TITLE XI LOAN GUARANTEE PROGRAM: 

ACTIONS ARE NEEDED TO FULLY 

ADDRESS OIG RECOMMENDATIONS

Maritime Administration

Report Number: CR-2011-024

Date Issued: December 7, 2010
U.S. Department of

Memorandum

Transportation

Office of the Secretary

of Transportation

Office of Inspector General

Subject: ACTION: Title XI Loan Guarantee Program: 

Actions Are Needed To Fully Address OIG's 

Recommendations

Report Number: CR-2011-024

Date: December 7, 2010

From: Mitchell Behm

Assistant Inspector General for Rail, Maritime and 

Economic Analysis

Reply to 

Attn. of: JA-50 

To: Maritime Administrator 

The Maritime Administration's (MARAD) Title XI loan guarantee program (Title 

XI) guarantees private loans to commercial ship owners and shipyards for ship and 

shipyard building and modernization. The program currently has a portfolio of 

guarantees that covers over $2 billion in loans, and has the funding to expand it to 

almost $4 billion. Since 2004, however, Title XI has approved only five 

applications, with commitments totaling approximately $482 million, compared to 

an average of 11 approvals per year from fiscal year 1998 through fiscal year 

2002. Furthermore, over the past 12 years, the program has suffered through 

periods of significant defaults. From February 1998 through April 2002, 

9 borrowers defaulted on approximately $490 million. Then, between 

August 2008 and January 2010, 6 more borrowers defaulted on approximately 

$305 million. 

We conducted two prior audits of MARAD's oversight of the Title XI program in 

20031 and 20042

 1 OIG report entitled Title XI Loan Guarantee Program (Report No. CR-2003-031). OIG reports can be found on our 

website: 

and made several recommendations to reduce the risks associated 

with the application process and improve portfolio monitoring. We followed up 

on this work with an October 2004 letter to the Secretary of Transportation stating

that MARAD had developed procedures to address the 2003 recommendations, but 

had not completed effective implementation of these procedures. 

www.oig.dot.gov. 2 OIG report entitled Title XI Loan Guarantee Program (Report No. CR-2004-095). 
2

We conducted this follow up audit in response to a directive in Senate Report 110-

1313 requesting that we certify to the House and Senate Committees on 

Appropriations whether MARAD is in compliance with the recommendations of 

our 2003 and 2004 reports.

4

We conducted this performance audit from November 2009 to May 2010 in 

accordance with generally accepted government auditing standards. We selected a 

statistical sample of 60 Title XI loan guarantees out of 114 total loan guarantees

approved by MARAD. We then conducted in-depth reviews of MARAD Office 

of Marine Financing's files for 20 of the 60 sample guarantees. These 

20 guarantees were active during the scope of our audit and were held by 

14 companies. Exhibit A details our scope and methodology. 

To accomplish this, our objectives were to determine:

(1) the extent to which MARAD has implemented procedures to improve its 

oversight of borrowers in the Title XI portfolio; and, (2) whether the information 

necessary for conducting this oversight is readily accessible.

RESULTS IN BRIEF

MARAD has not fully implemented new procedures for improving oversight of 

borrowers in its Title XI portfolio. The agency has not incorporated the guidance 

it developed to address our 2003 recommendations into the program policy it 

revised in 2007, resulting in inconsistent program policies. For example, the 

guidance calls for maintaining documents on the condition of assets in each 

guarantee's administrative file. However, the 2007 program policy was not 

updated using this guidance and, as a result, the files we reviewed did not contain

documents on the condition of assets. MARAD also developed a computer-based 

financial monitoring system, but the system was not tailored during development 

to meet portfolio monitoring needs. Consequently, Title XI analysts do not use it. 

The information needed to manage Title XI effectively is not readily accessible 

because of incomplete administrative files on program guarantees and borrowers, 

as well as limitations in its computer-based monitoring system. Neither Title XI 

program policy nor MARAD's 2004 guidance identifies what information is 

required for effective program monitoring, where the information should be 

stored, or how it should be shared. MARAD does not maintain a single, central 

file on each borrower. Instead, each of the three MARAD offices that monitor 

borrowers maintains its own files. Our review of files maintained by the Office of 

Marine Financing found that content varied from file to file and the files did not 

indicate where important documents, such as reserve fund and financial 

 3 Senate Report 110-131 accompanied the fiscal year 2008 Senate Transportation Appropriations Subcommittee bill 

and was printed on July 16, 2007. 4 The full text of these eight recommendations is in Exhibit B.
3

agreements, were maintained. As a result, there is no assurance that information 

MARAD needs to effectively oversee the $2.3 billion Title XI program is readily 

accessible. 

