3-1

Credit

Reports

Purchase 

RECEIVE 

APPLICATION

SCREEN 

PROSPECTIVE 

BORROWERS 

CAIVRS, DEBT 

CHECK 

CREDIT BUREAU 

REPOSITORIES 

APPLICATION 

REJECTED

LOAN AGREEMENT SIGNED 

ACCOUNT 

SERVICING 

SELL LOAN ON 

PRIVATE 

MARKET 

Report 

Consumer and 

Commercial 

Accounts 

Other 

Credit 

History 

Chapter 3 Credit Extension

Extending Credit

This Chapter details how Federal agencies and lenders

participating in guaranteed loan programs (guaranteed loan

lenders) should manage, process, evaluate, and document loan

applications and awards for loan assistance. See Chapter 5

“Management of Guaranteed Loan Lenders and Servicers” for

information on how Federal agencies should manage lenders and

servicers that participate in Federally insured guaranteed loan

programs. See also Office of Management and Budget (OMB)

Circular No. A-129, “Policies for Federal Credit Programs and

Non-Tax Receivables,” which may be found online at

www.whitehouse.gov/omb or www.fms.treas.gov. 

Credit Extension
Credit Extension

3-2

When extending credit through a Government loan program,

agencies and guaranteed loan lenders must ensure that applications

are processed and that credit is analyzed in accordance with all

statutory and regulatory requirements. Lenders and agencies need

to assess and document their loan applicants' eligibility for the

specific type of credit offered. Except where required by statute,

an agency will not extend credit to individuals or entities who

could obtain credit from private sector sources. Further, except in

limited circumstances, no agency or guaranteed loan lender may

extend credit to an individual or entity that is delinquent on a

Federal non-tax debt, until the delinquency is resolved and proof

of the resolution is presented by the debtor. Where permitted by

law, individuals who owe delinquent child support obligations are

likewise barred from obtaining Federal loan assistance. Federal

credit granting agency personnel should work with their agency

counsel to determine whether the eligibility requirements may be

extended to principals of entities in commercial transactions.

The Application

Federal credit granting agencies and private sector lenders in

guaranteed loan programs shall determine whether applicants

comply with statutory, regulatory, and administrative eligibility

requirements for loan assistance. Lenders and agencies should use

the application process as a first step in their effort to evaluate an

applicant’s request for credit and to determine eligibility for the

credit being sought by the applicant. The application form itself is

a critical piece of documentation for capturing key information

about the applicant(s), co-applicant(s) and guarantor(s), including:

C full name and any "also/known/as" (AKA);

C taxpayer identification numbers (TINs) (Social Security

Numbers [SSNs] for individuals or Employer Identification

Numbers [EINs] for all other entities). An agency must

require a loan applicant to provide the applicant’s TIN for

any program under which the agency makes, guarantees, or

insures loans. See 31 U.S.C. 7701(b). Applicants must be

asked to identify all prior TINs that were used in other

Federal Government applications;

C address(es) and telephone number(s);
Credit Extension

3-3

C any personal information, such as number in household,

required by the program in accordance with provisions of

the Privacy Act of 1974, as amended;

C name(s), address(es), and telephone number(s) of

applicant’s and co-applicant’s employer(s);

C all relevant financial information, such as income, assets,

payments, and liabilities; and

C collateral information, including collateral location,

estimated value and description.

The application form will also contain the following:

C a statement signed by each applicant attesting to the

accuracy of the information provided. The statement will

describe any penalties the Federal Government imposes on

those who knowingly provide false information on a

Federal credit or financial assistance application;

C a “Certification of Non-Delinquency” signed by each

applicant stating that he/she/it is not delinquent on a

Federal Government debt, including any tax debt, and does

not own any property that is subject to a judgment lien

securing a debt to the Government. If the applicant is

unable to make such certification, the applicant should be

asked to explain any delinquencies or defaults and

informed that the applicant must resolve the delinquency or

default, and present evidence of that fact to the agency,

before the application process can proceed. The agency

shall stop processing on the application until such

evidence is presented. 
Credit Extension

3-4

Pursuant to the Debt Collection Improvement Act of 1996

(DCIA), persons owing outstanding delinquent non-tax debt

to the United States may not obtain Federal loan assistance

until the delinquency is resolved. The DCIA eligibility

requirement does not apply to disaster loans, or if the

requirement is waived by the head of the lending agency. 

