Federal Credit Activities:

An Analysis of President Reagan's

Credit Budget for 1992

Staff Working Paper

April 1981

CONGRESS OF THt UNITED STATES CONGRESSIONAL BUDGET OFFICE

FEDERAL CREDIT ACTIVITIES:

AN ANALYSIS OF PRESIDENT REAGAN'S

CREDIT BUDGET FOR 1982

The Congress of the United States

Congressional Budget Office
NOTES

Unless otherwise indicated, all years referred to in this report are fiscal years.

Details in the text and tables may not add

to totals because of rounding.

All Administration estimates in this report

are from The Budget of the United States

Government—Fiscal Year 1982, Budget Revisions—Fiscal Year 1982 (March 1981) and

Office of Management and Budget data.

11
PREFACE

This analysis of the Administration's 1982 credit budget was prepared

at the request of the House and Senate Budget Committees. It is intended

to supplement the budget documents by bringing together in one place

information on the credit budget. The paper reviews major proposed

changes in federal credit activity during 1981 and 1982 and presents a

function-by-function examination of the Administration's credit program

estimates. It also discusses the integration of credit budgeting into the

federal budget process.

The paper was prepared by CBO's Budget Process Unit. The first three

chapters were written by Elisabeth Rhyne. Marvin Phaup and John D.

Shillingburg provided useful comments. The functional chapter was written

by Deirdre E. Briggs, Michael Margeson, and Mitchell I. Mutnick. Patricia

H. Johnston provided editorial and production assistance. Kathie Farri and

iNancy E. Wenzel typed the paper for publication.

Alice M. Rivlin

Director

April 1981

in

CONTENTS

Page

PREFACE iii

SUMMARY xv

CHAPTER I. THE NEED FOR A CREDIT BUDGET ... . 1

Size and Growth of Federal Credit ... . 1

Economic Effects of Federal Credit ... . 3

Credit in the Budget Process 4

Plan of the Paper 6

CHAPTER II. THE CREDIT BUDGET FOR 1982 .... . 7

The Credit Budget Totals 7

Components of the 1982 Credit Budget .. . 10

Revisions to the 1981 Credit Budget ... . 17

CHAPTER III. ISSUES IN CREDIT BUDGETING 19

Budget Resolutions 19

Program Limitations 20

Exemptions from Limitations 21

Other Issues 23

CHAPTER IV. THE CREDIT BUDGET BY FUNCTION .. . 25

National Defense 26

International Affairs 27

Energy 36

Natural Resources and Environment ... . 42

Agriculture 43

Commerce and Housing Credit 48

Transportation 62

Community and Regional Development .. . 69

Education, Training, Employment,

and Social Services 82

Health 86

Income Security 90

Veterans1 Benefits and Services 93
CONTENTS (Continued)

CHAPTER IV. (CONTINUED)

General Government 96

General Purpose Fiscal Assistance ... . 97

APPENDIX A. GLOSSARY OF CREDIT TERMS

USED IN THIS PAPER 103

APPENDIX B. THE ROLE OF THE FEDERAL

FINANCING BANK 105

VI
TABLES

Page

TABLE 1. CREDIT BUDGET TOTALS 8

TABLE 2. THE CREDIT BUDGET TOTALS-JANUARY

BUDGET COMPARED TO MARCH

REVISIONS 9

TABLE 3. MA3OR CREDIT PROGRAM CHANGES IN

LEVELS OF ACTIVITY BETWEEN FISCAL

YEARS 1981 AND 1982 11

TABLED THE CREDIT BUDGET BY FUNCTION ... . 13

TABLE 5. FFB-FINANCED CREDIT ACTIVITY 14

TABLE 6. LIMITATION REQUESTS IN THE FISCAL

YEAR 1982 BUDGET REVISIONS 15

TABLE 7. PROGRAMS PROPOSED TO BE EXEMPT

FROM LIMITATION FOR FISCAL YEAR

1982 16

TABLE 8. THE CREDIT BUDGET TOTALS FOR

FISCAL YEAR 1981 17

TABLE 9. CREDIT TARGETS IN THE FISCAL YEAR

1981 SECOND BUDGET RESOLUTION .. . 20

TABLE 10. PROGRAMS FOR WHICH PROPOSED

LIMITATION FOR 1982 EXCEEDS

ESTIMATED NEW ACTIVITY 23

TABLE 11. NATIONAL DEFENSE-SUM MARY OF

CREDIT ACTIVITY 26

TABLE 12. INTERNATIONAL AFFAIRS-SUMMARY

OF MAJOR CREDIT PROGRAMS 27

TABLE 13. ECONOMIC SUPPORT FUND LOANS ... . 29

Vll
TABLES (Continued)

Page

TABLE 14. FUNCTIONAL DEVELOPMENT

ASSISTANCE LOANS 29

TABLE 15. CREDIT ACTIVITIES FOR OVERSEAS

PRIVATE INVESTMENT CORPORATION . . 31

TABLE 16. HOUSING AND OTHER CREDIT

GUARANTEES 31

TABLE 17. FOOD FOR PEACE (PUBLIC LAW 480)

LOANS 32

TABLE 18. EMERGENCIES IN THE DIPLOMATIC

AND CONSULAR SERVICES 33

TABLE 19. FOREIGN MILITARY SALES CREDIT ... . 34

TABLE 20. CREDIT ACTIVITIES FOR EXPORTIMPORT BANK 35

TABLE 21. ENERGY PROGRAMS-SUMMARY OF

CREDIT ACTIVITY 37

TABLE 22. SYNTHETIC FUELS AND ENERGY

SECURITY RESERVE LOAN

GUARANTEES 37

TABLE 23. RURAL ELECTRIFICATION LOAN AND

LOAN GUARANTEE ACTIVITY 39

TABLE 24. TENNESSEE VALLEY AUTHORITY LOANS

AND LOAN GUARANTEES 40

TABLE 25. OTHER ENERGY CREDIT PROGRAMS ... . 41

TABLE 26. WATER AND POWER LOAN PROGRAM ... . 42

TABLE 27. AGRICULTURE-SUM MARY OF CREDIT

ACTIVITY 43

Vlll
TABLES (Continued)

Page

TABLE 28. AGRICULTURE CREDIT INSURANCE

FUND LOANS AND LOAN GUARANTEES . . 45

TABLE 29. COMMODITY CREDIT CORPORATION

LOANS 46

TABLE 30. COMMERCE AND HOUSING PROGRAMS--

SUMMARY OF CREDIT ACTIVITY .... . 48

TABLE 31. FEDERAL HOUSING ADMINISTRATION LOANS

AND LOAN GUARANTEES 50

TABLE 32. GOVERNMENT NATIONAL MORTGAGE

ASSOCIATION-TANDEM PLAN

DIRECT LOANS ,, . 51

TABLE 33. GOVERNMENT NATIONAL MORTGAGE

ASSOCIATION-GUARANTEES OF

MORTGAGE-BACKED SECURITIES . . . . 52

TABLE 34. LOANS FOR HOUSING FOR THE ELDERLY

OR HANDICAPPED 53

TABLE 35. RURAL HOUSING CREDIT ACTIVITIES . . . . 55

TABLE 36. NATIONAL CREDIT UNION ADMINISTRATION LENDING 56

TABLE 37. NATIONAL CONSUMER COOPERATIVE

BANK (NCCB) LOANS AND GUARANTEES ,. . 57

TABLE 38. CHRYSLER LOAN GUARANTEES .... . 58

TABLE 39. SMALL BUSINESS ASSISTANCE CREDIT

ACTIVITIES . 59

TABLE 40. BUSINESS LOAN AND INVESTMENT FUND,

LOANS AND LOAN GUARANTEES ... . 60

IX

77-245 0-81- 2
TABLES (Continued)

Page

TABLE 41. DEPOSIT INSURANCE PROGRAMS 61

TABLE 42. FEDERAL SHIP FINANCING FUNDFISHING VESSELS 61

TABLE 43. TRANSPORTATION-SUMMARY OF CREDIT

ACTIVITY 62

TABLE 44. RAILROAD REHABILITATION AND RESTRUCTURING LOANS AND LOAN

GUARANTEES 64

TABLE 45. LOAN GUARANTEES FOR AMTRAK ... . 65

TABLE 46. OTHER RAILROAD ASSISTANCE LOANS .. . 66

TABLE 47. AIRCRAFT PURCHASE LOAN

GUARANTEES 67

TABLE 48. FEDERAL CREDIT FOR SHIP FINANCING .. . 68

TABLE 49. FEDERAL HIGHWAY LOANS 68

TABLE 50. COMMUNITY AND REGIONAL DEVELOPMENT-SUMMARY OF CREDIT ACTIVITY . . 70

TABLE 51. COMMUNITY DEVELOPMENT BLOCK

GRANT LOAN GUARANTEES 71

TABLE 52. NEW COMMUNITIES FUND LOANS 71

TABLE 53. REHABILITATION LOANS 72

TABLE 54. ECONOMIC DEVELOPMENT CREDIT

ASSISTANCE 73

TABLE 55. COASTAL ENERGY IMPACT LOANS ... . 74
TABLES (Continued)

Page

TABLE 56. RURAL DEVELOPMENT INSURANCE FUND

CREDIT ACTIVITIES 75

TABLE 57. RURAL ELECTRIFICATION ADMINISTRATION

CREDIT ACTIVITIES 77

TABLE 58. SMALL BUSINESS ADMINISTRATION

DISASTER LOANS AND LOAN

GUARANTEES 79

TABLE 59. COMMUNITY SERVICES ADMINISTRATION

CREDIT 80

TABLE 60. INDIAN CREDIT ASSISTANCE 81

TABLE 61. EDUCATION, TRAINING, EMPLOYMENT,

AND SOCIAL SERVICES-SUMMARY OF

CREDIT ASSISTANCE 82

TABLE 62. CREDIT ACTIVITIES FOR THE GUARANTEED

STUDENT LOAN PROGRAM 83

TABLE 63. GUARANTEES OF STUDENT LOAN

MARKETING ASSOCIATION OBLIGATIONS . . 8*

TABLE 64. CREDIT ACTIVITY FOR NDSL PROGRAM .. . 85

TABLE 65. CREDIT ACTIVITY FOR COLLEGE

HOUSING LOANS . 85

TABLE 66. HEALTH-SUMMARY OF CREDIT

PROGRAMS . 86

TABLE 67. CREDIT ACTIVITIES FOR HEALTH

MAINTENANCE ORGANIZATIONS AND

MEDICAL FACILITIES 88

TABLE 68. OTHER HEALTH CREDIT PROGRAMS .... . 89
TABLES (Continued)

Page

TABLE 69. INCOME SECURITY-SUMMARY OF

CREDIT ACTIVITY 90

TABLE 70. LOW-RENT PUBLIC HOUSING LOANS

AND LOAN GUARANTEES 91

TABLE 71. OTHER INCOME SECURITY PROGRAMS .. . 92

TABLE 72. VETERANS' BENEFITS-SUMMARY OF

CREDIT ASSISTANCE 93

TABLE 73. CREDIT ACTIVITY FOR VETERANS'

EDUCATION PROGRAMS 94

TABLE 74. CREDIT ACTIVITY FOR VETERANS'

HOUSING PROGRAMS 95

TABLE 75. GUARANTEED LOANS TO U.S.

TERRITORIES 96

TABLE 76. DISTRICT OF COLUMBIA AND NEW YORK

CITY-SUMMARY OF CREDIT PROGRAMS . . 97

TABLE 77. LOANS TO THE DISTRICT OF COLUMBIA

FOR CAPITAL OUTLAYS 98

TABLE 78. NEW YORK CITY LOAN GUARANTEE

PROGRAM 99

xu
FIGURE

FIGURE 1. COMPONENTS OF NET FEDERAL

CREDIT, FISCAL YEARS 1971-1982

Xlll

SUMMARY

Last year the Administration and the Congress established a federal

credit budget. The development of the credit budget was prompted by three

concerns:

o Federal credit—in the form of direct loans and loan guaranteesgrew rapidly, and apparently without control, in the 1970s.

o Federal credit activities can have important economic consequences—for the allocation of credit resources among various

uses, the composition of economic activity, and the economy's

growth rate—that the Congress should recognize even though the

magnitude of these effects is unknown.

o The budgetary treatment of credit programs is less rigorous than

that for direct spending and taxes, a factor that may have played a

part in the rapid growth of federal credit.

The credit budget, which records estimates of new direct loans and

new loan guarantees for each fiscal year, attempts to correct for the

understatement in the unified budget of the size of federal credit activities.

In 1980 the federal government made obligations to extend $39 billion in

new direct loans and $70 billion in new loan guarantees. Yet net on-budget

direct lending, the only portion of the credit budget included in the unified

budget, accounts for less than 2 percent, or $9 billion, of total 1980 outlays.

The unified budget understates the amount of new federal credit extended

each year in three respects; the credit budget corrects for this understatement in each case, as follows:

o Direct loans by off-budget agencies are excluded by law from the

budget totals. All direct loans, however are recorded in the credit

budget.

o Loan guarantees are excluded by law from the budget totals,

except in the event of default. They are fully counted in the credit

budget.

o The unified budget records net loan disbursements. The credit

budget records gross new credit activity.

xv
Because the unified budget treatment understates credit activities, it

has fostered the perception of federal credit as an almost costless form of

federal assistance. The credit budget is designed to correct this perception

by recording the total volume in each fiscal year of new credit activities.

Through the imposition of limitations on the authority of agencies to enter

into new obligations for direct loans and new commitments to guarantee

loans, the credit budget can also enhance Congressional control of individual

credit programs.

THE CREDIT BUDGET FOR 1982

The proposed credit budget totals for 1982 demonstrate the Reagan

Administration's intent to use the credit budget as a vehicle to reduce

federal activity in credit markets. According to the Administration, new

federal loan and loan guarantee activity will be 15 percent higher in 1981

than it was the year before, but will decrease in 1982 to only 6 percent

above the 1980 total (see Summary Table). Despite the large increase in

1981, the credit budget totals presented in the March 1981 Budget Revisions

for Fiscal Year 1982 are 9 percent lower for 1981 and 13 percent lower for

1982 than those presented by the previous Administration in the January

budget. The current estimates show containment and then reversal of the

rapid growth -trend in federal credit in recent years.

The Administration is requesting the termination of several credit

programs, including the loan and loan guarantee programs of the Economic

Development Administration and the National Consumer Cooperative Bank,

housing rehabilitation loans, and several energy development programs. For

1981 many of the decreases from the January totals depend on requests for

reductions in previously appropriated limitations; these requests are

analogous to rescissions. In 1982 the major volume of savings occurs in

large credit programs for which appropriation limitations are being

requested. The greatest saving in credit budget totals occurs in loan

guarantees for home mortgages which, though not reduced, will not be

allowed to grow. Reductions in direct loans result largely from low

estimates for disaster spending, achieved in part through changes in program

administration. Student loans, synthethic fuel production, the ExportImport Bank, and the Farmers Home Administration also account for large

reductions. The Administration has announced its intent to promote the use

of private financing by many federal credit programs, and as an initial step

has restricted access of some agencies to the Federal Financing Bank.

There is a risk that the proposed decrease in credit planned for 1982

will not occur, as credit program estimates are often subject to great

uncertainties. The original 1981 credit budget estimate was 8 percent lower

xvi
than the latest total, even after the new Administration's attempts to

streamline it. Disaster loans and mortgage insurance programs have been

among the major contributers to unexpected increases in credit budget

totals, though the Administration contends that most of these activities are

potentially controllable through Congressional limitations.

SUMMARY TABLE. CREDIT BUDGET TOTALS (By fiscal year, in billions

of dollars)

Actual Administration Estimates

Credit Activity

Direct Loan Obligations

Total direct loans

Less FFB loan asset

purchases

Direct loans, adjusted

New Loan Guarantee

Commitments

Gross guarantees

Less secondary

guarantees b/

Less guarantees of direct

loans b/

Primary loan guarantees

Total, Credit Budget

1979

51.4

-10.9

40.5

135.2

-42.4

-18.1

74.7

115.2

1980

61.4

-12.1

49.3

161.0

-64.4

-24.4

72.2

121.5

1981

71.2

-16.2

55.0

184.7

-66.2

-33.3

85.2

140.2

1982

56. 9 a/

-6.2

50.7 a/

168.7

-64.7

-25.4

78.5

129. 2 a/

a/ These figures are higher than those presented in the Administration's

March 1981 Budget Revisions because of a $1.3 billion error in

Farmers Home Administration estimates. See note to that effect on

p. 19 of Budget Revisions.

b/ For defintions of secondary guarantees and guarantees of direct loans,

see Appendix A.

CONGRESSIONAL ACTION ON THE CREDIT BUDGET

The Congress may act on the credit budget in two ways. First, it may

include aggregate credit targets in the concurrent budget resolutions.

xvn
Second, it may include limitations on new credit activity for some programs

in the 1982 appropriations bills.

Budget Resolution Targets, In its budget resolutions for fiscal year

1981, the Congress set targets for total federal credit activity for the first

time. The second resolution included targets of $73.5 billion for direct loan

obligations, $82.8 billion for primary loan guarantee commitments, and

$53.0 billion for secondary guarantee commitments. \J The Administration's

totals for the 1981 credit budget are within the direct loan and primary

guarantee targets set in the resolution. The secondary loan guarantee total

exceeds the target by $13.2 billion, as a result of increased commitments

for GNMA mortgage-backed securities. Because the credit targets in the

second resolution are not binding, the Congress will not be prevented from

considering the requested supplemental increase in the 1981 GNMA

limitation.

Appropriation Limitations. Limits in appropriations bills on new

program activity instituted in the first credit budget are the mechanism for

controlling the annual activity of individual programs. For both 1981 and

1982, the Carter Administration chose not to propose limitations for all

programs, but instead exempted those for which it considered annual

limitations inappropriate, such as entitlement and emergency credit

programs. For 1982, the Reagan Administration is recommending

exemptions for 54 percent of new direct loan obligations, and for 30 percent

of new primary loan guarantee commitments.

As the Congress experiments with the credit budget as a means to

exert greater control over the annual level of federal credit activities, three

issues arise. First, should budget resolution targets be made binding?

Legislation has been introduced in the 97th Congress to amend the Congressional Budget Act of 1974 to subject credit targets to the same point of

order and other controls now used for unified budget targets and ceilings.

Second, who should have the responsibility for placing limitations on

the annual levels of new credit activity for individual programs? At

present, this responsibility is not clearly assigned for many programs. It has

been suggested that new authorizations for direct loans and loan guarantees

be made subject to advance approval in appropriation legislation. Last

I/ Secondary loan guarantees are new guarantees on loans that have

received an earlier federal guarantee, such as Government National

Mortgage Association guarantees of securities backed by federally

insured mortgages.

XVlll
session, the Senate included a section in its first concurrent resolution

recommending that all new bills authorizing loan guarantees include an

explicit statement requiring approval of guarantee amounts in an appropriation act. Several large credit programs, such as the one authorized by the

New York City Loan Guarantee Act, have already included such statements.

Without some change, however, in law or rules of the House and Senate,

jurisdiction over limitations may be an area of continued dispute.

Third, which, if any, programs should be exempt from annual

limitation? The Congress has not yet thoroughly reviewed the Administration's criteria for exempting programs from limitation, nor has it made any

evaluation of the appropriateness of annual limitations for certain kinds of

programs. To achieve systematic control over credit programs, the

Congress will have to develop a policy on exemptions from annual activity

limitations.

xix

CHAPTER I. THE NEED FOR A CREDIT BUDGET

The U.S. government extends credit to assist a wide array of

activities. The amount of new credit extended under federal auspices now

constitutes a significant share of the new credit advanced in the economy

each year. Last year, the Carter Administration and the Congress instituted

a credit budget. This step was prompted by concern over the size and

growth of federal credit, the consequences of federal credit for the

economy, and by the realization that the budgetary treatment of credit

programs was less rigorous than that for direct spending or taxes. The

credit budget, which records estimates of new direct loans and loan

guarantees for each fiscal year, attempts to correct for the understatement

in the unified budget of the size of federal credit activities.

SIZE AND GROWTH OF FEDERAL CREDIT

The federal government extends credit in two basic forms: direct

loans and loan guarantees. Federal agencies make direct loans to

individuals, businesses, nonprofit organizations, and local governments for a

variety of purposes, often at subsidized interest rates. The Small Business

Administration, for example, lends money under its disaster relief program

to businesses damaged by natural disasters. In a loan guarantee, the federal

government pledges to repay principal and interest on a loan in case of

default by the borrower, thus eliminating the lender's exposure to risk. No

federal funds are involved unless the borrower defaults. The Veterans

Administration, for example, guarantees repayment of home mortgages

extended to veterans by savings and loans or other financial institutions.

The growth in net federal credit—that is, net direct lending and net

loans guaranteed—is shown in Figure I. If In recent years both net loans

guaranteed and net direct loans extended each year have grown rapidly. Net

loans guaranteed annually rose from $14.0 billion in 1977 to $32.4 billion in

1980, an increase of 131 percent. Annual net direct lending rose from $11.6

billion in 1977 to $24.2 billion in 1980, an increase of 108 percent. Most of

the growth in direct lending occurred in lending by off-budget agencies,

whose activities are excluded from the unified budget totals.

J7 For definitions of net lending and other terms used in this paper, see

Appendix A.
Figure 1.

Components of Net Federal Credit, Fiscal Years 1971 -1982

Billions of Dollars

Direct LoansOff-Budget Agencies

Direct LoansOn-Budget Agencies

30 -

20 -

10

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981b 1982b

Fiscal Years

SOURCE: The Budget of the United States Government, Fiscal Year 1982, Special Analysis on Credit.

a

 Primary guarantees: excludes secondary guarantees and guaranteed loans acquired by on- and off-budget

agencies.

Estimates.
Federal loans and loan guarantees have not only grown faster than

direct federal spending, they have also grown faster in the past few years

than other forms of credit. Federal credit as a percentage of all credit

advanced in the United States each year has grown steadily from 8 percent

in 1977 to 16 percent in 1980.2/ If lending by the privately owned,

government-sponsored credit enterprises, such as the Federal National

Mortgage Association, is included, the federally directed share increases

from 12 to 23 percent in this period. 3/ It is difficult to gauge trends in the

rate of federal participation in credit markets, as the proportion is highly

sensitive to private market conditions; even allowing, however, for large

annual fluctuations, there appears to have been significant upward movement during the latter part of the decade.

ECONOMIC EFFECTS OF FEDERAL CREDIT

Control of federal credit activities is important because these

programs have the potential to change the allocation of credit among uses,

the composition of economic activity, and the economy's growth rate. */

Federal credit also uses scarce budget resources by providing substantial

subsidies to some borrowers.

In the absence of government intervention, credit and investment

resources flow into those uses in which rates of return, adjusted for risk, are

perceived to be highest. Enterprises facing low prospective rates of return

receive little credit in private markets. The government may intervene to

change this allocation if it believes market perceptions of profitability and

risk are wrong, or if it believes the market fails to take into account

significant social costs and benefits of some activities.

