Order Code RL30346
CRS Report for Congress
Received through the CRS Web
Federal Credit Reform: Implementation
Of the Changed Budgetary Treatment of
Direct Loans and Loan Guarantees
Updated April 25, 2006
James M. Bickley
Specialist in Public Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Federal Credit Reform: Implementation
Of the Changed Budgetary Treatment of
Direct Loans and Loan Guarantees
Summary
On November 5, 1990, the Omnibus Budget Reconciliation Act of 1990 (P.L.
101-508) was signed into law. P.L. 101-508 added Title V to the Congressional
Budget Act. Title V, also called the Federal Credit Reform Act of 1990 (the FCRA),
changed how the unified budget reports the cost of federal credit activities (i.e.,
federal direct loans and loan guarantees). Before fiscal year 1992 (FY1992), for a
given fiscal year, the budgetary cost of a new direct loan or loan guarantee was the
net cash flow for that fiscal year. This cash flow measure did not accurately reflect
the true cost of a loan or loan guarantee, which is its subsidy cost over the entire life
of the loan or loan guarantee; that is, its accrual cost. The purposes of this report are
to explain the credit reform provisions, examine their implementation, and discuss
proposed modifications.
Beginning with FY1992, federal credit reform legislation required that the
reported budgetary cost of a credit program equal the estimated subsidy costs at the
time the credit is provided. The FCRA defines the subsidy cost as “the estimated
long-term cost to the government of a direct loan or a loan guarantee, calculated on
net present value basis, excluding administrative costs.” This places the cost of
federal credit programs on a budgetary basis equivalent to other federal outlays. This
change means, because the subsidy costs of discretionary credit programs are now
provided through appropriations acts, that the discretionary credit programs must
now compete with other discretionary programs on an equal basis. Funding for most
mandatory credit programs (generally entitlement programs) is provided by
permanent appropriations. The Director of the Office of Management and Budget
(OMB) is responsible for coordinating the estimation of subsidy costs to the
government.
Since the passage of the FCRA, federal agencies, working with OMB, have
steadily improved their compliance with credit reform standards. In October 1990,
the Federal Accounting Standards Advisory Board was established. In August 1993,
this board required that agencies’ accounting procedures be consistent with their
budgetary procedures for their federal credit programs. On August 5, 1997, the
Balanced Budget Act of 1997 (P.L. 105-33) was enacted. This law amended the
FCRA to make some technical changes including codifying several guidelines set by
OMB.
Four proposals to modify current practice have been discussed: the principles
of credit reform could be applied to government-sponsored enterprises (GSEs), the
principles of credit reform could be extended to federal insurance programs, the
administrative costs of credit programs could be included in the calculation of the
costs of these programs, and the budgetary cost of capital for credit programs could
be changed to include market risk. This report will be updated as issues develop and
new legislation is introduced.

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Contents
Justifications for Credit Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Federal Credit Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Federal Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Federal Credit Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Concept of the Unified Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Budgetary Treatment of Credit Before FY1992 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Unified Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Credit Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Federal Credit Reform Act of 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Subsidy Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Estimation of Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Budgetary Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Accounting Standards Advisory Board . . . . . . . . . . . . . . . . . . . . . . 11
Balanced Budget Act of 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Credit Reform in the President’s FY2007 Budget . . . . . . . . . . . . . . . . . . . . 12
Proposals for the Expansion of Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Appendix A. Federal Credit Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Appendix B. Budgetary Treatment of a Hypothetical Direct Loan . . . . . . . . . . . 19
Appendix C. Budgetary Treatment of a Hypothetical Loan Guarantee . . . . . . . 21
Appendix D. Direct Loan Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Appendix E. Loan Guarantee Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
List of Tables
Table 1. Federal Credit Data, FY2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Table 2. Direct Loan Data, FY2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Table 3. Loan Guarantee Data, FY2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

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Federal Credit Reform: Implementation
Of the Changed Budgetary Treatment of
Direct Loans and Loan Guarantees
Before FY1992, for a given fiscal year, the reported budgetary cost of a new
loan or new loan guarantee was its net cash flow for that fiscal year. This did not
accurately reflect the true cost of a loan or loan guarantee (federal credit) for the
government, which is its subsidy cost over the entire life of the loan or loan
guarantee. Using the old cash-flow method, it was often difficult for policymakers
to accurately monitor and therefore make informed decisions about federal credit.
In addition, administrators at agencies could understate costs by using budgetary
techniques such as generating “savings” from the fees on increased volumes of new
guarantees while ignoring the increase in expected losses and offsetting the (cash)
cost of new direct loans with current year collections from old loans.
To remedy these problems, Congress added a section on credit reform to the
Omnibus Budget Reconciliation Act of 1990 (OBRA90). The President signed
OBRA90 into law (P.L. 101-508) on November 5, 1990. The legislation added a
new title, Title V, to the Congressional Budget Act. Title V is also called the Federal
Credit Reform Act of 1990 (FCRA).1 Beginning with fiscal year 1992 (October 1,
1991), the FCRA changed the methodology in the unified budget for measuring and
reporting the cost of federal direct loans and federal loan guarantees from cash flow
to accrual accounting.
The FCRA required that the budgetary cost of federal credit would be measured
for any one year as the net present value of the cost to the government of credit
subsidies in the fiscal year that the credit is provided. The Government
Accountability Office (GAO), the Congressional Budget Office (CBO), and the
Office of Management and Budget (OMB) all recommended this new measure of the
cost of federal credit.2 Specific provisions of the FCRA represent compromises
within Congress and between the legislative and executive branches of the
government.
The purposes of this report are to explain the provisions of the FCRA, examine
the implementation of credit reform including credit reform provisions of the
Balanced Budget Act of 1997 (BBA97), and discuss proposed modifications of credit
1 This report will be updated as issues develop and new legislation is introduced. For the
most current information about pending legislation, please consult the Legislative
Information System (LIS) at [http://www.congress.gov].
2 U.S. General Accounting Office, Budgetary Treatment of Federal Credit Programs,
Report No. AFMD-89-42 (Washington: April 1989), p. 28.

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reform. In order to achieve these objectives, it is necessary to initially discuss
justifications for credit programs, federal credit concepts, and the budgetary treatment
of federal credit before the FCRA.3 Those interested in federal credit programs may
find the information in this report to be useful.
Justifications for Credit Programs
Federal credit programs may be economically justified on two grounds: equity
and efficiency. Equity concerns the distributions of income, consumption, and
wealth. The distribution of income has received the most emphasis among policy
makers. Because economists cannot make interpersonal comparisons of utility, the
optimal distributions of income, consumption, and wealth are normative; that is, they
involve value judgments. In other words, economists cannot conclude that one
distribution is better than another. Many Members of Congress support redistributive
programs including credit programs to lessen income disparities. Some critics
maintain that direct subsidies can usually better target assistance to the needy than
can credit programs.
If an economy is productively efficient, it cannot produce more of one good
without reducing the production of one or more other goods. For an economy to be
efficient, private financial intermediaries should allocate capital to its most
productive uses. Private financial intermediaries generally operate efficiently, but
market imperfections do exist, and these imperfections may cause an inadequate
availability of credit in certain sectors of the economy. The Office of Management
and Budget (OMB) states that “market imperfections that can justify federal
intervention include insufficient information, limited ability to secure resources,
imperfect competition, and externalities.”4
Federal Credit Concepts
Numerous terms in financial economics have specific meanings for federal
budget practices. These terms include federal credit, federal credit subsidies, and the
unified budget. Some of these terms are defined in the FCRA.
Federal Credit
The Office of Management and Budget defines federal credit as federal direct
loans and federal loan guarantees. The FCRA defines a direct loan as “a
3 Some of these concepts and the budgetary treatment of federal credit before the FCRA are
presented in more detail in the following source: James M. Bickley, “The Bush
Administration’s Proposal for Credit Reform: Background, Analysis, and Policy Issues,”
Public Budgeting & Finance, vol. 11, no. 1, spring 1991, pp. 50-65.
4 U.S. Executive Office of the President, Office of Management and Budget, Analytical
Perspectives, Budget of the United States Government, Fiscal Year 2007 (Washington:
GPO, 2006), pp. 65-66.

