CREDIT PROGRAMS

Key Agencies Should 

Better Document 

Procedures for 

Estimating Subsidy 

Costs

Report to the Ranking Member, 

Subcommittee on Financial Services 

and General Government, Committee 

on Appropriations, U.S. Senate

July 2016

GAO-16-269

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-16-269, a report to the 

Ranking Member, Subcommittee on Financial 

Services and General Government, 

Committee on Appropriations, U.S. Senate

July 2016

CREDIT PROGRAMS

Key Agencies Should Better Document 

Procedures for Estimating Subsidy Costs

What GAO Found

The Federal Credit Reform Act of 1990 requires agencies to estimate the cost to 

the government of extending or guaranteeing credit. This cost, referred to as 

subsidy cost, equals the net present value of estimated cash flows from the 

government (e.g., loan disbursements and claim payments to lenders) minus 

estimated cash flows to the government (e.g., loan repayments, interest 

payments, fees, and recoveries on defaulted loans) over the life of the loan, 

excluding administrative costs. Agencies use established methods and data to 

estimate the future costs of a program based on what is known today. Based on 

budgeting and accounting guidance, GAO determined that agencies’ estimation 

processes should include various key elements to help ensure that estimates are

supported, reliable, and reasonable. For example, agency management should 

compare estimated and actual cash flows to identify potential trends. The figure 

below lists the key elements GAO identified based on relevance to creating 

credible cost estimates. 

To assess how agencies addressed these key elements in their subsidy cost 

estimation processes, GAO assessed (1) the Department of Agriculture’s 

(USDA) Export Credit Guarantee (GSM-102) Program, (2) the Department of 

Housing and Urban Development’s (HUD) Mutual Mortgage Insurance Fund, and 

(3) the Department of Education’s (Education) William D. Ford Federal Direct 

Loan Program (Direct Student Loan Program). GAO found that these agencies

varied in their implementation of these key elements, as shown below. 

Key Elements of the Subsidy Cost Estimation Process

While USDA documented the key elements of the estimation process for the 

GSM-102 program, HUD and Education lacked policies and procedures and 

adequate documentation for certain other key elements. Until these key elements 

are fully addressed, HUD and Education have increased the risk that institutional 

knowledge used in the estimation process may be lost and estimates may not be 

supported, reliable, and reasonable. 

Why GAO Did This Study

Federal direct loans and loan 

guarantees outstanding have doubled 

from $1.5 trillion as of September 30,

2008, to $3.0 trillion as of September 

30, 2015, as reported in the financial 

reports of the U.S. government. In light 

of the growing portfolio of outstanding 

direct loans and loan guarantees, 

questions have been raised about how 

agencies estimate the subsidy cost of 

credit programs.

GAO was asked to review the process 

federal agencies use to develop 

subsidy cost estimates for credit 

programs. This report examines (1) the 

key elements federal agencies should 

consider when developing subsidy cost 

estimates and (2) the extent to which 

certain agencies addressed these key 

elements when estimating the subsidy 

costs for selected federal credit 

programs. GAO analyzed budgeting 

and accounting guidance to identify a 

list of key elements agencies should 

consider when estimating subsidy 

costs and assessed the subsidy cost 

estimation processes used for three 

credit programs against these key 

elements. The three programs were 

selected based on average loan 

amounts and/or loan volume.

What GAO Recommends

GAO recommends that HUD and 

Education develop and document 

additional procedures related to the 

subsidy cost estimation process. HUD 

and Education concurred with GAO’s

recommendations and described 

ongoing and planned actions to 

address them.

View GAO-16-269. For more information, 

contact Cheryl E. Clark at (202) 512-9377 or 

clarkce@gao.gov.
Page i GAO-16-269 Estimating Credit Program Subsidy Costs 

Letter 1

Background 3

Key Elements Agencies Should Consider When Preparing 

Subsidy Cost Estimates 9

Agencies Addressed Several Key Elements in Their Subsidy Cost 

Estimation Processes, but FHA and Education Lacked 

Adequate Documentation Supporting Certain Processes 13

Conclusions 23

Recommendations for Executive Action 23

Agency Comments and Our Evaluation 24

Appendix I Objectives, Scope, and Methodology 27

Appendix II Comments from the Department of Housing and Urban 

Development 29

Appendix III Comments from the Department of Education 31

Appendix IV GAO Contact and Staff Acknowledgments 33

Related GAO Products 34

Tables

Table 1: Assessment of CCC’s GSM-102 Program Subsidy Cost 

Estimation Process against Key Elements 15

Table 2: Assessment of FHA’s MMI Fund Subsidy Cost Estimation 

Process against Key Elements 18

Table 3: Assessment of Education’s Direct Student Loan Program 

Subsidy Cost Estimation Process against Key Elements 21

Contents
Page ii GAO-16-269 Estimating Credit Program Subsidy Costs 

Figures

Figure 1: Agencies with the Highest Direct Loans and Loan 

Guarantees Outstanding as of September 30, 2015, and 

Types of Credit Programs 5

Figure 2: Calculation of Subsidy Costs for Direct Loans and Loan 

Guarantees 7

Figure 3: Key Elements of the Credit Subsidy Estimation Process 

for Selected Programs 14

Abbreviations

AAPC Accounting and Auditing Policy Committee

CCC Commodity Credit Corporation 

Education Department of Education

FASAB Federal Accounting Standards Advisory Board

FCRA Federal Credit Reform Act of 1990

FHA Federal Housing Administration

GSM-102 Export Credit Guarantee Program 

HUD Department of Housing and Urban Development

ICRAS Interagency Country Risk Assessment System

MMI Mutual Mortgage Insurance

NSLDS National Student Loan Data System

OMB Office of Management and Budget

SFFAS Statement of Federal Financial Accounting Standards

SBA Small Business Administration

USDA Department of Agriculture

VA Department of Veterans Affairs

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-16-269 Estimating Credit Program Subsidy Costs 

441 G St. N.W.

Washington, DC 20548

July 13, 2016

The Honorable Christopher A. Coons

Ranking Member

Subcommittee on Financial Services and General Government

Committee on Appropriations

United States Senate

Dear Senator Coons:

The federal government uses credit programs that provide direct loans 

and loan guarantees as tools to support specific social and public policy 

objectives, such as those for housing, education, and small businesses. 

The amount of federal credit outstanding has doubled from approximately 

$1.5 trillion as of September 30, 2008, to approximately $3.0 trillion as of 

September 30, 2015.1 Federal agencies that provide credit are generally 

required to annually estimate the net long-term cost to the government of 

extending or guaranteeing credit—referred to as subsidy cost—for each 

credit program.2 These estimated subsidy costs are reported in agencies’

annual budgets and financial statements. Agencies use established 

methods and data to estimate the future costs of a program based on 

what is known today. The management of a cost estimate involves 

updating the estimate with actual data as they become available, revising 

the estimate to reflect program changes, and analyzing differences 

between estimated and actual costs to identify any needed revisions to 

the estimation process. Reliable cost estimates are needed for the 

management and budgeting of credit programs and to support 

congressional oversight.

In light of the growing portfolio of outstanding direct loans and loan 

guarantees, you asked us to examine the budgetary treatment of the cost 

 1

These amounts were reported in the fiscal years 2008 and 2015 Financial Report of the 

U.S. Government. See GAO, Financial Audit: U.S. Government’s Fiscal Years 2015 and 

2014 Consolidated Financial Statements, GAO-16-357R (Washington, D.C.: Feb. 25, 

2016). Also see Department of the Treasury, 2008 Financial Report of the U.S. 

Government (Washington, D.C.: December 2008). 

2

This net long-term cost is calculated on a present value basis and excludes 

administrative costs.