2/ These percentages are based on net lending from the Federal Reserve

flow-of-funds model of credit markets. Budget of the United States

Government for Fiscal Year 1982, Special Analysis on Credit.

3J The government-sponsored enterprises are often regarded in financial

markets as part of the federal credit system. They are excluded from

the credit budget, however.

4/ The magnitude of these effects is unknown at present. See

Congressional Budget Office, Conference on the Economics of Federal

Credit Activity, Part I—Proceedings (December 1980).
In its direct loan programs, the federal government exploits its

premier standing in the credit markets to borrow at a risk-free rate and to

lend to favored borrowers at a lower rate than the borrowers could have

obtained on their own. If the government loan goes to a borrower who would

not have otherwise obtained the funds, then another potential borrower is

probably denied credit or "crowded-out" of the market by the government

program. The key element in assessing the economic effects of such a

reallocation is to determine which borrower, the favored one or the one

crowded out, would have used the funds more productively. Unless the

government chooses its credit recipients with extreme care, funds may be

reallocated from more useful to less useful purposes, even after social costs

and benefits are taken into account.

Loan guarantees are similar in effect to direct loans. By assuming a

large share of default risk, the government is able to direct resources to

uses that would otherwise be regarded as too risky to qualify for financing.

A federal loan guarantee does not affect the real risk involved in a project

or activity. It merely shifts the burden of that risk from lenders to

taxpayers. Crowding-out of unguaranteed, but less risky borrowers, is likely

to occur. Again, the net effect on productivity and economic growth

depends on the relative value of the supported and unsupported activities.

In fact, most federal financial assistance has been directed toward

increasing the flow of credit into housing, agriculture, and troubled low

earnings industries.

Federal credit delivers substantial subsidies to some borrowers. When

a federally sanctioned borrower who otherwise would pay 16 percent

interest in private credit markets obtains funds at 6 percent, the federal

government is providing a subsidy equal to 10 percent of the principal for

each year the loan is outstanding. The Office of Management and Budget

estimates (by assuming a 15 percent alternative interest rate for all

borrowers) that during 1980, newly committed loans and guarantees provided

interest subsidies with a minimum present value of $19 billion. 5/

CREDIT IN THE BUDGET PROCESS

The Unified Budget. Despite its large volume, federal credit activity

appears to be small in the unified budget. For example, net on-budget

direct lending,, the only portion of the credit budget included in the unified

5/ Budget of the United States Government for Fiscal Year 1982, Special

Analysis F, pp. 188-193.
budget totals, accounted for less than 2 percent, or $8.8 billion, of outlays in

1980. Net lending by on-budget agencies is not, however, an adequate

representation of the amounts of new credit extended each year by the

federal government. It understates new credit extensions in three respects.

First, most direct lending is extended by off-budget agencies, whose

activities are excluded by law from the unified budget totals. Net offbudget direct loans were $14.7 billion in 1980, compared to on-budget loans

of $8.8 billion. These off-budget loans, which are primarily attributable to

the Federal Financing Bank (FFB), are similar to on-budget loans in every

respect except their off-budget status.

Second, loan guarantees are excluded by law from the definition of

budget authority. At the time the federal government assumes liability for

repayment nothing is recorded in the budget. Although costs may eventually

be incurred in the form of default losses, there is no way in the unified

budget to measure the federal government's contingent liability.

Third, even when the budget records agency direct loan activity, it

obscures the actual volume of new credit channelled through the programs

by subtracting repayments against new loans. For example, in 1980 the

Commodity Credit Corporation extended almost $5 billion in loans to

farmers. Repayments on loans extended in earlier years were even higher,

however, so that the net loan outlays recorded in the budget were negative.

The Credit Budget. The credit budget corrects for the understatement

of new credit activity in the unified budget. Its totals include all new credit

activity of the government: on-budget direct loans, off-budget direct loans,

and loan guarantees. (It does not, however, include activities of

government-sponsored credit enterprises, which are not subject to annual

budget oversight.) The new activity is recorded on a gross basis, without

subtracting repayments, although some financing transactions are netted out

to prevent double counting in the totals. The activity is also recorded at the

point of obligation or commitment for credit, rather than at the point when

loans are actually made.

In addition to improving acknowledgement in the budget process of

total new federal credit activity, the credit budget features are designed to

improve control over annual activity of individual programs. Limitations

are proposed on the authority of agencies to enter into new obligations

rather than on disbursements so that decisions will be made at the point

where the government becomes legally bound to extend credit instead of

77-245 0-81- 4
after that point has passed. 6/ Placing limitations on gross, rather than net,

activity levels controls total new credit extended, rather than only the

increment of new credit after deducting repayments on prior activity.

The Congress may act on the credit budget for 1982 in two ways.

First, in its concurrent budget resolutions, the Congress may set targets for

total new credit budget activity. Second, the Congress may include

limitations on new direct loan obligations and new loan guarantee commitments by program in 1982 appropriations bills. The credit budget gives the

Administration and the Congress the means to exercise greater oversight of

federal credit. Control of credit growth will only be achieved, however,

when credit budgeting has become an integral part of the budget process,

and when the allocation of resources through credit is considered as

carefully as the allocation through direct spending.

PLAN OF THE PAPER

This paper provides information to assist the Congress in reviewing the

credit budget totals and the proposed limitations on individual programs.

Chapter II discusses the Administration's credit budget totals for 1981 and

1982, as presented in the IVIarch budget revisions, noting important

components of the proposals. Chapter III discusses several issues facing the

Congress as it refines the new credit budget process. Chapter IV describes

each active program in the credit budget, by function, based on information

presented in the March revisions to the 1982 budget.

6/ The federal government makes an obligation for a direct loan or a

commitment for a loan guarantee by agreeing with a prospective

borrower to lend directly or to guarantee borrowing from a third

party, contingent on the fulfillment of specified conditions. Time

often elapses between the obligation or the commitment and the

disbursement of the loan or extension of the guarantee. This is

particularly true when credit financing is used for construction

projects, which have long planning and financing lead times.
CHAPTER II. THE CREDIT BUDGET FOR 1982

The Reagan Administration's 1982 Budget Revisions request that the

Congress set a target of $129.2 billion for credit in its concurrent budget

resolutions. The budget also contains requests for appropriation and

authorization actions on individual programs. In the 1982 budget, the

Administration has also revised the 1981 credit budget totals. To achieve

the reduced activity levels proposed for many programs, decreases in the

previously enacted appropriated limitations on the 1981 levels of these

programs have been requested. This chapter reviews the requests for

Congressional action.

THE CREDIT BUDGET TOTALS

The Administration's fiscal year 1982 budget estimates that the

aggregate level of new credit activity will rise dramatically in 1981 and fall,

though not as sharply, in 1982. The decrease in 1982 is dependent on the

enactment of proposed legislative changes (see Table 1).

According to these estimates, during 1981 new direct loan obligations

will rise to $55.0 billion, up $5.7 billion from 1980, and new loan guarantee

commitments will reach $85.2 billion, up $13.0 billion from 1980. The 1981

credit budget total, $140.2 billion, would be 15 percent higher than in 1980.

For 1982, the Administration estimates that new direct loan

obligations will fall by $43 billion, to within 3 percent of the 1980 level.

New loan guarantee commitments will fall by a greater amount—$6.7

billion—but will still exceed the 1980 level by 9 percent. These decreases, if

achieved, would lower the combined 1982 credit budget total to $129.2

billion, only 6 percent above the 1980 total. If new credit activity is lower

in 1982 than 1981, it will be a significant departure from the recent trend of

growth in federal credit, which has averaged over 30 percent annually since

1977.

As part of its overall effort to contain the growth of the federal

government, the Reagan Administration is attempting to use the credit

budget as a vehicle to reduce federal activity in credit markets, even though

many of the reductions have little to offer by way of savings in the direct

spending budget. The credit budget totals presented in the March 1981

Budget Revisions, are substantially lower than the totals presented by the
TABLE 1. CREDIT BUDGET TOTALS (By fiscal year, in billions of dollars)

Actual Administration Estimates

Credit Activity 1979 1980 1981 1982

Direct Loan Obligations

Total direct loans 51.* 61.* 71.2 56.9 a/

Less FFB loan asset

purchases -10.9 -12.1 -16.2 -6.2

Direct loans, adjusted 40.5 *9.3 55.0 50.7 a/

New Loan Guarantee

Commitments

Gross guarantees

Less secondary

guarantees b/

Less guarantees of direct

loans b/

Primary loan guarantees

Total, Credit Budget

a/ These figures are higher

135.2

-12.il

-18.1

74.7

115.2

than those

161.0 184.7

-64.4 -66.2

-24.4 -33.3

72.2 85.2

121.5 140.2

presented in the

168.7

-64.7

-25.4

78.5

129. 2 a/

Administration1;

March 1981 Budget Revisions because of a $1.3 billion error in

Farmers Home Administration estimates. See note to that effect on

p. 19 of Budget Revisions.

b/ For defintions of secondary guarantees and guarantees of direct loans,

see Appendix A.

previous Administration in the January budget, particularly for 1982. The

revised credit budget is 9 percent lower for 1981 and 13 percent lower for

1982 than the January budget (see Table 2). The reductions include

"rescissions," or requests for reductions in previously enacted 1981 program

levels as well as requests for legislation terminating several programs. The

largest segment of the reduction in both years occurs in loan guarantees for

home mortgages.

The Administration's proposed restraint of credit programs is

relatively more stringent than that for direct spending. Despite the planned

program changes, direct spending is expected to grow in nominal terms in

both 1981 and 1982, while federal credit is expected to show a decrease in
1982. The credit reductions are sharper in part because few credit programs

fall within the large portions of the budget whose size the Administration

intends to maintain, defense and "social safety net" programs. The

remaining portions of the budget, including most credit programs, have been

targeted for proportionally greater decreases.

TABLE 2. THE CREDIT

COMPARED TO

of dollars)

BUDGET TOTALS—JANUARY BUDGET

MARCH REVISIONS (By fiscal year, in billions

Credit Activity

New Direct Loan Obligations

Total direct loans

Less FFB loan asset

purchases

Direct loans, adjusted

New Loan Guarantee

Commitments

Gross guarantees

Less secondary guarantees

Less guarantees of direct

loans

Primary loan guarantees

Total, Credit Budget

1981

January

Budget

T4.2

-16.6

57.6

202.1

-73.2

-32.7

96.2

153.8

Estimates

March

Revisions

71.2

-16.2

55.0

184.7

-66.2

-33.3

85.2

140.2

1982

January

Budget

60.2

-8.2

52.0

196.4

-74.3

-25.2

96.9

148.9

Estimates

March

Revisions

56.9

-6.2

50.7

168.7

-64.7

-25.4

78.5

129.2

Credit program estimates are subject to the same or perhaps greater

uncertainties than those that plague spending estimates. The Congress

should be aware that there is a risk that the decrease in the Administration's

1982 credit budget may not be achieved, especially if the experience with

estimates for the 1981 credit budget is any guide. The 1981 estimate

presented in the 1982 budget is 8 percent higher than the original estimate

in the 1981 budget. The decreases now planned for 1982 are dependent on

both accuracy of estimates and enactment of the requested authorization

changes and appropriation limitations.

In the March revisions the Administration made an important technical

adjustment to the credit budget totals, which changes the base of the direct
loan total, and results, for example, in a downward shift of $6.2 billion in

1982. The adjustment corrects for double counting of direct loans sold by

the Farmers Home Administration (FmHA) and other agencies to the

Federal Financing Bank (FFB). Such loans are counted twice in the new

direct loan obligation total, originally as new FmHA obligations, and again

when the FFB purchases the loans as new FFB obligations. The revised total

eliminates this double counting. In Table 2 the January budget has also been

adjusted to preserve comparability. J7

COMPONENTS OF THE 1982 CREDIT BUDGET

Direct Loans. The $4.3 billion decrease in the direct loan total

between 1981 and 1982 depends largely on reductions in the disaster loan

programs of FmHA and the Small Business Administration (SBA). The

combined 1982 level of the two programs is estimated at $2.0 billion/ $5.6

billion below the 1981 level, and $3.3 billion below that for 1980 (see Table

3). Some of the 1982 decrease can be explained by proposals of the

Administration to transfer most of the SBA program to FmHA, and to place

further restraints on the FmHA program. Most of the change, however, is

the result of the normal budgetary practice of using minimal level estimates

for disaster relief programs. It is generally expected that supplemental

program increases will be enacted after needs arise. If this occurs in 1982,

the anticipated reduction in direct lending may not be achieved.

Other programs estimated to show a major decrease between 1981 and

1982 are the Export-Import Bank and the non-disaster lending of the FmHA.

There is a further $1.6 million decrease in direct loans by the FFB to the

Student Loan Marketing Association (SLMA). This change does not affect

the credit budget total, however. The shift from FFB to private financing

changes the status of SLMA holdings from direct to primary guaranteed

loans and raises the primary loan guarantee total by the same amount that it

lowers the direct loan total.

Finally, several programs will show large increases in 1982, including

security assistance loans to foreign nations, GNMA mortgage purchase

assistance, the Commodity Credit Corporation price support program and

lending by the FFB to local public housing authorities and the TVAfs Seven

States Energy Corporation. These increases total $6.6 billion.

\J An adjustment has also been made to the loan guarantee total, to

include $3.4 billion in 1981 and $4.5 billion in 1982 of Tennessee Valley

Authority guarantees, previously omitted.

10
TABLE 3. MA3OR CREDIT PROGRAM CHANGES IN LEVELS OF

ACTIVITY BETWEEN FISCAL YEARS 1981 AND 1982 (In

billions of dollars)

1980

Program (Actual)

New Direct Loan Obligations

FmHA

Disaster loans

Loan asset repurchases

Other programs

SBA disaster loans

International security programs

Commodity Credit Corporation

GNMA mortgage purchase

assistance

Export-Import Bank

Guaranteed loans purchased

by the FFB

Student Loan Marketing

Association

Low-rent public housing

Tennessee Valley Authority

All other direct loans

Total, direct loans

New Loan Guarantee Commitments

Synthetic and alternate fuels

FmHA primary guarantees

Guaranteed student loans

Guarantees of SLMA obligations

Federal Housing Administration

Export-Import Bank

All other guarantees

Total, primary guarantees

ft. 5

ft. 5

3.5

1.2

1.3

ft. 9

2.2

ft. ft

1.1

0.1

2. ft

19.2

ft9.3

___

1.6

4.8

-1.1

29.1

8.0

29.8

72.2

Administration

Estimates

1981

6.1

3.6

3.7

2.1

0.9

3.6

1.8

5.1

2.1

1.7

3.4

20.9

55.0

6.0

0.8

7.2

-2.1

34.2

7.6

31.5

85.2

1982

1.6

1.5

5.1

0.4

2.7

4.5

3.6

4.4

0.5

2.7

4.5

19 ..2

50 ..7

2,0

0.2

5.7

-0.5

35.0

8.2

27.9

78.5

Change

Between

1981 and

1982

-4.5

-2.1

+ 1.4

-1.7

+ 1.8

+0.9

+ 1.8

-0.7

-1.6

+ 1.0

+ 1.1

-1.7

-4.3

-4.0

-0.6

-1.5

+ 1.6

+0.8

+0.6

-3.6

-6.7

Loan Guarantees. The changes between 1981 and 1982 in direct loans

are concentrated in a relatively small number of programs. The $6.7 billion

reduction in loan guarantees, however, is spread throughout a larger number

11
of programs. The two largest changes occur in synthetic and alternate fuel

production, and the guaranteed student loan program. The $4.0 billion

reduction in synthetic fuel guarantees is an artifact of the one-shot form of

the alternate fuels production program, which is expected to commit all

$4.5 billion of its guarantee authority in 1981 before yielding to the offbudget Synthetic Fuels Corporation, which will make commitments at a

lower, steadier rate. Student loan insurance is expected to decrease by $1.5

billion in 1982, assuming the Congress enacts an Administration proposal to

tighten program eligibility. The proposal would end in-school interest

subsidies, institute a needs test, and raise interest rates for parent loans to

market levels.

Further decreases occur because many of the loan guarantee

programs, such as Federal Housing Administration mortgage insurance, are

being held in 1982 to a level close to that of 1980 or 1981. Though the

reductions may appear small, holding to 1980 or 1981 levels in 1982

represents a significant change from the growth trend most of these

programs had been experiencing. The Administration is also planning to

terminate several loan guarantee and direct lending programs, including

HUDfs housing rehabilitation program, the Economic Development

Administration, several energy development programs, and the National

Consumer Cooperative Bank. Because these programs are already scheduled

to operate at reduced levels in 1981, the 1982 decreases are not large.

Functional Distribution of Credit. Table 4 displays the credit budget

by functional categories. The largest function, Commerce and Housing

Credit, accounts for 32 percent of 1982 gross direct lending and 64 percent

of gross guaranteed lending. A large portion of the guaranteed lending in

this function is for GNMA guarantees of mortgage-backed securities. These

guarantee commitments, which totaled $63 billion in 1980 and are estimated

to total $64 billion in 1981 and 1982, are secondary guarantees of pools of

Federal Housing Administration (FHA) and Veterans Administration (VA)

insured loans. At the bottom of Table 4, secondary guarantees are deducted

from the total of gross commitments as part of the adjustments made to

calculate primary loan guarantee commitments.

Other important functions are International Affairs, Income Security

(largely assistance to local public housing authorities), Energy, and Agriculture. The relative importance of energy as a category of credit

assistance has grown in recent years because of loan guarantees for new

alternative fuel production initiatives and a continued reliance on extensive

FFB lending for the Tennessee Valley Authority and the Rural Electrification Administration. Including the FFB loans, new direct loan obligations

for energy would total $9.8 billion in 1982 under the Administration's

proposals.

12
TABLE 4. THE CREDIT BUDGET BY FUNCTION (By fiscal year, in billions of

dollars) a/

New Direct Loan

Obligations

Function

International Affairs (150)

FFB purchases

Energy (270)

FFB purchases

Agriculture (350)

FFB purchases

Commerce and Housing

Credit (370)

FFB purchases

Transportation (400)

FFB purchases

Community and Regional

Development (450)

FFB purchases

Education, Training,

Employment and Social

Services (500)

FFB purchases

Income Security (600)

FFB purchases

Veterans' Benefits and

Services (700)

All Other Functions

FFB purchases

Total, gross

Less

FFB loan asset

purchases

Secondary loan

guarantees

Guarantees of direct

loans made by

another agency

Total

1980

7.0

2.4

1.2

5.6

12.5

5.3

12.2

4.8

0.2

1.2

3.3

1.5

0.7

1.1

1.3

0.1

0.6

0.2

0.2

61.4

-12.1

—

—

49.3

1981 b/

7.3

2.6

0.9

8.2

12.3

7.0

13.3

7.4

0.1

0.5

3.9

1.7

0.6

2.1

0.3

1.7

0.6

0.2

0.3

71.2

-16.2

—

—

55.0

1982 b/

8.2

2.7

0.7

9.1

8.9

1.2

14.2

3.9

0.2

0.3

0.8

1.2

0.9

0.5

0.3

2.7

0.6

0.3

0.3

56.9

-6.2

—

—

50.7

New Loan Guarantee

Commitments

1980

9.8

8.2

6.—2

—

102.9

1. —7

—

2.7

—

5.8

17. —0

—

6.3

0.4

—

161.0

—

-64.4

-24.4

72.2

1981 b/

10.4

—14.6

9. —4

—

111.0

1. —6

—

2.8

—

9.3

17. —8

—

7.4

0.4

—

184.7

—

-66.2

-33.3

85.2

1982 b/

11.0

11. —7

3.—6

—

107.5

1. —5

—

1.3

—

6.2

17. —4

—

7.4

1.0

—

168.7

—

-64.7

-25.4

78.5

a/ Budget functions that have no credit programs have been omitted from this

table. Includes both on- and off-budget lending.

b/ Administration March estimates.

77-245 0-81- 5
Federal Financing Bank Activity, One of the fastest growing

components of the credit budget has been the Federal Financing Bank, an

agency of the Treasury, which purchases loans made by some agencies (loan

assets) and acts as a lender for other agencies (guaranteed loan

originations). 2/ New loans by the FFB are distributed in Table 4 by budget

function of the agency originating FFB financing. This distribution

emphasizes the fact that agencies retain responsibility for the FFB loans

they sponsor. Table 5 summarizes FFB activity proposed by the the

Administration for 1980 through 1982. Guaranteed loan originations are

expected to increase in both 1981 and 1982. Loan asset purchases, which

often fluctuate widely from year to year, are estimated to be less than half

as large in 1982 as in 1981. The Administration has discretion over the

activity levels of the FFB and can vary them without prior Congressional

approval. The current estimates reflect steps it has already announced to

restrict access by certain agencies to FFB financing, in an attempt to stem

the FFB's growth. The Student Loan Marketing Association and the Rural

Electrification Administration are both being directed to find private

sources of financing. A large part of the reduction in loan asset activity

results from lower program levels for the Farmers Home Administration,

meaning lower FFB financing requirements.

TABLE 5. FFB-FINANCED CREDIT ACTIVITY (By fiscal year, in billions

of dollars)

Credit Activity

1980

Actual

Administration Estimates

1981 1982

New Direct Loan Obligations

Purchases of loan assets 12.1 16.2 6.2

Guaranteed loan originations 10.1 15.3 15.6

Total 22.2 31.5 21.8

Credit Program Appropriation Limitations. Annual appropriation

limitations on new direct loan obligations and loan guarantee commitments

are the means for controlling individual programs in the credit budget. The

Administration's 1982 budget contains a series of requests for Congressional

action on proposed limitations. The President is proposing limitations on 46

percent of all direct loan obligations and 70 percent of all loan guarantee

commitments, amounting to 61 percent of the total credit budget (see Table

6).

2/ See Appendix B for an explanation of these FFB functions.
TABLE 6. LIMITATION REQUESTS IN THE FISCAL YEAR 1982 BUDGET

REVISIONS (In billions of dollars)

Credit Activity

Credit

Budget

Administration

Limitation

Request

Percent

Limited

Direct Loan Obligations,

Adjusted 50.7 23.3

Loan Guarantee Commitments,

Primary

Total

78.5

129.2

55.2

78.5

70

61

The Reagan Administration, following the practice of the Carter

Administration, did not propose limitations on programs for which it

believed annual limitations were unenforceable or contrary to the nature of

the program. It granted exemptions for three basic types of lending:

entitle ment and other mandatory programs; disaster, emergency, and

insurance programs; and intragovernmental financing transactions. A few

programs are exempt for other reasons. The Synthetic Fuels Corporation,

for example, is free from limitation to allow it the maximum possible

independence in its operations (see Table 7). The March revisions, however,

contain two changes from previous exemption policies: The SB A disaster

loan program is requested for limitation, and the college housing loan

program is exempted.

