Rural Development: Rural Business-Cooperative Service Business Loan Losses Page: 10 of 29
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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 do cumentatio n
before a loan is approved. The Service has continued to find some similar
problems through quality control reviews in fiscal year 1999.
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.
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.
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
GAO/RCED-99-249 Rural Business and Industry Loans
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United States. General Accounting Office. Rural Development: Rural Business-Cooperative Service Business Loan Losses, report, August 25, 1999; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc290922/m1/10/: accessed May 24, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.