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disbursement of funds by the government to a nonfederal borrower under a contract
that requires the repayment of such funds with or without interest” [Section 502(1)].
According to the FCRA, a direct loan obligation is “a binding agreement by a federal
agency to make a direct loan when specified conditions are fulfilled by the borrower”
[Section 502(3)]. The FCRA defines a loan guarantee as a “pledge with respect to
the payment of all or a part of the principal or interest on any debt obligation of a
non-federal borrower to a non-federal lender” [Section 502(3)]. A loan guarantee
commitment is “a binding agreement by a federal agency to make a loan guarantee
when specified conditions are fulfilled by the borrower, the lender, or any other party
to the guarantee agreements” [Section 502(4)].
When either a direct loan obligation or a loan guarantee commitment is
extended, the federal government determines future credit flows because the
government signs a contract to provide credit. In some cases the specified conditions
may not be met, and, consequently, credit will not be provided even though a contract
was signed. Furthermore, there is a time lag between the signing of these contracts
and the actual disbursement of a direct loan by the federal government or the actual
disbursement of a guaranteed loan by a private lender. In some cases, particularly for
credit for construction, credit may be disbursed by either the federal government or
a private lender in increments over several fiscal years.5
Federal Credit Subsidies
Federal credit recipients obtain funds on more favorable terms than they could
receive from the private market. OMB describes subsidies from federal direct loans
as consisting of one or more of the following:
! Interest rates below commercial levels,
! Longer maturities than fully private loans,
! Deferral of interest,
! Allowance of grace periods,
! Waiver or reduction of loan fees,
! Higher loan amount in relation to the value of the underlying
enterprise than a fully private loan, and
! Availability of funds to borrowers for purposes for which the private
sector would not lend — at virtually any interest rate under virtually
any repayment terms.6
The recipient of a federal loan guarantee receives a subsidy because the federal
government covers part or all of the default risk — a subsidy conveyed by lower
5 At the end of FY2005, the face value of outstanding direct federal loans totaled $247
billion and the face value of outstanding federally guaranteed loans totaled $1,096 billion.
For data on the face value of outstanding credit by program, see appendix A. The number
of credit programs depends on the degree of aggregation, and data in appendix A are highly
aggregated.
6 U.S. Executive Office of the President, Office of Management and Budget, Special
Analysis F, Federal Credit Programs, Budget of the United States Government, Fiscal Year
1988 (Washington: GPO, 1987), p. F32.

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interest payments. Also, the federal government either does not levy a loan guarantee
fee or charges a smaller fee than a private insurer would charge. Consequently, a
lender can charge the borrower a lower interest rate. In addition, with some
guaranteed loans the federal government may pay to the lender part of the interest due
on a guaranteed loan.7 Thus, a federal loan guarantee with or without a federal
interest payment may provide a lower, equal, or higher level of subsidy than a federal
direct loan.
Concept of the Unified Budget
An important budget reform that preceded credit reform was the adoption of a
unified budget. Before 1967, the federal government most frequently used the
administrative budget, which was not comprehensive in coverage because it excluded
the trust funds (for example, the Social Security trust fund). The federal government
also used two other broad budgets: the consolidated cash budget and the national
income accounts budget. Each of these three budgets had a different coverage of
federal programs and a different accounting method, consequently each had a
different surplus or deficit.8 Each of these budgets had weaknesses, and the
simultaneous use of three different budget concepts caused confusion.9
In March 1967, the President’s Commission on Budget Concepts was created
and instructed to make “a thorough and objective review of budgetary concepts.”10
In October 1967, the Commission produced a comprehensive report with detailed
recommendations on implementing a unified budget. In its report, the Commission
stated that the two basic functions of the federal budget are resource allocation and
macroeconomic stabilization.11 For resource allocation, the Commission believed
that the budget should “provide the integrated framework for information and
analyses from which the best possible choices can be made in allocating the public’s
money among competing claims.”12 This function of resource allocation should
include comparisons among government programs and between the public and
private sectors.13 For macroeconomic stabilization, the Commission maintained that
the budget should contain detailed and accurate information in order to evaluate the
effects of federal fiscal activities.
7 Ibid., p. F33.
8 For a explanation of these budget concepts, see Report of the President’s Commission on
Budget Concepts (Washington: GPO, 1967), pp. 82 — 83.
9 Ibid., p. 1.
10 Ibid., p. 105.
11 Ibid., p. 14.
12 Ibid., p. 16.
13 Ibid.

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Furthermore, the budget should include data necessary to undertake
discretionary countercyclical fiscal policy.14 Thus, the Commission recommended
a unified budget that would be composed of all federal activities including the trust
funds and federal credit activities. The Commission recommended that federal credit
programs be measured by their cash flows, although it realized that this procedure
provided a poor measure of the economic and budgetary effects of federal credit. In
the FY1969 budget, the Johnson Administration adopted the unified budget concept,
but with some structural differences from the proposal of the Commission. The
Johnson Administration essentially adopted Commission recommendations of
measuring credit by its cash flows. Implementation of federal credit reform would
improve the use of the unified budget for resource allocation and macroeconomic
stabilization as originally desired by the Commission.
Budgetary Treatment of Credit Before FY1992
Before the implementation of the Federal Credit Reform Act of 1990, the
unified budget treated federal credit in two different ways. The unified budget
measured credit by its cash flows, but also, after 1980, included a separate credit
budget which measured and selectively controlled gross credit flows.
Unified Budget
The federal unified budget uses cash-basis accounting. Before FY1992, a new
federal direct loan was treated as a budget outlay in the current fiscal year, and
repayments of principal and payments of interest were treated as offsetting
collections (negative outlays) in the future fiscal years in which they occurred. If a
loan recipient paid a fee, this fee was treated as an offsetting collection. Loan
defaults reduced repayments of principal and interest, and therefore offsetting
collections. Administrative expenses were reported as outlays. In a given fiscal year,
the budgetary cost of a loan program, not the individual loans, was its net cash flow.
This equaled new loans made plus any administrative expenses associated with these
loans (rarely recognized in the loan accounts) less any loan fees, repayments of
principal, and payments of interest.
The federal acceptance of a contingent liability when a loan guarantee was
provided was not included in the federal budget because no cash flow occurred. The
administrative costs of a guarantee program were outlays in the fiscal year in which
they occurred. Some guarantee programs charge fees to the recipient, and these fees
were considered offsetting collections. Any federal outlays necessary to compensate
lenders for any default losses covered by a federal guarantee were not shown in the
budget until they were actually paid.
14 Ibid., p. 18.