By nature, the programs subject to appropriation limitations tend to

offer more opportunity for discretionary changes than do the exempt

programs. The March revisions to the January budget have therefore

proposed larger reductions in the portion of the credit budget subject to

limit, leaving the exempted programs at levels closer to those presented in

the January budget. While new commitments for loan guarantee programs

subject to limit were reduced by $16.7 billion, commitments for exempted

programs were reduced by only $1.7 billion. This emphasizes the point that

the restraint planned for credit programs in 1982 is dependent on

Congressional approval of the limitation requests.

15
TABLE 7. PROGRAMS PROPOSED TO BE EXEMPT FROM LIMITATION

FOR FISCAL YEAR 1982 (In millions of dollars)

Direct Loan

Loan Guarantee

Obligations Commitments

Program Exempted Exempted

Entitlement and Other Mandatory Programs

Commodity Credit Corporation 4,520 2,000

Low-rent public housing 300 17,446

Student loans — 5,697

Veterans1 housing and education 9 7,383

Railroad assistance 116 31

All loan guarantee default claims 1,492

Insurance and Emergency Programs

Financial institution insurance

programs 214 25

Veterans1 insurance programs 205 —

FmHA disaster loans 1,600

Other emergency programs 15

Intragovernmental Financing Transactions

Agriculture credit insurance (FmHA) a/ 882 1,416

Rural development insurance (FmHA) a/ 66 1,000

Rural housing insurance (FmHA) a/ 1,019 3,695

Student Loan Marketing Association b/ — 500

Tennessee Valley Authority b/ — 4,502

Other

Federal Financing Bank 21,838

Synthetic Fuels Corporation — 2,000

PL 480 - Food for Peace 808

Student financial assistance 286

All other 69 —

Total gross exemptions, unadjusted 33,439 45,695

a/ Sales of loan assets to the Federal Financing Bank,

b/ Guarantees of direct FFB loans.

16
REVISIONS TO THE 1981 CREDIT BUDGET

In the Second Budget Resolution for 1981 the Congress passed nonbinding targets for 1981 credit budget totals. In the 1982 budget presented

by President Carter, the revised estimates for the 1981 credit budget

exceeded the targets set by the Congress (see Table 8). The March revisions

reduce the 1981 totals for direct loans and primary loan guarantees slightly

below the resolution targets. The secondary loan guarantee total, $66.2

billion, primarily for FNMA mortgage-backed securities, still exceeds the

target by $13.2 billion.

TABLES. THE CREDIT BUDGET TOTALS FOR FISCAL YEAR 1981 (In

billions of dollars)

Credit Activity

Original

Adminis- Second

tration Budget January

Estimate Resolution Budget

March

Revision

Direct Loan Obligations,

Unadjusted

Unified budget 35.ft ftft. 6

Off-budget 25.3 28.9

Total, direct loan

obligations 60.7 73.5

Primary Loan Guarantee

Commitments a/ 81.ft 82.8

Total, credit budget Ift2.1 156.3

Secondary Loan Guarantee

Commitments 53.1 53.0

ft2.1

32.2

7ft.2

92.8

167.0

73.2

38.6

32.6

71.2

66.2

a/ Does not include correction for TVA guarantees.

The targets in the budget resolutions themselves were greater than the

original estimate presented in the 1981 budget by 10 percent. Two factors

pushed the 1981 credit budget totals beyond the original estimate and the

resolution. First, some of the increases may be ascribed to the fact that the

credit budget is a new development and that relatively little attention has

been devoted to credit program estimates in the past. A large number of

agencies simply underestimated the rate of increase in their activity by a

few percentage points. Second, several unanticipated events pushed federal

17
lending higher in 1981: natural disasters created demands for loans to

businesses and farmers; the demand for federally backed mortgage credit

rose sharply as borrowers faced high market interest rates; and the Carter

Administration's restructuring of the student loan program was not enacted.

The need for increases in direct lending estimates for disaster relief

were already evident by the time of the second budget resolution and were

incorporated into its total. The estimates for loan guarantees for housing,

however, increased only after the second resolution had been passed.

In the March revisions the Administration has taken some steps to

bring the 1981 totals below the resolution targets which require no Congressional action, and has proposed others that will require Congressional

approval. The major reductions from the January budget were achieved

simply by withdrawing supplemental requests for increases in loan levels,

leaving programs subject to their previously enacted limitation. This action

accounts for reductions from January of $0.9 billion in direct loans

(primarily SBA disaster insurance), $5.8 billion in primary guarantees (FHA

mortgage insurance and the Export-Import Bank), and $8.0 billion in

secondary guarantees (GNMA mortgage-backed securities). It also

represents a change from previous practice for several of these programs, as

they will for the first time face limitations lower than the demand for loans

and guarantees from eligible applicants. If the current limitations remain in

force for SBA, FHA, and GNMA, the programs will have to devise methods

for selection among the eligible applicants.

The Administration is also requesting that the Congress act to bring

down the 1981 credit budget totals by reducing appropriation limitations

previously enacted. These reductions are analagous to rescissions of

appropriations. Reductions in limitations are requested for $2.0 billion in

new direct loan obligations, with the largest reductions requested for the

Export-Import Bank (from $5,900 million to $5,148 million) and for the

FmHA (from $6,904 million to $6,339 million). Limitation reductions

requested for loan guarantee commitments total $0.4 billion, for reductions

in the levels of aircraft purchase and Economic Development Administration

guarantees.

18
CHAPTER III. ISSUES IN CREDIT BUDGETING

The term "budget" may refer to a system that records all financial

transactions, or it may refer to a procedure for controlling financial activity

in order to allocate scarce resources effectively. The credit budget is an

important step forward in providing complete accounting for federal credit.

Yet control over levels of activity remains incomplete. As the Congress

considers increasing budgetary control over its credit resources, three

questions arise:

o Should the credit budget totals in the concurrent budget resolutions

be binding?

o Who should be responsible for placing limitations on individual

programs?

o Should any credit programs be exempt from limitation and, if so,

which ones?

BUDGET RESOLUTONS

The credit targets set by the Congress in the 1981 budget resolutions

are not now binding; they have none of the enforcement mechanisms

included in the Congressional Budget Act of 1974. They could, however, be

made binding through changes in legislation. Legislation has been introduced in the 97th Congress in the House (H.R. 2372) and the Senate (S. 265)

to amend the Congressional Budget Act to include the credit budget in the

Congressional budget process at every step, and to subject budget resolution

credit ceilings to the same point-of-order provisions that now apply to

direct spending ceilings. For 1982, the Congress has the options of making

the credit budget totals binding, or of continuing to experiment with various

credit budget procedures.

Whether or not credit targets are to be made binding, the Congress

will have to give further consideration to which credit aggregates to include

in the budget resolutions. Targets were set in the first budget resolution for

1981 for on- and off-budget direct loans and for primary loan guarantees. In

the second resolution, targets were added for secondary loan guarantees.

Explicit targets were not set for activities funded through the FFB.

Because FFB lending was included as part of off-budget direct loans, there

were implicit targets on the volume of new FFB activity (see Table 9).

19
The Congress may wish to set explicit budget resolution targets

for FFB activity in 1982, as a means to strengthen Congressional oversight

of this form of federal lending. The Administration's credit budget makes

no provision, however, for controlling FFB transactions. Setting budget

resolution targets for FFB lending would be an indication that the Congress

intends to limit the authority of agencies to finance lending through the

FFB, authority that has previously been largely a matter of administrative

discretion. The targets could be accompanied by limitations by program on

the amount of lending that could be financed through the FFB during the

fiscal year.

TABLE 9. CREDIT TARGETS IN THE FISCAL YEAR 1981 SECOND

BUDGET RESOLUTION (In billions of dollars)

Budget Amounts Implicity

Resolution Assumed in

Credit Activity Targets Resolution Targets

New Direct Loan Obligations

Unified budget W. 6 44.6

Off-budget 28.9 28.9

Less FFB purchases of loan assets — -18.7

Total, direct loan obligations — 54.8

New Loan Guarantee Commitments

Gross guarantees — 165.3

Less secondary guarantees 53.0 -53.0

Less guarantees of direct loans a/ — -29.5

Total, primary guarantees 82.8 82.8

a/ Largely guarantees of FFB loans and loan asset purchases by the FFB.

PROGRAM LIMITATIONS

In its consideration of the fiscal year 1982 credit budget, the Congress

may wish to resolve the question of who should be responsible for placing

limitations on the annual activity levels of federal credit programs. The

Carter Administration's 1981 credit budget proposed annual dollar limitations in the form of appropriation language setting an annual ceiling on the

authority of agencies to incur obligations for direct loans and to enter into

commitments for guaranteed loans. In action on 1981 appropriations, the

20
Congress enacted limitations totaling $25.3 billion on new direct loan

obligations and $42.9 billion on new primary loan guarantee commitments.

In the absence of such limitations, most loan and guarantee programs

have no annual limits on the amount of new loans that can be extended or

guaranteed in a fiscal year. The programs are governed by authorizing

legislation which may have limits on the total amount of loans or guarantees

that can be outstanding any one time or, for direct loans, limits on budget

authority with which to finance net lending.

It is not clear at this time who should have jurisdiction over annual

limitations. Though activity levels for most programs are governed by

authorizing legislation for the most part, authorizing committees have not

exercised discretion over annual levels of new lending or new guarantees.

The Appropriations Committees, on the other hand, have begun to exercise

discretion through the limitations. At present, House and Senate rules

neither require nor prohibit appropriation action; there is no clear basis for

affirming or denying the authority of Appropriations Committees to report

annual limitations in their bills. The lack of a specific legal requirement for

appropriation limitations led the House State, Justice and Commerce

Appropriations Subcommittee to declare that the authorizing committee had

sole jurisdiction over new loans for most programs in its area, on the

grounds that an appropriated limitation would constitute a change to

authorizing legislation.

The Congress has several alternatives available to resolve this issue.

The jurisdiction of the authorizing committees in this area could be

explicitly affirmed in the rules. Alternatively, the Congress could amend

the rules to require approval in appropriations before any credit authority

can take effect. This would establish a two-step, authorization/

appropriation sequence for credit programs, just as is now required for most

direct spending programs. The credit control bills mentioned above include

such provisions for newly enacted legislation, as did the Senate-passed

version of the First Concurrent Resolution on the Budget for 1981. Such a

requirement could instead be written into authorizing legislation, program

by program. Recent authorizations for some credit programs, such as the

Chrysler and New York City loan guarantee programs, have included

language requiring approval in appropriations.

EXEMPTIONS FROM LIMITATIONS

If appropriation limitations continue to be the vehicle for program

control, what should the criteria be for exempting a program from

limitation? The Administration is not proposing limitations on entitlement,

21

77-245 0-81- 6
disaster, or emergency programs, or on financing transactions (see Table 7

in Chapter II). Other programs are also granted exemptions from limitations

on a case-by-case basis. The criteria have not been formalized by the

Administration, however, nor has the Congress explicitly reviewed them. To

achieve systematic control of credit programs, the Congress will have to

define a policy regarding exemptions from limitations.

If the Congress wishes to exempt entitlement credit programs from

annual limitations, it must first determine which credit programs are in fact

entitlements. If an agency has no discretion but must extend a loan or

guarantee to every eligible borrower that applies, then the program is an

entitlement and a limitation could not control the program's annual level of

activity.

If the Congress wished to establish an exemption policy for emergency

and insurance programs, it would need to determine whether the requirement to wait for a supplemental increase in a limitation would render a

program unable to provide assistance on a timely basis. If an annual

limitation in appropriations is found to be an unsuitable control mechanism,

the program could be classified exempt. To achieve reductions in the levels

of such programs, it might be necessary to resort to instructions to

authorizing committees mandating reductions in program levels, in much the

same way that reconciliation instructions are used to instruct the

authorizing committees to make reductions in mandatory spending

programs.

Exemptions for FFB transactions present slightly different problems.

The programs that use the FFB are controlled through annual limitations on

their new transactions with the public. Because the FFB transactions do not

affect credit program activity levels, their volume has been left to

administrative discretion. The Congress has not, for example, limited the

sale of Farmers Home Administration loan assets. Such financing transactions, however, can alter budget outlays and federal borrowing requirements substantially. Because of these effects on the unified budget, the

Congress may wish to consider enacting limitations on the volume of lending

an agency may finance through the FFB.

A related problem is the practice of proposing limitations in excess of

estimated obligation or commitment levels. These "padded" limitation

requests are justified on the grounds of needed flexibility. This practice,

however, is not in keeping with standard budgetary practice in either the

credit budget or the unified budget. In the unified budget, the Congress

would provide budget authority in the amount of the expected program

level, granting additional amounts as necessary through supplemental

appropriations. Limitations on new activity for these credit programs could

22
be handled in the same fashion. J7 In several instances the Administration's

1982 budget proposes limitations in excess of new activity estimates (see

Table 10). For example, the requested 1982 limitation on the Central

Liquidity Facility of the National Credit Union Administration is $750

million above the estimated obligation level.

TABLE 10. PROGRAMS FOR WHICH PROPOSED LIMITATION FOR 1982

EXCEEDS ESTIMATED NEW ACTIVITY (In millions of dollars)

Program

Estimated

New Limitation

Activity Request Excess

New Direct Loan Obligations

Rural Electrification and

Telephone Revolving Fund 700 900 200

Rural Telephone Bank 185 220 35

Central Liquidity Facility

(NCUA) 3,650 4,400 750

Loans to the District of

Columbia 145 155 10

New Loan Guarantee Commitments

Rural Electrification and

Telephone Revolving Fund 5,245 6,755 1,510

OTHER ISSUES

As the Congress implements the credit budget as

Congressional budget process, many of the procedures of the

Budget Act will have to be adapted to the credit budget,

developing procedures for scorekeeping Congressional action

budget, setting functional as well as aggregate credit

developing rules for allocating the credit budget targets by

part of the

Congressional

These include

on the credit

targets, and

committee in

This practice also poses a scorekeeping problem. In arriving at its

credit budget totals, the Administration included the estimated

program level, not the higher requested limitation. If the Congress

enacted the limitation, however, the higher amount would be scored in

the Congressional credit budget.

23
the conference reports on the concurrent resolutions. These changes raise a

variety of technical issues that will have to be addressed by the Budget

Committees and their staffs.
CHAPTER IV. THE CREDIT BUDGET BY FUNCTION

This chapter discusses the estimates for federal credit activities for

fiscal year 1982 and the limitations the Administration proposed for a

portion of those activities. The chapter is organized by major functional

category, using the same budget functions for which the Congress sets

targets and ceilings for direct spending in the concurrent resolutions on the

budget. The tables highlight past and requested Congressional action.

Data on credit programs in this chapter are from the appendix to The

Budget of the United States Government for Fiscal Year 1982 as updated in

the March Budget Revisions and from Office of Management and Budget

data. The source of data is the series of schedules entitled "Status of Direct

Loans" and "Status of Loan Guarantees" that follow the "Program and

Financing" schedule for each budget account containing credit activity. The

data in these schedules do not necessarily correspond to obligations and

outlay data in the "Program and Financing" schedule. Nor do the data in

these status schedules correspond to credit program data in Special Analysis

F, Federal Credit Programs, which accompanies the budget, because of the

differences in the coverage of the credit budget and the special analysis.

Table F-12 in that analysis contains an explanation of these differences.

One set of figures in the tables summarizing credit activity for several

of the programs in this chapter may be confused with total outlay figures in

the "Program and Financing" schedule. "Net direct loan outlays" in the

credit tables indicates that portion of total outlays for an account that is

attributable to changes in direct loan principal outstanding. These are new

direct loan disbursements, minus repayments, loan sales, write-offs for

default, and other adjustments. The total for net loan outlays will not in

many cases be equal to total outlays for the budget account because of

other activities, receipts, and balances in the account. The corresponding

figure, net loans guaranteed, is slightly different. It includes new loans

guaranteed minus guarantees terminated on loans that have been completely

paid off; it does not include partial repayments.

Two observations must be made about the functional summary tables

in this chapter. First, they make no distinction between on-budget and offbudget credit activities. Second, they do not include Federal Financing

Bank (FFB) lending attributed to the originating agencies. For this

attribution, see Table 4 in Chapter II.
NATIONAL DEFENSE (FUNCTION 050)

The only active credit program in the national defense function is a

program of loans and loan guarantees administered by the Department of

Defense to assist private enterprises in fulfilling defense production

contracts. Title HI of the Defense Production Act of 1950 as amended (50

USC 2091) sets a limit of $20 million for individual loan guarantees and $25

million for direct loans that may be made by defense procurement agencies

without prior Congressional approval. There have been no direct loans in

recent years. For fiscal year 1982 the Administration is requesting a

limitation of $30 million on new loan guarantee commitments. During the

two year period 1979-1980, the Carter Administration requested a total

limitation of $60 million. For the same period only $520,000 in loan

guarantee commitments were issued, leaving $59.5 million in loan guarantee

authority unused.

The Administration is also requesting appropriation language stating

that direct loan obligations are authorized to the extent necessary to cover

defaults on guaranteed loans. No estimates of defaults were included in the

1982 Budget. Table 11 summarizes credit activity in function 050.

TABLE 11. NATIONAL DEFENSE-SUMMARY OF CREDIT ACTIVITY (By

fiscal year, in millions of dollars)

1Qon Administration Estimates

1 >/oU

Credit Activity Actual 1981 1982

New Loan Guarantee Commitments

Limitation enacted 30.0 30.0

Limitation proposed — 30.0 30.0

Commitments subject to

limitation 0.5 30.0 30.0

Guaranteed Loans Outstanding — 5.0 5.0

26
INTERNATIONAL AFFAIRS (FUNCTION 150)

Credit assistance in the international affairs function includes loans

to foreign countries for economic development, for the purchase of military

equipment, and for purchase of U.S. surplus commodities. International

trade is promoted through assistance to U.S. firms doing business overseas

and to foreign countries and businesses making purchases in the United

States. The Export-Import Bank is one of the largest of all federal credit

programs. Table 12 summarizes the major credit programs in this function.

TABLE 12. INTERNATIONAL AFFAIRS-SUMMARY OF MA3OR CREDIT

PROGRAMS (By fiscal year, in millions of dollars)

New Direct Loan New Loan Guarantee

Obligations Commitments

Program 1980 1981 a/ 1982 a/ 1980 1981 a/ 1982 a/

Economic Support

Fund

Functional Development Assistance

Overseas Private

Investment Corp.

713

445

255

396

10

1,000

369

175 120 100

Housing and Other

Credit Guarantee

Programs — — — 175 150 150

Food for Peace 877 840 808

Emergencies in the

Diplomatic and

Consular Service

Foreign Military

Sales Credit

Export-Import

Bank

Total

1

635

4,365

7,040

1

640

5,148

7,290

1

1,652

4,400

8,230

—

1,450

8,031

9,831

—

2,546

7,559

10,375

—

2,573

8,220

11,043

a/ Administration estimates.

27
The Administration's 1982 budget recommends limitations for $7.3

billion of new direct loan obligations and for all new loan guarantee

commitments in function 150. The Food for Peace program and loans for

emergencies in the diplomatic and consular service are exempted from the

requirement for limitation, as are direct loans for loan guarantee defaults in

the foreign military sales credit program.

Direct loan obligations in function 150 are estimated to rise by 13

percent from 1981 to 1982. New loan guarantee commitments will increase

6 percent from 1981 levels. The following sections highlight 1980-1982

activities in each major program of function 150.

Economic Support Fund

The Economic Support Fund provides grants, cash transfers, or direct

loans to countries of strategic importance to the United States, particularly

those in the Middle East. Loans from the fund require annual authorization

and appropriations equal to their face value.

The International Security and Development Cooperation Act of 1980

(Public Law 96-533), passed in late December 1980, eliminated loans to

Egypt and Israel and replaced them with cash grants. As a result of this

change, direct loan obligations for 1981 are expected to be only $255

million. For 1982 the Administration requests a limitation of $1.0 billion for

new direct loan obligations. The limit requested is almost four times higher

than the obligations estimated for 1981. CBO estimates that obligations

will not be made as quickly as the Administration predicts, and will reach

only $695 million for 1982. Few repayments are expected, resulting in large

net loan outlays in the unified budget.

Table 13 summarizes the lending activity of the Fund.

Functional Development Assistance—Agency for International Development

The Foreign Assistance Act of 1961 (sections 103-106) authorizes

grants and direct loans for various development assistance programs administered by the Agency for International Development (AID). These funds

may be used for development assistance projects in the areas of agriculture,

rural development, nutrition, health, education, human resources

development, and energy research.

28
TABLE 13. ECONOMIC SUPPORT FUND LOANS (By fiscal year, in millions

of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted

Limitation proposed — — 1,000.0

Obligations subject to

limitation — — 1,000.0

Obligations exempt from

limitation 713.0 255.0

For 1982 the Administration proposes a limitation of $369.4 million on

new direct loan obligations. The proposed limitation is a 22 percent

reduction from the 3anuary request. Almost no repayments are expected

during 1981 or 1982. Table 14 summarizes activity in this program.

TABLE 14. FUNCTIONAL DEVELOPMENT ASSISTANCE LOANS (By fiscal

year, in millions of dollars)

1QOn Administration Estimates

1:7<SU

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted

Limitation proposed — — 369.4

Obligations subject to

limitation — — 369.4

Obligations exempt from

limitation 444.8 396.0

Overseas Private Investment Corporation (OPIC)

OPIC encourages U.S. investment overseas through programs of risk

insurance against losses due to war or political upheaval. It also offers

investment financing through direct loans and loan guarantees. The Foreign

29

77-245 0-81- 7
Assistance Act of 1969 as amended (22 U.S.C. 2194 et seq.) authorizes OPIC

to guarantee up to 75 percent of the principal of a loan. Maximum

contingent liability is limited to $750 million or four times the amount of

guarantee fees collected, whichever is smaller.

For fiscal year 1982 the Administration proposes terminating OPICs

direct loan program and reducing new loan guarantee commitments to $100

million. The new loan guarantee commitments for 1982 are estimated to

decrease 17 percent from 1981, after an estimated 32 percent decrease in

1981 from 1980.

In previous years OPIC was partially financed by sale of loan assets to

the Federal Financing Bank. It is now in the process of repurchasing those

loan assets. Table 15 details OPIC activities for 1980-1982.

Housing and Other Credit Guarantee Programs

The housing guarantee program provides federal guarantees of longterm financing extended by U.S. lenders for housing projects and programs

in developing nations. The International Development Cooperation Act of

1979 (Public Law 96-53) extends the authority of this program through the

end of fiscal year 1982. The act sets a ceiling of $1,555 million on the total

principal amount of guarantees that may be outstanding at one time for

housing guarantees, and a ceiling of $20 million on the total principal

amount of guarantees outstanding for self-help community development

programs. Loans guaranteed under this program may not have an average

face value in a fiscal year exceeding $15 million, nor may the total loans

guaranteed for projects in any country for a fiscal year exceed $25 million.

