Rural Development: Rural Business-Cooperative Service Business Loan
Losses (Letter Report, 08/25/1999, GAO/RCED-99-249).
Pursuant to a congressional request, GAO provided information on the
reasons for the losses being incurred by the Guaranteed Business and
Industry Loan Program, focusing on the Rural Business-Cooperative
Service's experience with business and industry guaranteed loans made
during fiscal year (FY) 1994 through FY 1998 on which the Service paid
losses.
GAO noted that: (1) the level of losses associated with the Rural
Business-Cooperative Service's Guaranteed Business and Industry Loan
Program has been relatively low in recent years, compared with the size
of the entire loan portfolio; (2) nevertheless, the Service did not
follow its own requirements in making guarantees on loans to 18 of the
24 borrowers, thereby contributing to the losses; (3) specifically, the
loans to these 18 borrowers did not meet the Service's guarantee
requirements because 11 loans were missing feasibility
studies--thoughtful evaluations of prospective borrowers' business
proposals--that Service officials should have obtained, 3 others had
feasibility studies with significant flaws, and 4 were questionable,
given the business risk and the potential for loss of collateral; (4)
for the remaining six borrowers, the information GAO obtained from the
Service's loan files was insufficient to pinpoint problems; (5) Service
field officials said that they had not obtained feasibility studies and
other documentation when information provided by lenders and borrowers
about the businesses and business plans appeared to provide an adequate
basis for their guarantee decisions; (6) they also said that they have
been operating in an environment that occasionally fosters lending to
riskier businesses in order to achieve the program's goals of
maintaining or increasing jobs in rural areas and that they occasionally
feel pressure to use all of the loan guarantee authority allocated to
their offices; (7) GAO's findings are similar to the results of internal
quality control reviews performed by the Service of its guarantee
decisions in 13 states during FY 1997 and FY 1998; and (8) through these
reviews, the Service found that its offices had made guarantee decisions
without feasibility studies and other required documents, such as
business plans.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-99-249
TITLE: Rural Development: Rural Business-Cooperative Service
Business Loan Losses
DATE: 08/25/1999
SUBJECT: Business assistance
Business development loans
Loan defaults
Government guaranteed loans
Rural economic development
Internal controls
Loan repayments
IDENTIFIER: USDA Business and Industry Loan Program
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United States General Accounting Office GAO Report
to the Chairman, Committee on Agriculture, House of
Representatives August 1999 RURAL DEVELOPMENT Rural
Business- Cooperative Service Business Loan Losses GAO/RCED-99-249
GAO United States General Accounting Office
Washington, D.C. 20548 Resources, Community, and Economic
Development Division B-283280 August 25, 1999 The Honorable Larry
Combest Chairman, Committee on Agriculture House of
Representatives Dear Mr. Chairman: The Guaranteed Business and
Industry Loan Program-one of the loan programs administered by the
Rural Business-Cooperative Service in the U.S. Department of
Agriculture (USDA)-guarantees the repayment of bank loans for
almost any business project that creates or retains jobs in a
rural area. The loans selected for a Service guarantee are to be
"quality loans" providing lasting community benefits. In January
1999, we reported to you that this program had losses of over $24
million in the 1990s.1 As of June 30, 1999, the program had over
1,980 borrowers and $2.6 billion in outstanding loan principal and
130 delinquent borrowers who owed $167 million. At your request,
to gain an understanding of the reasons for the losses being
incurred by the program, we examined the Service's experience with
business and industry guaranteed loans made during fiscal year
1994 through fiscal year 1998 on which the Service paid losses.
Thus far, the Service has paid losses of $13.4 million on loans of
$35.6 million that it guaranteed during that period; these loans
were obtained by 24 borrowers in 15 states. Results in Brief
The level of losses associated with the Rural Business-Cooperative
Service's Guaranteed Business and Industry Loan Program has been
relatively low in recent years, compared with the size of the
entire loan portfolio. Nevertheless, the Service did not follow
its own requirements2 in making guarantees on loans to 18 of the
24 borrowers, thereby contributing to the losses. Specifically,
the loans to these 18 borrowers did not meet the Service's
guarantee requirements because 11 loans were missing feasibility
studies-thoughtful evaluations of prospective borrowers' business
proposals3-that Service officials should have 1Rural Development:
Rural Business-Cooperative Service's Lending and the Financial
Condition of Its Loan Portfolio, (GAO/RCED-99-10, Jan.12, 1999).