Letter
Page 2 GAO-16-269 Estimating Credit Program Subsidy Costs 

of federal credit programs and how federal agencies estimate subsidy 

costs for credit programs. We have addressed these issues in two 

reports. In January 2016, we issued a report that (1) analyzed 

government-wide subsidy cost reestimates for direct loans and loan 

guarantees approved from fiscal years 2001 through 2014 and (2) 

explained implications of estimating credit program costs for the budget 

under the fair value approach3 rather than the current method under the 

Federal Credit Reform Act of 1990 (FCRA)4 for calculating subsidy costs.5

This report (1) describes the key elements federal agencies should 

consider when developing subsidy cost estimates based on relevant 

guidance and (2) evaluates the extent to which certain agencies 

addressed these key elements when estimating subsidy costs for 

selected federal credit programs.

For this report, we reviewed budgeting guidance, accounting standards 

and principles, and publications of best practices to identify a list of key 

elements that federal agencies should consider when developing and 

managing subsidy cost estimates. We determined the key elements 

based on their relevance to creating credible cost estimates. We used this 

list of key elements to assess the extent to which (1) the Department of 

Agriculture’s (USDA) Commodity Credit Corporation (CCC) Export Credit 

Guarantee (GSM-102) Program, (2) the Department of Housing and 

Urban Development’s (HUD) Federal Housing Administration’s (FHA) 

Mutual Mortgage Insurance (MMI) Fund,6 and (3) the Department of 

 3

The proposed fair value approach centers around the debate that beyond the cash flows 

associated with a direct loan or loan guarantee, which are recognized under the Federal 

Credit Reform Act of 1990, costs are imposed on taxpayers who would, in a similarly risky 

private market transaction, require compensation for bearing the aggregate risk 

associated with making the loan. 

4

Pub. L. No. 101-508, § 13201(a), 104 Stat. 1388, 1388-609 (Nov. 5, 1990), classified, as 

amended, at 2 U.S.C. §§ 661-661f.

5

GAO, Credit Reform: Current Method to Estimate Credit Subsidy Costs Is More 

Appropriate for Budget Estimates Than a Fair Value Approach, GAO-16-41 (Washington, 

D.C.: Jan. 29, 2016).

6

FHA offers mortgage insurance through its MMI Fund. Mortgage insurance or guarantees 

are available to eligible home buyers. They protect the lender or other mortgage holder, 

because the federal government commits to pay part or all of a loan’s outstanding 

principal and interest to a lender or other mortgage holder if the borrower defaults. 

Because “insurance” and “guarantee” have the same meaning in the context of our 

review, we use guarantee throughout this report when referring to the MMI Fund.
Page 3 GAO-16-269 Estimating Credit Program Subsidy Costs 

Education’s (Education) William D. Ford Federal Direct Loan Program 

(Direct Student Loan Program) addressed these elements in estimating 

the subsidy costs for the selected credit programs. We selected the Direct 

Student Loan Program and the MMI Fund because these programs 

represent the largest federal direct loan and loan guarantee programs, 

respectively. These two programs can be characterized as having a high 

volume of loans with relatively lower average loan amounts compared to 

other federal credit programs. To include a different type of credit 

program in our evaluation, we also selected the GSM-102 program, which 

can be characterized as having a lower volume of loans and larger 

average loan amounts. For these three programs, we evaluated the 

processes used by CCC, FHA, and Education to develop subsidy cost 

estimates and compared those processes to our list of key elements 

agencies should consider. We did not evaluate the reasonableness of 

subsidy cost estimates, reestimates, or the data and assumptions used to 

calculate them. See appendix I for additional details on our scope and 

methodology.

We conducted this performance audit from June 2014 to July 2016 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

Federal credit programs provide assistance to borrowers through two 

principal methods: direct loans and loan guarantees. Direct loans are a 

disbursement of funds by the government to a nonfederal borrower under 

a contract that requires the repayment of such funds with or without 

interest. Loan guarantees are any guarantees, insurance, or other 

pledges with respect to the payment of all or a part of the principal or 

Background
Page 4 GAO-16-269 Estimating Credit Program Subsidy Costs 

interest on any debt obligation of a nonfederal borrower to a nonfederal 

lender.7

As of September 30, 2015, 21 federal agencies reported that they had 

direct loans or loan guarantees outstanding. As shown in figure 1, 

Education (largely through its Direct Student Loan Program) and HUD 

(largely through its single-family mortgage guarantee program or the MMI 

Fund) held the largest share of federal direct loans and loan guarantees 

outstanding, respectively.

 7

Loan guarantees do not include the insurance of deposits, shares, or other withdrawable 

accounts in financial institutions. Further, the credit and insurance activities of the Federal 

Deposit Insurance Corporation, National Credit Union Administration, Pension Benefit 

Guaranty Corporation, National Flood Insurance, National Insurance Development Fund, 

Crop Insurance, and Tennessee Valley Authority are statutorily exempted from FCRA and 

are therefore not considered “credit programs” for budgetary purposes. 2 U.S.C. §

661e(a).
Page 5 GAO-16-269 Estimating Credit Program Subsidy Costs 

Figure 1: Agencies with the Highest Direct Loans and Loan Guarantees Outstanding as of September 30, 2015, and Types of 

Credit Programs
Page 6 GAO-16-269 Estimating Credit Program Subsidy Costs 

Twenty-five years ago, the enactment of FCRA changed the method used 

to budget for the cost of federal credit programs. Before fiscal year 1992, 

when FCRA took effect, the cost of credit programs was recorded in the 

budget on a cash basis (the expected amount of cash paid out minus the 

cash received in a given year). As a result, the budget cost associated 

with a loan guarantee was not recorded until a default occurred, which 

may have been many years after the guarantee was made. Further, direct 

loans appeared to cost the same as grants because the total amount of a 

loan was recorded as a cost when the loan was made and loan 

repayments were not recorded until the year received. Both were 

inaccurate and provided policymakers with distorted information for 

comparing credit programs to noncredit programs and to each other. This 

also created a bias in favor of loan guarantees over direct loans because 

loan guarantees appeared to be less expensive than direct loans,

regardless of the actual lifetime cost to the government.

FCRA was enacted with the intent of improving the accuracy of the cost 

of federal credit programs reported in the budget by requiring agencies to 

measure the government’s net long-term cost of federal credit programs 

to permit better cost comparisons both among credit programs and 

between credit and noncredit programs. The policies enacted under 

FCRA, sometimes referred to simply as credit reform, recognized that the 

actual cost of a direct loan or loan guarantee is not captured by its cash 

flows in any one year, but rather is the net present value—worth in terms 

of money paid immediately—of its cash flows over the life of the loan.8

Therefore, FCRA specified an approach using estimates of expected 

cash flows, including future loan repayments and defaults as elements of 

the cost to be recorded in the budget.

FCRA requires agencies to estimate the net long-term cost to the 

government of extending or guaranteeing credit. This cost, referred to as 

subsidy cost, equals the net present value of estimated cash flows from 

the government minus estimated cash flows to the government, over the 

life of the loan and excluding administrative costs. This approach puts 

 8

The present value of a stream of future returns or costs is its worth in terms of money 

paid immediately. In calculating present value under FCRA, prevailing interest rates on 

U.S. Treasury securities provide the basis for converting future amounts into their “money 

now” equivalents.

The Federal Credit Reform 

Act of 1990

Subsidy Cost Estimates 

and Reestimates
Page 7 GAO-16-269 Estimating Credit Program Subsidy Costs 

direct loans and loan guarantees on an equal footing in terms of cost in 

the federal budget and permits the costs of credit programs to be 

compared with each other and with the costs of noncredit programs. 

Figure 2 illustrates the types of cash flows that affect the subsidy costs for 

direct loans and loan guarantees. If the present value of estimated cash 

outflows exceeds cash inflows, there is a subsidy cost. If the present 

value of estimated cash inflows exceeds cash outflows, there is a 

negative subsidy cost, referred to as subsidy income.