The interest rate for guaranteed loans is expected to average 14 percent in

1981; it varies with the Federal Housing Administration insured mortgage

rate.

For fiscal year 1982, the Administration proposes a limitation of $150

million on new loan guarantee commitments. Table 16 summarizes recent

activity for this program.

Food for Peace (Public Law 480)

Public Law 480, the Agriculture Trade Development and Assistance

Act of 1954, authorizes the Commodity Credit Corporation (CCC) to extend

credit to foreign countries and exporters to finance the sale of agricultural

commodities. Credit sales for dollars are repayable over 20 years; sales for

convertible foreign currencies are repayable over 40 years. Outstanding

loans had accumulated to $7.1 billion by the end of 1980.

30
TABLE 15. CREDIT ACTIVITIES FOR OVERSEAS PRIVATE INVESTMENT

CORPORATION (By fiscal year, in millions of dollars)

i QQQ Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted

Limitation proposed — 10.0

Obligations subject to

limitation — 10.0

Obligations exempt from

limitation 4.3

New Loan Guarantee Commitments

Limitation enacted

Limitation proposed — — 100.0

Commitments subject to

limitation — — 100.0

Commitments exempt from

limitation 175.3 120.0

Sale of Loan Assets to FFB

Repurchases

Outstanding FFB holdings

-4.3

33.2

-5.0

28.2

-5.0

23.2

TABLE 16. HOUSING AND OTHER CREDIT GUARANTEES (By fiscal year,

in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Loan Guarantee Commitments

Limitation enacted

Limitation proposed — — 150.0

Commitments subject to

limitation — — 150.0

Commitments exempt from

limitation 175.0 150.0

31
New direct loan obligations for 1982 are estimated to total $808.2

million. No limitation is proposed because the full program amounts for the

Public Law 480 program must be appropriated each year. The

Administration contends, therefore, that a separate limitation on new loans

obligations is not necessary.

Table 17 summarizes Public Law 480 loans for 1980-1982.

TABLE 17. FOOD FOR PEACE (PUBLIC LAW 480) LOANS (By fiscal year,

in millions of dollars)

Credit Activity

1980

Actual

Administration Estimates

1981 1982

New Direct Loan Obligations

Exempt from Limitation 876.8 839.6 808.2

Net Direct Loan Outlays 651.1 658.6 682.4

Direct Loans Outstanding 7,134.2 7,792.8 8,475.2

Emergencies in the Diplomatic and Consular Services

Public Law 84-885 authorizes the Secretary of State to make expenditures to meet emergencies arising in the diplomatic and consular service.

The funds are used for relief and repatriation loans to U.S. citizens abroad.

No limitation is proposed because the full program amounts must be

appropriated each year. The Administration contends, therefore, that a

separate limitation on new loan obligations is unnecessary. It also argues

that a limitation would restrain the Secretary's power to meet emergencies.

New loans are estimated to total $1 million for 1982. Defaults on

loans in 1982 are estimated to be 30 percent, up from 20 percent in 1980.

Table 18 summarizes loan activity for this program during 1980-1982.

Foreign Military Sales Credit

The Arms Export Control Act (22 U.S.C. 2763, 2764) authorizes direct

loans by the Department of Defense and federal guarantees of commercial

or Federal Financing Bank loan agreements to foreign countries for the

purchase of defense articles and services. The direct loans require an

appropriation equal to the face value of the loan and are offered only when

32
there is a legal requirement that repayment be forgiven or when special

conditions make a guarantee inappropriate. In 1980, 1981, and 1982 the

government is expecting to make forgiveness credits for $500 million in

direct loans each year. The forgiven loans have in effect been converted

into grants. These credits result in a negative figure for net lending activity

in the program.

TABLE 18. EMERGENCIES IN THE DIPLOMATIC AND CONSULAR

SERVICES (By fiscal year, in millions of dollars)

, 98Q Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Obligations exempt from

limitation

Direct Loans Outstanding

0.9

3.9

1.0

4.3

1.0

4.7

Until the beginning of fiscal year 1982, the guaranteed loan program

required an appropriation equal to 10 percent of the loan prinicipal that was

to be guaranteed. The International Security and Development Cooperation

Act of 1980 (Public Law 96-533) amends the Arms Export Control Act by

eliminating the 10 percent requirement and creating a guarantee reserve.

The President is required to maintain the reserve at a level of $750 million,

and, if the reserve falls below that level, to request additional

appropriations to replenish the fund.

For fiscal year 1982, the Administration is requesting appropriated

limits of $1.48 billion for direct loan obligations. This represents an almost

threefold expansion in direct loan obligations over 1981 and previous levels.

The $2.6 billion requested for new loan guarantee commitments represents

almost no growth in 1982. Defaults on guaranteed loans during fiscal year

1982 are estimated at $170 million. The default payments will increase

total new direct loan obligations to $1.65 billion for 1982.

In recent years all new guaranteed loans have been financed through

the Federal Financing Bank. Thus, the loans are actually direct loans of the

federal government held off-budget; no private lender is involved. By the

end of 1982, the FFB will be holding 98 percent of all outstanding loans.

Table 19 illustrates the financing of foreign military sales credit for 1980-

1982.

33
TABLE 19. FOREIGN MILITARY SALES CREDIT (By fiscal year, in

millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted — 500

Limitation proposed — 500 1,482

Obligations subject to

limitation — 500 1,482

Obligations exempt from

limitation

Total obligations

635

635

1*0 a/

6*0

170 «

1,652

New Loan Guarantee Commitments

Limitation enacted — 2,546

Limitation proposed — 2,546 2,573

Commitments subject to

limitation — 2,546 2,573

Commitments exempt from

limitation 1,450

Guarantees of FFB Loans

New FFB loans 2,380 2,600 2,700

Repayments -448 -556 -767

Outstanding FFB holdings 7,209 9,253 11,186

a/ Disbursements for loan guarantee default claims.

Export-Import Bank

The Export-Import Bank (Eximbank) is a wholly owned government

corporation that aids in financing exports by U.S. firms to foreign countries

or firms. Eximbank provides direct loans, loan guarantees, insurance, or

reinsurance on terms and conditions that make U.S. products competitive

with foreign products. Eximbank's authority for loans, guarantees, or

insurance outstanding is limited to $40 billion (12 U.S.C. 635e). Only 25

percent of loan guarantees or insurance outstanding is charged against that

limitation, up to a limitation of $25 billion. In addition, an annual limitation

on program activity and administrative expenditures has been included in

Foreign Assistance Appropriation Acts.

34
Originally the Carter Administration requested a limitation of $4.7

billion for direct loans for 1981. This was increased to $5.9 billion by the

Foreign Operations Subcommittee in their appropriation bill. The bill was

not enacted, however, and the programs within it are being funded under a

continuing resolution. The revised budget proposes substantial cutbacks

from January levels in Eximbank loan and loan guarantee authority and

reduction in interest rate subsidies, effective in both 1981 and 1982. The

reduction in 1981 direct loans will require the Congress to enact a limitation

$752 million lower than the current limitation. Under the revised proposals,

in 1982 the Eximbank will be held near its 1980 level (see Table 20).

TABLE 20. CREDIT ACTIVITIES FOR EXPORT-IMPORT BANK (By fiscal

year, in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted — 5,900

Limitation proposed — 5,148 4,400

Obligations subject to

limitation — 5,148 4,400

Obligations exempt from

limitation 4,365

New Loan Guarantee Commitments

Limitation enacted — 7,559

Limitation proposed — 7,559 8,220

Commitments subject to

limitation — 7,559 8,220

Commitments exempt from

limitation 8,031

35
ENERGY (FUNCTION 270)

This function includes credit programs for energy research and development, conservation, and production. While the Department of Energy

administers most of these programs, the Department of Agriculture, the

Tennessee Valley Authority, and the Synthetic Fuels Corporation also have

programs of energy credit assistance.

The Administration's 1982 budget anticipates major increases in

energy loan guarantees for 1981, followed by a decrease in 1982. Table 21

summarizes the gross levels of new energy credit activity for 1980-1982.

New programs of loan guarantees for synthetic fuels facilities account for

the substantial increase in 1981 over 1980. Overall, new commitments for

loan guarantees are estimated to increase 78 percent in 1981 over the actual

level, and drop 19 percent in 1982.

Direct lending in the energy function is expected to decline in 1981

and 1982. The decline results from major shifts planned in Rural Electrification Administration activity.

The following sections highlight activity of the major energy credit

programs for fiscal years 1980 through 1982.

Synthetic Fuels Corporation and Energy Security Reserve

The Synthetic Fuels Corporation was established by the Energy

Security Act (Public Law 96-294) as part of an effort to reduce U.S.

dependence on imported oil. The goal of the corporation is to assist private

industry to finance the development of two million barrels of oil substitutes

by 1992. To achieve this goal, the Corporation will provide the private

sector with financial assistance in the form of direct loans, loan guarantees,

price guarantees, and purchase agreements. The legislation creating the

Corporation provides that the Corporation's budget not be included in the

budget totals. It is financed, however, by payments from the on-budget

Energy Security Reserve in the Department of the Treasury.

New loan guarantee commitments are estimated at $2 billion for 1982,

one-third above the 1981 estimate of $1.5 billion (see Table 22). No

repayments or defaults are projected through 1982.

When the Energy Security Reserve was established, 1981 authority was

made available from the reserve to the Department of Energy to issue loan

guarantees to carry out preliminary synthetic fuel development activities.

In 1981 $4.5 billion in loan guarantees are estimated under this authority.

36
TABLE 21. ENERGY PROGRAMS-SUMMARY OF CREDIT ACTIVITY (By

fiscal year, in millions of dollars)

New Direct Loan New Loan Guarantee

Obligations Commitments

Program 1980 1981 a/1982 a/ 1980 1981 a/ 1982 a/

Synthetic Fuels

Corporation — — — — 1,500 2,000

Energy Security

Reserve — — — — 4,500

Rural Electrification

Administration 1,175 913 700 5,688 5,095 5,245

Tennessee Valley

Authority 2 — — 2,436 3,437 4,502

Biomass and Geothermal

Energy Development — 20 — 79 45

Other Energy

Programs 5 2 2 6 — —

Total 1,182 935 702 8,209 14,577 11,747

a/ Administration estimates.

TABLE 22. SYNTHETIC FUELS AND ENERGY SECURITY RESERVE

LOAN GUARANTEES (By fiscal year, in millions of dollars)

1980

Credit Activity Actual

New Loan Guarantee Commitments

Exempt from Limitation

Synthetic Fuels Corporation

Energy Security Reserve

Total new commitments

Guaranteed Loans Outstanding —

Administration

1981

1,500

4,500

6,000

6,000

Estimates

1982

2,000

2,000

8,000

37
Rural Electrification Administration

The Rural Electrification Administration (REA) of the Agriculture

Department conducts two capital investment programs: rural

electrification, to provide electric service to farms and other rural establishments; and the rural telephone program, to furnish and improve

telephone service in rural areas. Both programs are operated through the

Rural Electrification and Telephone Revolving Fund (RETRF), which the

Congress placed off-budget to exempt its activities from outlay or

expenditure ceilings.

REA makes both direct and guaranteed loans through the RETRF. The

direct loan program provides direct loans not to exceed 35 years in term, at

either 2 or 5 percent interest rates, in accordance with criteria specified in

law. REA also guarantees loans made by FFB and other qualified lenders at

rates agreed upon by borrower and lender. FFB rates are more

advantageous to the borrower, since they are only one-eighth of one percent

above the Treasury's borrowing rate. Through the use of loan sales and FFB

origination of REA guaranteed loans, all of the RETRF's activity is financed

by the FFB. Because REAfs loans have a grace period before repayment

begins, there are no repayments to FFB scheduled during 1981 or 1982.

In the last few years, a range for direct loan limitations have been

included in appropriation acts to allow for changed economic circumstances

in rural areas during the fiscal year. This practice is continued in the 1982

budget, which recommends a limit of $900 million on direct loan obligations

although expected new obligations are only $700 million. For loan

guarantees the limit requested, $6,755 million, is $1,510 million above the

expected commitment level.

The Administration is proposing major cutbacks in REA activity,

including discontinuing further REA use of the FFB as a direct lender for

guaranteed loans, raising interest rates on certain loans from 2 percent to 5

percent and ending loans to telephone companies. To achieve the reduction

in 1981, the Administration is requesting that the previously enacted direct

loan ceiling of $1.4 billion be reduced to $1.2 billion. The FFB changes can

be made without Congressional action. For 1982 the Administration is

proposing increasing the limitation on new loan commitments loan program.

Table 23 presents the 1980-1982 activity of the RETRF.

Tennessee Valley Authority

The Tennessee Valley Authority (TVA) is a government-owned corporation created to oversee the unified development of a river basin

comprising parts of seven states. The Seven States Energy Corporation is a

TVA subsidiary that makes loans and loan guarantees for nuclear energy

38
TABLE 23. RURAL ELECTRIFICATION LOAN AND LOAN GUARANTEE

ACTIVITY (By fiscal year, in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted 1,250 1,425

Limitation proposed — 1,238 900

Obligations subject to

limitation 1,175 913 700

New Loan Guarantee Commitments

Limitation enacted

Limitation proposed — — 6,755

Commitments subject to

limitation — — 5,245

Commitments exempt

from limitation 5,687 5,095

FFB Lending a/

New FFB loans 3,188 4,736 4,600

Repayments -3

Outstanding FFB holdings 10,336 15,072 19,672

a/ Includes loan asset sales and loan guarantee originations.

projects in the seven states. To finance its lending, the Corporation borrows

from the FFB with TVA guaranteeing the indebtedness. As a result of this

activity TVA is guarantor of new FFB obligations estimated at $4.5 billion

for 1982. TVA also makes direct loans itself, estimated at $68 million for

1982. Because of a dispute about the exact nature of TVA"s activities, these

loan obligations have not been included in the credit budget. TVAs

activities are shown in Table 24.

Other Energy Credit Programs

Biomass Energy Development. The Energy Security Act (Public Law

96-294) authorized direct loans and loan guarantees to aid commercial

production of alcohol and other fuels from crops and crop waste, timber,

animal and timber waste, and other forms of biomass and urban waste. The

Secretaries of Agriculture and Energy may guarantee loans up to 90 percent

39
TABLE 24. TENNESSEE VALLEY AUTHORITY LOANS AND LOAN

GUARANTEES (By fiscal year, in millions of dollars)

Administration Estimates

Actual 1981 1982

New Direct Loan Obligations

Exempt from Limitation

Direct Loans Outstanding 3 3 3

New Loan Guarantee Commitments

Exempt from Limitation

Guarantees of FFB Loans

New FFB loans

Repayments

Outstanding FFB holdings

2,436

2,436

-1,751

685

3,437

3,437

-3,160

962

4,502

4,502

-4,245

1,219

of the cost of construction as estimated on the date of the guarantee or

commitment and 60 percent of cost increases thereafter. The authority to

guarantee loans expires on September 30, 1984.

The Administration, in its March budget revisions, is proposing to

reduce direct loan obligations for 1981 to $20 million, down from >100

million planned in the January budget. It proposes to eliminate the program

entirely in 1982.

Geothermal Resources Development Fund. The Geothermal Energy,

Research, Development, and Demonstration Act of 1974, as amended,

provides that the Secretary of Energy may guarantee loans up to $100

million each for the commercial development of geothermal energy. No

limits on aggregate program activity were specified in the enabling

legislation. Limitations on outstanding indebtedness were included in the

appropriations acts for fiscal years 1977 to 1981; the 1981 Energy, Water

and Related Agencies Appropriation Act set a ceiling of $500 million on the

outstanding indebtedness of the fund.

The original budget estimates for 1980 and 1981 assumed rapid growth

of geothermal loan guarantees, far in excess of actual program growth to

date. At the end of 1979, only $14.3 million in loans had been guaranteed.

The Administration is proposing to terminate this program in 1982.
Bonneville Power Administration. The budget included estimates for

two direct loan pilot programs to be conducted by the Bonneville Power

Administration. These programs would provide direct loans to customers for

installation, home insulation, and solar energy water heaters. The estimates

assumed $2.4 million in new direct loan obligations for 1981 and $2.4

million—the proposed limitation—for 1982.

Wind Energy Systems. The Wind Energy Systems Act of 1980 (Public

Law 96-345) allows the Secretary of Energy to make direct loans for up to

75 percent of the total purchase and installation costs of wind energy

systems. The Administration is proposing to terminate this program in 1982.

Other energy credit programs are summarized in Table 25.

TABLE 25. OTHER ENERGY CREDIT PROGRAMS (By fiscal year, in

millions of dollars)

New Direct Loan New Loan Guarantee

Obligations Commitments

Program 1980 198 la/ 1982 a/ 1980 198 la/ 1982 a/

Biomass Energy

Development — 20.0

Goethermal Resources

Devleopment — — — 78.5 45.0

Bonneville Power

Administration Loans b/ 2.4 2.4

Wind Energy Loan

Program 4.7 — — — — —

Total 4.7 22.4 2.4 78.5 45.0

a/ Administration estimates,

b/ Less than $50,000.

41

77-245 0-81- 8
NATURAL RESOURCES AND ENVIRONMENT (FUNCTION 300)

This function contains only one credit program: the direct loan

program of the Interior Department's Water and Power Resources Services

(formerly the Bureau of Reclamation). The Service makes loans to

irrigation districts or other public agencies under the Distribution Systems

Loan Act (43 U.S.C. 421a-h) and the Small Reclamation Projects Act of

1956, (43 U.S.C. 422a-k) to enable them to construct irrigation systems or

municipal and industrial water supply systems. Budget authority for loans

under both acts must be specifically provided in appropriations. For fiscal

year 1982 the Administration is proposing a limitation on gross obligations

of $24.4 million,, Table 26 summarizes all credit activity in function 300.

TABLE 26. WATER AND POWER LOAN PROGRAM (By fiscal year, in

millions of dollars)

198Q Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted — 38.0

Limitation proposed — 38.0 24.4

Obligations subject to

limitation — 25.1 24.4

Obligations exempt from

limitation 12.5

42
AGRICULTURE (FUNCTION 350)

Credit assistance for agriculture consists of loans and loan guarantees

of the Farmers Home Administration's Agricultural Credit Insurance Fund

(ACIF) and the Commodity Credit Corporation (CCC), both in the

Department of Agriculture. Table 27 summarizes new direct loan

obligations and new loan guarantee commitments by the ACIF and the CCC

in fiscal years 1980-1982.

TABLE 27. AGRICULTURE-SUMMARY OF CREDIT ACTIVITY (By fiscal

year, in millions of dollars)

New Direct Loan New Loan Guarantee

Obligations Commitments

Program 1980 1981 a/ 1982 a/ 1980 1981 a/ 1982 a/

Agricultural Credit

Insurance Fund 7,528 8,721 4,358 5,420 7,456 1,597

Commodity Credit

Corporation 4,947 3,571 4,520 744 1,947 2,000

Total 12,475 12,292 8,878 6,164 9,403 3,597

a/ Administration estimates.

Agricultural Credit Insurance Fund

Through the ACIF, the Farmers Home Administration (FmHA) makes a

wide variety of direct loans to farmers, ranchers, and others engaged in

agricultural activities. The principal programs of the ACIF are loans for

farm ownership, farm operations, and disaster relief. FmHA also conducts a

small program of guarantees of private lending for these same purposes.

Terms for direct loans made through the ACIF are more favorable

than those for commercial loans. Farm ownership loans and other property

or resource development loans have long-term maturities, usually 35 to 40

years, and bear interest at the ACIFfs cost of borrowing from the Treasury

plus a small administrative fee. Low-income borrowers receive 25 percent

of all loans extended. These loans are made at special interest rates of 6

percent or less. Farm operating loans have a shorter term, usually 7 to 10

years, but use the same cost-of-money basis for setting interest rates.

Again 25 percent of the loans are reserved for low-income farmers, who

receive a subsidized interest rate of 6 percent. Disaster loans are also made

43
for farm ownership and operating purposes and have similar maturities.

Loans on losses carry a 5 percent interest rate. Guaranteed loans by the

ACIF have the same maturities as direct loans; the interest rate is

negotiated between the borrower and the lender.

In the March budget revisions the Administration is proposing to

reduce direct lending in these programs below the amount specified in the

January budget. For 1981 the Administration is proposing a rescission of

$89 million, which would reduce the new direct loan limitation for the ACIF

to $1,705 million. The largest portion of the reduction, $80 million, is

planned for the farm ownership loan program. The Administration will

direct the Farmers Home Administration to focus its activities exclusively

on those who cannot obtain credit in private lending markets.

In the January budget, ACIF activity for 1982 was expected to fall

from its 1981 level to $5.7 billion, based on smaller estimates of disaster

loan requirements. In the March revisions the Administration proposes to

reduce new direct loan obligations by another $1.3 billion to $4.4 billion. J7

This proposed reduction will primarily affect the farm ownership loan

program, and assumes further decreases in disaster loans.

The ACIF is a revolving fund. Sales of direct loans held by the ACIF

provide funds for further loans, subject to limitations set by the

appropriation language. Groups of loans are packaged as a pool, and

certificates of beneficial ownership (CBOs), or loan assets, in that pool are

sold. Most CBOs are sold with a guarantee to the off-budget Federal

Financing Bank. Because receipts from these loan asset sales are considered

to be repayments on the loans in the pool, they are counted as negative

outlays and thus offset new lending. Selling loan assets to the FFB,

therefore, has the effect of transferring budget outlays from the ACIF to

the off-budget FFB.

In the credit program control system, the Administration has chosen to

propose limitations only on the new direct loans and loan guarantees by the

ACIF to the public. Sales of loans assets and guarantees of these sales, are

considered to be a means of financing. Therefore, limitations are not

proposed on the new direct loan obligations or on the new loan guarantee

J7 The credit budget totals in the March Budget Revisions included a

reduction of $2,650 million in direct loan obligations for the ACIF for

fiscal year 1982. The correct figure is $1,300 million. CBO has

adjusted the credit budget totals accordingly.

44
commitments associated with the loan asset sales. Of the $4.4 billion in

new direct loan obligations for 1982, $0.9 billion is for repurchases of loan

assets sold in previous years. Of the $1.6 billion in new loan guarantee

commitments proposed, all but $181 million are guarantees of loan asset

sales. Table 28 summarizes the direct loan and loan guarantee activities for

the ACIF for fiscal years 1980-1982.

TABLE 28. AGRICULTURAL CREDIT INSURANCE FUND LOANS AND

LOAN GUARANTEES (By fiscal year, in millions of dollars)

1980 Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted 1,744 1,794

Limitation proposed — 1,705 2,126

Obligations subject to

limitation 1,325 1,705 2,126

Obligations exempt from

limitation

Repurchase of loan assets

Disaster loans

Total obligations

New Loan Guarantee Commitments

Limitation enacted

Limitation proposed

1,330

4,873

7,528

81

1,266

5,750

8,721

81

81

882

1,350

4,358

181

Commitments subject to

limitation

Commitments exempt from

limitation a/

Total commitments

Sale of Loan Assets to FFB

New sales to FFB

Repurchases

Outstanding FFB holdings

81

5,339

5,420

5,257

-1,275

16,567

81

7,375

7,456

7,045

-1,025

22,587

181

1,416

1,597

1,166

-735

23,018

a/ Guarantees of loan asset sales to the FFB and the public.