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Credit Budget
In January 1980, the Office of Management and Budget introduced a federal
credit budget to help monitor and control the growth of federal credit, including new
direct loan obligations and new loan guarantee commitments. Federal credit was
measured at the time that the government signed a binding contract to provide credit
assistance. Initially, the credit budget consisted of nonbinding targets. Before
FY1992, limits in the credit budget were included in the budget resolution and in
annual appropriation acts for discretionary credit programs but not mandatory credit
programs.15 Although the credit budget improved credit visibility, the credit budget
did not measure or control the size of subsidies.
Federal Credit Reform Act of 1990
Reforming federal credit required that the budget, in the year in which the credit
was provided, include the multi-year net cash flows generated by a new direct or
guaranteed loan. Thus, federal credit would be recorded on an accrual basis but
incorporated into a cash flow budget. Advocates of credit reform maintained that the
inclusion of credit subsidies in the unified budget would equalize the budgetary
treatment and therefore congressional consideration of federal credit and noncredit
programs. Federal credit programs could be compared on a dollar-for-dollar basis
with expenditures for noncredit programs and cost-benefit analysis could be more
easily used to evaluate specific federal credit programs. Credit reform was expected
to improve the ability of the unified budget to allocate resources and stabilize the
economy. Numerous comprehensive plans were proposed, beginning in 1983. These
proposals culminated in the Federal Credit Reform Act of 1990.16
Purposes
The four stated purposes of the FCRA were to
(1) measure more accurately the costs of federal credit programs;
(2) place the cost of credit programs on a budgetary basis equivalent to
other federal spending;
(3) encourage the delivery of benefits in the form most appropriate to the
needs of beneficiaries; and
(4) improve the allocation of resources among credit programs and other
spending (Section 501 of the FCRA).
15 U.S. Executive Office of the President, Office of Management and Budget, Special
Analysis F, Federal Credit Programs, Budget of the United States Government, Fiscal Year
1990 (Washington: GPO, 1989), p. F4.
16 For hypothetical examples of the operation of a direct loan program and a loan guarantee
program under the Federal Credit Reform Act of 1990, see appendices B and C.

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Subsidy Costs
The FCRA never uses the word subsidy; nevertheless, the true budgetary and
economic cost of a federal credit program is the subsidy value at the time the credit
is provided. The FCRA defines the [subsidy] cost as “the estimated long-term cost
to the government of a direct loan or loan guarantee, calculated on net present value
basis, excluding administrative costs and any incidental effects on governmental
receipts or outlays” [Section 502(5A)]. The discount rate used to calculate subsidy
costs in terms of present value is the “average interest rate on marketable Treasury
securities of similar maturity” [Section 502(5E)].17 Hence, the subsidy cost of a
program is determined by the amount of credit provided and the discount rate used
to calculate the net present value of that credit.
Any government action that changes the estimated present value of an
outstanding federal credit program is counted in the budget in the year in which the
change occurs as a change in the subsidy cost of that program [Section 502(5D)]. For
example, the federal government could partially forgive the repayment of principal
for low-income borrowers from a particular credit program which would increase the
subsidy cost of the program.
Estimation of Subsidies
The Director of the Office of Management and Budget is responsible for
coordinating the estimation of subsidy costs. “The Director may delegate to agencies
authority to make estimates of costs” [Section 503(a)]. But these agencies must use
written guidelines from the Director, which are developed after consultation with the
Director of the Congressional Budget Office. The Director of OMB and the Director
of CBO are responsible for developing more accurate historical data on credit
programs which are used to estimate subsidy costs (Section 503). The President’s
budget includes “the planned level of new direct loan obligations and new loan
guarantee commitments associated with each appropriations request” (Section 504).
Budgetary Treatment
Beginning with FY1992, discretionary programs providing new direct loan
obligations and new loan guarantee commitments require appropriations of budget
authority equal to their estimated subsidy costs. Credit entitlements (for example,
guaranteed student loans) and existing credit programs of the Commodity Credit
Corporation have indefinite budget authority [Section 505(a-c)] and do not need an
annual appropriation.
An appropriation for the annual subsidy cost of each credit program is made into
a budget account called a credit program account. Funding for the subsidy costs of
discretionary credit programs is provided in appropriation acts and must compete
with other discretionary programs for funding available under the constraints of the
budget resolution. Most mandatory credit programs receive automatic funding for
the amount of credit needed to meet the estimated demand by beneficiaries.
17 The derivation of the discount rate was revised by the Balanced Budget Act of 1997.

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Mandatory programs are generally entitlement programs for which the amount of
funding depends on eligibility and benefits rules contained in substantive law. The
subsidy cost of federal credit is scored as an outlay in the fiscal year in which the
credit is disbursed by either the federal government or a private lender [504d]. For
mandatory credit programs, any additional cost from reestimates of subsidies for a
credit program is covered by permanent indefinite budget authority. This additional
cost is displayed in a subaccount in the credit program account.
Also, beginning with FY1992, each credit program has a nonbudget financing
account. Each of these nonbudget financing accounts receives payments from its
associated credit program account equal to the subsidy cost at the time a new loan or
loan guarantee is provided. They also acquire the value of the unsubsidized portion
of the loans (actual disbursements by the government minus the subsidy cost). These
amounts are borrowed from the Treasury through the loan program.18 Furthermore,
the financing accounts contain all other cash flows to and from the government
associated with each credit program [Section 502(5E6-7)]. Because they are
nonbudget, the cash flows into and out of these accounts are not reflected in total
outlay, receipts, or surplus/deficit. The budget authority of a credit program provides
the means for the credit program account to pay to the financing account an amount
equal to that program’s estimated subsidy costs.
Another special account, the liquidating account, includes all ongoing cash
flows of each credit program resulting from credit advanced prior to October 1, 1991
[Section 502(5E8)]. However, the new budgetary procedures under the FCRA would
apply to modifications made by the U.S. government to credit terms on credit
provided before FY1992.19
The FCRA does not apply to the credit activities of the Federal Deposit
Insurance Corporation, the National Credit Union Administration, the Resolution
Trust Corporation, national flood insurance, the National Insurance Development
Fund, crop insurance, or the Tennessee Valley Authority (Section 506).
Implementation
Agency
The Federal Credit Reform Act of 1990 was brief; it covered only five and one-
half pages of the U.S. Code and Administrative News.20 Numerous details necessary
to make the act completely operational were absent. Furthermore, many federal
18 These transfers within the government represent transfers of budgetary resources rather
than actual financial resources.
19 U.S. Executive Office of the President, Office of Management and Budget, The Budget
System and Concepts, Budget of the United States Government, Fiscal Year 2003
(Washington: GPO, 200), p. 15.
20 U.S. Code, Congressional and Administrative News, 101st Cong., 2nd sess., vol. 6, ( St.
Paul: MN, West Publishing Co., 1991), pp. 610 — 615.