We are making recommendations to MARAD to reconcile its Title XI policy with 

the 2004 guidance, and ensure that the information needed for effective program 

oversight is readily accessible. 

BACKGROUND 

Title XI of the Merchant Marine Act of 1936, as amended, is intended to promote 

the growth and modernization of the U.S. merchant marine and the Nation’s 

shipyards by helping owners of eligible vessels and shipyards obtain long-term 

financing under terms and conditions that might not otherwise be available. Upon 

approval of a Title XI application, MARAD agrees to guarantee a privately-issued 

loan through a commitment letter to the applicant. 

MARAD's Office of Marine Financing has primary responsibility for 

administering the Title XI program. The Department of Transportation's (DOT)

financial oversight entity, the Credit Council, provides additional supervision. 

The Office of Marine Financing administers the program's application process and 

monitors borrowers’ financial conditions throughout the terms of their guarantees.

It also keeps DOT's Credit Council apprised of the status of the Title XI portfolio, 

including quarterly Credit Watch Reports on borrowers experiencing financial 

difficulty. Two additional MARAD offices—the Office of Shipyards and Marine 

Engineering and the Division of Marine Insurance—monitor certain aspects of the 

guarantees in the portfolio for compliance with program requirements.

MARAD receives appropriations from both DOT and the Department of Defense 

to subsidize Title XI loan guarantees. According to MARAD officials, as of 

February 2010, MARAD had approximately $196 million to cover defaults and 

delinquencies on the loan guarantees in its $2.3 billion Title XI portfolio. It also 

had $78 million to use for new loan guarantees and to potentially expand the 

portfolio by almost $1.5 billion. 

INCONSISTENT PROGRAM POLICY AND A FINANCIAL 

MONITORING SYSTEM THAT DOES NOT MEET PROGRAM 

NEEDS COMPROMISES MARAD'S ABILITY TO EFFECTIVELY 

OVERSEE BORROWERS

MARAD has developed guidance for addressing the recommendations in our 2003

report, but the agency has not updated Title XI's policy based on this guidance.
4

Consequently, the guidance does not match Title XI's policy. MARAD has also 

developed a computer-based financial monitoring system, but since the system 

does not address portfolio monitoring needs, such as facilitating financial analysis 

of borrowers, Title XI analysts do not use it. Because MARAD has not fully

implemented the procedures and developed a financial system that meets its need 

for computer-based portfolio monitoring, we cannot certify that MARAD is in 

compliance with our recommendations or has adequate oversight of the Title XI 

portfolio. 

The Title XI Program's Policies and Guidance Are Inconsistent

In 2004, MARAD developed guidance5 to address our recommendations on 

improving policies and procedures for monitoring loan guarantees. However, the 

agency did not incorporate this guidance into the 2007 revision of Title XI's

formal policy.

6 Consequently, the guidance does not match the policy. For 

example, two of the guidance memoranda from 2004 address our 

recommendations on asset monitoring. Specifically, the guidance calls for 

maintaining documents on the condition of assets in the administrative file of each 

guarantee. However, the 2007 program policy does not include a requirement to 

maintain these documents and the files we reviewed did not include them. 

Furthermore, officials from the Office of Shipyards and Marine Engineering, 

which monitors asset condition, indicated that the office does not use the 2004 

memoranda or the 2007 policy as criteria for overseeing asset condition. 

In another example, the guidance's requirements for financial reporting do not 

match the requirements in the program’s policy. The guidance calls for obtaining 

quarterly financial statements for all borrowers and, for borrowers in the high risk 

credit-watch category, obtaining monthly financial statements. However, both 

Title XI’s policy and regulations require only semi-annual financial statements in 

addition to audited annual financial statements.

7 Consequently, Title XI 

borrowers are held to a variety of standards for financial reporting.