45
Commodity Credit Corporation

The Commodity Credit Corporation (CCC) conducts three direct loan

and two loan guarantee programs for farm income stabilization and support.

Table 29 summarizes the activities of these programs for fiscal years 1980-

1982.

TABLE 29. COMMODITY CREDIT CORPORATION LOANS (By fiscal

year, in millions of dollars)

toon Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Export loans

Limitation enacted 2,200 2,200

Obligations subject to

limitation 719 18

Commodity loans

Obligations exempt from

limitation 3,866 3,368 4,470

Storage facility loans

Obligations exempt from

limitation 363 185 50

Total obligations 4,947 3,571 4,520

New Loan Guarantee Commitments

Exempt from Limitation

Agricultural Fuels 5 38

Export Guarantees

Total commitments

740

745

1,913

1,951

2,000

2,000

The CCC's principal form of credit assistance is the nonrecourse

commodity loan. The CCC makes direct loans to producers with the crop or

commodity serving as collateral. On the date of maturity, an average of

seven months later, the producer may pay off the loan or deliver the

commodity to the CCC. Commodity loans act to set a floor under market

prices because they are based on a given support price. If the market price

is below this support price, the farmer does not repay the loan but instead

delivers his crop to the CCC. If the market price is above the support price,

he pays back the loan and sells the crop himself. For 1982 the

Administration estimates that new direct loan obligations for commodity

46
loans will equal $4.5 billion, an increase of nearly 33 percent from the 1981

estimate.

The Administration is proposing legislation to charge interest on all

loans equal to the Treasury's cost of borrowing, and to eliminate the interest

waiver for the first year on reserve loans held by farmers. The purpose of

this legislation is to reduce costs to the government of the price support

programs.

The CCC also conducts an export credit sales program to maximize

exports of agricultural commodities and products. For fiscal year 1982 the

Administration proposes no new loan obligations for short- and medium-term

export loans. Rather, it wishes to place greater reliance upon loan

guarantees for financing commercial export sales of agricultural

commodities. This policy was initiated during the previous Administration

after new direct loan obligations fell short of the enacted limitation for

fiscal year 1980. During that year only $0.7 billion of $2.2 billion was used

for new direct loan obligations, resulting in an unused balance of $1.5

billion. Since that time, new direct loan obligations have declined and will

be zero in 1982.

The third direct loan program conducted by the CCC provides

financing for the purchase, construction, or remodeling of commodity

storage facilities. The loans have 10-year terms and bear interest at a rate

based on the CCC's borrowing rate from the Treasury. The Administration

is proposing to phase out the storage facility loan program by 1986 because

of a surfeit of storage capacity. For fiscal year 1981 the Administration

proposes to reduce new direct loan obligations $180 million below the 1980

level, and for fiscal year 1982 new obligations will drop another $135

million.

The Rural Development Act of 1972 directed the CCC to guarantee

loans of up to $15 million each for not more than four pilot projects for the

production of industrial hydrocarbon and alcohol fuels from agricultural

commodities and forestry products. During 1980 one project received final

approval with a loan guarantee of $4.6 million. Final approval of three

tentatively approved projects, with new loan guarantee commitments

totaling $33.7 million, is expected in 1981.

As the direct loan export program is phased out, the CCCfs noncommercial risk assurance program will take over its activities. Under this

program the CCC guarantees U.S. exporters against default due to

noncommercial risks on payments owed to them under deferred payment

sales contracts. This program primarily is intended to protect exporters

from defaults caused by political instability. For 1982 the Administration

estimates that new loan guarantee commitments for the risk assurance

program will equal $2 billion.

47
COMMERCE AND HOUSING CREDIT (FUNCTION 370)

Credit programs in this function are designed to promote the flow of

funds into housing and commerce. These programs include the mortgage

insurance and purchase activities of the Department of Housing and Urban

Development (HUD), the rural housing activities of the Department of

Agriculture (USDA), the business loan programs of the Small Business

Administration (SBA), the National Consumer Cooperative Bank, and other

activities.

In the Administration's proposed budget for 1982, new direct loan

obligations would increase approximately 7 percent from the 1981 level,

while new loan guarantee commitments would fall by 3 percent, after a

large increase from 1980 to 1981. Table 30 summarizes the new direct loan

obligations and loan guarantee commitments in this function for 1980-1982.

TABLE 30. COMMERCE AND HOUSING PROGRAMS-SUMMARY OF

CREDIT ACTIVITY (By fiscal year, in billions of dollars)

New Direct Loan New Loan Guarantee

Obligations Commitments

Program 1980 1981 a/ 1982 a/ 1980 1981 a/ 1982 a/

FHA 0.3 0.3 0.3 29.1 34.2 35.0

GNMA 2.2 1.8 3.6 63.2 64.0 64.2

Housing for the Elderly

or Handicapped 0.9 0.9 0.9

Rural Housing Credit 6.8 6.4 4.7 4.8 7.2 3.7

National Credit Union

Administration 0.3 2.1 3.7 0.1 0.1 b/

Chrysler Guarantees — — — 0.8 0.7

Small Business

Assistance 0.8 0.7 0.8 4.8 4.9 4.4

Deposit Insurance

Programs

Other

Total

0.9

b/

12.2

1.1

0.1

13.3

0.2

b/

14.2

0.1

102.9

0.1

111.1

0.1

107.5

a/ Administration estimates,

b/ Less than $50 million.

48
Federal Housing Administration

The first major loan guarantee program of the federal government was

home mortgage insurance, begun during the Depression. Today home

mortgage insurance continues to be the largest of federal credit activities.

The mortgage insurance programs of the Federal Housing Administration

(FHA) are administered through the FHA Fund, which is actually a

collection of insurance funds. The Mutual Mortgage Insurance Fund provides

mortgage insurance for single-family homes. Premiums are determined on

an actuarial basis and are more than sufficient to cover expected losses.

The Cooperative Management Housing Insurance Fund provides mortgage

insurance for management-type cooperatives. The General Insurance Fund

provides specialized mortgage insurance for property improvement loans and

loans for cooperatives, condominiums, group practice medical facilities,

nonprofit hospitals, and others. The Special Risk Insurance Fund provides

mortgage insurance to high-risk borrowers who would otherwise not be

eligible for mortgage insurance.

According to the latest estimates FHA guarantee commitments will

rise 17 percent from 1980 to 1981, and will be held at near the 1981 level

($35 billion) in 1982. These commitment levels are substantially lower than

the levels requested in the January budget. The January budget had

requested $4.8 billion more in 1981 and $9.0 million more in 1982. The

reductions in FHA proposed in the March revision account for by far the

largest portion of the overall reduction in the credit budget. In the past

FHA guarantees have essentially been constrained only by demand from

eligible borrowers. For 1981, for example, the January budget requested a

supplemental increase in the enacted limitation in the face of unexpectedly

harsh housing market conditions. The proposed March revisions would

require for the first time that the FHA take steps to select from among

eligible borrowers or to alter its activity in some other way in order to meet

the limitation.

For 1982 the Administration is proposing a limitation of $76 million on

new direct loan obligations. This limitation applies only to direct loans for

temporary mortgage assistance payments. Exempt from limitation are new

direct loan obligations used to cover a portion of defaults against FHAinsured mortgages. In cases of default, the FHA pays off the holder of the

guaranteed mortgage, and the mortgage becomes a direct loan for which the

FHA seeks repayment. The FHA does not convert all defaults into direct

loans. Instead, it pays off some defaulted mortgages with grants. For 1982

the Administration estimates that total defaults on guaranteed mortgages

will equal $593 million. Of that amount $202 million will be converted into

direct loans, and $391 million will be written off as cash losses. Table 31

details the activity of the FHA fund for 1980-1982.
TABLE 31. FEDERAL HOUSING ADMINISTRATION LOANS AND LOAN

GUARANTEES (By fiscal year, in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted — 14

Limitation proposed — 14 76

Obligations subject to

limitation

Obligations exempt from

limitation a/ 301

Total obligations 301

New Loan Guarantee Commitments

Limitation enacted —

Limitation proposed —

1*

268

282

34,155

34,155

76

202

278

35,000

Commitments subject to

limitation — 34,155 35,000

Commitments exempt from

limitation 29,106

a/ Disbursements for loan guarantee default claims.

Government National Mortgage Association

Major federal support for the mortgage market is provided by the

activities of the Government National Mortgage Association (GNMA).

Tables 32 and 33 summarize GNMA activities for 1980-1982. GNMA

guarantees securities issued by mortgage bankers and other financial institutions backed by pools of privately held, federally-insured mortgages. The

GNMA-guaranteed securities are attractive to investors who have not

traditionally invested in mortgages. Through these guarantees GNMA is

able to draw more funds into housing credit. For 1981 the Administration is

proposing a supplemental increase in the enacted limitation from $53 billion

to $64 billion. This is $8 billion less than the January supplemental request.

The requested level for 1982 is almost the same as that for 1981.

GNMA makes commitments at the request of mortgage lenders to

guarantee their securities at a later date. Requests for GNMA

commitments are expected to exceed the limitation in both 1981 and 1982,

50
and GNMA will have to take administrative action to determine how to

select from among eligible borrowers and lenders. Because banks subsequently sell far fewer securities than they receive commitments on, it is

possible that commitments could be reduced without changing the volume of

securities actually guaranteed.

TABLE 32. GOVERNMENT NATIONAL MORTGAGE ASSOCIATIONTANDEM PLAN DIRECT LOANS, (By fiscal year, in millions

of dollars)

Credit Activity

Special Assistance Functions

Limitation enacted

Limitation proposed

1980 "

Actual

2,15*

Administration Estimates

1981 1982

1,800

1,800 3,600

Obligations subject to

limitation 2,15* 1,800 3,600

Emergency Mortgage Purchase

Assistance

Obligations exempt from

limitation *1 2* 5

GNMA also purchases mortgages to support the flow of housing credit.

Through the tandem plan or its special assistance functions fund, GNMA

purchases below-market interest rate FHA and VA loans from lenders,

paying the lenders full market rates. It also returns to the lender a premium

that functions as a subsidy for making the low rate loan. GNMA then sells

these loans itself at market rates to other institutional investors. For 1982

the Administration is requesting a limitation of $3.6 billion for new direct

loan obligations. This is twice the 1981 limitation, and $3.3 billion higher

than the January budget estimate. The January estimate assumed

enactment of legislation to convert the tandem plan from loans to

equivalent grants. Withdrawal of the proposal in the March revisions raises

the 1982 estimate to its current level.

As part of the tandem plan, GNMA also has authority to purchase

conventional, FHA, and VA mortgages on an emergency basis whenever the

HUD Secretary determines, with Congressional approval, that housing credit

needs to be supplemented. The last such authority was granted in

September 1976. New commitment activity since that time has been

51
limited to increases in existing contracts. The Administration does not

expect any new commitments to be made through 1982, although amendments to existing contracts were estimated to total $5 million in 1982.

TABLE 33. GOVERNMENT NATIONAL MORTGAGE ASSOCIATIONGUARANTEES OF MORTGAGE-BACKED SECURITIES (By

fiscal year, in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Exempt from Limitation

Net Direct Loan Outlays

Direct Loans Outstanding

5

2

6

8

1

10

9

k

\<4

New Loan Guarantee Commitments

Limitation enacted — 53,000

Limitation proposed — 64,000 64,208

Commitments subject to

limitation — 64,000 64,208

Commitments exempt from

limitation 63,200

Housing for the Elderly or Handicapped

Section 202 of the Housing Act of 1959, as amended, provides for a

program of direct loans to nonprofit sponsors, consumer cooperatives, and

certain public agencies to construct rental housing for elderly and handicapped persons. The loans have a maximum term of 40 years and bear interest

at Treasury's borrowing rate, plus an allowance to cover administrative

costs and probable losses.

For 1982, the Administration is proposing a limitation of $850.8

million for new direct loan obligations. This is a reduction of 5 percent

from the limitation proposed in 1981. The Administration estimates that

new direct loan obligations of $850.8 million would provide financing for

approximately 17,200 units of housing. It should be noted that, although

there is a high level of loan activity in this program, there are few

repayments in 1980-1982. Table 34 summarizes direct lending from the fund

for fiscal years 1980-1982.

52
TABLE 3*. LOANS FOR HOUSING FOR THE ELDERLY OR HANDICAPPED (By fiscal year, in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted — 920

Limitation proposed — 920 851

Obligations subject to

limitation — 896 851

Obligations exempt from

limitation 933

Net Direct Loan Outlays 782 829 823

Direct Loans Outstanding 1,975 2,80* 3,628

Rural Housing Credit

The Farmers Home Administration (FmHA) of USD A conducts two

programs in function 370 that provide rural housing credit. FmHAfs Rural

Housing Insurance Fund (RHIF) makes direct (and some guaranteed) loans for

rural housing purchases, rental and cooperative housing projects, farm labor

housing projects, and preparation of rural housing sites. The authority for

these loans is provided by Title V of the Housing Act of 19*9, as amended.

Direct loans by the RHIF are largely financed through the sale of

certificates of beneficial ownership (loan assets) to the Federal Financing

Bank. Through these transactions the balance of loans outstanding in the

on-budget RHIF is kept to a minimum but there is a corresponding rise in

off-budget FFB loan balances. In its credit program control system, the

Administration is proposing limitations on RHIF's new direct loan and loan

guarantee transactions with the public but not on the fund's transactions

with the FFB. Almost all the loan guarantee activity in this fund consists of

guarantees of the loan assets as they are sold to FFB>, rather than of

guarantees of private rural housing loans.

The Administration is planning to hold the activities of RHIF in 1981

and 1982 to approximately the 1980 level. The moderate-income homeownership loans program will be reduced, while the other programs will

continue to grow. The Administration is directing FmHA to target its

lending to those who cannot obtain credit elsewhere. To achieve the

restraint planned for 1981, the Administration is requesting that the already

53
enacted limitation of $4,102 million be reduced by $316 million. Total

obligations for direct loans decrease during 1981 and 1982 because of

decreasing repurchases of loan assets from FFB.

The second FmHA program is much smaller than RHIF. Through the

Self-Help Housing Land Development Program, authorized by the Housing

and Urban Development Act of 1968 (Public Law 90-448), the FmHA makes

loans to public or private nonprofit organizations to finance the acquisition

and development of sites for homes to be constructed by self-help. For

1982, the Administration is proposing a limitation of $2 million for new

direct loan obligations. Table 35 summarizes RHIF and the Self-Help

Housing Land Development program activities for 1980-1982.

National Credit Union Administration Credit Activities

Credit Union Central Liquidity Facility. Public Law 95-630

established the Central Liquidity Facility of the National Credit Union

Administration. The facility, which began operations October 1, 1979,

provides direct loans to member credit unions to meet seasonal and

emergency needs. The facility's funds come from stock subscriptions paid

by participating credit unions and through borrowing from the FFB.

For 1982 the Administration is proposing a limitation of $4.4 billion on

new direct loan obligations. This limitation exceeds the estimate for new

obligations to be made during 1982 by $750 million. For 1981 the limitation

exceeded the estimate by $2.2 billion. The Administration contends that a

limitation that exceeds anticipated obligations is needed in order to provide

for emergency liquidity needs.

Credit Union Share Insurance Fund. This insurance fund, authorized by

Public Law 91-468, is used to insure member deposits in federal credit

unions. Each insured credit union is required to pay a premium of onetwelfth of one percent of the total amount of its member accounts. These

premiums are expected to make the insurance fund self-supporting. The

Share Insurance fund is exempt from limitation, under the Administration's

criteria, because it is an insurance activity, the needs of which are not

easily anticipated. Table 36 summarizes the activities of the Central

Liquidity Facility and the Credit Union Share Fund for 1980-1982.

54
TABLE 35. RURAL HOUSING CREDIT ACTIVITIES (By fiscal year, in

millions of dollars)

Credit Activity

New Direct Loan Obligations

Limitation enacted

Limitation proposed

Obligations subject to

limitation

Obligations exempt from

limitation a/

Total obligations

New Loan Guarantee Commitments

Limitation enacted

Limitation proposed

Commitments subject to

limitation

Commitments exempt from

limitation b/

Total commitments

Sale of Loan Assets to FFB

New sales to FFB

Repurchases

Outstanding FFB holdings

J

i. Qs yonu

Actual

4,004

3,755

2,997

6,751

500

—

19

4,759

4,778

4,681

-2,775

17,076

Administration

1981

4,102

3,786

3,786

2,607

6,393

25

25

25

7,127

7,152

7,067

-2,000

22,143

Estimates

1982

3,727

3,727

1,019

4,746

—

—

3,695

3,695

3,645

-740

25,048

a/ The obligations exempt from limitation consist primarily of the

repurchase of loan assets from the FFB.

b/ Guarantees of loan asset sales to the FFB and the public.

55
TABLE 36. NATIONAL CREDIT UNION ADMINISTRATION LENDING (By

fiscal year, in millions of dollars)

1Qon Administration Estimates

1.7OU

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Central Liquidity Facility

Limitation enacted — 4,400

Limitation proposed — 4,400 4,400

Obligations subject to

limitation — 2,208 3,650

Obligations subject to

exemption 310

Share Insurance Fund

Obligations exempt from

limitation 16 lj> 21,

Total obligations 326 2,227 3,671

New Loan Guarantee Commitments

Exempt from Limitation 79 50 25

National Consumer Cooperative Bank

The National Consumer Cooperative Bank (NCCB), chartered by Public

Law 95-351, is a mixed-ownership government corporation whose purpose is

to provide credit at reasonable rates to consumer cooperative organizations.

The Bank makes direct loans to cooperatives with a maximum term of 40

years at rates comparable to those privately available. The Bank may also

guarantee loans by private lending institutions to cooperatives. The NCCB

has an Off ice of Self-Help Development and Technical Assistance to provide

assistance to cooperatives. This office may make capital investment

advances to consumer cooperatives that are not eligible for regular loans by

the bank.

In its 1981-1982 budget revisions, the Reagan Administration is

proposing to terminate the National Consumer Cooperative Bank.

Termination of the NCCB is based on the premise that credit-worthy

cooperatives can obtain loans from private credit sources. In addition, the

Administration asserts that much of the NCCB lending has been to housing

cooperatives which can obtain credit from other federal housing programs.

56
For 1981 the Administration is proposing in rescission requests to

reduce the new direct loan obligation ceiling for the bank itself from $163

million to $107 million, and for the self-help office from $24 million to $18

million. No further obligations are expected in 1982 for the bank, and only

$13 million for the self-help office. Table 37 summarizes the loan activities

of the bank.

TABLE 37. NATIONAL CONSUMER COOPERATIVE BANK (NCCB)

LOANS AND GUARANTEES (By fiscal year, in millions of

dollars)

1Q90 Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

NCCB

Limitation enacted — 163.4

Limitation proposed — 57.0

Obligations subject to

limitation — 57.0

Obligations exempt from

limitation 21.8

Self-Help Development Loans

Limitation enacted — 41.1

Limitation proposed — 5.7 13.1

Obligations subject to

limitation — 5.7 13.1

Obligations exempt from

limitation 0.6

Chrysler Corporation Loan Guarantees

The Chrysler Corporation Loan Guarantee Act of 1979 authorized the

Secretary of the Treasury to guarantee up to $1.5 billion of Chrysler's debt

to assist the troubled automaker in its efforts to regain commercial

viability. The act states that the loan guarantee authority could be granted

only in amounts as provided by appropriations. The accompanying appropriation, Public Law 96-183, provided that all $1.5 billion could be committed

as needed. By 1982 the loan guarantee ceiling will be reached and no

additional loan guarantee authority is requested. Table 38 summarizes the

activity of the Chrysler guarantee program for fiscal years 1980-1982.

57
TABLE 38. CHRYSLER LOAN GUARANTEES (By fiscal year, in millions

of dollars)

Credit Activity

1980

Actual

Adminsitration Estimates

1981 1982

New Loan Guarantee

Commitments 800 700

New Loans Guaranteed 800 700

Guaranteed Loans Outstanding 800 1,500 1,500

Small Business Activities

The Small Business Administration (SBA) provides credit to small

businesses in the form of direct loans, loan guarantees, guarantees of surety

bonds, lease contracts, and pollution control equipment contracts. The SBA

also provides disaster loans, assigned to function 450. The Administration

expects new SBA direct loan obligations in function 370 show a slight

decline from 1980 through 1982. iMost of the component programs are being

held to 1980 levels, though a few, such as the surety bond guarantee

program, will decrease. The total loan guarantee estimate reflects an

approximately 25 percent reduction from the $5.9 billion total proposed in

the January budget. Table 39 summarizes new direct loan obligations and

new loan guarantee commitments for 1980-1982.

Business Loan and Investment Fund. This fund accounts for most of

the credit assistance for small businesses. Through it are funded direct

loans to individual businesses and to small business development companies.

This fund also administers guarantees for business loans, loans to the

handicapped, economic opportunity loans, energy loans, and small business

development company and investment company debt. For 1982 the Administration is proposing consolidating the business loan programs into a single

program. A similar proposal was made during 1981 but was not enacted into

law. The Administration also proposes raising interest rates on direct loans

to the rates charged on guaranteed loans.

Direct loan and loan guarantee activity of the Business Loan and

Investment Fund is summarized in Table 40. For 1982 the Administration is

proposing a limitation of $260 million for new direct loan obligations. New

direct loan obligations exempt from limitation are expected to equal $499

million. Most of that amount will be used to cover defaults of SBA

guaranteed loans. In cases of default, the SBA pays the holder of the

guaranteed loans, and then converts the guarantee into a direct loan. The

58
Administration proposes a limitation of $3.2 billion for new 1982 loan

guarantee commitments, the same as in 1980.

TABLE 39. SMALL BUSINESS ASSISTANCE CREDIT ACTIVITIES (By

fiscal year, in millions of dollars)

Credit Activity

New Loan Guarantee

Commitments

1980 1981 a/ 1982 a/ 1980 1981 a/ 1982 a/

New Direct Loan

Obligations

Business Loan and

Investment Fund 761

Surety Bond

Guarantees

Pollution Control

Equipment Guarantees —

Total 761

7<Mf 759 3,176 3,388 3,150

1,534 1,400 1,200

99 100 95

759 4,809 M88

a/ Administration estimates.

In the past the FFB has purchased loan assets sold by the SBA. No new

asset sales are contemplated for 1982, and the FFB holding will decline as

repayments are made. The FFB also makes direct loans guaranteed by the

SBA to small business investment companies (SBICs) to finance their

provision of equity capital for small businesses. For 1982 the

Administration estimates that new loans by the FFB will total $295 million.