Otherwise, the DCIA eligibility requirement applies to all

Federal direct, guaranteed and insured loans regardless of

whether creditworthiness is an eligibility requirement. An

agency is not required to grant a loan merely because the

DCIA does not render an applicant ineligible (for example,

in the case of a delinquent tax debt or if the delinquent debt

has been resolved but evidences bad credit history);

C to the extent allowed by law, a statement that each applicant

does not owe delinquent child support obligations. As

permitted by law, lenders and agencies shall deny Federal

loan assistance to individuals who owe delinquent child

support obligations that have been submitted to the

Department of the Treasury (Treasury) for collection

through the offset of Federal tax refund and other payments. 

See Executive Order 13109, “Supporting Families:

Collecting Delinquent Child Support Obligations.” An

agency that is authorized to deny a loan pursuant to

Executive Order 13109 must provide the loan applicant with

a review process described in “Minimum Due Process

Guidelines: Denial of Federal Financial Assistance” issued

by the Attorney General. The Executive Order and due

process guidelines may be found on the web site of

Treasury’s Financial Management Service (FMS) at

www.fms.treas.gov; 

C a statement requiring the applicant(s) to affirm that he/she

has been unable to obtain credit from private sector sources

(where it is consistent with statutory, regulatory and

administrative eligibility requirements); and

C a “Debt Collection Certification Statement” signed by the

applicant, detailing the consequences of delinquency (for

example, credit bureau reporting, tax refund offset, etc.) and

certifying that the Federal Government's debt collection

policies have been discussed with the applicant at the time

of application.
Credit Extension

3-5

All applicants and co-applicants must be required to sign and

date the completed application form.

The Application

Application and Origination Fees

The agency should assess a non-refundable application fee that, at

a minimum, covers the costs of obtaining credit reports, appraisals,

and supplemental data, where applicable. The application fee

should be collected at the time the applicant(s) completes and

submits the application form. The amount of the application fee

should be reviewed on a regular basis and adjusted accordingly.

Names, addresses,

phone numbers

Employer

name, address,

phone numbers

Signed 

statement

certifying

accuracy of

information

Taxpayer Identification

Numbers

LOAN

APPLICATION

Signed debt

collection

certification

Applicant

financial

information

Collateral 

information

Signed non-delinquency

certification

Signed certification 

of non- delinquency of

child support payments
Credit Extension

3-6

In addition, the agency should charge an origination or funding fee

which covers the costs of making the loan, including an amount

sufficient to cover as much of the estimated losses as possible,

based on past performance of the portfolio. The agency should

reassess and adjust, as necessary, the amount of the origination or

funding fee at least annually, where permitted by statute.

The agency must inform the applicant at the time of application of

any application, origination or funding fees. The agency must

collect the origination or funding fee at the time of application,

upon loan approval, or at the time the loan funds are disbursed as

agency regulations require.

Verifying Information Provided by the Applicant

After receiving the completed application form and making an

initial determination based on the application alone that the

applicant is eligible for the credit being sought, the agency and/or

its lender, as appropriate, should verify the information provided

by the applicant by:

C matching the applicant's name and social security number

against the Internal Revenue Services’s delinquent tax files

to determine if the applicant has a Federal tax liability. 

Applicants with such liablity are ineligible until the liability

is satisfied;

C using, as appropriate, the Department of Housing and Urban

Development’s Credit Alert Interactive Voice Response

System (CAIVRS), the Debt Check program operated by

FMS, and other databases including internal agency

information systems, to determine if the applicant is

delinquent or has defaulted on a Federal Government loan

or has an outstanding Federal judgment;

C obtaining and using credit reports available through the

General Services Administration's (GSA) Federal Supply

Schedule for Business Information Services. The credit

report will also be used to conduct the credit analysis and

determine the applicant’s creditworthiness (see “Conducting

the Credit Analysis” in this chapter); and
Credit Extension

3-7

C requesting verification of the applicant's employment and

income, credit history, and bank deposits from the

appropriate sources. Requests for verification of this

information should carry an expiration date. Information

should be reverified if more than 90 days old at the time of

loan approval, 120 days old at closing, or at any time prior

to closing if there is reason to believe that changes have

occurred since the original verification. These time limits

may be extended 30 days based upon market conditions in

effect at the time of application. All information received

during the origination and underwriting process becomes

part of the permanent loan file.