Because MARAD has not reconciled Title XI’s policy with its 2004 guidance, we 

cannot be certain that it has the necessary internal controls in place to continuously 

monitor the financial condition of borrowers. 

 5 In 2004, the Office of Ship Financing produced five memoranda addressing the five recommendations in our 2003 

report. See Exhibit B for a list and explanation of the recommendations. 6 OMB A-123, Title XI Process Description (2007) 7 Loan guarantee agreements complicate the issue. Each agreement includes specific financial reporting requirements 

for the borrower, but these vary depending on which criteria (i.e., regulations, 2007 program policy, or 2004 

memorandum) were followed when the RFFA was put in place. According to MARAD officials, these agreements 

are contracts between MARAD and borrowers that cannot be changed without mutual consent.
5

Title XI Analysts Do Not Use MARAD's Computer-Based Financial 

Monitoring System 

Title XI analysts do not use its computer-based financial monitoring system, the 

Credit Programs Portfolio Management System (CPPMS). According to Title XI 

analysts, the system does not provide a more efficient means of evaluating and 

sharing borrowers' financial performance information than existing processes. 

In fiscal year 2005, MARAD provided $2 million to a project with the Office of 

the Secretary to develop and implement a financial monitoring system for use by 

DOT credit programs,

8

According to the MARAD Chief Information Officer and system developers, 

CPPMS has the capacity to track and manage loans, create reports for data 

analysis, and store documents related to processes and tasks. However, MARAD 

uses Microsoft Excel spreadsheets and a separate system, Moody's KMV 

RiskAnalyst, for collecting and analyzing financial information on the companies

in Title XI's portfolio. RiskAnalyst, however, is not linked to CPPMS, and 

consequently, MARAD analysts have no means of automatically transferring the

Title XI financial information in it to CPPMS. MARAD's Chief Information 

Officer stated that an interface between the two systems was never part of the 

agency's development plan for a financial monitoring system, and would require 

an upgrade of CPPMS. As a result, the $2 million investment that MARAD made 

in CPPMS has not yet delivered a comprehensive computer-based financial 

monitoring system that the agency can use to enhance management of its 

$2.3 billion portfolio.

including Title XI. This joint project developed CPPMS, 

and Title XI's CPPMS module became operational in December 2007. However, 

according to MARAD officials who monitor the Title XI portfolio, CPPMS does 

not meet management needs because it is not capable of assessing borrowers’

finances and operations, or of sharing financial performance information with the 

program's DOT stakeholders. 

TITLE XI POLICY DOES NOT IDENTIFY WHAT INFORMATION IS 

NEEDED TO MONITOR THE PORTFOLIO AND BORROWERS

Neither MARAD's Title XI program policy nor its 2004 guidance identifies what

information is required for effectively monitoring the Title XI portfolio and 

borrowers, where the information should be stored, or how it should be shared. 

Currently, only the two Office of Marine Financing analysts responsible for 

managing the portfolio know what information they use to monitor the guarantees

and how it is stored. Furthermore, comprehensive information on guarantees, 

 8 DOT credit programs with CPPMS currently include Transportation Infrastructure Finance and Innovation Act 

program (TIFIA), Railroad Rehabilitation and Improvement Financing program (RRIF), and Title XI.
6

borrowers, and assets is not maintained in one location. If the Office of Marine 

Financing analysts are not available, this information is inaccessible. 

MARAD does not maintain a single, central file on each loan guarantee and 

borrower. Instead, each of the three offices that monitor the different aspects of 

compliance maintains its own files. In our review of files9 from the Office of 

Marine Financing, which are the files used by the two analysts to monitor 

guarantees, we found that content varied from file to file. Some files included 

information related to the application process, some financial statements and 

associated reviews, and memoranda between borrowers and MARAD. The files

did not indicate where important documents, such as reserve fund and financial 

agreements, asset monitoring reports, external reviews of distressed loans, and 

documentation on borrowers' deposits to their reserve funds were maintained. 

Furthermore, while the Office of Shipyards and Marine Engineering and the 

Division of Marine Insurance is required to file quarterly reports on their activities

with the Office of Marine Financing, MARAD officials informed us that the 

Office of Marine Financing does not maintain these quarterly reports or related

information in its files on each guarantee. 