Figure 2: Calculation of Subsidy Costs for Direct Loans and Loan Guarantees
Page 8 GAO-16-269 Estimating Credit Program Subsidy Costs 

The subsidy cost represents the net present value cost of making or 

guaranteeing new loans and is included in the President’s Budget for the 

year the direct loan or loan guarantee is made. FCRA requires that 

agencies have budget authority to cover a program’s subsidy cost to the 

government in advance—before new direct loan obligations are incurred 

and new loan guarantee commitments are made. The data used for 

budgetary subsidy cost estimates are generally updated—or 

reestimated—annually after the end of the fiscal year to reflect actual loan 

performance and to incorporate any changes in assumptions about future 

loan performance. Reestimates that increase subsidy costs are referred 

to as upward reestimates (an agency would need additional funds), while 

reestimates that decrease subsidy costs are referred to as downward 

reestimates (an agency would return funds). Agencies do not need to 

request additional appropriations to cover upward reestimates because 

FCRA provides permanent indefinite budget authority for this purpose.9

To implement FCRA and calculate subsidy costs, agencies estimate the 

expected cash outflows and inflows over the life of the loans for each 

cohort of direct loans obligated or loan guarantees committed in the 

cohort year.10 The efforts to make reasonable subsidy cost estimates 

begin with establishing and using reliable records of historical credit 

performance data and taking into consideration current and forecasted 

economic conditions. Agency management is responsible for 

accumulating relevant, sufficient, and reliable data on which to base the 

estimates. Further, according to the primary accounting standard for 

direct loans and loan guarantees, subsidy cost estimates should be 

based on a systematic methodology to project expected cash flows into 

the future.11 To accomplish this task, an agency develops a cash flow 

model, which is a mathematical model that generally uses historical 

information and various assumptions related to future loan performance, 

 9

Permanent indefinite budget authority is available for obligation and expenditure without 

fiscal year limitation and is not limited to a specified amount or ceiling. 

10Cohort refers to the fiscal year of obligation for direct loan obligations or loan guarantee 

commitments of a program.

11The primary accounting standard for federal credit programs is Statement of Federal 

Financial Accounting Standards No. 2, Accounting for Direct Loans and Loan Guarantees, 

which became effective in fiscal year 1994.

Agencies Use Cash Flow 

Models to Estimate 

Subsidy Costs
Page 9 GAO-16-269 Estimating Credit Program Subsidy Costs 

including loan repayments, prepayments, defaults, recoveries, and the 

timing of these events. Such a cash flow model, which is based on sound 

economic, financial, and statistical theory, identifies factors that affect 

loan performance. In addition to using historical data, other relevant 

factors may be considered by agencies when estimating future loan 

performance. These factors may include (1) economic conditions that 

may affect loan performance, (2) financial and other relevant 

characteristics of borrowers, (3) the value of the collateral to loan 

balance, (4) changes in recoverable value of collateral, and (5) newly 

developed events that would affect loan performance. In addition, when 

new programs are established or changes are made to existing programs, 

historical supporting documentation for cash flow assumptions may not 

exist. In the absence of valid, relevant historical experience, the agency 

may use relevant experience from other federal or private sector loan 

programs, as well as informed opinion.12 Various budgeting and 

accounting guidance related to estimating subsidy costs requires 

agencies to establish internal controls over the calculations, including 

establishing and documenting policies and procedures and maintaining 

supporting documentation for subsidy cost estimates.

Agencies develop subsidy cost estimates based on relevant budgeting 

and accounting guidance. FCRA assigned to the Office of Management 

and Budget (OMB) the responsibility for coordinating the cost estimates 

required by the act. OMB is authorized to delegate to lending agencies 

the authority to estimate costs, based on OMB’s written guidelines. These 

guidelines are primarily contained in OMB Circular No. A-11, Preparation, 

Submission, and Execution of the Budget. Further, the Federal 

Accounting Standards Advisory Board (FASAB) developed the primary 

accounting standard for federal credit programs, Statement of Federal 

Financial Accounting Standards (SFFAS) No. 2, Accounting for Direct 

Loans and Loan Guarantees, which became effective in fiscal year 1994. 

This standard established financial accounting guidance consistent with 

FCRA for estimating the cost of direct loan and loan guarantee programs, 

and for recording direct loans receivable and the liability for loan 

guarantees for financial reporting purposes.

 12Informed opinion refers to the judgment of agency staff or others who make subsidy cost 

estimates based on their programmatic knowledge, experience, or both without using a 

fully satisfactory database of historical data. 

Key Elements 

Agencies Should 

Consider When 

Preparing Subsidy 

Cost Estimates
Page 10 GAO-16-269 Estimating Credit Program Subsidy Costs 

While OMB Circular No. A-11 and SFFAS No. 2 provide general guidance 

for agencies to develop subsidy cost estimates, detailed guidance on the 

preparation of subsidy cost estimates is contained in FASAB’s Accounting 

and Auditing Policy Committee’s Technical Release 6 Preparing 

Estimates for Direct Loan and Loan Guarantee Subsidies under the 

Federal Credit Reform Act.

13 This technical release provides detailed 

guidance and specific practices that if fully implemented by federal 

agencies, should enhance their ability to reasonably estimate credit 

program costs. In addition, GAO’s Cost Estimating and Assessment 

Guide: Best Practices for Developing and Managing Capital Program 

Costs provides detailed guidance on developing cost estimates.14 We 

identified the following practices discussed in Technical Release 6 and 

the cost estimating guide as the key elements of the subsidy cost 

estimation process based on relevance to creating credible cost 

estimates:15

• Historical data validation: Management should accumulate 

sufficient, relevant, and reliable supporting data on which to base 

cash flow projections, such as data on prepayments, defaults, and 

recoveries. Subsidy cost estimates should be based on the best 

available data at the time the estimates are made.

• Informed opinion documentation: In certain limited instances, when 

relevant historical data, modeling capabilities, or both are not 

available, informed opinion may be used to support cash flow 

projections. When informed opinion is used, management should 

document the expert’s qualifications. In addition, the basis for the 

stated opinion must be articulated and documented in detail, including 

 13The Accounting and Auditing Policy Committee (AAPC) was organized in May 1997 by 

the Department of the Treasury, OMB, GAO, the Chief Financial Officers’ Council, and the 

President’s Council on Integrity and Efficiency, as a body to research accounting and 

auditing issues requiring guidance. The AAPC serves as a permanent committee 

sponsored by FASAB. The mission of the AAPC is to assist the federal government in 

improving financial reporting through the timely identification, discussion, and 

recommendation of solutions to accounting and auditing issues as they relate to the 

specific application of existing authoritative literature.

14GAO, Cost Estimating and Assessment Guide: Best Practices for Developing and 

Managing Capital Program Costs, GAO-09-3SP (Washington, D.C.: March 2009).

15Technical Release 6 contains other practices of a technical nature that we did not 

include in this discussion. 
Page 11 GAO-16-269 Estimating Credit Program Subsidy Costs 

an explanation for why the particular projection is appropriate for the 

program.

• Cash flow assumption documentation: Documentation must be 

developed to support the assumptions used by agencies in the 

subsidy cost calculations, including the data sources and calculation 

methods. Assumptions should also be coordinated between program 

and accounting offices.

• Cash flow model documentation: Management should ensure that 

its cash flow models used to estimate subsidy cost estimates are well 

organized; documented; and, to reduce the chance of errors, require 

minimal manual data entry. Documentation should include the 

rationale for using the specific model; the mechanics of the model, 

including how to use and update the model and formulas and other 

mathematical functions within the model; and sources of supporting 

data. Management should also document the controls over the model, 

including management review and approval of the model. Often, 

because of the complexity of cash flow models, management will hire 

a private firm to conduct an independent verification and validation of 

the model, which entails ensuring that the model’s calculations are 

accurate and consistent with the model documentation.

