RED loans for 192 borrowers during this
5.5-year period; these borrowers were located in 32 states.  A
majority of the loans--136 loans, or 53.1 percent--were for borrowers
in six states:  Minnesota, Tennessee, North Dakota, Kansas, Iowa, and
Wisconsin.  The loans to these borrowers accounted for $34.2 million,
or slightly less than half--48.6 percent--of the total loan
obligations. 

Additionally, some borrowers had both RED and IRP loans approved from
the start of fiscal year 1993 through March 31, 1998.  Specifically,
eight borrowers had 13 RED loans, valued at about $4.1 million,
approved during this period; these borrowers also had 9 IRP loans,
valued at about $7.9 million, approved.  This occurred because RED
and IRP loans are both available to certain nonprofit cooperatives
for relending purposes. 


   SUBSIDIES ACCOUNT FOR A LARGE
   PART OF RBS' COSTS OF OPERATING
   THE LOAN PROGRAMS
------------------------------------------------------------ Letter :4

RBS' estimated cost for the business loan programs totaled about $290
million during fiscal year 1993 through fiscal 1997.  The cost of
operating a federal credit program consists of two components: 
subsidy costs, which involve the estimates of default costs, interest
rate subsidies, fees, and other costs and revenues; and
administrative costs, which cover salaries and other expenses.\5

About $195 million of RBS' total costs was the agency's estimated
subsidy costs associated with its loans.\6 In addition, as table 5
shows, RBS incurred an estimated $95 million in administrative costs
associated with operating the loan programs. 



                                Table 5
                
                  RBS' Estimated Total Costs for Rural
                  Business Loans, Fiscal Years 1993-97

                         (Dollars in millions)

                                   Subsidy  Administrati
Program and loan type                costs      ve costs   Total costs
----------------------------  ------------  ------------  ------------
B&I guaranteed                       $30.0         $85.5        $115.5
B&I direct                             0.1           0.7           0.8
IRP direct                           148.4           5.7         154.1
RED direct                            16.2           3.1          19.3
======================================================================
Total                               $194.7         $95.0        $289.7
----------------------------------------------------------------------
Note:  App.  II provides annual information on the estimated subsidy
and administrative costs of RBS' loan programs in each of these 5
years. 

Source:  Our calculation was based on information contained in USDA,
Budget Explanatory Notes for Committee on Appropriations, fiscal
years 1995-99, and estimates developed by us or provided by the
Budget Division of USDA's RD mission area. 

As shown in table 5, IRP loans, which had total costs exceeding $154
million for fiscal year 1993 through fiscal 1997, were the most
expensive of the rural business loans that RBS provided.  The
estimated subsidy costs constituted most of the total costs for these
loans, reflecting the high interest subsidy on IRP loans. 
Specifically, IRP loans are made at a 1-percent interest rate, which
is far below the agency's cost of money.  The overall subsidy rate
for IRP loans over this 5-year period was 54.8 percent, or about 55
cents per dollar of loan.  This was the highest subsidy rate for any
of the rural business loan programs. 

Guaranteed B&I loans were the second most expensive of RBS' loans
during this period.  Unlike the costs for IRP loans, the estimated
administrative costs accounted for a larger part of the total costs
than the estimated subsidy costs.  This difference is in part
explained by the fact that the overall subsidy rate for guaranteed
B&I loans is considerably lower than the subsidy rate for IRP loans. 
More specifically, over this 5-year period, the overall subsidy rate
for these guaranteed loans was 1.3 percent, or more than 1 cent per
dollar of loan. 

The costs associated with RED loans totaled $19.3 million, which
included $16.2 million of RBS' estimated subsidy costs.  At 25.5
percent, or about 26 cents per dollar of loan, the overall subsidy
rate for RED loans over this 5-year period was second only to IRP
loans.  The subsidy costs of these loans were funded with
appropriated funds; since fiscal year 1997, the subsidy costs of RED
loans have been funded from earnings received on advance payments
made by RUS' borrowers on their RUS loans.\7

Lastly, RBS' costs for direct B&I loans was small, reflecting the low
level of activity in the program during the 5-year period. 
Specifically, the estimated costs totaled about $770,000; this total
applies to the loans approved in fiscal year 1997--there were no
direct B&I loans approved during fiscal year 1993 through fiscal
1996.  RBS' estimated subsidy costs for the fiscal year 1997 loans
was over $60,000.  The subsidy rate for these loans was 0.5 percent,
or less than 1 cent per dollar of loan. 


--------------------
\5 The Federal Credit Reform Act of 1990, which was included as title
13B of the Omnibus Budget Reconciliation Act of 1990 (P.L.  101-508,
Nov.  5, 1990) changed the way post-fiscal year 1991 credit programs
are reported in the budget by ensuring that their subsidy costs were
considered in making resource allocation decisions.  (App.  II
presents a further discussion of the principles and requirements of
credit reform, which apply to post-fiscal year 1991 credit.)

