Rural Development: Rural Business-Cooperative Service Business Loan Losses Page: 6 of 29
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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
* 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.
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/m1/6/: accessed May 23, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.