• Program design comparison: Based on the laws and regulations 

that govern the credit program, management should document a 

comparison of the cash flow model and assumptions to relevant 

program design factors, such as fees, grace periods, and maximum 

loan amounts. This documentation will help management ensure that 

credit subsidy estimates are prepared consistent with the terms and 

conditions of the program.

• Analysis of estimated cash flows: Management should conduct 

periodic comparisons of estimated loan performance to actual cash 

flows in the accounting system. This comparison allows agencies to 

identify and research significant differences and determine whether 

the cash flow model or assumptions related to expected future loan 

performance need to be revised. Further, if management identifies 

consistent trends in under- or overestimates of subsidy costs, such 

trends should be investigated and explained.

• Sensitivity analysis: Management should perform sensitivity 

analyses to identify which cash flow assumptions—such as defaults, 

recoveries, or prepayments—have the greatest impact on the cost of 

the credit program. Knowledge of these key assumptions provides 

management with the ability to monitor the economic trends that most 

affect the program’s performance. These analyses also allow 
Page 12 GAO-16-269 Estimating Credit Program Subsidy Costs 

agencies to more efficiently focus their efforts on documenting the 

support for the key assumptions.

• Policies and procedures for estimating subsidy costs:

Management should establish and document policies and procedures 

for calculating subsidy cost estimates, including required supporting 

documentation and a formal review and approval process. In addition, 

preparing reliable and timely direct loan and loan guarantee subsidy 

cost estimates must be a joint effort between the budget, accounting, 

and program offices at each agency. These offices should work 

together to ensure that the procedures and internal controls are 

implemented and operating as designed. Further, documented 

policies and procedures are important internal controls that are 

designed to help ensure continuity when there is employee turnover 

and to calculate reliable, reasonable, and well-supported cost 

estimates.

In addition, Standards for Internal Control in the Federal Government

requires controls and transactions to be clearly documented and 

documentation to be readily available for examination.16 Documentation is 

necessary and required to demonstrate the design, implementation, and 

operating effectiveness of an entity’s internal control system. 

Documentation also provides a means to retain organizational knowledge 

and mitigate the risk of having knowledge limited to a few personnel, as 

well as a means to communicate as needed to external parties, such as 

external auditors. Further, in implementing internal controls, management 

is responsible for developing the detailed policies, procedures, and 

practices to fit their agency’s operations and to ensure that they are built 

into and an integral part of operations.

 16GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999), contains the internal control standards to be 

followed by executive agencies in establishing and maintaining systems of internal control 

as required by 31 U.S.C. § 3512 (c), (d) (commonly referred to as the Federal Managers’

Financial Integrity Act). The Standards for Internal Control in the Federal Government was 

revised in September 2014 and the controls are effective beginning with fiscal year 2016. 

Our report addresses subsidy cost estimation processes in place at the agencies we 

reviewed prior to fiscal year 2016; therefore, we reference the November 1999 version of 

the Standards for Internal Control in the Federal Government throughout our report.
Page 13 GAO-16-269 Estimating Credit Program Subsidy Costs 

Based on our review of the subsidy cost estimation processes for USDA’s 

Credit Commodity Corporation’s (CCC) Export Credit Guarantee (GSM102) Program, HUD’s Federal Housing Administration’s (FHA) Mutual 

Mortgage Insurance (MMI) Fund, and Education’s William D. Ford 

Federal Direct Loan Program (Direct Student Loan Program), we 

determined that while CCC addressed all key elements of the estimation 

process, FHA and Education lacked comprehensive documented policies 

and procedures for determining subsidy cost estimates and did not 

maintain adequate documentation supporting their implementation of 

other key elements of the estimation process. Figure 3 illustrates the key 

elements of the estimation process and the extent to which agencies 

addressed these key elements for the programs we reviewed.

Agencies Addressed 

Several Key 

Elements in Their 

Subsidy Cost 

Estimation 

Processes, but FHA 

and Education 

Lacked Adequate 

Documentation 

Supporting Certain 

Processes
Page 14 GAO-16-269 Estimating Credit Program Subsidy Costs 

Figure 3: Key Elements of the Credit Subsidy Estimation Process for Selected 

Programs
Page 15 GAO-16-269 Estimating Credit Program Subsidy Costs 

CCC designed and documented procedures for each of the key elements 

in its subsidy cost estimation process for the GSM-102 program. The 

GSM-102 program is intended to promote exports of U.S. agricultural 

commodities by providing export credit guarantees. As of fiscal year 

2015, CCC’s GSM-102 program had approximately $2.9 billion in 

outstanding loan guarantees. In the event that CCC pays a claim under 

the loan guarantee program, CCC assumes the debt and treats it as a 

loan receivable for accounting and collection purposes. As of fiscal year 

2015, the GSM-102 program had approximately $682 million of 

outstanding loans receivable.

To estimate the subsidy cost of the GSM-102 program, CCC developed 

an econometric cash flow model that utilizes foreign economic indicators 

that influence loan performance, including commitment amounts, upfront 

fees, claim payments, write-offs, recoveries, and rescheduling. Most of 

the key elements of the subsidy cost estimation process for the GSM-102 

program were documented by CCC in one of three documents: (1) 

standard operating procedures, (2) cash flow model documentation, and 

(3) a cash flow model user guide. Table 1 describes the design and 

documentation of the subsidy cost estimation process for CCC’s GSM102 program in relation to the key elements we identified.

Table 1: Assessment of CCC’s GSM-102 Program Subsidy Cost Estimation Process against Key Elements

Key element Designed procedures

Historical data validation

The Commodity Credit Corporation (CCC) documented its standard operating procedures for the 

Export Credit Guarantee (GSM-102) Program’s credit subsidy estimation process that call for 

acquiring and validating source data, including importing reliable historical data from its general 

ledger. Historical data used in the credit subsidy estimation process include loan performance data 

starting with the 1992 cohort year. 

Informed opinion 

documentation

CCC’s credit subsidy estimation process relies partly on the expert knowledge of a contractor for 

model development and changes. This contractor also helped develop the GSM-102 cash flow model 

documentation. The GSM-102 documentation for the subsidy cost estimation process states that the 

Department of Agriculture’s Economic Research Service provides historical and forecasted data 

related to borrower country exchange rate growth and gross domestic product that are used in the 

GSM-102 cash flow model. 

Department of Agriculture (USDA), 

Commodity Credit Corporation (CCC), 

Export Credit Guarantee (GSM-102) 

Program

The CCC GSM-102 program was developed 

to expand market opportunities for U.S. 

agricultural exporters and to assist long-term 

market development for U.S. agricultural 

commodity exports. Through the use of export 

credit guarantees, CCC encourages U.S. 

private sector financing of foreign purchases 

of U.S. agricultural commodities on credit 

terms. The export credit guarantee issued 

under the GSM-102 program is an agreement 

by CCC to pay the exporter or the U.S. 

financial institution specified amounts of 

principal and interest in case of default by the 

foreign financial institution for the export sale 

covered by the export credit guarantee. Under 

the GSM-102 program, maximum repayment 

terms may vary based on risk of default, as 

determined by CCC. The program operates in 

a manner intended not to interfere with 

markets for cash sales and is targeted toward 

those countries that have sufficient financial 

strength so that foreign exchange will be 

available for scheduled payments.

Source: USDA. | GAO-16-269

CCC Documented the Key 

Elements in Preparing 

Subsidy Cost Estimates 

for the GSM-102 Program 
Page 16 GAO-16-269 Estimating Credit Program Subsidy Costs 

Cash flow assumption 

documentation

The significant cash flow assumptions used in the GSM-102 cash flow model are default rate; 

recovery rate; exchange rate growth; gross domestic product; and Interagency Country Risk 

Assessment System ratings, or ICRAS, which is an interagency process through which the credit risk 

associated with U.S. credit assistance to foreign countries is assessed periodically. The data source 

and design for each of these assumptions was documented and approved by management. 