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agencies had inadequate financial and accounting systems to implement credit
reform.21
On July 2, 1992, OMB issued a revised circular, which improved and clarified
instructions for credit budget formulation.22 Furthermore, OMB simplified its credit
subsidy model to make it easier for agencies to estimate direct loan and loan
guarantee subsidies.23 In November 2000, OMB updated Circular A-129 concerning
the budgetary treatment of federal credit programs.24 On November 2, 2005, OMB
also revised Circular A-11 to include federal credit reform procedures. In Circular
A-11, OMB explains to agencies how they should fill out credit schedules in
preparing their budget requests.25 Federal agencies working with OMB have steadily
improved their compliance with credit reform standards.
Since the passage of the FCRA, OMB has continued to assist agencies in
upgrading the quality of subsidy estimates. Beginning with FY1994 agencies have
recorded reestimates of the cost of their credit programs. Aggregate subsidy
estimates have been adjusted upward or downward annually since FY1994.26 In the
aggregate, upward subsidy reestimates of $21.358 billion were partially offset by
downward subsidy reestimates of $13.512 billion.27
The trend for the subsidy reestimates has been for the magnitude to increase, but
in May 2001, CBO stated that it lacked any methodology to forecast the direction or
size of future reestimates.28 The FCRA provided for permanent indefinite authority
to cover the cost of reestimates so that new appropriations are not needed. Agencies
are required to incorporate improved knowledge into their subsidy estimates for
future direct loan obligations and loan guarantee commitments.29
21 David B. Pariser, Implementing Federal Credit Reform: Challenges Facing Public Sector
Financial Manager, Public Budgeting & Finance, vol. 12, no. 4, winter 1992, p. 28.
22 U.S. Executive Office of the President, Office of Management and Budget, Budget of the
United States Government, Fiscal Year 1994 (Washington: GPO, 1993), p. 49.
23 Ibid.
24 U.S. Executive Office of the President. Office of Management and Budget, Policies for
Federal Credit Programs and Non-Tax Receivables, Circular A-129, (Washington:
continually updated), p. 27.
25 OMB’s Circulars A-11 and A-129 are available at [http://www.whitehouse.gov/omb/
circulars/], visited April 3, 2005.
26 U.S. Executive Office of the President, Office of Management and Budget, Analytical
Perspectives, Budget of the United States Government, Fiscal Year 2004 (Washington: U.S.
GPO, 2003), p. 217 and Analytical Perspectives, Budget of the United States Government,
Fiscal Year 2007, p. 88.
27 Ibid.
28 U.S. Congressional Budget Office, An Analysis of the President’s Budgetary Proposals
for Fiscal Year 2002 (Washington: May 2002), p. 4.
29 U.S. Executive Office of the President, Office of Management and Budget, Federal Credit
Supplement, Budget of the United States Government, Fiscal Year 1997 (Washington: GPO,
(continued...)

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The Government Accountability Office examined subsidy estimates for 10
credit programs in five agencies for the period of fiscal years 1992 through 1998.
GAO found problems with supporting documentation for subsidy estimates and the
reliability of subsidy rate estimates and reestimates in each agency.30 But GAO
concluded that agencies showed improvement in documenting estimates in each
agency.31
CBO examined credit subsidy reestimates for the period of FY1993 through
FY1999. CBO concluded that
Projecting the losses and costs from federal credit assistance is difficult, and
errors are inevitable. Although various incentives may exist for agencies to
underestimate credit subsidies, the Congressional Budget Office’s analysis of
corrected reestimates does not reveal any pattern of bias in initial subsidy
estimates. However, another problem was uncovered: the reestimates reported
in the president’s budget are in such disorder that analysts cannot rely on them.
A few modest changes in current practice could reduce agencies’ errors in
preparing, reporting, and accounting for estimates and reestimates.32
OMB established on-budget receipt accounts to receive payments of earnings
from the financing accounts in those unusual cases where federal credit programs are
estimated to produce net income, that is, have negative subsidies.33 Usually
payments into a program’s receipt account are recorded in the Treasury’s general
fund as offsetting receipts.34 “In a few cases, the receipts are earmarked in a special
fund established for the program and are available for appropriation for the
program.”35 In the FY2007 Budget, FHA mortgage guarantees account for most of
the estimated negative subsidies.36
29 (...continued)
1996), pp. 48 — 49.
30 U.S. General Accounting Office, Credit Reform: Greater Effort Needed to Overcome
Persistent Cost Estimation Problems, Report no. AIMD-98-14 (Washington: GPO, March
1998), pp. 9-10.
31 Ibid., p. 11.
32 David Torregrosa, “Credit Subsidy Reestimates, 1993-99,” Public Budgeting & Finance,
vol. 21, no. 2, summer 2001, p. 114.
33 Marvin Phaup, “Credit Reform, Negative Subsidies, and FHA,” Public Budgeting &
Finance, vol. 16, no. 1, spring 1996, p. 24.
34 U.S. Executive Office of the President, Office of Management and Budget, Analytical
Perspectives, Budget of the United States Government, Fiscal Year 2007 (Washington:
GPO, 2006), p. 390.
35 Ibid.
36 For a comprehensive analysis of these negative subsidies, see Congressional Budget
Office, Subsidy Estimates for FHA Mortgage Guarantees, (Washington: Nov. 2003).

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CRS-11
Federal Accounting Standards Advisory Board
In October 1990, the Federal Accounting Standards Advisory Board (FASAB
or “the Board”) was established by the Secretary of the Treasury, the Director of
OMB, and the Comptroller General to consider and recommend accounting
principles for the federal government. On September 15, 1992, the Board issued an
exposure draft recommending accounting standards for federal credit programs on
a basis consistent with credit reform. The Board received numerous substantive
comments that were considered in revising its exposure draft, and on August 23,
1993, OMB issued the Board’s revised report titled Accounting for Direct Loans and
Loan Guarantees.37 This report provided extensive detail, including numerous
arithmetic examples, clarifying credit reform practices.38 It further required that
federal agencies use of present value accounting for federal credit programs
consistent with the Federal Credit Reform Act of 1990.39 Thus, for their credit
programs, agencies’ accounting procedures are now required to be consistent with
their budgetary procedures.
Balanced Budget Act of 1997
On August 5, 1997, the Balanced Budget Act of 1997 (P.L. 105-33) was
enacted.40 This law (BBA97) amended the Federal Credit Reform Act of 1990 to
make some technical changes including codifying several OMB guidelines.
Important changes were:
First, agencies are required to use the same discount rate to calculate the subsidy
when they obligate budget authority for direct loans and loan guarantees and when
submitting the agency’s budget justification for the President’s budget.41 Thus, the
dollar value of loans for a specific credit program is known when Congress considers
subsidy appropriations for that program. Prior to this change, agencies had used
37 For a discussion of the Board’s conclusions on issues raised these comments, see U.S.
Executive Office of the President, Office of Management and Budget, Accounting for Direct
Loans and Loan Guarantees: Statement of the Federal Financial Accounting Standards, no.
2 (Washington: Aug. 23, 1993), pp. 21 — 42.
38 For a detailed example of the estimation of credit subsidies, see U.S. General Accounting
Office, Credit Subsidy Estimates for the Sections 7(a) and 504 Business Loan Programs,
Report no. T-RCED-97-197 (Washington: GPO, July 16, 1997), p. 19.
39 U.S. Executive Office of the President, Office of Management and Budget, Accounting
for Direct Loans and Loan Guarantees: Statement of the Federal Financial Accounting
Standards, pp. 21-42.
40 For a summary of the contents of the Budget Enforcement Act of 1997, see CRS Report
97-930 GOV, Budget Enforcement Act of 1997: A Fact Sheet, by Robert Keith, Jan. 23,
2004.
41 U.S. Executive Office of the President, Office of Management and Budget, Analytical
Perspectives, Budget of the United States, Fiscal Year 1999 (Washington: GPO, 1998), p.
170.