\6 We mostly used the subsidy cost information from USDA's budget
explanatory notes from the fiscal years 1995-99 appropriations
requests, the best available subsidy cost information at the time of
our review.  However, USDA's Office of Inspector General has issued a
qualified opinion on the RD mission area's financial statements and
has reported continuing problems with support for the estimated
subsidy costs of the loan programs. 

\7 The authority for the RED loan program provides that RUS'
borrowers can make advance payments to USDA on their RUS loans and
earn interest at a rate of 5 percent.  To cover the costs of the RED
loans, RBS can use (1) the differential between the earnings on these
advance payments and the 5-percent interest or (2) appropriated
funds.  Earnings on the advance payments in excess of 5 percent
reduce the cost of these loans to the government. 


   DELINQUENT BORROWERS MOSTLY
   HAVE GUARANTEED B&I LOANS
------------------------------------------------------------ Letter :5

The outstanding principal on RBS' B&I, IRP, and RED loans totaled
about $2.2 billion as of March 31, 1998.\8 Borrowers that were
delinquent (at least 30 days past due on loan repayment) held about
$116 million, or 5.4 percent, of the total outstanding principal.  Of
the $116 million, about $112 million was held by delinquent borrowers
with guaranteed B&I loans, about $2 million was held by delinquent
borrowers with direct B&I loans, and another $2 million was held by
delinquent borrowers holding IRP loans.  More of the outstanding
principal on RBS' loans is at risk, however, because it is held by
other borrowers that the agency's officials have identified as being
problem borrowers, which include those likely to default on loan
repayment in the future.  RBS' records show that such borrowers owed
about $73.8 million on guaranteed B&I loans and over $400,000 on IRP
loans as of March 31, 1998. 

Furthermore, RBS had written off some borrowers' debts in recent
years.  Specifically, the agency lost $263.8 million on guaranteed
B&I loans during fiscal year 1993 through March 31, 1998.  The agency
also wrote off about $2 million on IRP loans during this period.  The
agency did not write off any direct B&I loans or RED loans during
this period. 


--------------------
\8 The information in this section of the report discusses the
outstanding principal on the loans made or guaranteed by RBS.  We
have not adjusted the outstanding loan amounts to reflect the
allowance for losses that RBS includes in its financial statements. 
Also, while collateral property has been pledged as security for the
loans, we did not determine the extent to which such property
protects the government's investments in the outstanding loans. 


      OVER $100 MILLION OF
      GUARANTEED B&I LOANS ARE AT
      RISK
---------------------------------------------------------- Letter :5.1

According to RBS' automated files, over $112 million, or 6.1 percent
of the more than $1.8 billion in outstanding principal on guaranteed
B&I loans as of March 31, 1998, was held by 76 borrowers that were
delinquent.  These 76 borrowers made up 5 percent of the 1,534 total
borrowers having guaranteed B&I loans. 

As table 6 shows, there has been a reduction in the amount of
principal owed by delinquent borrowers and in the number of
delinquent borrowers each year during fiscal year 1993 through the
first half of fiscal 1998. 



                                         Table 6
                         
                         Amount of Outstanding Principal Owed on
                         Guaranteed B&I Loans and Portion Owed by
                           Delinquent Borrowers, September 30,
                          1993, Through September 30, 1997, and
                                      March 31, 1998

                                  (Dollars in millions)

Guaranteed B&I
loans                    1993        1994        1995        1996        1997        1998
-------------------  --------  ----------  ----------  ----------  ----------  ----------
Amount of
 outstanding
 principal
Owed by all          $1,000.4      $942.8      $990.1    $1,180.8    $1,615.8    $1,828.7
 borrowers
Owed by delinquent     $224.9      $174.9      $150.9      $128.6      $128.3      $112.3
 borrowers
Percentage owed by       22.5        18.6        15.2        10.9         7.9         6.1
 delinquent
 borrowers
Dollar range of         <$0.1       <$0.1       <$0.1       <$0.1       <$0.1       <$0.1
 outstanding               to          to          to          to          to          to
 principal owed by      $17.1       $11.5       $11.5       $11.5       $17.4       $11.5
 delinquent
 borrowers\a
Number of borrowers
Having outstanding      1,043         955         942       1,053       1,348       1,534
 principal
That were                 145         121         108          95          78          76
 delinquent
Percentage that          13.9        12.7        11.5         9.0         5.8         5.0
 were delinquent
-----------------------------------------------------------------------------------------
\a The low end of the range for each year is as follows:  about
$4,300 for 1993, $5,700 for 1994, $13,800 for 1995, $5,400 for 1996,
$13,000 for 1997, and $4,500 for 1998 (dollars are not stated in
millions). 

Source:  RBS' loan reports and GAO's analysis of records from the RD
mission area's Finance Office. 

Many of the loans held by delinquent borrowers were made in recent
years.  Specifically, as of March 31, 1998, these borrowers were past
due on principal and/or interest payments on 47 loans that were made
during the 1990s--17 from fiscal year 1990 through 1993 and 30 from
fiscal year 1994 through 1997. 