2The Service's lending and servicing requirements for guaranteed
business and industry loans are contained in federal regulations
(7 C.F.R. 4279 and 4287), supplemented by instructions from the
Service. 3Feasibility studies are to be performed by a recognized
independent consultant and include assessments of the business
market and of the technical, financial, and managerial feasibility
of the business proposal (7 C.F.R. 4279.150). Page 1
GAO/RCED-99-249 Rural Business and Industry Loans B-283280
obtained; 3 others had feasibility studies with significant flaws;
and 4 were questionable, given the business risk and the potential
for loss of collateral. For the remaining six borrowers, the
information we obtained from the Service's loan files was
insufficient to pinpoint problems. Service field officials said
that they had not obtained feasibility studies and other
documentation when information provided by lenders and borrowers
about the businesses and business plans appeared to provide an
adequate basis for their guarantee decisions. They also said that
they have been operating in an environment that occasionally
fosters lending to riskier businesses in order to achieve the
program's goals of maintaining or increasing jobs in rural areas
and that they occasionally feel pressure to use all of the loan
guarantee authority allocated to their offices. Our findings are
similar to the results of internal quality control reviews
performed by the Service of its guarantee decisions in 13 states
during fiscal years 1997 and 1998. Through these reviews, the
Service found that its offices had made guarantee decisions
without feasibility studies and other required documents, such as
business plans. We make a recommendation to USDA aimed at reducing
future losses by clarifying when feasibility studies should be
obtained. Background Under the Guaranteed Business and Industry
Loan Program, a loan is made by a lender, such as a local bank,
and the Service agrees to guarantee the loan's repayment in the
event of a loss. According to the program's regulations, business
and industry guaranteed loans are to be quality loans that provide
lasting benefits. The Service is responsible, in part, for
determining whether a borrower is eligible, whether a proposed
loan is for an eligible purpose, and whether the borrower is able
to repay the loan and has sufficient collateral and equity. Within
USDA's organization, the Service is located in the Rural
Development mission area. The agency's national office in
Washington, D.C., provides policy direction and guidance on loan-
making and loan-servicing and reviews and approves certain loans.
Many of the loan-making and -servicing functions are performed by
staff in the Rural Development mission area who are located in
field offices throughout the country. The maximum loan currently
allowed by the Service is $25 million. The directors of USDA's
Rural Development state offices have the authority to approve
guarantees on loans of less than $5 million and must forward
applications for guarantees of $5 million or more for concurrence
by Service headquarters officials. The Service's guarantees
generally range Page 2 GAO/RCED-99-249
Rural Business and Industry Loans B-283280 from 60 percent on
loans of more than $10 million to 80 percent on loans of $5
million or less. In addition, the Administrator of the Service can
approve a guarantee of up to 90 percent on loans of $10 million or
less. The interest rate on a guaranteed loan is the rate agreed to
by the lender and the borrower. According to Service officials,
this rate is generally the lender's prime rate-the rate a lender
charges its best customers-plus 1 to 1.5 percentage points. The
Service's lending has increased sharply in the past several years.
During fiscal year 1994 through fiscal year 1998, over 1,380
borrowers obtained about 1,620 guaranteed loans with about $1.8
billion in outstanding principal as of September 30, 1998. The
Service made almost 64 percent of these loans during the last 2
fiscal years (1997 and 1998). More Consistent
During fiscal year 1994 through fiscal year 1998, the Service did
not follow Application of its own lending
requirements in guaranteeing loans to 18 of the 24 borrowers who
obtained loans on which it paid losses. Of the loans to 18 Lending
Requirements borrowers, 11 were missing feasibility studies, 3 had
feasibility studies Could Have Limited with
significant flaws, and 4 were questionable, considering the risk
of the businesses and their potential for losses. For the
remaining six borrowers, Losses the
information we obtained from the Service's loan files was
insufficient to clearly identify specific problems with a
guarantee-or there may not have been problems. Thus far, the
Service has paid losses of $13.4 million on the $35.6 million
loaned to the 24 borrowers.4 Appendix 1 lists these borrower's
loans, identifies some of the documents contained in the Service's
loan files for them, and indicates the number of months to
delinquency and the amounts of the loan losses. The Service's
lending regulations and requirements are intended to ensure that
borrowers' business projects are sound, that the borrowers are
creditworthy, and that the government's risk of loss is minimized.
Before December 23, 1996, the Service's lending regulations
required a loan application to include, among other things, a
feasibility study in all cases unless a waiver was provided by the
Service's staff,5 financial information on the past performance of
the borrower's businesses, and a forecast of the business's
financial performance. Twenty of the 24 borrowers in our 4Losses
on a few of the loans were not final as of June 1999-the loss rate
on the 24 loans is 38 percent, while loan losses have been about a
13 percent over the life of the program, from 1974 through 1998.