At the end of 1982 FFB holdings of guaranteed direct loans to SBICs and

SBA loan assets will total $1.09 billion.

Deposit Insurance Programs

Federal Savings and Loan Insurance Corporation. The Federal Savings

and Loan Corporation (FSLIC) insures deposits in federally chartered and

qualified state-chartered savings and loan associations. The FSLIC, which

functions under the direction of the Federal Home Loan Bank Board, derives

its authority to provide this insurance from Title IV of the National Housing

Act.

As part of its protection offered to prevent default by an institution,

the FSLIC is authorized to make loans to institutions experiencing financial

difficulties. The FSLIC was excluded from a limitation requirement because

59
TABLE 40. BUSINESS LOAN AND INVESTMENT FUND, LOANS AND

LOAN GUARANTEES (By fiscal year, in millions of dollars)

1QOA Administration Estimates

l:7oU

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted

Limitation proposed — — 260

Obligations subject to

limitation — — 260

Obligations exempt from

limitation a/ 761 789 499

Total obligations 761 789 759

New Loan Guarantee Commitments

Limitation proposed — 4,000 3,150

Obligations subject to

limitation — — 3,150

Obligations exempt from

limitation 3,176 3,388

FFB Lending b/

New FFB loans 149 293 295

Repayments -22 -30 -39

Outstanding FFB holdings 568 831 1,087

a/ Includes disbursements for loan guarantee default claims,

b/ Includes loan asset sales and loan guarantee originations.

its credit activities support its insurance activities, and an annual limitation

would impede its ability to function effectively.

For 1982 the Administration estimates that new direct loan obligations

will equal $190 million. FSLIC loans are highly sensitive to economic

conditions facing savings and loans, and, in particular, variations in interest

rates and demand for housing. The Administration's low estimate for new

direct loan obligations for 1982, following over $1 billion in obligations made

in 1981, reflects its belief that economic conditions will improve in the

coming year.

60
Federal Deposit Insurance Corporation, The Federal Deposit Insurance

Corporation, which provides protection for bank depositors,, was established

by the Banking Act of 1933. The Corporation makes and enforces rules that

promote sound banking practices. The Administration is not requesting new

direct loan obligations for 1981 or 1982. Table 41 summarizes the new

direct loan obligations of the FSLIC and the FDIC for 1980-1982.

TABLE 41. DEPOSIT INSURANCE PROGRAMS (By fiscal year, in millions

of dollars)

Credit Activity

New Direct Loan Obligations

Exempt from Limitation

Federal Savings and Loan

Insurance Corporation

Federal Deposit Insurance

Corporation

19KO

Actual

588.9

325.0

Administration Estimates

1981 1982

1,055.3 190.0

— —

Federal Ship Financing Fund—Fishing Vessels

Additional credit assistance is provided by the Federal Ship Financing

Fund—Fishing Vessels. The fishing vessels financing program is subject to

the proposed limitations of the control system. For 1982 the Administration

is proposing a limitation of $75 million on new loan guarantee commitments,

slightly below the expected 1981 activity level. Table 42 summarizes the

loan guarantee activity of the Federal Ship Financing Fund for 1980-1982.

TABLE 42. FEDERAL SHIP FINANCING FUND-FISHING VESSELS (By

fiscal year, in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Loan Guarantee Commitments

Limitation enacted

Limitation proposed — — 75.0

Commitments subject to

limitation — — 75.0

Commitments exempt from

limitation 73.8 88.0

61
TRANSPORTATION (FUNCTION 400)

Function 400 includes credit programs of the Department of Transportation (DOT) and the Maritime Administration of the Department of

Commerce that provide financial assistance for rail, air, and sea transportation projects. Table 43 summarizes new direct loan obligations and new

loan guarantee commitments for programs in function 400 for 1980-1982.

TABLE 43. TRANSPORTATION-SUMMARY OF CREDIT ACTIVITY (By

fiscal year, in millions of dollars)

New Direct Loan New Loan Guarantee

Obligations Commitments

Program 1980 1981 a/ 1982 a/ 1980 1981 a/ 1982 a/

Credit Assistance for Railroads

Railroad

rehabilitation b/ 128.7 106.0 113.0 277.5 395.0 354.0

Regional rail

reorganization 19.2 6.8 1.0

Emergency rail 1.9 2.0 2.2 — — —

Subtotal 149.8 114.8 116.2 277.5 395.0 354.0

Aircraft Loan

Guarantees — — — 247.0 300.0 100.0

Federal Credit for

Ship Financing 11.0 15.0 15.0 1,222.6 900.0 1,050.0

Federal Highway Loans 23.3 13.5 19.Q — — —

Total 184.1 143.3 150.2 1,747.1 1,595.0 1,504.0

a/ Administration estimates.

b/ Includes rail service assistance.

Railroad assistance accounts for over three fourths of all new direct

loan obligations for 1982. Loan guarantee assistance in function 400 is

dominated by the ship financing guarantees of the Maritime Administration,

62
though aid to railroads and aircraft purchase loan guarantees are sizable

programs.

The Administration proposes no limitations on direct loan obligations

for 1982, but does propose limitations on all new loan guarantee

commitments, except for a portion of rail assistance. The following

sections highlight the credit activity for each program.

Credit Assistance for Railroads

The federal government provides direct loans and loan guarantees

through four programs to help railroads finance capital improvements.

Total new direct loan obligations for rail assistance are expected to

decrease by 22 percent between 1980 and 1982. During the same period,

loan guarantee commitments will increase by 28 percent.

Railroad Rehabilitation and Restructuring Credit. 2/ The Federal

Railroad Administration (FRA), under the authority of the Railroad Revitalization and Regulatory Reform Act of 1976 (the "4R Act"), makes

direct loans to railroads by purchasing redeemable preference shares. The

funds from sale of these shares are used for capital expenditures for rail

freight services.

The "4R Act" also authorizes FRA to guarantee long-term debt

obligations issued by railroads to finance new facilities and rehabilitation of

existing equipment. Some FRA guarantees have been issued to railroads

under bankruptcy reorganization proceedings. The Administration estimates

that new guarantees of railroad obligations will increase from $278 million

in 1980 to $354 million in 1982. All new FRA guaranteed loans have been

originated by the FFB, a practice the Administration expects to continue in

1982. Thus, the guarantee program functions as an off-budget direct loan

program. For fiscal year 1981, the Congress chose not to place a limitation

on new guarantee commitments but instead to limit the total amount of

guarantee commitments that could be outstanding to $770 million. These

credit activities are summarized in Table 44.

2/ This program is presented in the 1982 budget document under two

account titles: Rail Service Assistance and Railroad Rehabilitation

and Improvement. The division into two accounts is erroneous. The

combined program is shown here.

63
TABLE **. RAILROAD REHABILITATION AND RESTRUCTURING

LOANS AND LOAN GUARANTEES (By fiscal year, in millions

of dollars)

Credit Activity

1980

Actual

Administration Estimates

1981 1982

New Direct Loan Obligations

Exempt from Limitation 128.7 106.0 113.0

New Loan Guarantee Commitments

Limitation enacted

Limitation proposed

Commitments subject to

limitation

Commitments exempt

from limitation a/

Total commitments

Guarantees of FFB Loans

New FFB loans

Repayments

Outstanding FFB holdings

___

—

—

277.5

277.5

222.7

-24.1

783.6

20.0

20.0

20.0

375.0

395.0

308.9

-335.0

757.3

__ _

322.6

322.6

31.*

35*. 0

269.0

-6.7

1,026.3

a/ Includes DOT commitments to guarantee U.S. Railroad Association

debt.

Guarantees of Amtrak Debt. The National Railroad Passenger Corporation (Amtrak) was originally financed through FFB purchases of its debt.

Because of its lack of profits, it has not been able to pay back that debt, nor

is it expected to in the future. It has, however, been required to pay

interest to the FFB. To reduce its debt service expenses, Amtrak has

engaged in an unusual practice: its appropriated grants for capital improvements have been placed on deposit with the FFB, temporarily reducing the

balance of FFB holdings on which interest is charged. These grants have

remained on deposit during the period of up to five years between the

appropriation and actual expenditure. In 1980 Public Law 96-254 ended this

practice and Amtrak is now withdrawing its FFB deposits as it uses the

funds to pay for delivered equipment. The Department of Transportation

guarantees these FFB transactions. By the end of 1982, Amtrak will come

within $25 million of its $850 million ceiling on total indebtedness (see Table
TABLE 45. LOAN GUARANTEES FOR AMTRAK (By fiscal year, in

millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

Loans Guaranteed

Net loans guaranteed a/

Guaranteed loans outstanding

Guarantees of FFB Loans

Repayments

Outstanding FFB holdings

63.6

535.3

-65.9

235.2

770.5

-236.6

698.0

54.5

825.0

-55.7

753.7

a/ Includes guarantees of Amtrak debt and lease purchases.

Regional Rail Reorganization Program. The U.S. Railway Association

(USRA) was established in 1975 to develop and implement plans for

restructuring and rehabilitating bankrupt railroads in the Northeast and

Midwest.

USRA provides loans to Conrail's predecessor railroads to cover debts

incurred by these companies prior to the conveyance of their rail properties

to Conrail. Most of the loan funds flow through Conrail to the other

companies and are included in the credit control system. Loans made

directly by the USRA to other firms are excluded from credit budget

control. The Administration estimates that loan obligations will be $1

million in 1982, down from $19.2 million in 1980. Repayments in 1981 will

be $241 million, much larger than in other years. The repayments result

from the settlement of Penn Central claims litigation. Some of the claims

settlement funds received from the government will be used by railroads to

pay off their outstanding federal loans.

Emergency Rail Facilities Restoration Program. The Emergency Rail

Facilities Restoration Act, Public Law 92-591, authorized the Secretary of

Transportation to make loans to restore railroad facilities damaged by

natural disasters during June 1972 (hurricane Agnes). This program was

terminated in 1974. New direct loan obligations made since 1974 cover

deferred interest payments.

Table 46 summarizes the credit activity of the regional reorganization

and emergency facilities restoration programs.

65
TABLE 46. OTHER RAILROAD ASSISTANCE LOANS (By fiscal year, in

millions of dollars)

Credit Activity

New Direct Loan Obligations

Exempt from Limitation

Regional rail reorganization

Emergency rail facilities

Net Direct Loan Outlays

Direct Loans Outstanding

1980

Actual

19.2

1.9

-1.2

421.3

Administration

1981

6.8

2.0

-232. 2 a/

189.1

Estimates

1982

1.0

2.2

2.2

192.3

a/ Includes receipts from settlement of Penn Central litigation.

Aircraft Loan Guarantees

The Federal Aviation Administration (FAA) is authorized to guarantee

90 percent of principal and 100 percent of interest on loans up to $100

million per carrier for the purchase of aircraft and equipment by private

airlines. Of the $350 million total, at least $100 million is targeted for

commuter carriers serving small communities. This authority will terminate

October 24, 1983.

For the past two years, new loan guarantee commitments have been

substantially lower than the limitation set. For 1981 actual commitments

are estimated to be 25 percent less than the limitation enacted. To insure

that commitments do not increase, the Administration is requesting a

reduction of the enacted limitation, to $300 million. The program is

scheduled to be sharply reduced in 1982, with estimated new guarantee

commitments only one-third as high as commitments in 1981. Table 47

summarizes aircraft loan guarantee credit activity for 1980-1982.

Federal Credit for Ship Financing

Under Title XI of the Merchant Marine Act of 1936, as amended, the

Maritime Administration (MarAd) of the Department of Commerce is

authorized to guarantee construction loans and mortgages on U.S.-flag

vessels built in the United States. Guarantees for loans under Title XI have

no proof-of-need requirement. Guaranteed loans may have a maximum term

of 25 years and may cover up to 87.5 percent of the cost of the vessel.

There is no dollar maximum on the size of loans that may be guaranteed.

Outstanding guaranteed loan principal may not exceed $10 billion dollars.

66
TABLE 47. AIRCRAFT PURCHASE LOAN GUARANTEES (By fiscal year,

in millions of dollars)

1Qon Administration Estimates

JL:7oU

Credit Activity Actual 1981 1982

New Loan Guarantee Commitments

Limitation enacted 650.0 400.0

Limitation proposed — 300.0 100.0

Commitments subject to

limitation 247.0 300.0 100.0

Mar Ad may also make direct loans in the form of advances to operators of

vessels built under Title XI guarantees to forestall possible defaults and to

satisfy claims on defaulted loans. Table 48 summarizes activity levels for

1980-1982.

This program is scheduled to remain below the 1980 level in both 1981

and 1982. The Administration is proposing a limitation of $1.1 billion on

new commitments for loan guarantees in 1982. It considers the limitation

on annual activity a supplement to the ceiling on total indebtedness.

Federal Highway Loans

The Highway Act of 1968 authorized $300 million for the

establishment of a right-of-way revolving fund and a federal aid to highways

loan program. The funds are used to make interest free direct loans to the

states. The first fund is for the purchase of right-of-way parcels in advance

of highway construction to prevent inflation of land prices from increasing

construction costs.

The initial legislation required the states to pay back the loans within

seven years from the date of the advance. Subsequent legislation extended

the time limit for repayment indefinitely, and no repayments are expected

from 1980 through 1982. Table 49 summarizes the two programs' activities.

67
TABLE 48. FEDERAL CREDIT FOR SHIP FINANCING (By fiscal year, in

millions of dollars)

Credit Activity

New Direct Loan Obligations

Exempt from Limitation a/

Net Direct Loan Outlays

Direct Loans Outstanding

11 9X s OU0

Actual

11.0

6.1

129.9

Administration Estimates

1981 1982

15.0 15.0

5.3 3.5

135.2 138.7

New Loan Guarantee Commitments

Limitations enacted

Limitation proposed

Commitments subject to

limitation

Commitments exempt

from limitation 1,222.6 900.0

1,050.0

1,050.0

a/ Disbursements for loan guarantee default claims.

TABLE 49. FEDERAL HIGHWAY LOANS (By fiscal year, in millions of

dollars)

Credit Activity

1980

Actual

Administration Estimates

1981 1982

New Direct Loan Obligations

Exempt from Limitation 23.3

New Direct Loans 29.3

Net Direct Loan Outlays 29.3

Direct Loans Outstanding 190.2

13.5

54.8

245.0

19.0

64.0

64.0

309.1

68
COMMUNITY AND REGIONAL DEVELOPMENT (FUNCTION 450)

This function contains credit assistance programs for community

development in the Department of Housing and Urban Development, for

area and regional development in the Departments of Commerce and

Agriculture and smaller agencies, disaster loans of the Small Business

Administration, and assistance to Indian tribes in the Department of

Interior.

New direct loan obligations in function 450 are estimated to total $846

million in 1982, down 74 percent from 1980, and 79 percent from the 1981

estimate. New loan guarantee commitments are expected to decrease to

$1.3 billion in 1982. This is a decrease of 54 percent from the 1981

estimate. Table 50 summarizes new credit activity for the major programs

in function 450.

Community Development Loan Guarantees

Title I of the Housing and Community Development Act of 1974, as

amended, established the Community Development Block Grant Program.

Under the program, HUD makes annual grants to state and local

governments for community development programs. Section 108 of that act

provides that the Secretary may guarantee debt certificates issued by grant

recipients in amounts equal to three times their grant award to enable them

to finance acquisition of real property and rehabilitation of publicly owned

property. The recipients pledge their grants as security for the guaranteed

loan.

Section 108 guarantees were first issued in 1979. In that year $5.4

million of the $11.8 million of loans guaranteed were originated by the

Federal Financing Bank. The Administration's estimates assumes that all

loans guaranteed in fiscal year 1982 will be originated by the FFB. In

effect, the Section 108 guarantee program has been converted to an offbudget program of direct loans to local governments, in which the loans are

secured by federal grant payments.

For 1982 the Administration estimates no increase in new

commitments from the 1981 level. The level for new commitments for

fiscal year 1982 is $250 million. Table 51 summarizes new activity for

1980-1982.

New Communities Fund

The New Communities Fund is authorized by the Housing and Urban

Development Act of 1968, as amended, and Title VII of the Housing and

Urban Development Act of 1970, as amended. It is administered by the New

Community Development Corporation. The fund provided assistance to

69
private and public developers of new communities by guaranteeing their

bonds, debentures, notes, and other obligations. Of the 13 new community

projects that were guaranteed, nine defaulted on their loans. The $25

million requested for fiscal year 1981 was to cover these defaults. The

Administration anticipates no new direct loan obligations or loan guarantee

commitments in fiscal year 1982 for the New Communities Fund, as shown

in Table 52.

TABLE 50. COMMUNITY AND REGIONAL DEVELOPMENT-SUMMARY

OF CREDIT ACTIVITY (By fiscal year, in millions of dollars)

New Direct Loan New Loan Guarantee

Obligations Commitments

Program 1980 1981 a/ 1982 a/ 1980 1981 a/ 1982 a/

Housing and Urban

Development

Community development — — — 157 250 250

Rehabilitation loans

New communities

Commerce

Economic Development

Administration

Coastal energy impact

loans

Agriculture

Rural development

insurance fund 1

Rural Electrification

Administration

j

Other Agencies

SBA disaster loans 1

CSA programs

Interior credit

programs

Total 3

203

10

116

33

,423

210

,237

25

19

,277

45

25

66

7

1,507

201

2,070

9

15

3,945

—

—

—

196

185

440

8

16

846

—

48

—

2,509

24

2

—

b/

2,740

—

163

—

2,338

3

— 2

2

2,758

—

—

—

1,000

—

2

28

1,280

a/ Administration estimates,

b/ Less than $50,000.

70
TABLE 51. COMMUNITY DEVELOPMENT BLOCK GRANT LOAN

GUARANTEES (By fiscal year, in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Loan Guarantee Commitments

Limitation enacted — 250.0

Limitation proposed — 250.0 250.0

Commitments subject to

limitation — 250.0 250.0

Commitments exempt from

limitation 156.9

New Loans Guaranteed

Guaranteed Loans Outstanding

Guarantees of FFB Loans

New FFB loans

Repayments

Outstanding FFB holdings

45.0

46.2

45.5

-11.0

46.3

270.0

305.5

127.0

-11.0

162.3

270.0

537.5

180.0

-38.0

342.3

TABLE 52. NEW COMMUNITIES FUND LOANS (By fiscal year, in millions

of dollars)

Credit Activity

New Direct Loan Obligations

Exempt from Limitation

Net Direct Loan Outlays

Direct Loans Outstanding

Guarantees of FFB Loans

Repayments

Outstanding FFB holdings

11 9R yOOU

Actual

10.0

9.9

129.5

-5.0

33.5

Administration

1981

25.0

25.0

154.5

33.5

Estimates

1982

—

154.5

33.5

71
Housing Rehabilitation Loans

Section 312 of the Housing Act of 1964, as amended, authorizes direct

loans for the rehabilitation of residential and commercial properties. These

loans may be used in areas undergoing federally assisted development

provided for in the programs for urban renewal, code enforcement,

community development block grant, and urban homesteading.

The Administration has proposed the termination of the Rehabilitation

Loan Fund. It contends that the fund's functions are accomplished by other

programs, notably the Community Development Block Grant Program. For

1981 the Administration is proposing a rescission to reduce the new direct

loan obligation ceiling from $197 million to $45 million. For 1982 no further

obligations are anticipated. Table 53 details rehabilitation loan activity for

fiscal years 1980-1982.

TABLE 53. REHABILITATION LOANS (By fiscal year, in millions of

dollars

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted — 197.0

Limitation proposed — 45.0

Obligations subject to

limitation — 45.0

Obligations exempt from

limitation 203.3

Economic Development Administration

The Economic Development Administration (EDA) of the Department

of Commerce provides business development loans and loan guarantees in

economically distressed areas to encourage private credit and investment

that, it is hoped, will create new jobs. These assistance programs are

authorized by the Public Works and Economic Development Act of 1965, as

amended, and Title II of the Trade Act of 1974. EDA's direct loan program

makes credit available for retaining, constructing, expanding, or improving

facilities in manufacturing or service industries. EDA's loan guarantee

program assists firms that have difficulty in obtaining private financing for

fixed asset and working capital expansions. In 1978 and 1979 portions of the

EDA revolving fund were set aside as reserves for a program of loan

72
guarantees to assist steel firms. The guarantees were to enable the firms to

overcome problems of foreign competition and to invest in needed modernization and pollution control equipment, thereby saving jobs.

The Administration is proposing to eliminate funding for the Economic

Development Administration. The Administration asserts that EDA

programs are not effective, and that other means will be used to stimulate

economic expansion and employment opportunities in distressed areas. The

Administration proposes that development assistance to rural areas be

provided by the FmHA.

For 1981 the Administration is proposing a rescission to reduce the

limitation on new direct loan obligations from $116.4 million to $66 million.

No further obligations are expected in 1982. The Administration is also

requesting that the limitation for new loan guarantee commitments be

reduced to $163 million for 1981. No new loan guarantee commitments are

contemplated for 1982. Table 54 details activity for EDA credit programs.

TABLE 54. ECONOMIC DEVELOPMENT CREDIT ASSISTANCE (By fiscal

year, in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted 61.8 116.4

Limitation proposed — 66.0

Obligations subject to

limitation 61.8 66.0

Obligations exempt from

limitation a/ 54.6

New Loan Guarantee Commitments

Limitation enacted — 425.0

Limitation proposed — 163.0

Commitments subject to

limitation — 163.0

Commitments exempt from

limitation 48.3

a/ Direct loan to cover the default of Wisconsin Steel loan guarantee.

73
Coastal Energy Impact Loans

The Coastal Zone Management Act, as amended, authorizes grants,

loans, loan guarantees, and repayment assistance to states and local

governments to assist in financing new or improved public facilities necessitated by energy related activities in coastal and outer continental shelf

areas. Energy related activities in these areas include offshore drilling for

natural gas and oil, port receiving and storage facilities, and petroleum

refineries for imported oil. The act sets up the Coastal Energy Impact Fund

in the National Oceanic and Atmospheric Administration (NOAA) of the

Department of Commerce.

The Administration is proposing to terminate coastal energy impact

loans in the belief that states and localities are capable of dealing with the

effects of oil and gas development. For 1981 the Administration is

proposing a rescission to reduce the new direct loan obligation ceiling by $40

million to $7.4 million. No further obligations are anticipated for 1982.

Table 55 details the direct loan program of the Coastal Energy Impact

Fund for fiscal years 1980-1982.

TABLE 55. COASTAL ENERGY IMPACT LOANS (By fiscal year, in

millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted —- 47.4

Limitation proposed — 7.4

Obligations subject to

limitation — 7.4

Obligations exempt from

limitation 33.1

Rural Development Insurance Fund

The Farmers Home Administration makes loans for water systems,

waste disposal facilities, community facilities, and industrial development

through the Rural Development Insurance Fund (RDIF). Water and waste

development loans are made to Indian tribes, nonprofit corporations, and

public and quasipublic agencies. Community facility loans may cover fire

74
and rescue services, transportation systems and social, cultural, or

recreational facilities. Both the water and community facility loans have a

term that is the lesser of the useful life of the facility or 40 years. Their

interest rate may not exceed 5 percent. Table 56 details the direct lending

and loan guarantee activities under the RDIF.