Credit Scoring

Credit scoring is a specific standardized, statistical method of

rating applicants by assigning points to certain attributes and

criteria of the applicant. For example: low consumer debt and no

delinquencies -- 5 points; high consumer debt with 3 delinquencies

-- 2 points; or, as a second example, occupancy in the same

residence for 5 years -- 10 points; occupancy in the same residence

for 2 years -- 3 points. In this example, a higher score would

indicate greater financial stability and responsibility and,

presumably, represent a lower credit risk.

Criteria used in a credit scoring system must be relevant to an

applicant's ability to repay and must be uniformly applied to all

applicants to ensure agency/lender impartiality in its credit

analysis. In developing a credit scoring system, an agency must be

able to demonstrate that there is a positive statistical relationship

between specific criteria, such as length of time at the same

residence, and its applicants' creditworthiness. Where

creditworthiness is a criterion for loan approval, agencies and

private sector lenders shall determine if applicants have the ability

to repay the loan and a satisfactory history of repaying debt. 

Credit scoring may be used to determine whether an applicant

meets baseline creditworthiness requirements prior to conducting a

full credit analysis. Credit scoring should not be used as a

substitute for conducting such analysis, nor as the only means for

determining creditworthiness.
Credit Extension

3-8

Using Credit Reports

Agencies and guaranteed loan lenders shall use reports originating

from credit bureau repositories as a screening tool. Credit reports

and supplementary data sources, such as financial statements and

tax returns, should be used to verify or determine employment,

income, assets and credit history. In addition to using a credit

report to verify information supplied by the applicant and where

creditworthiness is a criterion for loan approval, the agency shall

also use it to answer two key questions: (1) does the applicant have

the ability to repay the loan or credit award in question; and 

(2) does the applicant have a satisfactory history of repaying debt?

Guaranteed loan lenders and agencies need to determine what

type(s) of credit report(s) will best help them answer these

questions and order the appropriate report. Through the GSA’s

Federal Supply Schedule for Business Information Services,

Federal agencies have access to a number of different types of

reports, with different types of information. 

Depending upon the type obtained, the credit report will reveal:

C the type of credit history that has been established, including

whether the applicant has met the terms of established credit

accounts;

C whether there have been any recent inquiries about the

applicant's credit status; and

C whether there are any outstanding liens against the

applicant's property.

The credit report will contain information on amounts owed to, and

the status of accounts held by, private sector companies, as well as

Government agencies, and public record information, such as

judgments, liens and bankruptcies. The agency needs to evaluate

all of the information in the credit report in terms of the following

questions:

C How long has credit been established? A six month credit

history may be acceptable if the applicant just graduated

from college, but may be a cause of concern if the applicant

has indicated that he/she has a well-established credit history.
Credit Extension

3-9

C Are the credit accounts being paid as agreed? The

answer to this question will indicate whether the applicant is

able to handle the debts he/she incurs, identify potential

problem accounts, and identify outstanding delinquent

amounts owed to the United States or delinquent child

support obligations that need to be resolved before

additional Federal loan assistance may be approved.

C Who is responsible for a given account? Applicant? 

Co-applicant? Information on the credit report will tell the

agency who is liable for paying a given account. The

agency should follow-up with the applicant on any accounts

which show up on the credit report, but which the applicant

did not reveal.

C At the time of application, is there any bad credit? Has

there been in the past? And, if so, what were the

circumstances -- medical problems, death, divorce,

unemployment? If past due accounts have been brought

current, the applicant may be trying to reestablish a good

credit rating. Repeated one or two month delinquencies

may indicate a cash flow problem -- or someone who knows

how to "play the system" so that the delinquencies never

look so serious as to affect the applicant's ability to obtain

new credit.

Agency personnel should exercise judgment when reading an

applicant's credit report and should not hesitate to ask the applicant

to clarify or explain any items of concern to the agency. (See

Appendix 1 for a key to reading credit reports.)
Credit Extension

3-10

Credit Ratings

A credit rating may assist the agency in determining the

creditworthiness of the applicant. The rating is based upon the

applicant's financial condition, experience, and credit history. 