5The requirement for a feasibility study could be waived for
existing businesses when there was thorough documentation showing
that the financial interests of the lender and the government were
protected. Page 3 GAO/RCED-
99-249 Rural Business and Industry Loans B-283280 review obtained
guarantees on loans when these requirements were in effect. On
December 23, 1996, the Service stopped requiring a feasibility
study and gave its staff the flexibility to request a feasibility
study for start-up businesses or when a business proposal would
significantly affect the financial operations of the business. The
Service Director responsible for loan making explained that while
the Service has not issued further instructions, it expects its
staff to request a feasibility study when an existing business has
been less than very successful, there are indications of weakness,
or a new or existing business's forecasts of future results appear
overly optimistic. Furthermore, a borrower's loan application must
contain, among other things, a detailed business plan6 and a
thorough analysis of the borrower's creditworthiness by the
lender. The regulations state that the lender is to determine
credit quality and to provide an analysis of the business that
addresses the adequacy of the equity, cash flow, collateral,
history, and management, as well as the current status of the
industry. The lender is also responsible for ensuring that
appraisal values adequately reflect the actual value of the
collateral. Four of the 24 borrowers in our review obtained loans
under these latter requirements. Once the Service obtains complete
information from the borrower and the lender, it requires its
staff to evaluate a proposed loan as a basis for making its
guarantee decision. Our review of loan file documents and
discussions with field office and headquarters officials showed
that the Service guaranteed loans to 11 businesses without the
feasibility studies that it should have obtained. These businesses
should have prepared feasibility studies for the following
reasons: * Four were start-up businesses that obtained guarantees
on loans before December 23, 1996, when the Service's regulations
required feasibility studies for new businesses. These borrowers
obtained the Service's guarantees on loans of $800,000 to $2
million. The borrowers became delinquent on their loans within 3
to 23 months, and the Service paid losses totaling $2.1 million on
these loans. * Six were existing businesses that obtained loans
from $1 million to $5 million that were significant for their
financial operations. Five of these six businesses had recently
experienced financial difficulties, including losses, and the
remaining business was depending on increasing sales 6The
regulations also state that if a feasibility study is sufficiently
thorough, it may not require a separate business plan (7 C.F.R.
4279.161). The regulations call for a business plan that, at a
minimum, includes a description of the business and project,
management experience, products and services, proposed use of
funds, availability of labor, and materials and supplies, and the
names of any corporate parent, affiliates, and subsidiaries. Page
4 GAO/RCED-99-249 Rural
Business and Industry Loans B-283280 within its existing market to
repay its loan. These businesses became delinquent on their loans
between 1 and 51 months, and the Service paid losses of $3.2
million on these loans. * One borrower obtained a loan of $262,000
to complete the purchase of an ongoing business that appeared
successful. When the loan was made, the Service's regulations
stated that Service officials could waive the feasibility study
requirement if they provided a thoroughly documented justification
showing that the financial interests of the lender and the
government were protected. However, the borrower's loan file did
not contain documentation of a decision to waive a feasibility
study. This borrower became delinquent within 15 months, and the
Service paid a loss of $178,000 on the loan. The following four
cases illustrate situations in which feasibility studies would
have assisted the Service in deciding whether to guarantee a loan:
* An Ohio borrower. This borrower obtained a $1.7 million loan
with an 80-percent guarantee in September 1994 to finance the
purchase, expansion, and modernization of a trout hatchery and
farm. According to the lender, this business was a start-up
project. Relying on background information on the industry and an
analysis of financial projections for the proposed business, the
lender endorsed a loan to this borrower. However, the lender
stated that its evaluation of the project was limited in scope and
that it had been unable to find reliable industry financial
standards for comparison with the company's projections. Despite
these limitations, the Service stated in its project summary that
a feasibility study was not necessary because the lender had
evaluated the project. About 3 months after obtaining the loan, in
December 1994, the borrower defaulted on a loan payment and
thereafter was continuously late in making payments. The borrower
filed for bankruptcy in June 1996, and the Service paid a loss of
$270,000 on the loan. * A Louisiana borrower. This borrower
obtained a loan of about $1.5 million with an 80-percent guarantee
in January 1995 to refinance existing debt and provide working
capital to expand the borrower's business of manufacturing engines
for marine vessels. The company had been weakened financially by
the research and development expenses of developing a new engine-a
type of pump engine described as a "totally new" propulsion system
for the pleasure boat market, including jet skis, inboard boats,
inboard/outboard boats, and outboard boats. Although the company
was introducing a new product in a market segment that was also
new for the company, the loan file shows that a feasibility study
was not obtained. The company had sales and warranty problems and
sold its Page 5 GAO/RCED-99-249 Rural
Business and Industry Loans B-283280 assets late in 1997. The
Service subsequently paid a loss of about $70,000 on the loan. * A
Maine borrower. A Cadillac, Oldsmobile, Volvo, and Mitsubishi
dealer obtained a $2.5 million guaranteed loan in April 1995 to
consolidate two sales outlets at a more desirable and visible
location. Field officials did not require a feasibility study of
this business, even though success at the new location depended on
expanding sales within the existing sales market by 20 percent.