A small number of borrowers in a few states accounted for a
disproportionate share of the outstanding principal on guaranteed B&I
loans held by delinquent borrowers.  Specifically, a total of 12
delinquent borrowers in four states--Mississippi, North Dakota, New
York, and Louisiana--owed about $55 million of outstanding principal
on 17 loans, or almost 50 percent of the amount owed by all
delinquent borrowers, as of March 31, 1998. 

In addition to the delinquent borrowers, 56 other borrowers were
identified by the agency's field office officials as being problem
borrowers as of March 31, 1998; these borrowers owed about $73.8
million in outstanding principal on guaranteed B&I loans. 
Specifically, the field office officials reported that 51 borrowers
were not in full compliance with the terms and conditions of their
loans or that they expect noncompliance to occur in the future.  RBS
officials said the agency anticipates that some of these borrowers
will likely default on scheduled loan payments.  This assessment was
made on the basis of information provided by the lenders that made
the loans and/or the borrowers.  These 51 borrowers owed about $69.3
million as of March 31, 1998.  Additionally, the field office
officials reported that another five borrowers were involved in
liquidation and/or bankruptcy proceedings; these borrowers owed about
$4.5 million as of March 31, 1998. 

Borrowers that failed to repay their guaranteed B&I loans caused RBS
to incur losses of $263.8 million during fiscal year 1993 through
March 31, 1998.  Specifically, RBS incurred losses on guaranteed B&I
loans for 169 borrowers during this 5.5-year period.  Generally, the
loans on which these losses were incurred had been made many years
ago--as far back as the 1970s.  However, the agency has experienced
some losses on newer loans.  For example, as of July 24, 1998, RBS
lost $24.2 million on 53 loans that had closed since the start of
fiscal year 1990, including losses of $6.6 million on 15 loans closed
since fiscal 1993. 


      SOME DIRECT B&I LOANS ARE AT
      RISK
---------------------------------------------------------- Letter :5.2

The outstanding principal owed by 27 borrowers with direct B&I loans
totaled $10.1 million as of March 31, 1998.  Of this amount, as table
7 shows, two delinquent borrowers owed principal of $1.8 million, or
17.4 percent. 



                                         Table 7
                         
                         Amount of Outstanding Principal Owed on
                           Direct B&I Loans and Portion Owed by
                           Delinquent Borrowers, September 30,
                          1993, Through September 30, 1997, and
                                      March 31, 1998

                                  (Dollars in millions)

Direct B&I loans         1993        1994        1995        1996        1997        1998
-------------------  --------  ----------  ----------  ----------  ----------  ----------
Amount of
 outstanding
 principal
Owed by all              $7.0        $5.8        $5.1        $4.3        $4.7       $10.1
 borrowers
Owed by delinquent       $0.6          $0          $0        $1.3        $1.3        $1.8
 borrowers
Percentage owed by        8.4           0           0        29.8        27.4        17.4
 delinquent
 borrowers
Dollar range of          $0.6          $0          $0        $0.4        $0.4        $0.9
 outstanding                                                  and         and         and
 principal owed by                                           $0.9        $0.9        $0.9
 delinquent
 borrowers
Number of borrowers
Having outstanding         14          13          11           8          12          27
 principal
That were                   1           0           0           2           2           2
 delinquent
Percentage that           7.1           0           0        25.0        16.7         7.4
 were delinquent
-----------------------------------------------------------------------------------------
Source:  RBS' loan reports and GAO's analysis of records from the RD
mission area's Finance Office. 

Concerning the two delinquent borrowers, one, located in Kentucky,
owed slightly more than $900,000 on two loans that had been made in
the early 1980s.  The other, located in Oregon, owed about $850,000
on a loan made in mid-1997. 

According to RBS-provided information, the agency's field office
officials have not identified any nondelinquent borrowers as being
problem borrowers as of March 31, 1998.  Also, RBS did not write off
the debt of any direct B&I loan borrowers during fiscal year 1993
through March 31, 1998. 


      FEW PROBLEMS EXIST WITH IRP
      LOANS
---------------------------------------------------------- Letter :5.3

The outstanding principal on IRP loans totaled $268.5 million as of
March 31, 1998.  As table 8 shows, $1.9 million, or less than 1
percent, was owed by three borrowers that were delinquent. 



                                         Table 8
                         
                         Amount of Outstanding Principal Owed on
                         IRP Loans and Portion Owed by Delinquent
                          Borrowers, September 30, 1993, Through
                          September 30, 1997, and March 31, 1998

                                  (Dollars in millions)

IRP loans                1993        1994        1995        1996        1997        1998
-------------------  --------  ----------  ----------  ----------  ----------  ----------
Amount of outstanding principal
-----------------------------------------------------------------------------------------
Owed by all            $154.6      $220.7      $268.8      $275.2      $272.0      $268.5
 borrowers
Owed by delinquent       $3.2        $3.2        $3.2        $2.8        $1.9        $1.9
 borrowers
Percentage owed by        2.1         1.5         1.2         1.0         0.7         0.7
 delinquent
 borrowers
Dollar range of          $0.5        $0.5        $0.5        $0.5        $0.5        $0.5
 outstanding               to          to          to          to          to          to
 principal owed by       $1.2        $1.2        $1.2        $0.9        $0.7        $0.7
 delinquent
 borrowers
Number of borrowers
Having outstanding        157         220         275         308         330         331
 principal
That were                   4           4           4           4           3           3
 delinquent
Percentage that           2.5         1.8         1.5         1.3         0.9         0.9
 were delinquent
-----------------------------------------------------------------------------------------
Source:  RBS' loan reports and GAO's analysis of records from the RD
mission area's Finance Office. 