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CRS-12
interest rates from the preceding calendar quarter to calculate the subsidy at the time
a direct loan was advanced or a loan guarantee was obligated.42
Second, agencies are required to use the same forecast assumptions (for
example, default and recovery rates) to calculate subsidy rates when they obligate
credit and when preparing the President’s budget.43
Third, agencies are required to transfer end-of-year unobligated balances in
liquidating accounts (revolving funds for direct loans and loan guarantees made prior
to the effective date of the FCRA) to the general fund as soon as practicable after the
close of the fiscal year.44
Fourth, the same interest rate must be used on financing account debt (which
generates interest payments to the Treasury), financing account balances, and the
discount rate used to calculate subsidy costs.45
Fifth, the definition of the term “cost” is modified so that the discount rate is
based on the timing of cash flows instead of on the term of the loan. Under this new
approach, in the President’s budget, a series of different rates would be used to
calculate the present value of cost flows over a multi-year period. For example, for
a 10-year direct loan (or loan guarantee), costs in the first year would be discounted
using the interest rate on a one-year Treasury bill, costs in the second year would be
discounted using the interest rate on a two-year Treasury note, etc. Under the prior
approach, the interest rate of a 10-year Treasury note would have been used as the
discount rate. This prior method proved to be inferior because the flow of
semiannual interest payments and the repayment of full principal on the last payment
date did not match up well with yearly cost flows.46
Credit Reform in the President’s FY2007 Budget
In the FY2007 budget, direct loans obligated and loan guarantees committed
before FY1992 remain recorded on a cash flow basis. Unless modified, these “old”
loans and loan guarantees will remain in their liquidating accounts. Also, in the
FY2007 budget, as in all budgets since the FY1992 budget, explicit subsidy estimates
for all credit programs have been made by OMB or agencies using OMB guidelines.
In the early 1990s, “OMB developed a model for estimating subsidies which ... [has
been] used by all agencies in their budget estimates and therefore provides
42 Ibid.
43 Ibid.
44 Ibid.
45 Ibid.
46 U.S. Congress, Conference Committee, Balanced Budget Act of 1997, Conference Report
to Accompany H.R. 2015, H.Rept. 105-217, 105th Cong., 1st sess. (Washington: July 30,
1997), pp. 996-997.

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CRS-13
consistency and uniformity in the discounting method.”47 The loan characteristic
variables in this estimation model are loan maturity period, borrower interest rate,
grace period, upfront fees, annual fees, other fees, assumed default rate, rate of
recovery on defaults, and percent of loan guaranteed (for loan guarantee programs
only).48 In addition, OMB breaks down estimated subsidy rates into four
components: defaults (net of recoveries), interest, fees, and all other.49
For FY2007, the four direct loan programs with the highest levels of proposed
subsidy budget authority in the President’s budget are the Department of Defense’s
Family Housing Improvement Fund ($215 million), the Department of Agriculture’s
Rural Community Advancement Program ($184 million), the International
Assistance Programs’ Debt Restructuring ($183 million), and the Department of
Agriculture’s Rural Housing Insurance Fund ($136 million).50 For FY2007, the
aggregate level of proposed subsidy budget authority is $1,159 million.51
For FY2007, OMB estimates an aggregate proposed value of new direct loans
of $38,639 million.52 The four programs with the largest proposed dollar value of
direct loans are the Department of Education’s Federal Direct Student Loan Program
($24,807 million), the Department of Agriculture’s Rural Electrification and
Telecommunications Loan Program ($4,528 million), the Department of
Transportation’s Federal-Aid for Highways ($2,400 million), and the Department of
Agriculture’s Rural Housing Insurance Fund ($1,294 million).53
For FY2007, the loan guarantee program with the highest levels of proposed
subsidy budget authority in the President’s budget is the Department of Education’s
Federal Family Education Loan Program ($6,125 million), which was far higher than
any other program.54 For FY2007, the aggregate level of proposed subsidy budget
authority was $5,186 million, which was reduced by the negative subsidy budget
authority of two Housing and Urban Development (HUD) Programs: FHA-Mutual
Mortgage Insurance (-$845 million) and FHA-General and Special Risk Program
(-$247 million).55
47 U.S. Executive Office of the President, Office of Management and Budget, Handout on
Credit Reform (Washington: Jan. 31, 1991), p. 13.
48 U.S. Executive Office of the President, Office of Management and Budget, Federal Credit
Supplement, Budget of the United States Government, Fiscal Year 2007 (Washington: GPO,
2006), pp. 9, 13.
49 Ibid.
50 U.S. Executive Office of the President, Office of Management and Budget, Analytical
Perspectives, Budget of the United States Government, Fiscal Year 2007, p. 89.
51 Ibid., for data on subsidy budget authority on each direct loan program, see Appendix D.
52 Ibid.
53 Ibid., for data on proposed loan levels on each direct loan program, see Appendix D.
54 Ibid., p. 90.
55 Ibid., for data on subsidy budget authority on each loan guarantee program, see Appendix
(continued...)