After the relocation, problems with access to the site and the
placement of signs became evident. In an effort to help the
borrower, the lender deferred the principal payments and reduced
the interest rate for the last half of 1996. According to a
consultant hired by the company 2 years after the loan was
obtained, the sales potential in that area for the dealer's car
lines was too limited to support a profitable business at the debt
level the borrower had incurred. The borrower defaulted shortly
after receiving the consultant's report, and the Service paid a
loss of over $1 million after the business was sold. * A
Pennsylvania borrower. The company, which produced frozen
stromboli, obtained three loans guaranteed by the Service totaling
$950,000 in March 1997 to relocate and expand, but its plans
proved to be unrealistic. The company had planned to relocate,
restart production with newly manufactured equipment, and multiply
sales 5 times in one year. The bank noted that the company had
identified customers but did not yet have contracts that would
sustain its sales goals. Moreover, this company had incurred
operating and net losses for the previous 3 years, and sales had
declined over the past 4 years-from about $1.6 million to $1
million per year. A Dun and Bradstreet report obtained by the
lender rated the company as having the highest risk possible.
Despite these problems, the Service did not require a feasibility
study or obtain a business plan. After the relocation, the company
immediately experienced start-up problems with its new equipment
and obtained an additional loan of $270,000, also guaranteed by
the Service, to provide more operating cash. However, the
production problems proved too difficult to overcome; the company
missed a loan payment 1 month later, in July 1997; and the company
lost customers. These conditions eventually led to closure. While
the value of the company's collateral was estimated to be over $1
million, the sale of its assets brought much less, and the Service
paid a loss of $849,000. Besides making guarantee decisions
without feasibility studies, the Service based at least three
guarantee decisions on feasibility studies with notable flaws. For
example, one of the feasibility studies examined a troubled
business seeking additional financing but did not conclude that a
guaranteed loan would enable the business to succeed. The business
Page 6 GAO/RCED-99-249 Rural Business
and Industry Loans B-283280 obtained two loans guaranteed by the
Service totaling almost $5 million but continued to decline. It
defaulted 27 months later, and the Service paid a loss of $1.6
million on these loans. Four other loans did not meet the
Service's standards for quality. Specifically, the businesses had
considerable potential for failure along with minimal collateral
for recovery in the event of loss. For example, one company
planned to introduce an innovative tool for servicing oil field
equipment. It offered a patent and related production equipment as
collateral but became delinquent on its loan within 3 months,
after discovering that the depressed oil industry had no immediate
interest in the product. The Service paid an estimated loss of
$1.4 million on the company's $1.5 million loan. Another company
planned to extract metals from wastes, proceeding directly from a
laboratory experiment to commercial production. The feasibility
study endorsed the process while also raising questions. The
commercial plant and an acre of land were pledged as collateral.
The plant did not work, and the company made only one payment on
its loan. The Service paid an estimated loss of $900,000 on a
$950,000 loan. Service officials cited several reasons for
approving guarantees on loans without feasibility studies and on
loans that appeared to be somewhat risky. In some cases, field
office loan specialists said that feasibility studies did not seem
necessary because descriptions of projects and financial
projections appeared sufficient. Furthermore, they said the risks
being taken in some cases were not altogether different from those
taken with some other loans that were performing well. These
specialists also said that some of the lenders had excellent
reputations. As a result, they said, the Service could rely on the
lenders' evaluations of business proposals. Moreover, state office
staff said they have not required feasibility studies when it
appeared to them that (1) the business concepts were known and
likely to be sound and (2) the government's financial interests
were protected. In addition, field office staff in the four states
we visited said they heavily weigh opportunities to save jobs or
increase employment when they make decisions about guaranteeing
loans. They also said that one of the goals for this program is to
use the full amount of the Service's guarantee authority and that
on occasion they feel pressure to accomplish this goal as well. In
some cases, staff said, they operate in an environment that
fosters lending to riskier businesses, and some borrowers might
not have been able to obtain a loan without a Service guarantee.