The three borrowers that were delinquent at the end of March 1998 had
loans made by the Department of Health and Human Services before the
transfer of the IRP loan program and portfolio to USDA.\9
Specifically, a delinquent borrower in Michigan owed $700,000 of
outstanding principal on a loan made in 1983.  Two other delinquent
borrowers had outstanding loans that were made from 1980 through
1983--a Louisiana borrower owed about $673,000, and a Washington
State borrower owed about $550,000. 

In addition to the delinquent borrowers, one other borrower had been
identified by the agency's field office officials as being a problem
borrower as of March 31, 1998.  This borrower, which received a loan
in 1989, owed about $416,000 in outstanding principal. 

RBS experienced losses on two IRP loans during fiscal year 1993
through March 31, 1998.  Specifically, in November 1992, the agency
wrote off about $1.2 million that was owed by a borrower in Puerto
Rico and, in February 1997, about $1 million owed by a borrower in
Florida.  Both these write-offs involved loans that had been made by
the Department of Health and Human Services in the 1980s. 


--------------------
\9 The IRP loan program was transferred from the Department of Health
and Human Services to USDA by section 1323 of the Food Security Act
of 1985 (P.L.  99-198, Dec.  23, 1985). 


      NO PROBLEMS IDENTIFIED WITH
      RED LOANS
---------------------------------------------------------- Letter :5.4

The outstanding principal on RED loans totaled $47.6 million as of
March 31, 1998.  There were no delinquencies on these loans.\10 Table
9 shows the outstanding principal on RED loans at the end of fiscal
year 1993 through March 31, 1998. 



                                          Table 9
                          
                          Amount of Outstanding Principal Owed on
                           RED Loans, September 30, 1993, Through
                           September 30, 1997, and March 31, 1998

                                   (Dollars in millions)

RED loans                 1993        1994        1995        1996        1997        1998
------------------  ----------  ----------  ----------  ----------  ----------  ----------
Amount of                $17.1       $29.8       $38.6       $41.5       $43.9       $47.6
 outstanding
 principal
Number of                  176         215         231         246         252         260
 borrowers having
 outstanding
 principal
------------------------------------------------------------------------------------------
Source:  RBS' loan reports and GAO's analysis of records from the RD
mission area's Finance Office. 

No RED loan borrower had been identified by the agency's field office
officials as being a problem borrower as of March 31, 1998.  Also,
RBS did not write off the debt of any RED loan borrowers during
fiscal year 1993 through March 31, 1998. 


--------------------
\10 We do not include as delinquent those RED loan borrowers that are
shown in the Finance Office's reports as being past due on repayments
when the delinquency was due to billing, payment, or administrative
errors. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We provided USDA with a draft of this report for review and comment. 
USDA made a number of technical comments and suggested several
adjustments to the financial information in the report.  We
incorporated these comments and suggestions as appropriate.  USDA's
comments and our response are in appendix III. 


---------------------------------------------------------- Letter :6.1

We performed our review of RBS' business loan programs from May
through October 1998 in accordance with generally accepted government
auditing standards.  Our scope and methodology are discussed in
appendix IV. 

As agreed, unless you publicly announce its contents earlier, we plan
no further distribution of this report until 30 days from the date of
this letter.  At that time, we will send copies of this report to the
appropriate Senate and House committees; interested Members of
Congress; the Secretary of Agriculture; the Administrator of RBS; the
Director, Office of Management and Budget; and other interested
parties.  We will also make copies available to others upon request. 

Please call me at (202) 512-5138 if you or your staff have any
questions about this report.  Major contributors to this report are
listed in appendix V. 

Sincerely yours,

Robert E.  Robertson
Associate Director, Food
 and Agriculture Issues


DESCRIPTIVE INFORMATION ON THE
RURAL BUSINESS-COOPERATIVE
SERVICE'S LOAN PROGRAMS
=========================================================== Appendix I

The Rural Business-Cooperative Service (RBS), an agency within the
U.S.  Department of Agriculture's (USDA) Rural Development mission
area, operates loan programs that are intended to assist in the
business development of the nation's rural areas and the employment
of rural residents.  The agency was established by the Federal Crop
Insurance Reform and Department of Agriculture Reorganization Act of
1994 (P.L.  103-354, Oct.  13, 1994).  This appendix provides
information on RBS' three loan programs:  the business and industry
(B&I) program, the intermediary relending program (IRP), and the
rural economic development (RED) program. 


