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Chapter 5 Management of Guaranteed Lenders and Servicers

Managing Risks in Guaranteed Loan Programs

An agency that extends credit through a guaranteed loan program

must take appropriate steps to minimize the risk of loss to the

Federal Government. This goal can be efficiently achieved by

monitoring the approved lenders and servicers, rather than

monitoring the credit extension and servicing actions taken on

each guaranteed loan. Accordingly, an agency should focus its

efforts on assuring that only qualified lenders and servicers take

actions on federally guaranteed loans, and that these qualified

lenders and servicers continue to adhere to agency rules and

standards concerning credit extension and loan servicing. The key

components of a successfully managed guaranteed loan program

are:

C lender eligibility, including lender participation criteria,

continuing review of a lender's eligibility to participate in

the agency's guaranteed loan programs, decertification of a

lender that fails to meet an agency's standards, and use of

loan servicers;

C lender agreements, including terms of lender participation

agreements, performance standards, reporting

requirements, and terms applicable to loan servicers;

C lender and servicer reviews, including requirements for

on-site reviews by the agency on a regular basis (annually

or biennially, depending on volume and performance); and

C corrective actions, including actions to be taken when a

lender or servicer is not in compliance with program

requirements.

Agencies responsible for the management of guaranteed lending

programs must comply with the applicable provisions of the Office

of Management and Budget (OMB) Circular No. A-129, “Policies

for Federal Credit Programs and Non-Tax Receivables.” These

provisions are set out in detail below. The OMB Circular No. A129 is available in its entirety on line at www.whitehouse.gov/omb

or www.fms.treas.gov. 
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Lender Eligibility

Participation Criteria. Federal credit granting agencies shall

establish and publish in the Federal Register specific eligibility

criteria for lender participation in Federal guaranteed loan

programs. These criteria should include:

C requirements that the lender is not currently

debarred/suspended from participation in a Government

contract or delinquent on a Government debt;

C qualification requirements for principal officers and staff of

the lender;

C fidelity/surety bonding and/or errors and omissions

insurance with the Federal Government as loss payee,

where appropriate, for new or non-regulated lenders with

questionable performance under Federal guarantee

programs; and

C financial and capital requirements for lenders not regulated

by a Federal financial institution regulatory agency,

including minimum net worth requirements based on

business volume.

Review of Lender Eligibility. Agencies shall review and

document a lender’s eligibility for continued participation in a

guaranteed loan program at least every two years. Ideally, these

reviews should be conducted in conjunction with on-site reviews

of lender operations or other required reviews, such as renewal of a

lender agreement (“Lender Agreements,” see below). Lenders not

meeting standards for continued participation should be

decertified. In addition to the participation criteria above, agencies

should consider lender performance as a critical factor in

determining continued eligibility for participation.

Fees. When authorized and appropriate for such purposes,

agencies should assess non-refundable fees to defray the costs of

determining and reviewing lender eligibility.
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Decertification. Agencies should establish specific procedures to

decertify lenders or take other appropriate action any time there is:

C significant and/or continuing non-conformance with agency

standards; and/or 

C failure to meet financial and capital requirements or other

eligibility criteria.

Agency procedures should define the process and establish

timetables by which decertified lenders can apply for reinstatement

of eligibility for Federal guaranteed loan programs.

Loan Servicers. Lenders transferring and/or assigning the right to

service guaranteed loans to a loan servicer should use only

servicers meeting applicable standards set by the Federal credit

granting agency. Where appropriate, agencies may adopt

standards for loan servicers established by a Government

Sponsored Enterprise (GSE) or a similar organization (e.g.,

Government National Mortgage Association for single family

mortgages) and/or may authorize lenders to use servicers that have

been approved by a GSE or similar organization.

Lender Agreements

Agencies should enter into written agreements with lenders that

have been determined to be eligible for participation in a

guaranteed loan program. These agreements should incorporate

general participation requirements, performance standards and

other applicable requirements of OMB Circular No. A-129. 