Cash flow model

documentation

CCC’s cash flow model documentation includes procedures related to the methodology for forecasting 

defaults and recoveries, as well as other estimated cash flows associated with the GSM-102 program. 

CCC also developed a user’s guide for the GSM-102 cash flow model, which includes guides for 

executing the cash flow model, detailed technical requirements for updating the cash flow model, and 

updating model inputs. CCC also has documented procedures to perform an independent verification 

and validation of the model whenever significant changes occur. 

Program design 

comparison

CCC’s documented procedures call for the GSM-102 cash flow model to be revised when changes are 

required, including those driven by changes in program regulations. These procedures help ensure 

that the rationale for cash flow model changes will be documented, reviewed, appropriately 

implemented, and approved. 

Analysis of estimated cash 

flows

CCC’s documented procedures state that if the GSM-102 program’s reestimates exceed a certain 

threshold, further research, such as trend analysis, is required to be performed and explained.

Sensitivity analysis

CCC documented its procedures to conduct sensitivity analysis on assumptions in the GSM-102 cash 

flow model. The procedures were developed to assist in identifying the assumptions that have the 

greatest impact on the subsidy cost. CCC’s sensitivity analysis includes an assessment of the default 

rate, recovery rate, exchange rate growth, gross domestic product, and ICRAS ratings. 

Policies and procedures 

for estimating subsidy 

costs

CCC developed standard operating procedures, cash flow model documentation, and a cash flow 

model user guide for subsidy cost estimates for the GSM-102 program. These procedures document 

steps for, among other things, preparing reestimates, acquiring and validating source data, running the 

cash flow model, formatting and validating cash flow outputs, review and approval of results, and 

analysis of the GSM-102 cash flow model outputs.

Source: GAO analysis of CCC documentation. | GAO-16-269

We reviewed the supporting documentation that CCC provided related to 

the key elements of the subsidy cost estimation process and found that 

CCC adequately addressed the key elements. Adequately addressing the 

key elements helps an agency ensure that subsidy cost estimates are 

supported, reliable, and reasonable.
Page 17 GAO-16-269 Estimating Credit Program Subsidy Costs 

FHA addressed several key elements of the subsidy cost estimation 

process for the MMI Fund, evidenced by documentation of its cash flow 

model and assumptions. However, it lacked documented policies and 

procedures over the subsidy cost estimation process and documentation 

of other key elements of the process. FHA through the MMI Fund insures 

private lenders against losses from defaults on single-family forward 

mortgages that meet FHA criteria.17 As of September 30, 2015, FHA had 

approximately $1.1 trillion in forward mortgage loan guarantees 

outstanding.

To estimate the subsidy cost of the MMI Fund, the federal government’s 

largest loan guarantee program, FHA developed an econometric cash 

flow model that is sensitive to, among other things, house price 

appreciation and unemployment rates, which affect estimates associated 

with borrower repayments or default. The cash flow model has four 

modules that forecast (1) the size of future loan cohorts, (2) loan 

performance, (3) the impact of loss mitigation efforts, and (4) the severity 

of losses for loans that are expected to result in insurance claims.18 As its 

final output, the cash flow model produces the expected nominal future 

cash flows, including insurance premiums, refunds, claim payments, and 

recoveries using inputs from the four modules. Table 2 describes the 

design and documentation of the subsidy cost estimation process for 

FHA’s MMI Fund in relation to the key elements we identified.

 17For this report, we are focusing on the process used to estimate the subsidy cost of the 

MMI-insured single-family forward mortgages. With forward mortgages, the borrower’s 

monthly loan payments to the lender add to the borrower’s home equity and decrease the 

loan balance. FHA also insures reverse mortgages that permit persons 62 years and older 

to convert their home equity into cash advances.

18When home buyers fall behind on their mortgage obligations, FHA instructs mortgage 

servicers (typically large financial institutions) to assist the home buyers in bringing their 

mortgage payments current because foreclosure proceedings can impose high costs on 

financial institutions and homeowners. These efforts are referred to as loss mitigation. 

FHA Addressed Several 

Key Elements in Preparing 

Subsidy Cost Estimates 

for the MMI Fund; 

However, Documentation 

Was Incomplete

Department of Housing and Urban 

Development (HUD), Federal Housing 

Administration (FHA), Mutual Mortgage 

Insurance (MMI) Fund

FHA has played a particularly large role 

among minority, lower-income, and first-time 

homebuyers and promotes stability in the 

market by providing mortgage insurance in 

areas that may be underserved by the private 

sector or are experiencing economic 

downturns. Homebuyers may obtain FHAinsured mortgages from FHA-approved 

lenders to purchase new or existing properties 

with one to four housing units (including 

condominium units) with low down payments 

or to refinance existing debt on such 

properties. HUD insures loans made by 

private financial institutions. By insuring 

lenders against loss, FHA encourages them to 

invest capital in the home mortgage market. In 

addition to these typical loans, FHA also

insures single-family reverse mortgages. 

Reverse mortgages permit persons 62 years 

and older the ability to convert some of the 

equity in their primary residences into monthly 

streams of income or lines of credit. 

Source: HUD. | GAO-16-269
Page 18 GAO-16-269 Estimating Credit Program Subsidy Costs 

Table 2: Assessment of FHA’s MMI Fund Subsidy Cost Estimation Process against Key Elements

Key element Designed procedures

Historical data validation

The Federal Housing Administration’s (FHA) documentation explains that the Mutual Mortgage 

Insurance (MMI) Fund subsidy cost estimation process includes the use of historical loan-level data, 

dating back to 1975, from FHA for approximately 29 million loans. The historical data from FHA include 

underwriting information, origination dates, losses, and the current status of insured loans. Historical 

economic data include information on house price appreciation, unemployment rates, and interest 

rates. FHA also uses historical data related to overall mortgage market volume as reported by the 

Mortgage Bankers Association. 

Informed opinion 

documentation

FHA’s subsidy cost estimation process relies partly on the expert knowledge of a contractor for model 

development and changes. This contractor also developed the MMI Fund’s cash flow model 

documentation. FHA’s cash flow model documentation describes several economic assumptions used 

in the MMI Fund subsidy cost estimation process that are provided by outside parties. For example, 

FHA uses home price appreciation information provided by the Federal Housing Finance Agency and 

regional home price information from a vendor. 

Cash flow assumption 

documentation

Documentation of FHA’s cash flow assumptions includes information on data sources and calculation 

methods. Assumptions are calculated based on loan-level data for borrower characteristics (such as 

credit score), underwriting characteristics (such as loan purpose, first-time home buyer status, and 

loan-to-value ratio), and performance characteristics (such as delinquency and termination status). 

Forecasts of economic assumptions used in the cash flow model include house price indexes, interest 

rates, and fixed-rate mortgage commitment rates, which are obtained from the President’s economic 

assumptions.

Cash flow model 

documentation

FHA’s cash flow model documentation includes detailed descriptions of the model’s four modules 

related to (1) volume demand, (2) loan performance, (3) loss mitigation, and (4) loss severity, as well 

as the process to compile the final output of overall expected cash flows. For each module, the 

documentation includes procedures for executing, mathematical calculations, and assumptions or data 

used. The documentation also includes numerous comparisons, validations, and calculations to 

illustrate the validity of the cash flow model’s estimates. 

Program design 

comparison

FHA’s cash flow model documentation includes references to a number of program rules that affect 

projected cash flows, such as premium rates; however, management was unable to provide 

documentation of its method to help ensure that subsidy cost estimates of the MMI Fund are developed 

consistent with the terms and conditions of the program. 

Analysis of estimated cash 

flows

FHA’s cash flow model documentation includes multiple comparisons of estimated to actual to cash 

flows. These comparisons are provided to support the analysis of various assumptions, including 

refinance market share, non-claim terminations, 90-day delinquencies, and persistently delinquent 

loans.

Sensitivity analysis

FHA officials were unable to provide documentation of sensitivity analysis to identify the key cash flow 

assumptions that significantly affect the estimated cost of insuring loans under the MMI Fund.