   B&I LOANS
--------------------------------------------------------- Appendix I:1

A B&I loan can be either a direct government-funded loan or a loan
made by another lender on which RBS guarantees repayment in the event
of a loss.  These loans are made to finance almost any business
project that creates or retains jobs in rural areas and to finance
projects in all segments of the economy, such as mining,
manufacturing, and wholesale and retail sales.  There are only a few
activities for which B&I loans cannot be used, such as funding
gambling facilities, race tracks, and golf courses.  Additionally,
RBS' regulations, which, according to the agency's officials, are
being revised, provide that direct B&I loans cannot be used for
constructing hotels and motels, and tourism and recreational
facilities.  However, guaranteed B&I loans can be used for those
purposes. 

Direct B&I loans are made to any legal entity, such as an individual
operating a sole proprietorship, a cooperative, or a corporation,
including local governmental bodies.  The maximum loan currently
allowed by RBS is $10 million, which is also the amount of
outstanding debt that a direct loan borrower may owe.  The interest
rate on a direct loan is based on the prime rate that was in effect
in the quarter of a year prior to the quarter in which the loan is
made. 

Guarantees are provided on loans made by traditional lenders, such as
commercial banks, and, to a lesser extent, on loans made by
nontraditional lenders, which are entities using investment capital
for lending and which are authorized by state law to engage in
lending.  The loans are made to most types of legal entities,
including for-profit and nonprofit cooperatives, corporations,
partnerships, individuals, public bodies, and Indian tribes.  The
maximum loan currently is $25 million, which is also a borrower's
maximum debt level.  In addition, RBS provides the following
guarantee percentages:  80 percent on loans of $5 million or less, 70
percent on loans between $5 million and $10 million, and 60 percent
on loans of more than $10 million.  However, a guarantee of up to 90
percent can be provided on a loan of $10 million or less if RBS'
Administrator approves the higher percentage.  The interest rate on a
guaranteed loan is the rate agreed to by the lender making the loan
and the borrower.  According to RBS officials, this rate is generally
the lender's prime rate plus 1 to 1.5 additional percentage points. 

A business financed with a B&I loan is required to be located in a
rural area, which is one that can have a population of no more than
50,000.  Section 310B of the Consolidated Farm and Rural Development
Act, as amended (7 U.S.C.  1932), contains the basic authority for
the B&I loan program. 


   IRP LOANS
--------------------------------------------------------- Appendix I:2

IRP loans are direct government-funded loans made mostly to nonprofit
community development organizations, and, to a lesser extent, to
for-profit and nonprofit cooperatives, public bodies, and Indian
tribes.  For example, some electricity cooperatives that borrow from
USDA's Rural Utilities Service (RUS) have obtained IRP loans. 
Individuals are not eligible to obtain IRP loans nor are for-profit
commercial companies. 

All IRP loans are made for relending.  Specifically, the IRP loan
funds are deposited into a revolving fund that the RBS borrower--an
intermediary--has established.  The intermediary relends the money in
the revolving fund to its borrowers, which may be individuals, public
or private organizations, or any other legal entity.  A recipient can
use the funds it obtains from the revolving fund to finance just
about any project related to business or community development in
rural areas.  IRP loan funds are not allowed for certain purposes,
including funding gambling facilities, race tracks, and golf courses. 
RBS' approval is required for the relending of the IRP loan funds. 

The maximum loan currently allowed is $2 million for the first loan
that an IRP borrower obtains and $1 million per fiscal year for any
subsequent loans.  The maximum total IRP debt that a borrower can
have outstanding is $15 million. 

RBS charges borrowers a 1-percent interest rate on all IRP loans. 
The interest rate on a loan from the revolving fund is the rate
agreed to by the intermediary and its borrower.  RBS does not specify
what this rate should be; the agency's regulations state that
intermediary borrowers should charge the recipients the lowest rate
necessary to cover the debt service costs on outstanding IRP loans, a
reserve for bad debts, and administrative costs.  However, RBS does
not track the rates charged by its borrowers to revolving fund
recipients. 

An IRP borrower does not have to be located in a rural area to obtain
a loan.  The intermediary's borrower, however, is to be located in a
rural area, which, for this program, is an unincorporated area or an
incorporated area that has a population of no more than 25,000.  The
basic authority for the IRP loan program is 42 U.S.C.  9812, as
amended by section 1323 of the Food Security Act of 1985 (P.L. 
99-198, Dec.  23, 1985), as amended. 


   RED LOANS
--------------------------------------------------------- Appendix I:3

RED loans, which are also direct loans, are made to entities that
have outstanding RUS electricity or telecommunications loans or to
former RUS borrowers that repaid their electricity loans early at a
discount.  RED loans are not available to former RUS borrowers that
repaid their loans with scheduled payments. 