Maintenance of separate files prevents easy access to complete information on 

each guarantee. Without maintaining readily-accessible files on each loan 

guarantee and borrower that include or reference important documents, MARAD 

cannot respond to requests for information in a timely manner. Moreover, if the 

institutional knowledge of current Office of Marine Financing staff is lost, the 

Agency cannot effectively monitor borrowers' compliance with Title XI's 

requirements.

CONCLUSION 

MARAD developed new Title XI guidance and information systems to address the 

recommendations in our 2003 and 2004 reports, but did not effectively implement 

them. As a result, administration and oversight of the $2.3 billion program still 

needs improvement. Given the potential for expansion of Title XI’s portfolio to 

almost $4 billion with existing funding, MARAD must ensure that it implements 

consistent policies and processes, and maintains ready access to important 

financial information on Title XI borrowers and their loan guarantees. 

 9 We requested the administrative files on 14 borrowers holding the 20 guarantees in our statistical sample. It took the 

agency 7 weeks, from November 2009 through January 2010, to provide the files.
7

RECOMMENDATIONS 

To strengthen MARAD's oversight of the Title XI program, we recommend that 

the Maritime Administrator take action to: 

1. Reconcile formal Title XI policy with the February 2004 guidance memoranda 

and practices used to manage the program.

2. Require the Office of Marine Financing and MARAD's CIO to work together 

to identify capabilities needed to complete the development of the 

comprehensive computer-based financial monitoring system. At a minimum, 

they should ensure that the system allows for efficient monitoring of portfolio 

performance and information sharing with DOT stakeholders.

3. Ensure that the information needed to oversee borrower compliance with 

program requirements is readily accessible, that the location and components 

of each administrative file are easily identifiable, and that each file contains all 

documentation needed for evaluating borrower compliance with Title XI 

requirements by inclusion or reference.

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE

We provided MARAD a draft of our report on October 19, 2010. We received 

MARAD's response on November 15, 2010, which is included in its entirety in the 

appendix of this report. In its response, MARAD detailed recent actions it has 

taken to improve its business practices, but noted that the largest opportunity to 

mitigate default risk occurs during the period prior to loan guarantee approval. 

While we appreciate MARAD's commitment to improving the implementation of 

procedures for the administration and oversight of Title XI borrowers, we maintain 

that by taking action to respond to our recommendations, including during the loan 

repayment period, MARAD can further limit the potential loss to the government 

when a default occurs. Nevertheless, MARAD fully concurred with all of our 

recommendations. However, MARAD did not provide a target completion date

for actions to address our second recommendation. Since its response indicates

that it has obligated the resources needed to implement changes to CPPMS, and 

that it is pursuing the additional resources to train its staff on the use of CPPMS, 

MARAD should be able to provide a target completion date for this 

recommendation. Accordingly, we are requesting that MARAD provide us with a 

planned completion date for those actions. 
8

ACTIONS REQUIRED

MARAD provided acceptable actions and timeframes for recommendations 1 and 

3, and we consider them resolved, subject to follow-up provisions in accordance 

with DOT Order 8000.1C. We request that within 30 days of this report, MARAD 

provide in writing a target completion date for recommendation 2. We appreciate 

MARAD's courtesies and cooperation during this audit. If you have any questions 

concerning this report, please contact me at (202) 366-9970 or Christopher 

Brothers at (202) 366-8811.

cc: Audit Liaison, OST, M-1 

Audit Liaison, MARAD, MAR-392

#
9

Exhibit A. Scope and Methodology

EXHIBIT A. SCOPE AND METHODOLOGY

We conducted a follow-up audit, as requested in Senate Report 110-131, to 

determine whether MARAD had addressed the eight recommendations in our 

2003 and 2004 audit reports on the Title XI Loan Guarantee program. Through 

meetings with MARAD Headquarters officials, we obtained and evaluated 

documentation to determine whether MARAD had taken actions to fully address 

each OIG recommendation. We also reviewed a sample of loan guarantee files that 

were statistically selected by the OIG statistician and assessed the actions taken by 

MARAD from September 28, 2004 through December 31, 2009—after our 2004 

report.