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CRS-14
For FY2007, OMB estimates an aggregate proposed value of guaranteed loans
of $275,091 million.56 For FY2007, the four guarantee programs with the highest
estimated dollar value were HUD’s FHA-Mutual Mortgage Insurance Program
($86,039 million), Department of Education’s Federal Family Education Loan
Program ($84,287 million), Veterans Affairs’ Veterans Housing Program ($37,681
million), and the Small Business Administration’s General Business Loan Program
($28,000 million).57
The Federal Credit Reform Act of 1990 decreased the importance of the credit
budget because the control of credit subsidies largely replaced limits on gross credit
flows as a determinant of the amount new federal credit for each program. For
FY2007, appropriations acts limitations on credit loan levels are imposed, although
the term “credit budget” is not used by OMB.58 The estimated subsidy cost to the
taxpayer is the only true constraint on the amount of credit extended, however,
because the appropriations acts’ limitations on credit loan levels are set too high to
realistically affect the amount of credit extended.
Proposals for the Expansion of Reforms
Four major proposals to expand credit reform have been discussed in recent
years. First, the principles of credit reform could be applied to government-
sponsored enterprises (GSEs). GSEs are privately-owned financial intermediaries,
which were established and chartered by the federal government. GSEs pay lower
interest rates on their securities because investors generally believe that securities
issued by GSEs have an implied federal guarantee, making them appear less risky
than other private sector securities. Proponents of extending credit reform principles
to GSEs argue that the federal government has already “bailed out” one GSE (the
Farm Credit System). Hence, proponents argue that credit reform should cover the
subsidy costs to taxpayers of GSEs. Opponents argue that the subsidy costs of GSEs
are difficult to quantify; furthermore, the federal government has no legal
responsibility to “bail out” GSEs. Opponents also maintain that the current exclusion
of administrative costs and a risk premium would probably result in subsidy costs of
approximately zero.
Second, the principles of credit reform could be extended to federal insurance,
which currently is primarily treated on a cash flow basis.59 Most federal insurance
55 (...continued)
E.
56 Ibid.
57 Ibid.
58 For estimated appropriations acts limitations on credit loan levels for FY2007 by program,
see Analytical Perspectives, Budget of the United States, Fiscal Year 2007, p. 94.
59 For a comprehensive analysis of the current budgetary treatment of a federal insurance
program, see Congressional Budget Office, The Budgetary Treatment of Subsidies in the
(continued...)

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CRS-15
consists of deposit insurance or pension insurance.60 The Government Accountability
Office maintains that credit reform could improve the budgetary information and
incentives for federal insurance.61 But, for some federal insurance programs,
significant difficulties exist in accurately estimating future claims for losses. Often
historical data are unavailable, frequent program modifications occur, and
fundamental changes take place in the activities insured.62 “Many federal insurance
programs cover complex, case-specific, or catastrophic risks that the private sector
has historically been unwilling or unable to cover.”63
The complexity of the issues involved and the need to build agency capacity to
generate such estimates suggest that it is not feasible to integrate accrual-based
costs directly into the budget at this time.64
GAO suggests that a supplemental approach should precede the full inclusion of
insurance programs under credit reform. Thus, GAO recommends that accrual-based
cost measures be initially included along with cash-based estimates as supplemental
information in the budget documents.65
Some opponents of the inclusion of insurance programs maintain that because
the current subsidy measure excludes administrative costs and a risk premium, some
major insurance programs would record negative subsidies.
The Comprehensive Budget Process Reform Act of 1999, H.R. 853 in the first
session of the 106th Congress, as introduced in the House on June 24, 1999, would
have extended credit reform to federal insurance programs. But, H.R. 853 as
reported in the House on August 5, 1999, did not include those sections extending
credit reform to federal insurance programs.
Third, as was discussed in the 1990 debate, administrative costs of credit
programs could be included in the calculation of the costs of these programs.
Proponents argue that the current exclusion of these costs understates the actual costs
of credit programs. Proponents also stress that cost comparisons among credit
programs are distorted. For example, the administrative costs per $1 million of credit
59 (...continued)
National Flood Insurance Program, Testimony of Donald B. Marron, Acting Director,
before the Senate Committee on Banking, Housing, and Urban Affairs, Jan. 25, 2006.
60 U.S. General Accounting Office, Budget Issues: Budgeting for Federal Insurance
Programs, Report no. AIMD-97-16 (Washington: Sept. 1997), p. 6.
61 Ibid., p. 7.
62 U.S. General Accounting Office, Budget Issues: Budgeting for Federal Insurance
Programs, Testimony before the Budget Task Force, Committee on the Budget, House of
Representatives, Report no. T-AIMD-98-147 (Washington: April 23, 1998), p. 9.
63 Ibid.
64 Ibid., p. 13.
65 U.S. General Accounting Office, Budget Issues: Budgeting for Federal Insurance
Programs, Report no. AIMD-97-16, p. 10.

---

CRS-16
are higher for direct student loans than guaranteed student loans. Opponents argue
that agencies have difficulty separating the administrative costs of their credit
programs from their general administrative costs.
Fourth, the budgetary cost to taxpayers of providing federal credit could be
changed to include market risk.66 Currently, the FCRA requires the “discounting of
expected cash flows at the interest rate on risk-free Treasury securities (the rate at
which the government borrows money).”67 CBO’s report on federal credit subsidies
examined two ways of including the market price for risk: risk-adjusted discount
rates and options-pricing methods.
The risk-adjusted discount rate (ADR) method “adds a spread — the difference
between the interest rate on a Treasury security and the rate on a risky security — to
Treasury rates and uses the resulting adjusted rate to discount expected cash flows
associated with a loan.”68 The ADR method results in a higher discount rate for both
costs and revenues and, with a few exceptions for negative subsidies, raises the net
cost of credit programs.
“An option is a marketable security which allows the owner to buy (or sell)
another security at a stipulated price on or before a specified date.”69
“The general
ideal behind options-pricing methods is that assets with the same payoffs must have
the same price; otherwise, investors would have the opportunity to earn a risk-free
profit by buying low and selling high.”70 An options-pricing method is likely to be
more accurate than the ADR method but only when the necessary data and model are
available.71 Options-pricing models are seldom used to value credit provided to
individuals; instead the use of the ADR method is usually appropriate.72 Option-
pricing methods are usually better than ADR methods in valuing credit provided to
commercial enterprises.73 The best method to use varies for other credit programs
such as “loan assistance to sovereign states, municipalities, and special-purpose
enterprises.”74
66 This change would require new legislation because the FCRA specifies that the subsidy
cost of federal credit is the cost to the taxpayer rather than the market value to the recipient.
67 Congressional Budget Office, Estimating the Value of Subsidies for Federal Loans and
Loan Guarantees, Aug. 2004, p. 4.
68 Ibid., p. 7.
69 Robert C. Radcliffe, Investment: Concepts, Analysis, and Strategy (Glenview, Ill.: Scott,
Foresman and Company, 1982), p. 348.
70 Congressional Budget Office, Estimating the Value of Subsidies for Federal Loans and
Loan Guarantee, p. 8.
71 Ibid.
72 Ibid.
73 Ibid.
74 Ibid., p. 9.

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CRS-17
As an example of the process, CBO applied a type of options pricing — the
binomial pricing method — to calculate the risk-adjusted cost of extending federal
loan guarantees to Chrysler in 1980 and to America West Airlines (AWA) in 2002.
CBO computed that the market-value loss of the Chrysler loan guarantee was $239.0
million instead of the Treasury-rate loss of $107.6 million.75 CBO also found that the
calculated market-value loss was $26.3 million for the AWA loan guarantee instead
of a gain of $47.4 million using Treasury interest rates.76
75 Ibid., pp. 12-19.
76 Ibid.