All RED loans are made for relending, and the loan funds are targeted
to a specific project.  Specifically, the RED loan funds are
deposited into a fund that the RUS borrower has established.  The RUS
borrower relends the money to other borrowers, which may be any
public or private organization or other legal entity, for an economic
development and job creation project.  These projects include new
business creation, existing business expansion, community
improvements, and infrastructure development.  RED loan funds cannot
be used for certain purposes, including the RUS borrowers'
electricity or telecommunications operations or a community's
television system or facility, unless tied to an educational or
medical project.  RBS' approval is required for the relending of the
RED loan funds. 

The maximum RED loan in any year to an RBS borrower is 3 percent of
the appropriated loan level for the year, rounded to the nearest
$10,000.  For example, the maximum RED loan in fiscal year 1998 is
$750,000, which is 3 percent of the $25 million appropriated loan
level for the year.  There is no maximum number of RED loans that an
RBS borrower may receive nor a maximum debt level that an RBS
borrower may accumulate. 

RED loans are interest free, and RBS requires that loan funds be
relent interest free.  However, RBS' borrowers are allowed to charge
a loan-servicing fee equal to 1 percent of the unpaid principal owed
on the loan. 

Section 313 of the Rural Electrification Act of 1936, as amended (7
U.S.C.  940c), which authorizes the RED loans, provides that RUS'
borrowers are allowed to make advance payments to USDA on their RUS
loans and to earn interest at a rate of 5 percent on the advance
payments.  RBS is authorized to use the differential between the
earnings on these advance payments and the 5-percent interest or to
use other available funds to cover the costs of the RED loans. 
Rather than allowing RBS to use the differential to cover the subsidy
costs of RED loans during fiscal years 1993 through 1997, the
Congress provided USDA with separate appropriations. 

A rural area for a loan in the RED program parallels a rural area for
an initial RUS electricity loan, which is an area that has less than
2,500 residents.  However, RBS officials said that a RED loan can be
made for a project that is located in an area that has a higher
population level if the project serves or provides employment for
residents of an area that meets the 2,500-population threshold. 


SUBSIDY AND ADMINISTRATIVE COSTS
OF RBS' LOAN PROGRAMS
========================================================== Appendix II

This appendix contains information on RBS' estimated subsidy cost for
loans made during fiscal year 1993 through fiscal 1997.  The appendix
also includes estimates of the administrative cost of operating each
of the loan programs during these 5 fiscal years.  Information that
describes the credit reform procedures in the Federal Credit Reform
Act of 1990 is also provided. 


   RBS' COSTS FOR OPERATING THE
   RURAL BUSINESS LOAN PROGRAMS
-------------------------------------------------------- Appendix II:1

Tables II.1 through II.3 contain information on RBS' estimated
subsidy cost for making and guaranteeing rural business loans and its
estimated administrative costs for operating the business loan
programs during fiscal year 1993 through fiscal 1997.  For example,
table II.1 shows that a large part of the estimated subsidy costs in
each year were for IRP loans.  Table II.2 shows that the estimated
administrative costs were highest with the guaranteed B&I loans. 
Table II.3 shows that RBS' estimated costs totaled about $290
million. 



                                        Table II.1
                         
                          RBS' Subsidy Costs for Rural Business
                               Loans, Fiscal Years 1993-97

                                  (Dollars in millions)

Program and loan
type                     1993        1994        1995        1996        1997       Total
-----------------  ----------  ----------  ----------  ----------  ----------  ==========
B&I guaranteed          $10.2        $2.3        $4.0        $5.9        $7.6       $30.0
B&I direct                  0           0           0           0         0.1         0.1
IRP direct               18.3        44.5        46.0        22.4        17.3       148.4
RED direct                3.2         3.4         3.1       3.7\a         2.8        16.2
=========================================================================================
Total                   $31.6       $50.3       $53.1       $32.0       $27.7      $194.7
-----------------------------------------------------------------------------------------
Note:  Totals may not add because of rounding. 

\a This amount was provided in USDA's written comments on a draft of
this report.  (See app.  III.)

Source:  Except as noted above, estimates contained in USDA, Budget
Explanatory Notes for Committee on Appropriations, fiscal years
1995-99. 



                                        Table II.2
                         
                         RBS' Administrative Costs for the Rural
                           Business Loan Programs, Fiscal Years
                                         1993-97

                                  (Dollars in millions)

Program and loan
type                     1993        1994        1995        1996        1997       Total
-----------------  ----------  ----------  ----------  ----------  ----------  ==========
B&I guaranteed        $18.3\a       $21.4       $14.9     $14.9\b     $16.1\b       $85.5
B&I direct                  0           0           0           0       0.7\b         0.7
IRP direct                0.5         1.5         1.5         1.5       0.7\b         5.7
RED direct              0.6\c         0.6         0.6         0.7         0.7         3.1
=========================================================================================
Total                   $19.5       $23.4       $16.9       $17.0       $18.2       $95.0
-----------------------------------------------------------------------------------------
Note:  Totals may not add because of rounding. 

\a This estimate is based on transfers from the Rural Development
Insurance Fund program account to cover the salaries and expenses
associated with various USDA rural credit programs. 