Agencies are encouraged, where not prohibited by authorizing

legislation, to set a fixed duration for the agreement to ensure a

formal review of the lender eligibility for continued participation

in the program.
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General Participation Requirements

Lender participation requirements include:

C requirements for lender eligibility, including participation

criteria, eligibility reviews, fees, and decertification (see

Lender Eligibility, Participation Criteria, above);

C agency and lender responsibilities for sharing the risk of

loan defaults (see Chapter 2, Budget and Legislative Policy

for Credit Programs, Financial Standards) and, where

feasible;

C maximum delinquency, default and claims rates for lenders,

taking into account individual program characteristics.

Performance Standards

Agencies should include in their lender agreements due diligence

requirements for originating, servicing, and collecting loans. This

may be accomplished by referencing agency regulations or

guidelines. Examples of due diligence standards include collection

procedures for past due accounts, delinquent debtor counseling

procedures and litigation to enforce loan contracts. 

Agencies should ensure through the claims review process, that

lenders have met these standards prior to making a claim payment. 

Agencies should reduce claim amounts or reject claims for lender

non-performance.
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Reporting Requirements

Agencies should require certain data to monitor the health of their

guaranteed loan portfolios, track and evaluate lender performance

and satisfy OMB, the Department of the Treasury, and other

reporting requirements. Examples of the data which agencies must

maintain include:

C activity indicators. The number and amount of

outstanding guaranteed loans at the beginning and end of

the reporting period and the agency share of risk; number

and amount of guaranteed loans made during the reporting

period; and number and amount of the guaranteed loans

terminated during the period; and

C status indicators. A schedule showing the number and

amount of past due loans by age of the delinquency, and

the number and amount of loans in foreclosure or

liquidation (when the lender is responsible for such

activities).

Agencies may have several sources for such data, but some or all

of the information may best be obtained from lenders and

servicers. Lender agreements should require lenders to report

necessary information on a quarterly basis (or other reporting

period based on the level of lending and payment activity).

Loan Servicers

Lender agreements must specify that loan servicers meet

applicable participation requirements and performance standards. 

The agreement should also specify that servicers acquiring loans

must provide any information necessary for the lender to comply

with reporting requirements to the agency. Servicers may not

resell loans except to qualified servicers.
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Lender and Servicer Reviews

To evaluate and enforce lender and servicer performance, agencies

should conduct on-site reviews on a biennual basis, except as

noted below. Agencies should summarize review findings in

written reports with recommended corrective actions and submit

them to agency review boards. (See Chapter 1 - Introduction,

Responsibilities of Departments and Agencies.) 

Agencies should conduct annual on-site reviews of all lenders and

servicers with substantial loan volume or whose:

C financial performance measures indicate a deterioration in

their guaranteed loan portfolio;

C portfolio has a high level of defaults for guaranteed loans

less than one year old;

C overall default rates rise above acceptable levels; and/or

C poor performance results in monetary penalties imposed on

the lender or servicer or an abnormally high number of

reduced or rejected claims.

Agencies are encouraged to develop a lender/servicer classification

system which assigns a risk rating based on the above factors. 

This risk rating can be used to establish priorities for on-site

reviews and monitor the effectiveness of required corrective

actions.

Reviews should be conducted by guarantor agency program

compliance staff, Inspector General staff, and/or independent

auditors. Where possible, agencies with similar programs should

coordinate their reviews to minimize the burden on

lenders/servicers and maximize the use of scarce resources. 

Agencies should also utilize the monitoring efforts of GSEs and

similar organizations for guaranteed loans that have been

“pooled.”
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Corrective Actions

If a review indicates that the lender/servicer is not in conformance

with all program requirements, agencies should determine the

seriousness of the problem. For minor non-compliance, agencies

and the lender or servicer should agree on corrective actions. For

more serious and frequent offenses, agencies should establish

penalties. Penalties may include loss of guarantees, reprimands,

probation, suspension and decertification. 

For further guidance or information, agencies should contact the

Agency Enterprise Solutions Division at 202-874-6875.