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CRS-18
Appendix A. Federal Credit Data
Table 1. Federal Credit Data, FY2005
Estimated Future Cost of Outstanding Federal Credit Programs
(in billions of dollars)
Estimated Future
Outstanding
Program
Costs of 2005
2005
Outstandinga
Direct Loans:b
Federal Student Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113
11
Farm Service Agency (excl. CCC), Rural Dev., Rural
Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43
9
Rural Utilities Service and Rural Telephone Bank . . . . . . . . .
34
2
Housing and Urban Development . . . . . . . . . . . . . . . . . . . . .
12
2
Export-Import Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
5
Public Law 480 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
4
Agency for International Development . . . . . . . . . . . . . . . . .
8
3
Commodity Credit Corporation . . . . . . . . . . . . . . . . . . . . . . .
3
1
Federal Communications Commission . . . . . . . . . . . . . . . . . .
*
*
Disaster Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
1
VA Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
*
Other Direct Loan Programs . . . . . . . . . . . . . . . . . . . . . . . .
11
3
Total Direct Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
247
41
Guaranteed Loans:b
FHA Mutual Mortgage Insurance Fund . . . . . . . . . . . . . . . . .
336
2
VA Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
206
3
Federal Family Education Loan Program . . . . . . . . . . . . . . . .
289
31
FHA General/Special Risk Insurance Fund . . . . . . . . . . . . . .
90
3
Small Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
2
Export-Import Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36
2
International Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
2
Farm Service Agency (excl. CCC), Rural Dev., Rural
Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
1
Commodity Credit Corporation . . . . . . . . . . . . . . . . . . . . . . .
2
*
Maritime Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
*
Air Transportation Stabilization Program . . . . . . . . . . . . . . .
1
1
Government National Mortgage Association (GNMA)c
0
*
Other Guaranteed Loan Programs . . . . . . . . . . . . . . . . . . . . .
8
1
Total Guaranteed Loans . . . . . . . . . . . . . . . . . . . . . . . .
1,096
48
Total Federal Credit . . . . . . . . . . . . . . . . . . . . . . . . .
1,343
89
Source: Adapted by CRS from U.S. Executive Office of the President, Office of Management and Budget,
Analytical Perspectives, Budget of the United States Government, Fiscal Year 2007 (Washington: GPO, 2006),
p. 86.
Note: Detail may not add to total due to rounding.
*$500 million or less.
a. Direct loan future costs are the financing account allowance for subsidy cost and the liquidating account
allowance for estimated uncollectible principal and interest. Loan guarantee future costs are estimated
liabilities for loan guarantees.
b. Excludes loans and guarantees by deposit insurance agencies and programs not included under credit reform,
such as CCC commodity price supports. Defaulted guaranteed loans which become loans receivable are
accounted for as direct loans.
c. GNMA data are excluded from the totals because they are secondary guarantees on loans guaranteed by FHA,
VA, and RHS.

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CRS-19
Appendix B. Budgetary Treatment of
a Hypothetical Direct Loan
1)
For a proposed direct loan program, CBO is required to estimate the subsidy
cost. If legislation is passed that includes this new loan program, OMB
becomes responsible for estimating the subsidy cost. If a direct loan program
L has been enacted into law, agency A establishes a credit program account and
a nonbudget financing account.
(2) OMB (or agency A using OMB guidelines) estimates that the net present value
of the cost of credit subsidies equals (in this example) 20% of loans disbursed
under program L operated by agency A.
(3) If program L is a discretionary loan program, an appropriations bill for the fiscal
year is passed by Congress and signed into law by the President.77 This bill
includes an appropriation of (in this example) $100 million for the subsidy
budget authority of program L. Within agency A, this $100 million is
appropriated to the credit program account for program L. Furthermore, this
appropriations bill must include an estimate of the dollar amount of new direct
loan obligations supportable by the subsidy budget authority appropriated to
agency A for program L. For example, if program L has an estimated subsidy
rate of 20%, the dollar amount of new direct loan obligations supportable would
be $500 million.
(4) Agency A signs a contract to loan $10 million to a borrower under the auspices
of program L. The estimated subsidy cost of this loan is $2 million (20% of $10
million).

(5) The borrower meets the terms and conditions of the loan contract. Agency A
pays $2 million from its credit program account for L into its financing account
for L. The financing account for program L borrows $8 million (unsubsidized
portion of the loan) from the U.S. Treasury. At the same time that these
budgetary transfers occur within agency A, the loan of $10 million is disbursed
from the financing account for program L to the borrower. The subsidy
payment of $2 million that goes into the financing account is scored as an outlay
for agency A and for the federal budget. The $8 million borrowed from the
Treasury is a non-budget means of financing, and consequently, does not affect
the budget deficit, outlays, or revenues. But this $8 million, if the budget is in
deficit, does increase the national debt.
(6) Agency A services the loan. Cash flows between the public and the non-budget
financing account for fees, interest, defaults, etc., do not affect the budget
deficit, outlays, or revenues. But the net cash flows of the financing account do
affect the national debt.

77 If program L is a mandatory loan program, an automatic appropriation of budget authority
would occur for whatever amount of credit is needed to meet the estimated demand for
services by beneficiaries.

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CRS-20
(7) Repayments of principal and payments of interest are paid by the borrower
into the financing account for program L. The financing account uses
these monies to pay the interest and repay the principal on the $8 million
borrowed from the Treasury.

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CRS-21
Appendix C. Budgetary Treatment of
a Hypothetical Loan Guarantee
(1) For a proposed loan guarantee program, CBO would be required to estimate the
subsidy cost. If legislation is passed that includes this new loan guarantee
program, OMB becomes responsible for estimating the subsidy cost. If a loan
guarantee program G has been enacted into law, agency A establishes a credit
program account and a financing account.
(2) OMB (or agency A using OMB guidelines) estimates that the net present value
of the cost of credit subsidies equals (in this example) 10% of loans guaranteed
under program G operated by agency A.
(3) If program G is a discretionary loan guarantee program, an appropriations bill
for the fiscal year is passed by Congress and signed into law by the President.78
This bill includes an appropriation (in this example) of $60 million for the
subsidy budget authority for program G. Within agency A, this $60 million is
placed in the credit program account for program G. Furthermore, this
appropriations bill must include an estimate of the dollar amount of guaranteed
loan commitments supportable by the subsidy budget authority appropriated to
agency A for program G. For example, if program G has an estimated subsidy
rate of 10%, the dollar amount of new guaranteed loan commitments
supportable would be $600 million.
(4) Agency A signs a contract to guarantee a loan of $15 million to the borrower.
The estimated subsidy cost of this guarantee is $1.5 million (10% of $15
million). The loan guarantee fee (if any) is paid by the borrower to the
financing account for program G at the time the loan guarantee is obligated.
(5) After the borrower (lender, or other party to the agreement) meets the terms and
conditions of the loan guarantee contract, the borrower obtains the loan from the
lender in the private sector. Agency A pays $1.5 million from its credit program
account for G into its financing account for G. At the same time that this
budgetary transfer occurs within agency A, the agency provides the guarantee
in order for the borrower to obtain the loan from the private lender. The subsidy
payment of $1.5 million that goes into the financing account is scored as an
outlay for agency A and for the federal budget. The borrower must pay to the
lender interest on the principal and repay the principal.
(6) Agency A services the loan guarantee. The cash flows between the public and
the non-budget financing account do not affect the budget deficit, outlays, or
revenues. But the net cash flow from the financing account affects the national
debt.
78 If program G is a mandatory loan guarantee program, an automatic appropriation of
budget authority would occur for whatever amount of credit needed to meet the estimated
demand for services by beneficiaries.

