Rural Development: Rural Business-Cooperative Service Business Loan Losses Page: 9 of 29
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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 lo an.
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 fo r 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.
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/m1/9/: accessed May 21, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.