Policies and procedures 

for estimating subsidy 

costs

FHA officials were unable to provide documentation of overall policies and procedures or internal 

controls over the subsidy cost estimation process. 

Source: GAO analysis of FHA documentation. | GAO-16-269
Page 19 GAO-16-269 Estimating Credit Program Subsidy Costs 

We reviewed the supporting documentation that FHA provided related to 

its subsidy cost estimates for the MMI Fund and found that while FHA 

addressed several key elements of the subsidy cost estimation process, it 

lacked documentation for three key elements that would help ensure 

proper implementation of its processes. Specifically, as noted in table 2, 

we found that FHA did not have comprehensive, documented, and 

approved policies and procedures over the subsidy cost estimation 

process. We also found that FHA did not (1) fully document procedures to 

help ensure that its subsidy cost estimates are consistent with the terms 

and conditions of the MMI Fund or (2) document procedures to require a 

sensitivity analysis that identifies key cash flow assumptions. FHA 

explained that in February 2016, it awarded a new contract that includes 

preparing estimates of subsidy costs and also requires documentation of 

policies and procedures over the subsidy cost estimation process for 

FHA. In addition, FHA officials indicated that they are in the process of 

developing a solicitation to have a contractor perform an independent 

verification and validation of its cash flow model to help ensure that the 

model’s calculations are accurate and consistent with the model 

documentation. Completing this documentation of the key elements of the 

subsidy cost estimation process will help management oversee the 

program as required by internal control standards and help FHA support 

its subsidy cost estimates.
Page 20 GAO-16-269 Estimating Credit Program Subsidy Costs 

While Education addressed some of the key elements of the subsidy cost 

estimation process for the Direct Student Loan Program, it did not provide 

adequate documentation of (1) the process to validate historical data 

used in subsidy cost estimates, (2) cash flow assumptions and the cash 

flow model used to estimate subsidy costs, (3) its process to analyze 

estimated cash flows for reasonableness, and (4) the process to perform 

sensitivity analysis. Further, Education was unable to provide 

documentation of (1) overall policies and procedures for estimating 

subsidy costs, (2) the method used to document informed opinion used in 

the subsidy cost estimation process, and (3) the process to help ensure 

that estimated cash flows are consistent with the design of the program. 

Education, through its Direct Student Loan Program, provides qualified 

students and their parents with loans to obtain postsecondary education. 

As of September 30, 2015, Education’s Direct Student Loan Program had 

approximately $845.1 billion in outstanding loans.

To estimate the subsidy costs of the Direct Student Loan Program, the 

federal government’s largest direct loan program, Education estimates 

cash flows based on a variety of loan characteristics. For example, the 

cash flow model estimates cash flows based on the loan type (i.e., 

subsidized or unsubsidized), the repayment plan (i.e., standard, 

extended, graduated, and income-driven repayments),19 and the type of 

school the student attends (i.e., trade school, community college, or 4-

year university). Each of these factors influences loan performance and 

complicates the subsidy cost estimation process for the program. Table 3 

describes how the subsidy cost estimation process for Education’s Direct 

Student Loan Program compares to the key elements we identified.

 19Income-driven repayment plans are designed to make student loan debt more 

manageable for the borrower by reducing the monthly payment amount.

Education Addressed 

Some Key Elements in 

Preparing Subsidy Cost 

Estimates for Its Direct 

Student Loan Program; 

However, Documentation 

Was Incomplete 

Department of Education (Education), 

William D. Ford Federal Direct Loan 

Program (Direct Student Loan Program)

Education’s Direct Student Loan Program

provides students and their parents loans to 

obtain postsecondary education. Loan 

origination is done through postsecondary 

institutions, but loan servicing is handled by 

Education through private sector contractors.

The Direct Student Loan program features 

four types of loans: (1) Stafford Loans, which 

are subsidized, low-interest loans based on 

financial need and are only available to 

undergraduate students; (2) Unsubsidized 

Stafford Loans, which have a fixed interest 

rate for undergraduate borrowers and a 

different fixed interest rate for graduate and 

professional borrowers; (3) Parent Loans for 

Undergraduate Students Loans, which are 

available to parents of dependent 

undergraduate students and to graduate and 

professional students; and (4) Consolidation 

Loans, which allow borrowers with multiple 

student loans who meet certain criteria to 

combine their loans and extend their 

repayment schedules. Under the Direct 

Student Loan Program, interest rates are 

determined based on statute, there are 

several repayment plans available to 

borrowers, and loan terms may extend up to 

30 years. 

Source: Education. | GAO-16-269
Page 21 GAO-16-269 Estimating Credit Program Subsidy Costs 

Table 3: Assessment of Education’s Direct Student Loan Program Subsidy Cost Estimation Process against Key Elements

Key element Designed procedures

Historical data validation

The Department of Education (Education) provided a flowchart indicating the sources of data used in 

the subsidy cost estimation process, including data from the National Student Loan Data System 

(NSLDS), which is the national database of information about loans and grants awarded to students. 

NSLDS includes data for student loans’ complete life cycle, from aid approval through disbursement, 

repayment, deferment, delinquency, and closure. The subsidy cost estimates for the William D. Ford 

Federal Direct Loan Program (Direct Student Loan Program) are based on a statistical sample of 

loan performance from the NSLDS database. Education officials stated that they have a process to 

validate actual data used in the subsidy cost estimation process; however, documentation that 

described the validation process was not provided for our review. 

Informed opinion 

documentation

Education officials explained that occasionally the institutional knowledge of its employees is used 

when making changes to its cash flow model and assumptions. Education officials explained that 

when changes are made to the cash flow model or assumptions, they are assessed based on 

whether the outcomes seemed reasonable based on expected outcomes. However, Education was 

unable to provide documentation of the rationale for its conclusions based on these assessments, 

which when prepared could be provided to management for review and approval. 

Cash flow assumption 

documentation

Education provided a list of 19 assumptions used in its cash flow model, such as interest rates, loan 

maturity, repayment terms, and default rates. According to Education officials, these assumptions are 

not all updated annually. The extent of the assumption documentation differed between the various 

assumptions. For example, the default rate documentation included a description of how the 

assumption was calculated, the data sources, and how the assumption affected the results, whereas 

the collection rate documentation lacked information on how the assumption affected the results but 

included the specific formulas used to calculate actual collection rates. Overall, the assumption 

documentation lacked the detailed methodology or formulas used to calculate assumptions.

Cash flow model 

documentation 

Education officials provided documentation that explained how to run the cash flow model. Education 

also provided a document that listed data element calculations used within the model. However, 

Education’s model documentation was incomplete. For example, the document stated that simple 

formulas should be self-explanatory; however, a thorough document would include all formulas and 

not assume that users will interpret the variable correctly without the formulas. In addition, the 

documentation was missing key inputs to the subsidy cost estimation process, such as income-driven 

repayment calculations. It appeared to be in draft form because it included edits and the section of 

the document that summarized model revisions was updated only through 2009. One method that 

agency management can use to review a complicated cash flow model is an independent verification 

and validation. However, without complete and updated model documentation, such a review would 

be difficult. 

Program design comparison

Education officials stated that they regularly followed and analyzed legislation that could potentially 

affect the department’s calculations of subsidy costs and the cash flow model; however, 

documentation of that analysis or the process used to analyze legislation and incorporate changes 

into the estimation process was not provided. While not a documented process, Education officials 

indicated that if estimated cash flows are not tracking with actual loan performance data, the group 

that develops the subsidy cost estimates will consult with the program office to determine if 

something in the estimation process should be updated.