\b These amounts are estimates provided by the Budget Division of
USDA's Rural Development mission area. 

\c This estimate is based on an average for the succeeding 4 years. 

Source:  Except as noted above, estimates contained in USDA, Budget
Explanatory Notes for Committee on Appropriations, fiscal years
1995-99. 



                                        Table II.3
                         
                         RBS' Total Costs for the Rural Business
                           Loan Programs, Fiscal Years 1993-97

                                  (Dollars in millions)

Program and loan
type                     1993        1994        1995        1996        1997       Total
-----------------  ----------  ----------  ----------  ----------  ----------  ==========
B&I guaranteed          $28.5       $23.7       $18.9       $20.7       $23.7      $115.5
B&I direct                  0           0           0           0         0.8         0.8
IRP direct               18.8        46.0        47.5        23.9        18.0       154.1
RED direct                3.8         4.0         3.7         4.4         3.5        19.3
=========================================================================================
Total                   $51.1       $73.7       $70.0       $49.0       $45.9      $289.7
-----------------------------------------------------------------------------------------
Note:  Totals may not add because of rounding. 

Source:  GAO's calculation. 


   CREDIT REFORM
-------------------------------------------------------- Appendix II:2

The two key principles of credit reform contained in the Federal
Credit Reform Act of 1990 center on the (1) definition of cost in
terms of the present value of the estimated cash flow over the life
of a credit instrument and (2) inclusion in the budget of the costs
of credit programs before direct or guaranteed loans are made or
modified. 

Credit reform requirements separate the government's cost of
extending or guaranteeing credit, called the subsidy cost, from
administrative and unsubsidized program costs.  Administrative
expenses receive separate appropriations; they are treated on a cash
basis and reported separately in the budget.  The unsubsidized
portion of a direct loan or loan guarantee is expected to be
recovered from the borrower. 

The Credit Reform Act defines the subsidy cost of direct loans as the
present value of estimated loan disbursements, repayments of
principal, and payments of interest and other payments by or to the
government--over the loan's life--after adjusting for projected
defaults, prepayments, fees, penalties, and other recoveries.  It
defines the subsidy cost of loan guarantees as the present value of
cash flows from estimated payments by the government (for defaults
and delinquencies, interest rate subsidies, and other payments) minus
estimated payments to the government (for loan origination and other
fees, penalties, and recoveries).  Permanent, indefinite
appropriations are available should the appropriated subsidy cost be
less than the estimates in a later fiscal year. 

Before credit reform, credit programs--like other programs--were
reported in the budget on a cash basis.  As a result, it was
difficult to make appropriate cost comparisons between direct loan
and loan guarantee programs and between credit and noncredit
programs.  Credit programs had different economic effects than most
budget outlays, such as the purchase of goods and services, income
transfers, and grants.  In the case of direct loans, for example, the
fact that the loan recipient was obligated to repay the government
over time meant that the budgetary impact of a direct loan
disbursement could be much less than other budget transactions of the
same dollar amount.  This lower budgetary impact also created a bias
in favor of loan guarantees over direct loans.  Loan guarantees
appeared to be free, while direct loans appeared to be expensive
because the budget did not recognize that at least some of the loan
guarantees would default and that some of the direct loans would be
repaid. 

The Credit Reform Act changed this treatment for direct loans and
loan guarantees made on or after October 1, 1991. 




(See figure in printed edition.)Appendix III
COMMENTS FROM USDA
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on USDA's letter dated November 9,
1998. 

GAO'S COMMENTS

1.  The final report was revised to reflect USDA's comment. 

2.  USDA's comment on the number and total dollar value of guaranteed
B&I loans approved in fiscal year 1993 overlooks 94 loans valued at
$87,401,900, which were approved under an emergency supplemental
appropriation authorization.  These additional loans are contained in
the automated obligation records that we obtained from the Finance
Office of USDA's Rural Development (RD) mission area and were
reported in a USDA appropriation request as having been approved in
fiscal 1993.  We have added a note to table 1 stating that the fiscal
year 1993 information includes loans made under this emergency
appropriation provision. 

3.  Our report is based on the automated obligation records that the
RD mission area's Finance Office provided us for each fiscal year. 
These automated records show that RBS obligated $421.6 million of
guaranteed B&I loans for fiscal year 1995.  However, USDA commented
that it obligated $2 million more, for a total of $423.6 million.  We
rechecked the automated records that we had been provided and did not
identify additional obligations totaling $2 million.  Subsequently,
officials in the Finance Office said that the fiscal year 1995
automated record that we were provided did not include adjustments
that had been made to the agency's master loan file, which increased
the total obligations by approximately $2 million.  We have adjusted
the financial statistics on the guaranteed B&I loans to include these
additional obligations. 

4.  We agree and have adjusted the financial statistics accordingly. 
Reports from the RD mission area's Finance Office show that 19 loans
with a total value of $6,825,000 had been obligated in the first half
of fiscal year 1998.  The draft reviewed by USDA included four
additional loans valued at $1,680,000 that had been approved but not
obligated in the first half of fiscal year 1998. 