In addition, the intensity of local interest in assisting some
businesses can affect the Service's decisions. Page 7
GAO/RCED-99-249 Rural Business and Industry Loans B-283280 The
Service itself has identified similar deficiencies through quality
control reviews of its field offices performed by its headquarters
staff over the past several years. These problems included
guarantee decisions made without feasibility studies, business
plans, and lenders' analyses of borrowers' creditworthiness. For
example, during fiscal years 1997 and 1998, the Service's quality
control reviews in 8 of 13 state offices found instances in which
feasibility studies were inappropriately waived, business plans
were inappropriately substituted for feasibility studies, and loan
files did not show that the Service had reviewed lenders' analyses
of prospective borrowers' businesses. The Service also found
instances in which borrowers had insufficient equity invested in
their businesses to meet the Service's minimum standards or
borrowers' equity could not be determined because field office
staff had not obtained the accounting statements needed to do so.
The Service has implemented a variety of actions intended to
correct the problems found in its field offices. These actions
include having headquarters officials review loan documentation
before a loan is approved. The Service has continued to find some
similar problems through quality control reviews in fiscal year
1999. Conclusion Some of the Service's losses could have
been avoided if the agency had obtained feasibility studies to
provide a basis for making more informed lending decisions.
However, the Service has not laid out clear guidance to help its
field office staff determine when to obtain these studies. As a
result, there is no assurance that feasibility studies will be
obtained when they are needed for making prudent lending
decisions. Prudent and well-supported lending decisions are
especially important in light of the increased pace with which the
Service is guaranteeing loans. Recommendation We recommend
that the Secretary of Agriculture direct the Service to (1)
clarify when it expects feasibility studies to be obtained and (2)
emphasize to its field offices the importance of carefully
evaluating these studies before making lending decisions. Agency
Comments We provided the U.S. Department of Agriculture with a
draft of this report for review and comment. The Department stated
that it has observed some of the same issues raised in our report
and that it would (1) issue an instruction to its staff clarifying
the requirements for obtaining feasibility studies and (2)
emphasize the importance of carefully evaluating these studies
before making lending decisions. In addition, the Department said
Page 8 GAO/RCED-99-249 Rural Business
and Industry Loans B-283280 that it would use our findings to
support future consideration of regulatory changes clarifying its
requirements for obtaining and analyzing feasibility studies. The
Department also provided a few technical comments, which we
incorporated as appropriate. The Department's comments are
presented in appendix II. Scope and To identify loans made
during fiscal year 1994 through fiscal year 1998 on Methodology
which losses occurred, we obtained and analyzed information from
the computerized databases in USDA's Rural Development agency's
St. Louis, Missouri, Finance Office, where financial and
statistical data on business loans are maintained. We did not
verify the accuracy of the information contained in these
databases. We selected four states-Texas, Missouri, Maine, and
Pennsylvania-for visits because they had the highest numbers of
delinquent and problem loans during the period. During our state
office visits, we reviewed Service loan files and interviewed
knowledgeable staff. In addition, for loans that incurred losses
during the same 5-year period for the 11 states with loan losses
that we did not visit, we obtained and reviewed specific
documentation from each loan file, such as the loan project
summary, lender's credit analysis, feasibility study, business
plan, reports of visits with the borrower, and reports of
delinquencies and losses. We also obtained information about the
quality control reviews the Service conducts of its field offices.
We performed our work from February through July 1999 in
accordance with generally accepted government auditing standards.
As agreed, unless you publicly announce its contents earlier, we
plan no further distribution of this report until 30 days after
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 Honorable Dan Glickman, Secretary of
Agriculture; the Honorable Dayton Watkins, Administrator of the
Rural Business-Cooperative Service; the Honorable Jacob Lew,
Director, Office of Management and Budget; and other interested
parties. We will also make copies available to others upon
request. Page 9 GAO/RCED-99-249 Rural
Business and Industry Loans B-283280 Please call me at (202) 512-
9889 if you or your staff have any questions about his report. Key
contributors to this report were Charles Adams, Larry Van Sickle,
and Jerry Hall. Sincerely yours, Robert E. Robertson Associate
Director, Food and Agriculture Issues Page 10
GAO/RCED-99-249 Rural Business and Industry Loans Page 11
GAO/RCED-99-249 Rural Business and Industry Loans Contents Letter
1 Appendix I
14 Loans, Loan Losses, and Loan File Documentation for 24
Guaranteed Business and Industry Loans Appendix II
24 Comments From the U.S. Department of Agriculture Abbreviations
GAO General Accounting Office USDA U.S.