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CRS-22
(7) The subsidy amount and any loan guarantee fee earn interest, which is paid by
the Treasury. If the borrower defaults on all or part of the guaranteed loan then
the financing account is responsible for covering the cost of compensating the
lender.

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CRS-23
Appendix D. Direct Loan Data
Table 2. Direct Loan Data, FY2007
Estimated 2007 Subsidy Rates, Budget Authority, and Loan Levels for Proposed Direct Loansa
(in millions of dollars and percent)
Subsidy
Estimated
Subsidy
budget
loan
Agency and Program
ratea
authority
levels
%
$
$
Agriculture:
Agriculture credit insurance fund . . . . . . . . . . . . . . . . . .
9.50
95
1,008
Farm storage facility loans . . . . . . . . . . . . . . . . . . . . . . .
0.25
0
74
Rural community advancement program . . . . . . . . . . . .
14.28
184
1,287
Rural electrification and telecommunications loans . . . .
-0.81
-36
4,528
Rural telephone bank . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
0
Distance learning, telemedicine, and broadband program
2.90
9
327
Rural housing insurance grants . . . . . . . . . . . . . . . . . . . .
47.82
0
0
Farm labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47.95
20
42
Rural housing insurance fund . . . . . . . . . . . . . . . . . . . . .
10.45
136
1,294
Rural development loan fund . . . . . . . . . . . . . . . . . . . . .
44.07
15
34
Rural economic development loans . . . . . . . . . . . . . . . .
21.84
8
35
Public law 480 title I direct credit and food for progress
0
0
0
Commerce:
Fisheries finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-8.08
0
5
Defense — Military:
Defense family housing improvement fund . . . . . . . . . .
28.40
215
757
Education:
College housing and academic facilities loans . . . . . . . .
0
0
56
Federal direct student loan program . . . . . . . . . . . . . . . .
0.16
41
24,807
Homeland Security:
Disaster assistance direct loan . . . . . . . . . . . . . . . . . . . .
1.18
0
25
Housing and Urban Development:
FHA-mutual mortgage insurance . . . . . . . . . . . . . . . . . .
0
0
50
State:
Repatriation loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60.14
1
1
Contributions to international organizations . . . . . . . . .
0
0
0
Transportation:
Federal-aid highways . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.05
121
2,400
Railroad rehabilitation and improvement program . . . . .
0
0
0
Treasury:
Community development financial institutions fund . . .
0
0
0

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CRS-24
Subsidy
Estimated
Subsidy
budget
loan
Agency and Program
ratea
authority
levels
%
$
$
Veterans Affairs:
Housing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.93
17
605
Vocational rehabilitation program . . . . . . . . . . . . . . . . .
2.00
0
4
International Assistance Programs:
Debt restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
183
0
Overseas Private Investment Corporation . . . . . . . . . . .
4.28
15
350
Small Business Administration:
Disaster loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.18
118
900
Business loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
0
Export-Import Bank of the United States:
Export-Import Bank loans . . . . . . . . . . . . . . . . . . . . . . .
34.00
17
50
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
1,159
38,639
Source: Adapted by CRS from U.S. Executive Office of the President, Office of Management and
Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2007
(Washington: GPO, 2006), p. 89.
a. Additional information on credit subsidy rates is contained in the Federal Credit Supplement to the
budget for 2007.

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CRS-25
Appendix E. Loan Guarantee Data
Table 3. Loan Guarantee Data, FY2007
Estimated 2004 Subsidy Rates, Budget Authority, and Loan Levels for Proposed Loan Guaranteesa
(in millions of dollars and percent)
Subsidy
Subsidy
Loan
budget
Agency and Program
ratea
levels
authority
%
$
$
Agriculture:
Agriculture credit insurance fund . . . . . . . . . . . . . . . . .
1.10
27
2,498
Commodity Credit Corporation export loans . . . . . . . .
3.61
115
3,167
Rural community advancement program . . . . . . . . . . .
3.94
50
1,273
Rural electrification and telecommunications loans . . .
0
0
0
Distance learning, telemedicine, and broadband
program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.63
1
30
Rural housing insurance fund . . . . . . . . . . . . . . . . . . . .
0.61
23
3,762
Rural business investment . . . . . . . . . . . . . . . . . . . . . .
0
0
0
Renewable energy . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.49
2
35
Defense — Military:
Defense family housing improvement fund . . . . . . . . .
0
0
0
Education:
Federal family education loan . . . . . . . . . . . . . . . . . . .
7.27
6,125
84,287
Health and Human Services:
Health resources and services . . . . . . . . . . . . . . . . . . . .
0
0
0
Housing and Urban Development:
Indian housing loan guarantee fund . . . . . . . . . . . . . . .
2.35
6
251
Native Hawaiian housing loan guarantees . . . . . . . . . .
2.35
1
43
Native American housing . . . . . . . . . . . . . . . . . . . . . . .
11.99
2
15
Community development loan guarantees . . . . . . . . . .
0
0
0
FHA-mutual mortgage insurance b . . . . . . . . . . . . . . . . . .
-0.96
-845
86,039
FHA-general and special risk b . . . . . . . . . . . . . . . . . . . . .
-3.38
-247
7,370
Interior:
Indian guaranteed loan . . . . . . . . . . . . . . . . . . . . . . . . .
6.45
5
87
Transportation:
Minority business resource center program . . . . . . . . .
1.82
0
18
Federal-aid highways . . . . . . . . . . . . . . . . . . . . . . . . . .
3.90
8
200
Maritime guaranteed loans (Title XI) . . . . . . . . . . . . . .
0
0
0
Veterans Affairs:
Housing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0.30
-114
37,681

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CRS-26
Subsidy
Subsidy
Loan
budget
Agency and Program
ratea
levels
authority
%
$
$
International Assistance Programs:
Loan guarantees to Israel . . . . . . . . . . . . . . . . . . . . . . .
0
0
1,000
Loan guarantees to Egypt . . . . . . . . . . . . . . . . . . . . . . .
0
0
0
Development credit authority . . . . . . . . . . . . . . . . . . . .
5.49
13
238
Overseas Private Investment Corporation . . . . . . . . . .
-1.88
-30
1,600
Small Business Administration:
General business loans . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
28,000
Export-Import Bank of the United States:
Export-Import Bank loans . . . . . . . . . . . . . . . . . . . . . .
0.25
44
17,477
Presidio Trust:
Presidio Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.32
0
20
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
5,186
275,091
Addendum: Secondary Guaranteed Loan Commitment
Limitations
GNMA:
Guarantees of mortgage-backed securities loan
guarantee b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0.27
-235
86,000
Source: Adapted by CRS from U.S. Executive Office of the President. Office of Management and Budget.
Analytical Perspectives, Budget of the United States Government, Fiscal Year 2007 (Washington: GPO, 2006), p.
90.
N/A = Not applicable.
a. For additional information on credit subsidy rates, see the Federal Credit Supplement to the Budget for 2007.
b. Loan levels do not include standby commitment authority.

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