5.  We agree and have adjusted the subsidy cost amount and other
appropriate statistics.  The draft reviewed by USDA had the subsidy
costs that USDA reported in its annual appropriation requests,
including $2.6 million for fiscal year 1996. 

6.  USDA states that, as more loans are made, the delinquency rate
decreases, implying that the most recent loans are more financially
secure.  Our view is that there has simply been less time for
delinquencies to occur on loans made most recently, and the
delinquency rate for these loans may well increase as time passes. 

7.  USDA states that only a small portion of loans made in recent
years has resulted in losses.  It is reasonable to expect a low level
of losses on recently made loans.  (See comment 6.)

8.  We correctly rounded $148,447,000 as $148.4 million. 

9.  Differences between the amounts that we present and those
suggested by USDA are due to rounding as stated in the report. 


OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================== Appendix IV

This appendix contains information on our objectives, scope, and
methodology in conducting this review.  Concerned about the financial
status of RBS' business loan programs, the former Chairman of the
House Committee on Agriculture asked that we report on (1) the number
and dollar value of loans approved by the agency, (2) the federal
government's costs associated with the agency's loans, and (3) the
financial condition of the agency's loan portfolio, including the
losses incurred. 

In order to provide relatively current information on RBS' lending
and portfolio, we focused on fiscal year 1993 through the first 6
months of fiscal 1998; for information on the subsidy and
administrative costs of the loan programs, we focused on fiscal year
1993 through fiscal 1997 (the latest cost information readily
available when we conducted our work). 

To compile background information and to gain an understanding of how
the business loan programs operate, we interviewed numerous RBS
officials, including the Deputy Administrator for Business Programs,
the Directors of the Processing and the Servicing Divisions, and the
Acting Director and a Rural Development Specialist in the Speciality
Lenders Division.  We reviewed the basic statutory authority for the
programs--the Consolidated Farm and Rural Development Act contains
the basic statutory authority for the B&I loans; 42 U.S.C.  9812, as
amended by the Food Security Act of 1985, authorizes the IRP loans;
and the Rural Electrification Act authorizes the RED loans.  We also
reviewed RBS' implementing regulations and operating instructions,
and its various publications, pamphlets, and reports that describe
the loan programs.  Additionally, we reviewed USDA's Budget
Explanatory Notes for Committee on Appropriations for fiscal years
1995 through 1999.  Furthermore, we reviewed prior reports addressing
the loan programs that were issued by USDA's Office of Inspector
General and by us.  Finally, we reviewed the provisions that apply to
RBS and its loan programs that are contained in the Federal Crop
Insurance Reform and Department of Agriculture Reorganization Act of
1994. 

To compile information on the number and dollar amount of loans that
RBS approved (both direct and guaranteed) during fiscal year 1993
through the first half of fiscal 1998, we used RBS' automated files
and its various loan reports. 

To compile information on RBS' estimated subsidy costs and
administrative costs, we used USDA's budget explanatory notes.  Where
information on the administrative costs was not available in the
notes, we made estimates that were based on, for example, reported
transfers of funds from the Rural Development Insurance Fund to RBS
or obtained estimates from the Budget Division in the Rural
Development mission area.  The descriptive information on credit
reform was extracted from our prior reports.  To compile information
on preapplications and applications for guaranteed B&I loans at the
end of fiscal year 1997, we used a report from the Rural Community
Facilities Tracking System, which is an automated information system
used by RBS to manage the loan programs. 

Our analysis of the financial conditions of RBS' portfolio covered
fiscal year 1993 through the first half of fiscal 1998.  To determine
the financial condition of the three loan programs, we reviewed data
contained in RBS' automated files, the agency's financial loan
reports, and other information that RBS provided us.  We used these
data sources to compile information on the outstanding principal in
each program and the portion of outstanding principal that was owed
by delinquent borrowers at the end of fiscal year 1993 through the
first half of fiscal 1998 and the losses that RBS has incurred during
these years.  We did not adjust the outstanding loan amounts to
reflect the allowance for losses that RBS includes in its financial
statements nor did we assess the adequacy of reserves on the loans. 

Additionally, to obtain information on borrowers that were not
delinquent but were identified by the agency's field office officials
as being problem borrowers, we obtained reports from the Rural
Community Facilities Tracking System.  We also cross-matched these
borrowers with RBS' automated loan files to determine the outstanding
principal owed by each borrower. 

Most of the financial data presented in this report are unaudited
information that we extracted from RBS' reports and automated
records.  We did not verify the accuracy of the information contained
in the agency's reports and automated records.  However, we did
cross-match information in the various automated files that we used,
and we also cross-matched the information we developed with the
agency's financial loan reports. 

We conducted our review from May through October 1998 in accordance
with generally accepted government auditing standards.  USDA reviewed
a draft of this report.  The Department's comments are contained in
appendix III. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

Charles M.  Adams, Assistant Director
Jerry D.  Hall
Patrick J.  Sweeney
Larry D.  Van Sickle


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