Department of Agriculture Page 12
GAO/RCED-99-249 Rural Business and Industry Loans Page 13
GAO/RCED-99-249 Rural Business and Industry Loans Appendix I
Loans, Loan Losses, and Loan File Documentation for 24 Guaranteed
Business and Industry Loans Type of Purpose
Loan Date of Months to State
business of loan
amount loan delinquency New start-up
businesses without feasibility studies Ohio Trout
hatchery and Finance the acquisition, $1,700,000
9/19/94 3 farm
modernization, and expansion of an existing facility. The lender
identified this project as a new business. Missouri
Assemble, finish, Purchase machinery,
$1,960,500 3/28/95 23 and sell
aircraft equipment inventory, tooling, and component and
proprietary materials and parts. start up at a new
site. North Dakota Establish a Buy building, and
purchase $800,000 9/26/96
4 cooperative for refrigeration and aeration carrot
production, equipment. processing, and marketing. Tennessee
Mobile home Obtain working capital and
$1,140,000 2/15/96 20
manufacturing refinance construction debt on a new
facility. Page 14 GAO/RCED-99-249 Rural
Business and Industry Loans Appendix I Loans, Loan Losses, and
Loan File Documentation for 24 Guaranteed Business and Industry
Loans Lender's Feasibility Business credit
Service Loss study plan analysis
evaluation Comments $270,927 No a
Yes Yes The lender supported the
project but stated that its evaluation of the project was limited.
A feasibility study was not prepared. The business had operating
problems, was cash-starved, and sold fish at a discount before
they reached full size, leading to failure. Fish kills also
occurred. $1,078,619 Waived Yes Yes
Yesb A feasibility study of this new aircraft
business was needed. After obtaining the loan, the owners decided
to change their plans and increase the capacity of the proven
airplane they had planned to produce, which had been certified by
the Federal Aviation Administration. The changes to this crop
duster required recertification, which slowed the start-up of
production. Also, there were management and inventory problems.
$441,072 No Yes Yes Yesb
A new co-op proposed to start the first large-scale carrot
production in North Dakota. A feasibility study was not obtained,
and the business plan was not prepared by the company. The manager
had only 1 year of experience in carrot research and no business
management experience. The growers did not meet their production
commitments, and the co-op members did not have a written
cooperative agreement. $334,845 Waived Yes
a Yes A feasibility study of this
new manufacturing business was needed. Management was not skilled
in this business or in manufacturing. The company did not achieve
the production levels needed to succeed. There were quality
control problems, poor control of expenses and production
materials, and accounting deficiencies. (continued) Page 15
GAO/RCED-99-249 Rural Business and Industry Loans Appendix I
Loans, Loan Losses, and Loan File Documentation for 24 Guaranteed
Business and Industry Loans Type of Purpose
Loan Date of Months to State
business of loan
amount loan delinquency Existing
businesses without feasibility studies Maine Family
clothing Restructure debt to pay off $1,000,000
1/20/94 51 and footwear loans held
by an out-of-state creditor. Louisiana Rice mill operation
Acquire rice milling equipment, $5,000,000
11/16/94 30 and debt refinancing
Louisiana Marine vessel Refinance existing debt and
$1,508,500 1/4/95 35 engine
provide working capital to manufacturing introduce new
marine engine Oklahoma High-precision job Refinance debt and
obtain $1,250,000 4/19/95
24 shop for working capital automated machine parts
Maine Automobile Relocate and construct new
$2,478,500 4/19/95 25
dealership facility to consolidate and expand business
Page 16 GAO/RCED-99-249 Rural
Business and Industry Loans Appendix I Loans, Loan Losses, and
Loan File Documentation for 24 Guaranteed Business and Industry
Loans Lender's Feasibility Business credit
Service Loss study plan analysis
evaluation Comments $95,741 Waived a
Yes Yes The company had sustained
losses for several years before obtaining the loan because of
increasing competition from other retailers. A feasibility study
was waived because collateral appeared sufficient, but past
performance indicated a troubled company, so a feasibility study
should have been done. The company started closing stores 3 months
after obtaining the loan because of losses. The owners struggled
with declining sales until liquidation was the only option.
$928,934 No a Yes Yesb
As sales declined during a renovation in 1994, the company
incurred net losses. A feasibility study would have been prudent.