We interviewed officials from MARAD's Office of Marine Financing and the 

DOT Credit Council to obtain information about the management of the Title XI 

program. We received a demonstration of CPPMS; however, we did not audit the 

system or its procurement. We also conducted interviews with MARAD officials 

from the Office of the Maritime Administrator, Office of Shipyards and Marine 

Engineering, and Division of Marine Insurance. 

We selected a statistical sample of 60 of 114 approved Title XI loan guarantees

with probability proportional to the dollar amount of the loan guarantee. Upon 

receipt, we conducted an in-depth review of the files of 20 loan guarantees that 

had activity during the scope of our review. Our in-depth review of files for 20 

loan guarantees covered 14 companies or borrowers. We also reviewed additional 

documentation that MARAD provided in May 2010.

We also reviewed relevant laws and regulations, and policies and procedures, such 

as DOT orders, Title XI program guidance, the February 2004 memoranda,

MARAD's Maritime Administrative Orders, and related criteria. 

We conducted this performance audit from November 2009 through 

February 2010 in accordance with generally accepted government auditing 

standards as prescribed by the Comptroller General of the United States. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the evidence obtained 

provides a reasonable basis for our findings and conclusions based on our audit 

objectives. 
10

Exhibit B. OIG's 2003 and 2004 Recommendations

EXHIBIT B. OIG'S 2003 AND 2004 RECOMMENDATIONS

2003 OIG Audit Report (CR-2003-031) 

1. Require a rigorous analysis of the risks from modifying any loan approval 

criteria and impose compensating provisions on the loan guarantee to mitigate 

those risks. 

2. Formally establish an external review process as a check on MARAD’s 

internal loan application review and as assistance in crafting loan conditions 

and covenants. 

3. Establish a formal process for continuously monitoring the financial condition 

of borrowers, including requirements for financial reporting over the term of 

the guarantee as a condition of loan approval. 

4. Establish a formal process for continuously monitoring the physical condition 

of guaranteed assets over the term of the loan guarantee. 

5. Develop an improved process for monitoring the physical condition of 

foreclosed assets and for recovering the maximum amount of funds from their 

disposal. 

2004 OIG Audit Report (CR-2004-095) 

1. Perform a full accounting of each borrower’s Reserve Fund, and require all 

borrowers to cure any defaults under the requirements of their Reserve Fund 

and Financial Agreements, including full funding of Reserve Funds. 

2. In coordination with the Department of Transportation Credit Council, secure 

access to advisors outside MARAD with the requisite capacity and technical 

sophistication to negotiate solutions to distressed loans, including appropriate 

compensating provisions to mitigate risk. 

3. With the concurrence of the Department of Transportation Credit Council,

seek appropriations language allowing the use of as much of the $25 million 

wartime supplemental appropriation as necessary to develop a comprehensive 

computer-based financial monitoring system. 
11

Exhibit C. Major Contributors to This Report

EXHIBIT C. MAJOR CONTRIBUTORS TO THIS REPORT 

Brenda R. James Program Director

Name Title

Christopher Brothers Project Manager

Regan Maund Senior Analyst

Marvin Tuxhorn Senior Auditor

Michael English Analyst

Doris Kwong Analyst

Petra Swartzlander Senior Statistician

Harriet Lambert Writer-Editor

Susan Neill Writer-Editor
12

Appendix. Agency Comments

APPENDIX. AGENCY COMMENTS

Memorandum

U.S. Department

of Transportation

Maritime

Administration

Subject: Draft Report on Title XI Loan Guarantee Program: 

Actions Needed To Fully Address OIG's 

Recommendations

Project No. 09M3004M000

Date: November 10, 2010

From: David T. Matsuda

Maritime Administrator

Reply to 

Attn. of: 

To: Mitchell Behm

Assistant Inspector General for Rail, Maritime

and Economic Analysis 

The Maritime Administration (MARAD) recognizes the importance of effective business 

processes and careful oversight to ensure that investments in American shipyards and 

merchant fleets through the Title XI program offer the maximum achievable benefit. 

While the majority of the risk of guaranteeing a loan that later results in default occurs in 

the initial analysis period and loan guarantee approval process - not the loan repayment 

period -MARAD takes very seriously its record-keeping and post-approval monitoring 

duties in order to ensure transparency of the program and rapid action when necessary to 

protect the federal government’s financial interests. We believe that none of the Title XI 

defaults over the past decade could have been avoided by any action taken post-approval 

of the loan guarantee. 