TABLE 56. RURAL DEVELOPMENT INSURANCE FUND CREDIT

ACTIVITIES (By fiscal year, in millions of dollars)

Credit Activity

Direct Loan Obligations

Limitation enacted

Limitation proposed

Obligations subject to

limitation

Obligations exempt from

limitation a/

Total obligations

New Loan Guarantee Commitments

Limitation enacted

Limitation proposed

Commitments subject to

limitation

Commitments exempt from

limitation b/

Total commitments

Sale of Loan Assets to FFB

New sales to FFB

Repurchases

Outstanding FFB holdings

1

1 q« 7oUn

Actual

950

—

948

475

1,423

1,066

—

1,066

1,443

2,509

1,443

-450

4,318

Administration

1981

1,010

850

850

657

1,667

741

741

741

1,591

2,338

1,597

-625

5,290

Estimates

1982

—130

130

66

196

—

—

—

IjOOO

1,000

1,021

6,31—1

a/ The obligations exempt from limitation consist primarily of the

repurchase of loan assets from the FFB.

b/ The commitments exempt from limitation are for guarantees of loan

asset sales.

75
For 1981 the Administration is proposing a rescission to reduce the

authority to incur direct loans for water and waste projects from $750

million to $590 million, reducing the limitation for the entire RDIF to $850

million.

The Administration is proposing legislation to increase the present

interest rate for water and waste loans to the average rate applied to

municipal bonds sold for the same type of project. This change is proposed

in order to curb the growth of interest subsidy outlays. Further loan

obligations for water and waste disposal projects in 1982 are contingent

upon the enactment of this legislation.

Industrial development guaranteed loans may be made to cooperatives,

corporations, Indian tribes, municipalities, or individuals. The loans are to

assist in financing business and industrial facilities, purchasing real estate,

paying start-up costs, or supplying working capital. The interest rate on

loans to private entrepreneurs is the cost of Treasury borrowing plus

administrative expenses, and the maturity is 30 years. Loans to public

entities have a 5 percent interest rate and a 40-year maturity. No further

loan guarantee commitments are expected for 1982. The Administration is

proposing to terminate this program.

As a further part of its effort to curb the lending activities of Farmers

Home Administration credit programs, the Administration is proposing to

reduce new direct loan obligations for community facility loans of the RDIF.

For fiscal year 1982, the Administration is proposing $130 million in new

direct loan obligations for community facilities. In addition, the Administration is proposing legislation to increase the present interest rate for

community facility loans to the average municipal bond rate.

It should be noted that the RDIF is a revolving fund largely financed

by the sale of loan assets (certificates of beneficial ownership) to the FFB.

The Administration did not make direct loan and loan guarantee activity

relating to sales and purchases of loan assets subject to the proposed

limitation. These transactions are considered to be a means of financing,

not program activity.

Rural Electrification Administration

The Rural Electrification Administration (REA) administers two credit

programs in function 450: the Rural Communications Development Fund,

and the off-budget Rural Telephone Bank. Table 57 summarizes the credit

activities of these programs.

Rural Communications Development Fund. The Consolidated Farm

and Rural Development Act authorizes loans and loan guarantees for the

76
financing of community antenna television services in rural areas.

Originally this activity was financed out of the Rural Development

Insurance Fund of the Farmers Home Administration. In 1980 the activity

was transferred to a new revolving fund in the REA.

TABLE 57. RURAL ELECTRIFICATION ADMINISTRATION CREDIT

ACTIVITIES (By fiscal year, in millions of dollars)

Administration Estimates

Credit Activity Actual a/ 1981 1982

New Direct Loan Obligations

Rural Communications Development

Fund

Limitation enacted 10.0 31.4

Limitation proposed — 15.1

Obligations subject to

limitation 10.0 31.4

Rural Telephone Bank

Limitation enacted 199.9 220.0

Limitation proposed b/ — 220.0 220.0

Obligations subject to

limitation 199.9 185.0 185.0

New Loan Guarantee Commitments

Rural Communications Development

Fund

Limitation enacted 24.0 2.6

Limitation proposed — 2.6

Commitments subject to

limitation 24.0 2.6

a/ Activity in part of 1980 was financed through the Rural Development

Insurance Fund. Such amounts are included in that fund.

b/ The proposed limitation provides "not less than $160,000,000 nor more

than $220,000,000."

77
Under the community facilities program, nonprofit organizations may

receive 35-year loans at 5 percent interest to provide television service in

rural areas comparable to service in urban areas. Profit-making

organizations may obtain loans from a business and industrial development

loan program, again for a 35-year term, but at rates just above Treasury

borrowing costs.

The Administration is proposing to terminate the Rural

Communications Development Fund. The Administration believes that

private lenders can adequately provide credit for this activity. For 1981 the

Administration is proposing a rescission of $16.3 million which reduces the

ceiling on new direct loan obligations to $15.1 million. No further new

direct loan obligations or loan guarantee commitments are contemplated for

1982.

Rural Telephone Bank (RTB). The Rural Telephone Bank, established

by Public Law 92-12, provides a supplemental source of financing for the

RE A telephone program. The bank borrows from the Treasury and bases the

interest rates for its loans on its average cost of money. On all loans

through September 30, 1980, the weighted average interest rate was 7.08

percent. During the first quarter of 1981, loans were made at 10.25

percent.

For fiscal year 1982, the Administration is proposing a minimum of

$160 million for new direct loan obligations and a maximum of $220 million.

A point estimate of $185 million is included in the credit budget. For fiscal

year 1981 a limitation of the same amount was enacted, while it was

estimated that only $185 million in new direct loan obligations would be

made.

SBA Disaster Loans and Loan Guarantees

The Small Business Administration (SBA) makes both direct and

guaranteed loans to assist small businesses and property owners to recover

from physical disasters under sections 7(b), 7(f), and 7(g) of the Small

Business Act, as amended. Such loans are specifically exempted from

limitation on annual new obligations. The Administration is proposing to

increase the interest rates on physical disaster loans to the cost of Treasury

borrowing.

Nonphysical disaster loans are made to small businesses that need

assistance in complying with various federal or state statutes and

regulations and to small businesses that have suffered economic loss because

of displacement or economic injury. Examples of the former include

assisting small businesses in complying with pollution control, meat and

poultry inspection, and occupational safety requirements. Examples of the

78
latter include economic loss caused by closure of federal offices and

military bases or energy shortages. For fiscal year 1982, the Administration

is proposing to eliminate nonphysical disaster loans as part of its plan to

limit disaster assistance to those most in need.

In the March budget revisions the Administration withdrew the $780

million supplemental appropriation requested in the January budget. The

disaster loan program has generally required a supplemental every year to

accommodate the needs of all eligible applicants. If no supplemental is

passed in 1981, the SB A will for the first time have to devise a method for

selecting recipients from the pool of eligible applicants. For 1982 the

Administration is continuing to press for restraint in disaster loans by

requesting that the program no longer be exempt from limitation. The

relatively low limitation requested for 1982—$440 million—reflects in part a

decision to transfer much of the disaster lending to the Farmers Home

Administration.

Table 58 details disaster loan assistance through the SBA disaster loan

revolving fund for 1980-1982.

TABLE 58. SMALL BUSINESS ADMINISTRATION DISASTER LOANS AND

LOAN GUARANTEES (By fiscal year, in millions of dollars)

1QOA Administration Estimates

17OU

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation proposed — — MO

Obligations subject to

limitation — — 440

Obligations exempt from

limitation a/ 1,237 2,070

New Loan Guarantee Commitments

Exempt from Limitation 2

Guaranteed Loans Outstanding 7 6 4

a/ Obligations made for physical disaster loans are exempt from

limitation.

79
Community Services Administration Credit Programs

The Community Services Administration (CSA) administers two credit

programs: rural development loans and loan guarantees, and loans to

community development credit unions. Table 59 details the activities of the

rural development loan fund and the credit union loans.

Rural Development Loan Fund. Through this fund, loans and loan

guarantees are provided to borrowers in rural communities that have

substantial concentrations of low-income persons. The loans and guarantees

are for group ventures, developing either business or community facilities

that will provide increased income, employment, and ownership

opportunities for low-income residents. Loans and guarantees may be made

directly or to intermediary organizations that, in turn, lend or guarantee

funds to eligible borrowers. For fiscal year 1982, the Administration is

proposing a limitation of $8 million on new direct loan obligations and $2

million on new loan guarantee commitments.

Community Development Credit Unions. A revolving fund was

established in fiscal year 1980 to be jointly administered by CSA and the

National Credit Union Administration. The fund makes "seed money" loans

to newly chartered community development credit unions. These credit

unions will provide financing for community development needs. The

Administration proposes that no new direct loan authority be made available

for fiscal year 1982.

TABLE 59. COMMUNITY SERVICES ADMINISTRATION CREDIT (By

fiscal year, in millions of dollars)

Direct Loans Loan Guarantees

1980 1981 a/1982 a/ 1980 1981 a/ 1982 a/

Rural Development Loan

Fund

New Obligations 20.0 8.0 8.0 — 2.0 2.0

New transactions b/ 24.0 8.0

Community Development

Credit Unions

New obligations 5.0 1.0

New transactions — 6.0

a/ Administration estimates,

b/ Less than $50,000.

80
Indian Credit Assistance

To provide Indian tribes on federal reservations greater access to

credit, the Indian Financing Act of 1974 established a revolving fund for

loans and the Indian guarantee and insurance fund. The former provides

direct loans, while the latter guarantees private lending to Indians.

For fiscal year 1982 the Administration is proposing a limitation of

$14.8 million on new direct loan obligations. The Administration is

requesting a limitation of $27.6 million on new loan guarantee commitments

for fiscal year 1982. Table 60 details the activities of the revolving fund

and the Indian loan guarantee and insurance fund.

TABLE 60. INDIAN CREDIT ASSISTANCE (By fiscal year, in millions of

dollars)

Direct Loans Loan Guarantees

Credit Activity 1980 1981 a/1982 a/ 1980 1981 a/ 1982 a/

Revolving Fund for Loans

New obligations 17.1 12.7 14.8

New transactions 17.0 13.4 14.8

Guarantee and Insurance

Fund

New obligations 1.5 1.8 1.3 — 2.3 27.6

New transactions 1.5 b/ 1.8 b/ 1.3 b/ 7.7 2.3 27.6

a/ Administration estimates.

b/ Disbursement for loan guarantee default claims.

81
EDUCATION, TRAINING, EMPLOYMENT, AND SOCIAL SERVICES

(FUNCTION 500)

Credit programs in this function consist primarily of loans and loan

guarantees to assist students and their families in financing college

educations. In addition there are loans and loan guarantees to colleges and

other institutions to finance construction of facilities. Table 61 gives a

summary of credit assistance in education.

TABLE 61. EDUCATION, TRAINING, EMPLOYMENT, AND SOCIAL

SERVICES-SUMMARY OF CREDIT ASSISTANCE (By fiscal

year, in millions of dollars)

New Direct Loan New Loan Guarantee

Obligations Commitments

Program 1980 1981 a/ 1982 a/ 1980 1981 a/ 1982 a/

Guaranteed Student

and Parent Loans 271 343 588 *,750 7,185 5,697

Guarantees of SLMA

Obligations — — — 1,070 2,095 500

National Direct

Student Loans 305 186 286

College Housing

Loans 11* 76 60

Total 690 605 92* 5,820 9,280 6,197

a/ Administration estimates.

Guaranteed Student and Parent Loan Programs

The guaranteed student loan program is designed to stimulate commercial, state, and nonprofit lenders to provide loans to students and

parents to help pay the costs of education at universities, colleges, and

vocational schools. The Administration is proposing a number of changes in

the guaranteed student loan program for 1981 and 1982: the amount of a

loan would be determined according to the student's assessed financial need;

in-school interest subsidies on new loans to students would be eliminated;

and interest rates on loans to parents would be set at the market rate,

eliminating federal subsidies. These changes would probably reduce the

number of program participants and hence lower the level of new loan

commitments.

82
Table 62 provides a summary of the credit activity in the guaranteed

student loan program. The Administration estimates that total loan

guarantee commitments will decrease by 21 percent, from $7,185 million in

1981 to $5,697 million in 1982, reflecting the proposed changes in the

program. The 1981 estimate does not include the impact of the proposal on

1981 loans; the 1982 estimate does. CBOfs estimate for new loan guarantee

commitments in 1981 is $5.6 billion, reflecting the major impact the

proposal would have as early as 1981. CBO estimates that new

commitments will fall to $5.1 billion in 1982. The difference of $600 million

from the Administration's 1982 estimate derives from CBO's assumption

that very few parents would borrow under the program at the proposed

nonsubsidized interest rates. If no changes are enacted, CBO estimates that

new loan guarantee commitments for 1982 will be $8.8 billion.

TABLE 62. CREDIT ACTIVITIES FOR THE GUARANTEED STUDENT

LOAN PROGRAM (By fiscal year, in millions of dollars)

Credit Activity

1980

Actual

Administration Estimates

1981 1982

New Direct Loan Obligations

Exempt from Limitation a/ 271 343 588

New Loan Guarantee Commitments

Exempt from Limitation 4,750 7,185 5,697

Net Loans Guaranteed 3,347 5,580 2,903

Guaranteed Loans Outstanding 11,649 17,157 20,060

a/ Primarily disbursement for loan guarantee default claims.

The Administration estimates the total obligations for defaults of

guaranteed loans (which are converted to direct loans) at $588.1 million for

1982, an increase of 72 percent over the 1981 level of $342.7 million. While

total obligations are increasing as the program gets larger, there is a slowly

declining default rate—now approximately 9 percent.

Guarantees of SLMA Obligations

The Student Loan Marketing Association (SLMA) is classified as a

govenment-sponsored private credit corporation, although to date SLMA's

capital has come from the Federal Financing Bank. The Department of

Education guarantees SLMA's borrowing from the FFB, and these guarantees

are recorded as secondary guarantees in the credit budget. SLMA performs

83
three basic credit functions for the guaranteed student loan program. First,

it is a lender of last resort to enable students to obtain a federally insured

loan. Secondly, it purchases insured loan portfolios from financial

institutions. Finally, it serves to consolidate federal loans for students with

several seperate loans. Loan activity in the entire student loan program has

grown over 300 percent in the last three years, and banks are seeking SLMA

services for their greatly expanded portfolios. SLMAfs market share in

student loan insurance lending activity is expected to remain constant.

As part of its attempt to promote private rather than government

financing the Administration recently announced that the SLMA will no

longer finance its activities through the FFB. To facilitate the transition to

private financing, the FFB will purchase $2.1 billion in SLMA debt in 1981,

almost double the 1980 purchases. The Administration is proposing a

substantial decrease in federal funding in 1982 with its requested limitation

of $500 million. Thereafter, no further FFB transactions would occur.

Table 63 summarizes the credit activity for this program.

TABLE 63. GUARANTEES OF STUDENT LOAN MARKETING

ASSOCIATION OBLIGATIONS (By fiscal year, in millions of

dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Loan Guarantee Commitments

Exempt from Limitations 1,070 2,095 500

Guarantees of FFB Loans

Net FFB loan purchases

Outstanding FFB holdings

1,070

2,345

2,095

4,440

500

4,940

National Direct Student Loan Program

National direct student loans (NDSL) are long-term, low interest loans

to assist financially needy students in pursuing post-secondary education at

eligible institutions. The Administration estimates total direct lending

obligations of $286 million for fiscal year 1982 for NDSL. The federal

government makes loans in the form of capital contributions to the

revolving funds at higher education institutions. Colleges use their receipts

to make new loans, rather than repaying the federal government. The new

federal capital, combined with $514 million in college revolving fund

capital, is estimated to provide $800 million in loans for the 1980-1981

school year. This level of activity is expected to decline for the 1981-1982
school year as a result of the proposed reduction of the federal capital

contribution. The 1982 request does not quite restore the contribution to

the 1980 level for the 1982-1983 school year. Table 64 summarizes the

activity for this program.

TABLE 64. CREDIT ACTIVITY FOR NDSL PROGRAM (By fiscal year, in

millions of dollars)

jagg Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Exempt from Limitation 305 186 286

New Direct Loans

Collections on defaults

Net direct loan outlays

Direct Loans Outstanding

311

-23

287

4,098

283

-25

258

4,356

210

-27

184

4,539

College Housing Loans

Title IV of the Housing Act of 1950 authorized loans at 3 percent

interest rates to colleges and eligible hospitals for the construction or

acquisition of housing facilities. The loans have a 40-year term. Through a

rescission the Administration is proposing to reduce college housing loans to

$76 million in 1981, because of the decline in the college age population. At

the same time it is requesting the removal of the limitation of $110 million

which was previously enacted. For 1982, the Administration expects a

further reduction, to $50.0 million. Table 65 summarizes the credit activity

in this area.

TABLE 65. CREDIT ACTIVITY FOR COLLEGE HOUSING LOANS (By

fiscal years, in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted — 110.0

Limitation proposed

Obligations exempt from

limitation 113.7 76.0 50.0

85
HEALTH (FUNCTION 550)

Credit assistance in the health function includes loans and loan

guarantees for health services, health maintenance organizations, and the

education and training of health care professionals. Table 66 summarizes

the levels of new direct loan obligations and new loan guarantee

commitments for 1980-1982.

TABLE 66. HEALTH-SUMMARY OF CREDIT PROGRAMS (By fiscal

year, in millions of dollars)

New Direct Loan New Loan Guarantee

Obligations Commitments

Program 1980 1981 a/ 1982 a/ 1980 1981 a/ 1982 a/

Health Maintenance

Organizations 35.6 51.5 91.9 33.4 51.5 75.5

Health Professions

Graduate Student

Loan Insurance

Health Resources

Health Services

Total

—

29.9

0.1

65.6

0.1

13.5

0.5

65.6

0.2

—

1.0

93 .1

31.7

—___

65.1

48.0

—

__ —

99.5

100.0

—

— »

175.5

a/ Administration estimates.

For 1982 the Administration proposes a total of $93.1 million in new

direct loan obligations, a 42 percent increase over 1981. The increase is due

primarily to loans to health maintenance organizations (HMOs). The

Administration proposes $176 million in new loan guarantee commitments, a

76 percent increase over 1981. These large increases are caused by higher

levels of loan guarantees for HMOs and for the Health Professions Graduate

Student Loan Insurance program. The major increases in direct loans to

HMOs in both 1981 and 1982 will have no impact on the unified budget since

the majority of the new loans are to be sold to the Federal Financing Bank

as loan assets. This lending is effectively transferred off-budget through

such sales.

86
Health [Maintenance Organization and Medical Facilities Loan and Loan

Guarantee Funds

The Public Health Service Act authorizes financial assistance to

HMO's in the form of grants, contracts, loans, and loan guarantees for

planning, development, acquisition, and construction of ambulatory health

care facilities. Both the direct and guaranteed loans have a 20-year

maturity and bear interest at 12 percent.

The budget estimates for 1981 and 1982 envision a substantial increase

in lending and guarantees under this program, which has grown slowly since

its inception in 1975. Total direct loan obligations in 1982 are estimated to

be $91.9 million, a 78 percent increase over 1981. Total loan guarantee

commitments are estimated to be $76 million in fiscal year 1982, a 46

percent increase over 1981 estimates.

Direct loans are financed through a revolving fund. As new loans are

made they are sold to the FFB as loan assets to provide funds for additional

loans. All the loan sales are fully guaranteed. For fiscal 1982, a limitation

of $76 million for direct loan obligations is being requested, as is a

limitation of $76 million for the guarantee of loan asset sales to the FFB.

The authorizations for direct and guaranteed lending will expire on

September 30, 1981, so reauthorization will be required before the end of

this session of the Congress.

The medical facilities program has made direct loans for public

facilities and loan guarantees for private, nonprofit facilities in the past,

financed through the FFB. No new loan guarantee commitments or loan

obligations are planned in 1981 or 1982.

Table 67 summarizes the credit activities of HMO and medical

facilities funds.

Other Health Programs

Health Professions Graduate Student Loans. The Health Professions

Graduate Student Loan Insurance Fund enables students to borrow from

private lenders to help pay the cost of their medical training under Title VII

of the Public Health Service Act. The federal government fully insures the

principal amount of the loans. The students pay 12 percent annual interest

on the 10-year loans. Only students who received guaranteed loans prior to

September 30, 1980 can receive new guaranteed loans. Since only a student

who started graduate school in either 1978, 1979, or 1980 may receive these

loans, 1982 should be the last year with high commitment levels. The

Administration anticipates that loans totaling $100 million will be made to

87
TABLE 67. CREDIT ACTIVITIES FOR HEALTH MAINTENANCE

ORGANIZATIONS AND MEDICAL FACILITIES (By fiscal year,

in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Limitation enacted — 155.0 a/

Limitation proposed — — 75.5

Obligations subject to

limitation

Obligations exempt from

limitation

Total obligations

Net Direct Loan Outlays

Direct Loans Outstanding

35.6

35.6

-2.5

216.8

51.5

51.5

-34.2

182.6

75.5

16.4 b/

91.9

-6.1

176.5

New Loan Guarantee Commitments

Limitation enacted — 170.0

Limitation proposed — — 75.5

Commitments subject to

limitation — — 75.5

Commitments exempt from

limitation 33.4 c/ 51.5 c/

Net Loans Guaranteed 32.0 51.0 59.1

Guaranteed Loans Outstanding 115.7 166.7 225.8

Sale of Loan Assets to FFB

New sales to FFB 39.8 51.5 75.5

Repurchases -17.7 -4.9 -21.2

Outstanding FFB holdings 269.1 315.7 370.0

a/ A limitation of $155 million was reported by the House Appropriations

Committee. The program is operating, however, under continuing

resolution, based on 1980 when there was no limitation.

b/ Disbursement for guarantee default claims.

c/ Primarily guarantees of loan assets sold to FFB.

88
10,000 students, averaging around $10,000 each in 1982. The

Administration's recommended limitation of $100 million for 1982, is a 108

percent increase over the 1981 commitment level. Direct loan obligations

for 1982 are expected to be $0.2 million, to cover defaults on guaranteed

loans.

Health Resources. Credit activity in health resources consists mainly

of interest subsidy payments to meet federal commitments on long-term

guaranteed loans for health professions school facilities. When necessary,

funds are provided for default payments on federally guaranteed loans. No

new direct loan obligations are anticipated for 1982.

Health Services. The Secretary of Health and Human Services may

make loans to community organizations in eligible areas for the initial costs

of establishing health-care delivery sites for the National Health Service

Corps. The Administration estimates new direct loan obligations of $1

million for fiscal year 1982.