Analysis of estimated cash 

flows

Education officials provided an example of a comparison of estimates to actual cash flows, which was 

performed on an overall fiscal year level for the program and included a narrative assessment of the 

comparison. However, Education did not provide procedures for how this comparison was conducted, 

how trends could be identified, or how it was reviewed and approved. 
Page 22 GAO-16-269 Estimating Credit Program Subsidy Costs 

Sensitivity analysis

Education officials stated that they have a process in place to prepare a sensitivity analysis of certain 

assumptions based on requests from their financial statement auditor. Officials provided a sensitivity 

analysis for three assumptions that were tested (interest rates, default rates, and collection rates). 

However the documentation provided did not include the rationale for only testing these three 

assumptions, procedures used to perform a sensitivity analysis, the frequency of the analysis, or the 

preparer or approver of the analysis.

Policies and procedures for 

estimating subsidy costs

Education officials provided a high-level flowchart that described the process used to estimate 

subsidy costs, as well as a document that is used to support management approval of cash flow 

model assumption updates, but confirmed that they did not have documented policies and 

procedures for the department’s process. 

Source: GAO analysis of Education documentation. | GAO-16-269

We reviewed supporting documentation and interviewed Education 

officials responsible for preparing and reviewing subsidy cost estimates 

and found that while Education addressed some of the key elements in its 

subsidy cost estimation process, it lacked adequate documentation of 

these key elements that would help to ensure proper implementation. 

Further, as noted in table 3, we found that Education did not have 

documented and approved policies and procedures for its Direct Student 

Loan Program subsidy cost estimation process. Officials stated that while 

it might be helpful to document the roles and responsibilities of those 

involved in the subsidy cost estimation process, they believed that the 

process was too complicated to be documented in policies and 

procedures. Without documented policies and procedures for the overall 

subsidy cost estimation process, the other key elements of the process 

might not be performed consistently or at all or may not be adequately 

documented, as evidenced by Education being unable to provide 

adequate documentation for several of the other key elements of the 

process that we requested.

In addition, by not having thoroughly documented procedures for the 

subsidy cost estimation process, Education is at increased risk of 

potential errors in its cash flow calculations. For example, during our 

review Education officials stated that they were aware of challenges in the 

Direct Student Loan Program’s calculated subsidy cost estimates and 

therefore had to manually adjust the estimated cash flows before 

submitting reestimates for the 2016 President’s Budget. Officials also 

stated that in part because of these challenges, Education has entered 

into an interagency agreement with the Department of the Treasury to 

improve the Direct Student Loan Program’s cash flow model with a more 

comprehensive loan-level model. Education officials stated that the 

subsidy cost estimation process involves a balance between limited staff 

resources and the effective use of those resources when determining the 
Page 23 GAO-16-269 Estimating Credit Program Subsidy Costs 

extent of supporting documentation to be prepared. However, without a 

full set of management-approved procedures for the estimation 

processes, the institutional knowledge that Education relies on to 

estimate the subsidy cost for the Direct Student Loan Program could be 

at risk of loss. Completing this documentation of the key elements of the 

subsidy cost estimation process will help management oversee the 

program as required by internal control standards and help Education 

support its subsidy cost estimates.

While CCC adequately documented the key elements of the subsidy cost 

estimation process for the GSM-102 program, FHA and Education lacked 

overall policies and procedures over the subsidy cost estimation process 

that address management reviews and approvals and did not maintain 

adequate supporting documentation for certain other key elements of the 

subsidy cost estimation process for the MMI Fund and Direct Student 

Loan Program, respectively. Without policies and procedures and 

thorough documentation of the other key elements of the subsidy cost 

estimation process, FHA and Education have increased the risk that their 

institutional knowledge may be lost; that subsidy cost estimates might not 

be consistently prepared or documented; and that the resulting estimates 

may not be supported, reliable, and reasonable. Further, if certain key 

elements are not being performed, FHA and Education could miss 

opportunities to validate or improve their subsidy cost estimates, which in 

turn could provide less reliable information to external parties, such as 

Congress or auditors.

To help ensure that subsidy cost estimates for the MMI Fund are 

supported, reliable, and reasonable, we recommend that the Secretary of 

Housing and Urban Development direct the Principal Deputy Assistant 

Secretary for the Office of Housing to take the following action:

• Develop detailed policies and procedures over the subsidy cost 

estimation process that address, at a minimum, the documentation 

that should be prepared and maintained to support subsidy cost 

estimates and the process to document management review and 

approval of subsidy costs estimates.

To help ensure that subsidy cost estimates for the Direct Student Loan 

Program are supported, reliable, and reasonable, we recommend that the 

Secretary of Education direct the Assistant Secretary for the Office of 

Conclusions

Recommendations for 

Executive Action
Page 24 GAO-16-269 Estimating Credit Program Subsidy Costs 

Planning, Evaluation and Policy Development to take the following three 

actions:

• Develop detailed policies and procedures over the subsidy cost 

estimation process that address, at a minimum, the documentation 

that should be prepared and maintained to support subsidy cost 

estimates and the process to document management review and 

approval of subsidy cost estimates.

• Develop detailed documentation of the cash flow model used to 

estimate subsidy costs, including the rationale for model calculations, 

all formulas and assumptions used in the model, data sources, the 

process to update and document changes to the model, and the 

process to document management review and approval of the model, 

which may be based on an independent verification and validation of 

the model to ensure that calculations are accurate and consistent with 

the model documentation.

• Document the procedures and results of such procedures used to 

develop or support key elements of the subsidy cost estimation 

process, addressing at a minimum (1) the reliability of historical data, 

(2) the rationale for informed opinion when applicable, (3) the 

methods used to calculate cash flow assumptions, (4) the process to 

ensure that subsidy cost estimates are consistent with the terms and 

conditions of the program, (5) the process to assess estimated cash 

flows for reasonableness, and (6) the process used to perform 

sensitivity analysis.

We provided a draft of this report to USDA, HUD, and Education for their 

review and comment. Our report did not include recommendations to 

USDA, and USDA did not have any comments. In written comments from 

HUD and Education, which are summarized below and reprinted in 

appendixes II and III, respectively, both agencies concurred with our 

recommendations and provided information on their actions planned or 

under way to address them. HUD also provided technical comments 

which we incorporated as appropriate.

In response to our recommendation to HUD that it develop detailed 

policies and procedures over the subsidy cost estimation process, HUD 

said that a new contract was issued that will address documentation of 

the MMI cash flow model and the subsidy cost estimation process. HUD 

also said that it was in the process of developing a solicitation for a 

contractor to perform an independent verification and validation of the 

MMI cash flow model. HUD stated that completing this documentation of 

Agency Comments

and Our Evaluation
Page 25 GAO-16-269 Estimating Credit Program Subsidy Costs 

the subsidy cost estimation process will help management oversee the 

program as required by internal control standards and help support its 

subsidy cost estimates.

In response to our recommendations to Education, the department said 

that it is committed to ensuring that its subsidy cost estimates are 

adequately documented. Regarding our first recommendation that 

Education develop detailed policies and procedures over the subsidy cost 

estimation process, Education said that it has begun drafting more 

detailed policies and procedures and hopes to complete this 

documentation in a matter of months. Regarding our second 

recommendation that Education develop detailed documentation of its 

cash flow model used to estimate subsidy costs, Education said that it will 

update its model documentation and has invested staff and resources into 

developing a new cash flow model to estimate subsidy costs. Education 

also said that detailed documentation of this new cash flow model will be 

prepared before the model becomes operational. Regarding our third 

recommendation that Education document the procedures and results of 

such procedures used to develop or support key elements of the subsidy 

cost estimation process, Education said that the detailed policies and 

procedures developed in response to our first recommendation will 

address these key elements.

These HUD and Education actions, if implemented effectively, would 

address our recommendations.

We are sending copies of this report to the Secretary of Agriculture, the 

Secretary of Housing and Urban Development, the Secretary of 

Education, and other interested parties. In addition, the report is available 

at no charge on the GAO website at http://www.gao.gov.
Page 26 GAO-16-269 Estimating Credit Program Subsidy Costs 

If you or your staff have any questions about this report, please contact 

me at (202) 512-9377 or clarkce@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. GAO staff members who made key contributions to 

this report are listed in appendix IV.