After obtaining the loan, the business was affected by competition
from Mexico and the death of the owner. Service officials
indicated there were concerns about financial irregularities.
$69,818 No Yes Yes Yes
A service loan specialist advised against guaranteeing this loan,
saying the company would be too highly leveraged and vulnerable to
losses. A feasibility study should have been done. However, the
loan guarantee was approved without comment. Warranty expenses on
the company's new engine were higher than expected, sales lagged,
and liquidity problems developed. $171,650 No Yes
Yes Yesb The company had a $332,000
loss the year before the loan guarantee was approved. The company
had poor liquidity ratios and high indebtedness with the loan-a
feasibility study should have been done. Management problems were
evident-the owner was inattentive to the business-and losses
continued as products were priced below cost. $1,037,518 Waived
a Yes Yesb The business
needed to increase its sales to succeed in its new location-it
could have benefited from a feasibility study. After sales
problems developed, a business consultant hired by the company
stated that the borrower's investment in the new facility was too
large for the sales market. The company then filed for bankruptcy
and sold the business to another auto dealership at a significiant
loss. (continued) Page 17
GAO/RCED-99-249 Rural Business and Industry Loans Appendix I
Loans, Loan Losses, and Loan File Documentation for 24 Guaranteed
Business and Industry Loans Type of Purpose
Loan Date of Months to State
business of loan
amount loan delinquency North Carolina
Physical therapy Finance the purchase of a
$262,000 3/29/96 15 Carolina
business Pennsylvania Producing and Obtain 4 loans to
relocate and $450,000 3/25/97
4 marketing frozen purchase equipment to expand
300,000 3/25/97 stromboli production
200,000 3/25/97 270,000 6/25/97
1 $1,220,000 Businesses with flawed feasibility studies South
Carolina Spawning and Obtain working capital to
$2,500,000 1/28/94 45
growing clams construct a building, purchase equipment, and
improve a leasehold. South Dakota Grain elevator and Obtain two
loans-one for $3,200,000 11/18/94
27 seed business working capital and one for
1,750,000 debt refinancing $4,950,000 Page
18 GAO/RCED-99-249 Rural Business
and Industry Loans Appendix I Loans, Loan Losses, and Loan File
Documentation for 24 Guaranteed Business and Industry Loans
Lender's Feasibility Business credit Service
Loss study plan analysis
evaluation Comments $177,578 No a
a Yes This was an on-going
business, but its market risk was not clear. The loan file did not
document the basis for not obtaining a feasibility study. After
the loan was made, doctors began directing patients to the local
hospital for therapy, and the business failed. $305,850 No
No Yes Yes The bank's
credit analysis noted that the 211,040
guarantee would greatly mitigate the fact that 142,156
the company had losses in 3 of the 4 189,866
previous years, with sales declining from $1.6 $848,912
million to $1 million-a feasibility study should have been done.
After expansion, the company experienced production difficulties
because of problems with new equipment. It was unable to overcome
these problems and sales declined. $1,474,687 Yes a
Yes Yes The Service guaranteed a loan
to get this business started in 1991. The feasibility study for
the 1991 loan was prepared by a researcher who became the
company's scientist-and it called for a very large expansion of a
noncommercial project developed by this individual. Although the
original study was not done by an independent consultant, as
required, and the company had sustained losses, the feasibility of
the project was not reexamined before this additional loan was
made. Production problems continued, and creditors eventually
forced the company into bankruptcy. $936,368 Yes
Yes Yes Yes This was a
long-established business. A 661,436
feasibility study identified significant $1,597,804
concerns with its organization, management, and sales. However,
the study did not conclude whether the company could succeed with
a loan. After obtaining the loan, sales and profit margins were
lower than forecast because of a depressed market. The company was
not in compliance with its loan terms 7 months after receiving the
loan. (continued) Page 19
GAO/RCED-99-249 Rural Business and Industry Loans Appendix I
Loans, Loan Losses, and Loan File Documentation for 24 Guaranteed
Business and Industry Loans Type of Purpose
Loan Date of Months to State
business of loan
amount loan delinquency Pennsylvania
Aluminum Obtain two loans to refinance
$1,000,000 7/31/96 3
windows, doors the debt of a company in
1,000,000 and vinyl bankruptcy reorganization
$2,000,000 replacement windows Businesses with considerable risk
of loss Texas Maintenance tool Purchase land,
building, $1,499,000 1/19/95
3 and technology machinery, and equipment and obtain working
capital Iowa Bowling alley Purchase an on-going
business $420,000 5/12/95
11 Missouri Waste recycling Purchase equipment and
$950,000 3/6/97 13 property
and construct building Missouri Restaurant Open
and furnish a start-up $190,000 8/27/97
2 restaurant Other businesses Mississippi Manufacture fire
Construct a building and $400,000
4/28/94 46 trucks, fire- purchase
land, machinery, and fighting equipment equipment business
Missouri Restaurant and bar Assume a loan for an existing
$140,000 8/18/95 5
restaurant and bar Page 20
GAO/RCED-99-249 Rural Business and Industry Loans Appendix I
Loans, Loan Losses, and Loan File Documentation for 24 Guaranteed
Business and Industry Loans Lender's Feasibility Business
credit Service Loss study plan
analysis evaluation Comments $704,945 Yes
a Yes Yes The company
was in Chapter 11 bankruptcy 811,434
proceedings and hoping to restart when it $1,516,379
obtained loans. The company had a history of declining sales and
proposed to reestablish sales with prior customers and develop a
new product line. The feasibility study was not clear about the
potential for quickly reviving sales levels. After the loan was
made, the company found that prior customers had made other plans,
and the business failed. $1,400,000 Yes a
Yes Yesb The idea was innovative but
could not be (est.)