While staffing of the Title XI program reached an all-time low during the IG 

investigation period primarily due to regular attrition, MARAD recently named a new 

Associate Administrator for Business and Finance Development. This senior official has 

been charged with conducting a comprehensive business process review of the Title XI 

Program, with the intention of ensuring that processes are effective, efficient, sufficiently 

documented, and complied with. This effort will be assisted by issuance of a recent 

contract for an outside consultant to study the existing processes and recommend new 

ones. Further, MARAD has obtained additional staff resources for the Title XI program 

that will be trained according to MARAD’s updated, standardized processes. MARAD is 

also working toward participation in an upgrade to Credit Program Performance 
13

Appendix. Agency Comments

Monitoring System (CPPMS) functionality that will enable it to better serve MARAD’s 

multifunctional mission requirements. Finally, MARAD is implementing an updated 

centralized electronic filing system that will enable the organization to store images of 

standardized information requirements in a single place, accessible to all program 

officials.

Recommendations and Response

Recommendation 1: Reconcile formal Title XI policy with the February 2004 guidance 

memoranda and practices used to manage the program. 

Response: Concur. MARAD has recently taken several actions that will ensure better 

alignment of procedures with the February 2004 guidance memorandum. First, MARAD 

has commissioned a business process review of the Title XI program. This review, 

expected to be completed by May 31, 2011, will document in detail the current policies 

and procedures in place, identify any gaps such as those identified in the draft report, and 

recommend measures to reconcile gaps or inconsistencies and, further, to improve the 

management of the existing Title XI portfolio and provide better processing of Title XI 

applications. MARAD intends to complete actions necessary to ensure that all policy, 

guidance and procedures for the Title XI program are consistent by July 15, 2011. 

In addition, the Office of Marine Financing has hired three Financial Analysts since the 

beginning of June 2010. As part of the training and orientation process for these 

employees, the senior staff of the Office of Marine Financing will ensure that the new 

Financial Analysts are trained in a manner consistent with the February 2004 guidance. 

Finally, MARAD will conduct a Title XI policy review to ensure that support offices are 

adhering to the 2004 guidance. This review will include a study by the Office of Chief 

Counsel about the legal authority and potential to make changes to existing contracts with 

Title XI borrowers in order to harmonize financial reporting requirements among all 

borrowers. 

Recommendation 2: Require the Office of Marine Financing and MARAD's CIO to 

work together to identify capabilities needed to complete the development of the 

comprehensive computer-based financial monitoring system. At a minimum, they should 

ensure that the system allows for efficient monitoring of portfolio performance and 

information sharing with DOT stakeholders. 

Response: Concur. MARAD has obligated its portion of the resources necessary to 

implement changes to CPPMS to make it more useful to Title XI program staff and DOT 

stakeholders. MARAD will also seek to work with the DOT Office of the Chief 

Information Officer to identify resources to train DOT stakeholders on the use of CPPMS 

for use in sharing information and monitoring program performance. MARAD looks 

forward to a partnership with the DOT Chief Information Officer and the DOT Office of 

Budget and Program Performance to complete the development of this department-wide 

computer-based financial monitoring system.
14

Appendix. Agency Comments

Recommendation 3: Ensure that the information needed to oversee borrower compliance 

with program requirements is readily accessible, that the location and components of 

each administrative file are easily identifiable, and that each file contains all 

documentation needed for evaluating borrower compliance with Title XI requirements by 

inclusion or reference. 

Response: Concur. Since the OIG concluded its performance audit in May 2010, 

MARAD’s Office of Marine Financing has taken several steps to increase the usability of 

its administrative files. First, the files have been placed in a centralized location and 

organized in a more logical fashion. Second, MARAD has executed a contract for 

scanning services, with the objective of scanning all required documents for each 

transaction and organizing them on MARAD’s internal network, accessible both through 

CPPMS and the network. This will allow ready identification of files, easing monitoring 

of borrower compliance. In addition, as part of the training and orientation process for 

the new Financial Analysts, the new analysts will be trained on the required contents of 

each administrative file. As the scanning contract is concluded, the documents will be 

placed on the network in a consistent manner and in a format that favors easy 

identification. We anticipate having the scanned files available by August 31, 2011.