Table 68 summarizes the activity for health professions graduate

students, health resources, and health services.

TABLE 68. OTHER HEALTH CREDIT PROGRAMS (By fiscal years, in

millions of dollars)

Direct Lending Loan Guarantees

Program 1980 1981 a/ 1982 a/ 1980 198 la / 1982 a/

Health Professions Loans

New obligations — 0.1 b/ 0.2b/ 31.7 48.0 100.0

New transactions — 0.1 0.2 31.7 48.0 100.0

Health Resources

New obligations 29.9 13.5

New transactions 27.6 28.0 9.0

Health Services

New obligations

New transactions

0.1 0.5

0.4 0.4

1.0

0.5 — — —

— — —

a/ Administration estimates.

b/ Disbursement for loan guarantee default claims.

89
INCOME SECURITY (FUNCTION 600)

Credit assistance in the income security function is primarily for

housing. Local public housing authorities are assisted in the construction of

low-rent public housing, and a "seed money" loan program assists nonprofit

sponsors in the planning of housing projects to be financed by the Housing

for the Elderly or Handicapped Fund (in function 370). Only the loans to

nonprofit sponsors are subject to limitation. Table 69 summarizes the credit

activity levels in function 600 for 1980-1982. The following sections

highlight each activity.

TABLE 69. INCOME SECURITY-SUMMARY OF CREDIT ACTIVITY (By

fiscal year, in millions of dollars)

New Direct Loan New Loan Guarantee

Obligations Commitments

Program 1980 1981 a/ 1982 a/ 1980 1981 a/ 1982 a/

Low-Rent Public

Housing 1,318.1 300.0 300.0 17,012.6 17,838.6 17,^6.3

Nonprofit Sponsor

Assistance 0.6 2.3 2.6

Pension Benefit

Guaranty

Corporation — 2.3 2.7 — — —

Total 1,318.7 304.6 305.3 17,012.6 17,838.6 1

a/ Administration estimates.

Low-Rent Public Housing

The low-rent public housing program provides credit assistance to

local public housing agencies (PHAs) for the construction, acquisition, or

modernization of public housing projects. Credit assistance is provided at

three different stages in the process. First, the federal government makes

direct loans to PHAs to finance early costs, such as design and planning.

These are shown in the direct loan portion of Table 70. The Administration

estimates total direct loan obligations of $300 million for fiscal year 1982,

the same level estimated for the previous year.

At a second stage, when the volume of direct loans has accumulated to

a size that can be made attractive to private investors, PHAs issue shortterm, tax-exempt notes that are guaranteed by federal pledges to issue

direct loans in case of default. These short-term notes are for terms

90
averaging between 90 days and one year, and are shown in the guaranteed

lending portion of Table 70. They constitute the largest volume of lending

under the program. With these guaranteed notes, the PHAs raise sufficient

funds to repay the initial direct federal loans and to continue project

construction. Loan guarantee commitments are estimated at $17.4 billion

for fiscal year 1982, a slight decrease from the 1981 estimate of $17.8

billion. The $17.4 billion represents the gross of all new lending extended

during the year. Because the loans mature within a year, this overstates the

net volume of funds involved, but is an accurate reflection of total new

activity.

TABLE 70. LOW-RENT PUBLIC HOUSING LOANS AND LOAN

GUARANTEES (By fiscal year, in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Exempt from Limitation

Net Direct Loan Outlays

Direct Loans Outstanding

1,318

38

94

300

— — . 94

300

_—

94

New Loan Guarantee Commitments

Exempt from Limitation 17,013 17,839 17,446

Guarantees of FFB Loans

New FFB Loans 119 1,68* 2,65*

Repayments — -606 -92

Outstanding FFB holdings 119 1,197 3,759

At or near completion of construction or modernization, the third or

permanent stage of financing takes place. In the past, the PHAs sold longterm, tax-exempt bonds to the public. These were secured by the

government's implied guarantee through long-term contracts of annual

contributions sufficient to meet interest and principal requirements. No

such bonds have been offered in recent years because of high interest rates.

Long-term financing is now provided by the Federal Financing Bank and in

some cases by refinancing of the short-term notes. The Administration

anticipates sharp increases in the use of the FFB for permanent financing,

estimating that new FFB loan purchases will rise from $0.1 billion in 1980 to

$2.7 billion in 1982.

The activity estimated in this account for 1981 and 1982 is below the

levels estimated in the January budget. The difference arises in part from

91
assumptions of less public housing construction and modernization due to

1981 rescissions in other forms of public housing funding.

Other Income Security Programs

Nonprofit Sponsor Assistance. The nonprofit sponsor assistance

program provides interest-free direct loans to nonprofit organizations

sponsoring construction of housing for the elderly or handicapped. To

demonstrate their commitment, the sponsors are required to put up 20

percent or $50,000, whichever is less, of the start-up costs. The interestfree or "seed money" loans cover the remainder. Once the project is

approved, the sponsor's 20 percent and the "seed money" loan are repaid

from the initial proceeds of the construction loan from the Housing for the

Elderly or Handicapped Fund (in function 370). For 1982, the Administration

is requesting a limitation of $2.6 million for new direct loan obligations,

which represents an increase of 13 percent over the 1981 request (see Table

71).

Pension Benefit Guarantee Corporation. The Pension Benefit

Guarantee Corporation administers insurance programs to prevent the loss

of pension benefits to participants if pension plans terminate and are not

able to pay the insured benefits. A recent amendment (Public Law 96-364)

provided that the corporation's receipts and disbursements should be

included in the totals of the U.S. budget, beginning in 1981. Prior to this

amendment the corporation had been off-budget. Table 71 summarizes

credit activity for nonprofit sponsor assistance and for the Pension Benefit

Guaranty Corporation.

TABLE 71. OTHER INCOME SECURITY PROGRAMS (By fiscal year, in

millions of dollars)

Administration Estimates

Program Actual 1981 1982

Nonprofit Sponsor Assistance

New loan obligations 0.6 2.3 2.6

New direct loans a/ a/ a/

Pension Benefit Guaranty

Corporation

New obligations — 2.3 2.3

New transactions — 2.3 2.7

a/ Less than $50,000.

92
VETERANS1

 BENEFITS AND SERVICES (FUNCTION 700)

Credit assistance to veterans includes direct loans for educational

purposes, direct loans in the form of borrowing against the cash value of life

insurance policies, and loans and guarantees to purchase homes. For fiscal

year 1982, new direct loan obligations are estimated to total $647 million,

while new loan guarantee commitments will reach $7.4 billion. Because this

credit assistance is considered part of the benefits to which veterans are

entitled, the Administration is not recommending limitations on most of

these programs. Table 72 summarizes the estimated gross activity levels of

veterans1 credit programs.

TABLE 72. VETERANS1 BENEFITS-SUMMARY OF CREDIT ASSISTANCE

(By fiscal year, in millions of dollars)

New Direct New Loan Guarantee

Loan Obligations Commitments

Program 1980 1981 a/ 1982 a/ 1980 1981 a/ 1982 a/

Insurance Policy

Loans 256.7 209.4 202.2

Education Loans 7.7 9.6 9.6

Housing Loans 361.6 408.2 433.6 6,310.4 7,421.9 7,383.0

Total 626.0 627.2 647.4 6,310.4 7,421.9 7,383.0

a/ Administration estimates.

Insurance Policy Loans

Veterans and their survivors may borrow against the cash values of life

insurance policies issued by the federal government under five programs:

the Service-Disabled Veterans1 Insurance program, the Veterans' Reopened

Insurance program, the National Service Life Insurance program, the U.S.

Government Life Insurance program, and the Veterans1 Special Life

Insurance program. The Administration proposes to change the present 5

percent interest rate on these policy loans to a rate equal to 2 percent less

than the market rate for loans with similar security and repayment periods.

It is anticipated that the higher interest rates will cause demand for the

loans to decrease. These are regulatory changes, requiring no Congressional

action. Loan activity in the insurance programs is expected to decline in

the next two years to $209.4 million in new loans in 1981 and to $202.2

million in 1982.

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Education Loans

Veterans may borrow up to $2,500 per academic year for educational

expenses directly from the Veterans1 Education Loan Fund. These loans

carry an interest rate of 7.0 percent and have a maturity of 10 years.

Repayments on previous loans are returned to the revolving fund and used to

make new loans. New loans for 1982 are estimated to total $6.4 million,

down slightly from the $6.9 million estimated for 1981.

Veterans may also receive advances of up to $200 to pay expenses

while taking vocational rehabilitation training courses. These advances are

interest-free and are repaid over 10 months through a reduction in education

benefits. The Administration estimates the new loan obligations level for

vocational rehabilitation for 1982 to be $3.2 million. Credit activity for

veterans1 education and vocational rehabilitation is highlighted in Table 73.

TABLE 73. CREDIT ACTIVITY FOR VETERANS1 EDUCATION

PROGRAMS (By fiscal year, in millions of dollars)

Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Exempt from Limitation 7.7 9.6 9.6

Net Direct Loan Outlays 1.1 1.9 -0.1

Direct Loans Outstanding 62.4 64.3 64.2

Housing Credit

The principal form of credit assistance to veterans is guarantees of

loans made by private lenders for the purchase or construction of homes. In

fiscal year 1982, the Administration estimates that $7,383 million in loan

guarantee commitments will be made, very close to the 1981 level. Because

of prior year commitments, new loans guaranteed in 1981 and 1982 will

exceed new commitments. Unlike most loan guarantee programs, the

Veterans Administration (VA) does not insure the full value of the mortgages

it guarantees, but only the portion at highest risk. While the credit budget

records only the government's contingent liability for the guarantees, the

full principal is also important, as a measure of the resources being directed

through the assistance of the VA. By 1982 the VA is expected to have $64

billion in outstanding contingent liability, while the full principal value of

the mortgages insured will total $130 billion.

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The Veterans Administration is also authorized to make direct loans to

severely disabled veterans for specially adapted housing. New obligations

for these loans will be only $2 million in 1982. In addition, the VA takes

over defaulting guaranteed loans, pays off the lender, and assists borrowers

by rescheduling payments. These actions, in effect, constitute extension of

a direct loan to satisfy a guarantee claim, and are recorded in 1982 as $381

million in new direct loan obligations. Finally, in 1982, the VA will make

obligations to purchase $49 million in existing VA-insured loans from the

public. Credit activity for veterans1 housing programs is shown in Table 74.

TABLE 74. CREDIT ACTIVITY FOR VETERANS1 HOUSING PROGRAMS

(By fiscal year, in millions of dollars)

i oon Administration Estimates

Credit Activity Actual 1981 1982

New Direct Loan Obligations

Exempt from Limitation a/ 362 408 436

Net Direct Loan Outlays -29 -42 -40

Direct Loans Outstanding 481 439 399

New Loan Guarantee Commitments

Exempt from Limitation 6,310 7,422 7,383

New Loan Guarantees 6,701 10,496 11,234

Guaranteed Loans Outstanding 46,270 54,089 64,425

Full Principal Value of

Guaranteed Loans Outstanding 97,424 114,354 130,052

a/ Primarily disbursement for loan guarantee default claims and purchases

of existing VA loans from the public.

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GENERAL GOVERNMENT (FUNCTION 800)

Credit assistance in function 800 is limited to one active program:

loans and guarantees for U.S. territories made by the Department of the

Interior. This has included direct loans to Guam for rehabilitation after

typhoons, guarantees of Guam Power Authority obligations, and guarantees

of bonds and loans for capital improvement projects in the Virgin Islands.

The Virgin Islands and Guam Power Authority projects have been financed

through the Federal Financing Bank, which purchased obligations guaranteed

by the Secretary of the Interior. The authority to make such guarantees is

provided by Public Law 94-392.

For fiscal year 1982, the Administration is requesting a $31 million

limitation on new commitments to guarantee loans for the Virgin Islands.

These loans will also be extended by the FFB. Table 75 summarizes the

credit activity in this program.

Federal Financing Bank. Beginning in fiscal year 1982, the

administrative expenses of the Federal Financing Bank are included in the

general government function rather than in function 370. For the purposes

of the credit budget, loan activities of the FFB are distributed among the

major functional categories. (For a discussion of the Federal Financing

Bank, see Appendix B of this study.)

TABLE 75. GUARANTEED LOANS TO

year, in millions of dollars)

U.S. TERRITORIES (By fiscal

Credit Activity

1980

Actual

Administration Estimates

1981 1982

New Loan Guarantee Commitments

Limitation enacted 10.0

Limitation proposed

Commitments subject to

limitation 9.0

Net Loans Guaranteed 8.7

Guaranteed Loans Outstanding 66.2

-0.3

65.9

31.0

31.0

30.0

95.9

Guarantees of FFB Loans

New FFB loans

Repayments

Outstanding FFB holdings

9.0

-0.3

66.2

-0.3

65.9

31.0

-0.3

96.6

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GENERAL PURPOSE FISCAL ASSISTANCE (FUNCTION 850)

Credit assistance in function 850 consists of direct loans to the

District of Columbia and loan guarantees for New York City. Table 76

summarizes the activity levels for these programs.

TABLE 76. DISTRICT OF COLUMBIA AND NEW YORK CITYSUMMARY OF CREDIT PROGRAMS (By fiscal year, in

millions of dollars)

New Direct Loan New Loan Guarantee

Obligations Commitments

Program 1980 1981 a/ 1982 a/ 1980 1981 a/ 1982 a/

Direct Loans to the

District of Columbia 90.0 133.3 145.0

New York City

Loan Guarantees

Total 90 .0 133.3 1[45.0

300

300

.0

.0

300.

300.

0

0

755

755

.9

.9

a/ Administration estimates.

Loans to the District of Columbia

The District of Columbia Self-Government and Governmental Reorganization Act (Public Law 93-198) terminated the District's permanent

authority to borrow from the Treasury to finance capital improvement. It

authorized interim loans by the Treasury to the District for capital projects

until the District is able to develop its own bond-financing program.

Because of delays in the program's development, the interim financing

program has been extended to include all new projects approved in the 1980

and 1981 budgets.

The Administration is proposing a ceiling on federal lending to the

District of $155 million, and plans to phase out such lending by 1984. The

Administration expects that the District government will enter the

municipal bond market and have no further need to borrow from the

Treasury by 1984. The limitation requested for 1981 is $10 million higher

than the expected level of new obligations (see Table 77).

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TABLE 77. LOANS TO THE DISTRICT OF COLUMBIA FOR CAPITAL

OUTLAYS (By fiscal year, in millions of dollars)

Administration Estimates

Actual 1981 1982

New Direct Loan Obligations

Limitation enacted — 200.0

Limitation proposed — 200.0 155.0

Obligations subject to

limitation — 133.3 145.0

Obligations exempt from

limitation 90.0

New York City Loan Guarantees

Public Law 93-339, the New York City Loan Guarantee Act of 1978,

authorizes the Secretary of the Treasury to guarantee $1.65 billion of

borrowing by New York City through 3une 30, 1982, to enable it to regain

financial soundness after the financing crisis of 1975. The act prescribes

the amounts of borrowing that may be guaranteed each year during the life

of the program. In addition, the act requires New York City to pay an

annual guarantee fee of 0.5 percent to the Treasury.

For fiscal year 1982, the Administration requests that Congress limit

new loan guarantee commitments to $755.9 million, more than twice the

level of new commitments in 1981. This will exhaust the $1.65 billion in

loan guarantee authority provided in authorizing legislation. Table 78

describes activity in the New York City loan guarantee program.

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TABLE 78. NEW YORK CITY LOAN GUARANTEE PROGRAM a/ (By

fiscal year, in millions of dollars)

198Q Administration Estimates

Actual 1981 1982

New Loan Guarantee Commitments

Limitation enacted — — —

Limitation proposed — 300.0 755.9

Commitments subject to

limitation — — 755.9

Commitments exempt from

limitation 300.0 300.0

Net Loans Guaranteed 276.7 210.9 662.4

Guaranteed Loans Outstanding 776.7 987.6 1,650.0

a/ The New York City fiscal year runs from July 1 to June 30.

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APPENDIXES

APPENDIX A. GLOSSARY OF CREDIT TERMS USED IN THIS PAPER

Certificates of Beneficial Ownership (CBOs). Securities backed by pools of

agency direct loans, which are usually sold to the Federal Financing Bank,

but occasionally to the public.

Direct Loan. A disbursement of funds by the federal government directly to

the borrower under a contract that requires the repayment of such funds

with or without interest, including the purchase of or participation in a loan

made by another lender and the acquisition of a federally guaranteed loan in

satisfaction of default claims.

Direct Loan Obligation. A binding agreement by the government to make a

direct loan once specified conditions are fulfilled by the borrowers.

Direct Loans Outstanding, Loan Guarantees Outstanding. The stock of

direct loan principal currently outstanding. The stock of guaranteed loans

outstanding that have not yet been fully repaid.

Guaranteed Loan Originations. Direct loans extended by the Federal

Financing Bank (FFB) at the request of another federal agency under that

agency's loan guarantee authority. Such loans are fully guaranteed by the

requesting agency. (Same as guarantees of direct loans, but used in

reference to the FFB direct loan rather than to the guarantee.)

Guarantees of Direct Loans. A guarantee by one federal agency of

repayment of a loan for which another federal agency (usually the Federal

Financing Bank) acts as the direct lender.

Loan Assets. Agency direct loans sold, usually as certificates of beneficial

ownership, to the FFB or the public, thereby reducing the agency's

outstanding loan balance.

Loan Guarantee. A pledge by the federal government to repay principal

and/or interest on a loan in whole or in part in the event of default by the

borrower.

Loan Guarantee Commitment. A binding agreement by the government to

guarantee a loan once specified conditions are fulfilled by borrower and

lender.

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Net Lending, Net Direct Loan Outlays, Net Loan Guarantees, For direct

loans, new disbursements for direct loans, minus repayments, prepayments,

and other loan offsets. For loan guarantees, new loans guaranteed minus

guarantees for which the loan has been fully repaid.

New Lending, Gross Lending; New Guarantees, Gross Guarantees. New

credit extended in a fiscal year, without subtracting any repayments.

Primary Loan Guarantees. Guarantees of loans to borrowers by nonfederal

government lenders. Secondary guarantees and guarantees of direct loans

are deducted from gross new guarantees to arrive at the total for primary

loan guarantees.

Secondary Loan Guarantees. Guarantees of repayment of loans previously

guaranteed by the federal government, usually in the form of a guarantee of

a security backed by guaranteed loans, for example, mortgage-backed

securities.

10*
APPENDIX B. THE ROLE OF THE FEDERAL FINANCING BANK

Loans financed through the Federal Financing Bank (FFB) have been

one of the fastest growing federal activities in recent years. Some of the

FFBfs activities have inadvertently created opportunities for agencies to

expand their activities without having them recorded in the unified

budget. J7 These activities lead to two forms of FFB direct lending:

purchase of loan assets from agencies, and origination as direct lender of

agency guaranteed loans. Although responsibility for originating and

servicing these FFB loans remains with the parent agency, the outlays are

recorded as off-budget outlays of the FFB. In 1980, through the FFB!s loan

asset purchases, $7.6 billion in on-budget outlays of net loans were converted into off-budget outlays and, through its loan guarantee orginations,

$6.8 billion in net guaranteed loans were converted into direct loans.

FFB Purchases of Loan Assets

Loan assets are loans made by an agency or securities backed by loans

in an agency's portfolio; the securities are also known as certificates of

beneficial ownership (CBOs). The receipts from sales of loan assets by an

agency are counted in its budget as repayments on loans. Thus, they are

offset against gross new lending to reduce that agency's net lending.

In the past, agencies sold loan assets to private investors in order to

substitute private financing for public. This practice in effect converted

on-budget direct loans into loans involving no federal funds. In most, if not

all cases, the agencies guaranteed repayment of the loans. When the FFB

was established, it replaced the private investors as a purchaser of most new

loan assets from agencies. This was done for the same reason that agency

debt was transferred to the FFB—to reduce the variety of federal debt

issued to the public and to reduce the interest rate for agencies. While the

FFB's purchases of loan assets lower financing costs, they convert on-budget

direct loans to off-budget loans, reducing the unified budget deficit while at

the same time increasing off-budget outlays.

J7 For more background on the Federal Financing Bank itself, see

Congressional Budget Office, "The Federal Financing Bank: A Primer"

in Loan Guarantees; Current Concerns and Alternatives for Control,

A Compilation of Staff Working Papers (January 1979).

105
When agencies sell loan assets to the FFB, they retain responsibility

for all aspects of loan servicing and for repayment in case of default. In

fact, agencies do not really sell assets to the FFB; instead, they borrow

from the FFB in much the same way that other agencies sell their own debt

securities. Borrowing by agencies is not a budgetary transaction. It does

not affect outlays, as the sale of loan assets does. According to budgetary

principles, the sale by agencies of loan assets to the FFB ought to be treated

simply as borrowing by the agency from the FFB. The current budgetary

treatment of CBO sales by the Farmers Home Administration and the Rural

Electrification Administration as sales of loan assets are, however, required

by law. The Congress could revise that requirement, and treat the sale of

loan assets as borrowing by the agency from the FFB. This would end the

transfer of outlays to off-budget status, and would have the same effect on

budget totals as bringing FFB!s loan asset purchases on budget. If loan

assets had been treated as borrowing in 1980, budget outlays would have

been $7.6 billion higher. Alternatively, the Congress could set limits on the

amounts of loan assets that each agency could sell to the FFB during a year,

continuing to allow loan asset sales to reduce on-budget outlays, but limiting

the annual volume of new lending that could be transferred off-budget.

FFB Origination of Guaranteed Loans

By purchasing loan assets and certificates of beneficial ownership, the

FFB acts indirectly as a lender: it lends to agencies that in turn use these

funds to finance program activity. The FFB also acts as a primary lender at

the request of various federal agencies. In these instances, if an agency

guarantees repayment of all interest and principal in the event of default by

a borrower, the FFB makes a direct loan to that borrower at interest rates

1/8 of 1 percent above Treasury borrowing costs. In this case, an on-budget

agency may use guarantee authority, a nonbudgetary transaction, to make

an off-budget direct federal loan at below market interest rates.

The credit control appropriation limitations set a ceiling on the level

of agencies' commitments to guarantee loans; however, no limitation is set

on what portion of the guaranteed loans may, in fact, be financed as offbudget direct loans through the FFB. As with loan asset sales, the decision

to use the FFB as the lender is a matter of executive discretion. Several

alternatives are available to the Congress to improve control over the

conversion of guaranteed loans into off-budget direct loans. First, it could

change the budgetary treatment of FFB loan originations, recording them as

on-budget direct lending by agencies and borrowing by the agency from the

FFB. This would require that agencies be given budget authority and that

outlays be recorded in agency budgets. Alternatively, limitations could be

set for each program on the amount of loans guaranteed by that agency in a

fiscal year that could be originated by the FFB. Finally, the FFB could be

placed on-budget with no other changes.

O

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