marketed in a depressed oil industry. Only one loan payment was
made, and that was 7 months late. $191,073 Waived a
Yes Yesb A special disaster loan was
made to a bowling alley mechanic with some day-to-day experience
in operations but no financial management experience. Waiving the
feasibility study was questionable because the business was highly
leveraged with loans. Financial management of the business was
weak. $900,000 Yes Yes Yes
Yesb This project was designed to commercialize
(est.)
a laboratory experiment. The feasibility study did not clearly
identify the problems with this idea. The plant equipment could
not extract metals from waste streams as envisioned and could not
be put into operation. $150,000 No Yes
Yes Yes The restaurant was located at
a distance (est.)
from the lunchtime crowds on which it depended. A feasibility
study might have identified this location problem. The restaurant
also developed a poor reputation for quality, and there were
management and partnership troubles. $61,505 Waived
a a No The loan
application indicates a successful company, but key financial
documents were not on file, including an evaluation of the loan
application. The company sustained losses after obtaining the
loan. $114,713 No a a
Yesb The purchaser owned another restaurant. The
business failed through lack of customers, poor management, and
personal problems. (continued) Page 21
GAO/RCED-99-249 Rural Business and Industry Loans Appendix I
Loans, Loan Losses, and Loan File Documentation for 24 Guaranteed
Business and Industry Loans Type of Purpose
Loan Date of Months to State
business of loan
amount loan delinquency Wisconsin
Long-distance Refinance debt and purchase
$2,450,000 12/21/95 12
hauling and additional trucks transportation broker Maine
Craft and hobby Construct a new facility on
$950,000 12/29/95 6 leased
land and purchase equipment, and fixtures Texas Franchise
Construct a building and $800,000
12/31/96 8 restaurant purchase
machinery and equipment Missouri Specialty bakery Purchase
a building and $37,300 7/22/97
3 equipment (two loans) 22,800 $60,100
Total
$35,638,600 Page 22 GAO/RCED-99-
249 Rural Business and Industry Loans Appendix I Loans, Loan
Losses, and Loan File Documentation for 24 Guaranteed Business and
Industry Loans Lender's Feasibility Business credit
Service Loss study plan analysis
evaluation Comments $80,886 Waived Yes
Yes Yesb Freight rates and volume
experienced downward pressure. Rising fuel costs led to losses.
$127,738 Waived a Yes
Yes This company's business appeared to be sound,
but a competitor decided to hold a liquidation sale at the same
mall, continuing for months. The business was unable to continue
making lease and loan payments while sustaining heavy losses.
$400,000 Yes Yes Yes
Yes This franchise sit-down restaurant
opportunity along a well-traveled highway appeared to be viable.
However, it was located next to a truck stop and had very limited
sales. $22,740 No No Yes
Yesb This was a very small business. The borrower
walked away from the business after 3 months without explanation
and mailed the keys to the lender. $13,493,139 aNot required when
the loan was made. bService evaluation was incorporated in the
project summary document with limited narrative. Source: Service's
automated financial records, loan files, and Service officials.
Page 23 GAO/RCED-99-249 Rural
Business and Industry Loans Appendix II Comments From the U.S.
Department of Agriculture Now on p. 2. Now on p. 9. Page 24
GAO/RCED-99-249 Rural Business and Industry Loans Appendix II
Comments From the U.S. Department of Agriculture (150129) Page
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