Sincerely yours,

Cheryl E. Clark

Director, Financial Management and Assurance
Appendix I: Objectives, Scope, and 

Methodology

Page 27 GAO-16-269 Estimating Credit Program Subsidy Costs 

To identify a list of key elements federal agencies should consider when 

developing subsidy cost estimates, we reviewed existing guidance and 

best practices related to budgeting and accounting for subsidy cost 

estimates. This guidance included the Office of Management and 

Budget’s (OMB) Circular No. A-11, Preparation, Submission, and 

Execution of the Budget; OMB Circular No. A-129, Policies for Federal 

Credit Programs and Non-Tax Receivables; the Federal Accounting 

Standards Advisory Board’s (FASAB) Statement of Federal Financial 

Accounting Standards No. 2, Accounting for Direct Loans and Loan 

Guarantees; the Credit Reform Task Force’s issue paper Model Credit 

Program Methods and Documentation for Estimating Subsidy Rates and 

the Model Information Store;

1 FASAB’s Accounting and Auditing Policy 

Committee’s Technical Release 6 Preparing Estimates for Direct Loan 

and Loan Guarantee Subsidies under the Federal Credit Reform Act; and 

our Cost Estimating and Assessment Guide: Best Practices for 

Developing and Managing Capital Program Costs.

2 Based on our review 

of the guidance and best practices, we developed a list of key elements 

that agencies should consider when preparing subsidy cost estimates.

To assess the extent to which certain federal agencies addressed the key 

elements when estimating the subsidy cost of federal credit programs, we 

selected three federal credit programs: (1) the Department of Agriculture’s 

Commodity Credit Corporation (CCC) Export Credit Guarantee (GSM102) Program, (2) the Department of Housing and Urban Development’s 

Federal Housing Administration’s (FHA) Mutual Mortgage Insurance 

(MMI) Fund, and (3) the Department of Education’s (Education) William 

D. Ford Federal Direct Loan Program (Direct Student Loan Program). We 

selected the Direct Student Loan Program and the MMI Fund because 

these programs represented the largest federal direct loan and loan 

guarantee programs, respectively. These two programs can be 

characterized as a high volume of loans with relatively lower average loan 

amounts compared to other federal credit programs. To include a different 

type of credit program in our evaluation, we also selected the GSM-102 

 1

The issue paper published by the Credit Reform Task Force under FASAB’s Accounting 

and Auditing Policy Committee, provides guidance on the type of historical information 

agencies need to reasonably estimate the cost of credit programs.

2

GAO, Cost Estimating and Assessment Guide: Best Practices for Developing and 

Managing Capital Program Costs, GAO-09-3SP (Washington, D.C.: March 2009).

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 28 GAO-16-269 Estimating Credit Program Subsidy Costs 

program, which can be characterized as a low volume of loans and 

significantly larger average loan amounts.

We met with CCC, FHA, and Education officials responsible for preparing 

and approving subsidy cost estimates to discuss the subsidy cost 

estimation process for the programs we selected. We requested and 

reviewed supporting documentation related to the key elements of the 

subsidy cost estimation process. We also reviewed the fiscal year 2015 

annual financial statements and related budget information for CCC, FHA, 

and Education to obtain background information related to the programs 

included in our review. We did not evaluate the reasonableness of 

subsidy cost estimates, reestimates, or the data and assumptions used to 

calculate them.

We conducted this performance audit from June 2014 to July 2016 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
Appendix II: Comments from the Department 

of Housing and Urban Development

Page 29 GAO-16-269 Estimating Credit Program Subsidy Costs 

Appendix II: Comments from the Department 

of Housing and Urban Development
Appendix II: Comments from the Department 

of Housing and Urban Development

Page 30 GAO-16-269 Estimating Credit Program Subsidy Costs 
Appendix III: Comments from the Department 

of Education

Page 31 GAO-16-269 Estimating Credit Program Subsidy Costs 

Appendix III: Comments from the 

Department of Education
Appendix III: Comments from the Department 

of Education

Page 32 GAO-16-269 Estimating Credit Program Subsidy Costs 
Appendix IV: GAO Contact and Staff 

Acknowledgments

Page 33 GAO-16-269 Estimating Credit Program Subsidy Costs 

Cheryl E. Clark, (202) 512-9377 or clarkce@gao.gov

In addition to the contact named above, Marcia Carlsen (Assistant 

Director), Steven Westley (Assistant Director), Natasha Guerra, Cole 

Haase, Karen Jarzynka-Hernandez, Jason Kelly, Jason Kirwan, Rebecca 

Perkins, and Monasha Thompson made key contributions to this report.

Appendix IV: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments
Related GAO Products

Page 34 GAO-16-269 Estimating Credit Program Subsidy Costs 

Credit Reform: Current Method to Estimate Credit Subsidy Costs Is More 

Appropriate for Budget Estimates Than a Fair Value Approach. 

GAO-16-41. Washington, D.C.: January 29, 2016.

Rural Housing Service: Progress on GAO Recommendations and 

Preliminary Observations on Loan Guarantee Risk Management.

GAO-15-625T. Washington, D.C.: May 19, 2015.

Mortgage Financing: FHA’s $7 Billion Reestimate Reflects Higher Claims

and Changing Loan and Performance Estimates. GAO-05-875. 

Washington, D.C.: September 2, 2005.

Mortgage Financing: Actions Needed to Help FHA Manage Risks from 

New Mortgage Loan Products. GAO-05-194. Washington, D.C.: February 

11, 2005.

Export-Import Bank: OMB’s Method for Estimating Bank’s Loss Rates 

Involves Challenges and Lacks Transparency. GAO-04-531. Washington, 

D.C.: September 30, 2004.

Department of Education’s Federal Direct Loan Program: Status of 

Recommendations to Improve Cost Estimates and Presentation of 

Updated Cash Flow Information. GAO-04-567R. Washington, D.C.: 

March 29, 2004.

Department of Education: Key Aspects of the Federal Direct Loan 

Program’s Cost Estimates. GAO-01-197. Washington, D.C.: January 12, 

2001.

Credit Reform: Key Credit Agencies Had Difficulty Making Reasonable 

Loan Program Cost Estimates. GAO/AIMD-99-31. Washington, D.C.: 

January 29, 1999.

Credit Reform: Greater Effort Needed to Overcome Persistent Cost 

Estimation Problems. GAO/AIMD-98-14. Washington, D.C.: March 30, 

1998.

Related GAO Products

(100225)
The Government Accountability Office, the audit, evaluation, and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and 

policies; and provides analyses, recommendations, and other assistance 

to help Congress make informed oversight, policy, and funding decisions. 

GAO’s commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no 

cost is through GAO’s website (http://www.gao.gov). Each weekday 

afternoon, GAO posts on its website newly released reports, testimony, 

and correspondence. To have GAO e-mail you a list of newly posted 

products, go to http://www.gao.gov and select “E-mail Updates.”

The price of each GAO publication reflects GAO’s actual cost of 

production and distribution and depends on the number of pages in the 

publication and whether the publication is printed in color or black and 

white. Pricing and ordering information is posted on GAO’s website, 

http://www.gao.gov/ordering.htm. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 

TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 

MasterCard, Visa, check, or money order. Call for additional information.

Connect with GAO on Facebook, Flickr, Twitter, and YouTube. 

Subscribe to our RSS Feeds or E-mail Updates. 

Listen to our Podcasts and read The Watchblog. 

Visit GAO on the web at www.gao.gov. 

Contact:

Website: http://www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-

4400, U.S. Government Accountability Office, 441 G Street NW, Room 

7125, Washington, DC 20548

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548

GAO’s Mission

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Phone

Connect with GAO

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Congressional 

Relations

Public Affairs

Please Print on Recycled Paper.