Under a credit rating system, each application is independently

evaluated using specific standards and acceptable deviations from

those standards developed by the agency. Ratios, in particular

income ratios, are often used to determine a credit rating. Income

ratios, which indicate the relationship between expenses and

income, are used to assess an applicant's ability to make additional

payments or absorb future expenses.

To develop and apply a credit rating system, an agency must:

C determine, based on past credit experience, what it considers

to be an acceptable level of risk for its loans;

C establish standards, including acceptable ratio levels, that it

can apply to relevant financial information obtained from

the applicant;

C calculate all applicable ratios; and

C apply the appropriate standards to a loan application for a

specific type of credit to determine the credit rating.

If the agency determines that an applicant has an unacceptable

credit rating, it must decide if there are compensating factors

which may mitigate the poor rating. Such factors would include

the applicant's:

C demonstrated ability for increased annual earnings, based

upon employment history;

C long-term employment prospect; and

C conservative use of credit or minimal amount of debt.
Credit Extension

3-11

Conducting the Credit Analysis

Using the information on the credit report, the verified application

information, and the results of the credit rating, the agency should

conduct a credit analysis to determine an applicant's

creditworthiness, that is, the applicant’s ability and willingness to

repay the loan.

A credit analysis for a consumer applicant will consider the

following:

C employment history for the past 2 years;

C current and potential income and benefits;

C financial statements including current assets, financial

obligations, and liabilities;

C income tax returns for the past 2 years;

C credit rating;

C repayment history of prior debts;

C guarantees and collateral, ensuring that they are not pledged

to other debts;

C value of any pledged collateral; and

C homeownership status and residential stability.
Credit Extension

3-12

A credit analysis for a commercial entity will consider the

following:

C financial condition, as documented by annual and interim

financial statements such as the balance sheet, income

statement, and cash-flow statements. The agency should use

audited statements whenever possible and not require

documentation that is cost prohibitive for the applicant to

obtain;

C any income tax returns for the past 2 years;

C ratios, such as total liability to total equity, net income to

interest expense, current assets to current liabilities, net

income to assets, and net income to equity;

C profit margin;

C amount and type of working capital;

C evaluation of the actual or potential market for the

commodity or service being offered and the entity's

marketing strategy for expanding or creating that market;

C company ownership (e.g., sole proprietor, partnership,

corporation);

C managerial ability and/or experience of key company

personnel;

C guarantees and collateral, ensuring that they are not pledged

or attached to other debts; and

C credit rating.

Generally, an agency should give particular attention to a

company's cash flow since it will be the source of the debt

repayment. The agency should also consider whether debts owed

to the United States by officers, directors, major shareholders and

partners render the commercial entity ineligible for loan assistance

under the DCIA. See 31 C.F.R. 285.13(c)(2).
Credit Extension

3-13

The agency should conduct comparable credit analyses on any coborrower(s) and guarantor(s) listed on the application form. The

agency must document and maintain the appropriate credit

analyses in the applicant’s file.

Appraisal of Real Property

For many types of loans, the Federal Government can reduce its

risk of default and potential losses through well managed collateral

requirements. Appraisals of real property serving as collateral for

a direct or guaranteed loan (or property required for grant

agreements and procurement contracts) must be conducted in

accordance with the following guidelines:

C agencies should require an independent, unbiased appraisal

of property used as collateral. The appraisal should be

consistent with the "Uniform Standards of Professional

Appraisal Practice" (USPAP), as promulgated by the

Appraisal Standards Board of the Appraisal Foundation, and

any additional requirements established by the agency; and 

C the appraiser should be qualified in accordance with the

applicable State and Federal regulatory requirements.

Lenders and/or agencies shall determine whether an

appraisal must be performed by a State licensed or certified

appraiser based on the size of the loan and/or complexity of

the appraisal. For non-business loans over $100,000 and for

business loans over $250,000, lenders and agencies should

ensure that a State licensed or certified appraiser prepares

the appraisal. Agencies may also require the services of a

State licensed or certified appraiser for smaller direct or

guaranteed loan transactions. The services of a State

licensed or certified appraiser are not required for loans with

no cash out and for those transactions where the collateral is

not a major factor in the decision to extend credit.

The appraisal will establish the fair market value of the property

and serve as the basis for the agency's decision as to the maximum

loan it will make on the property. The property should be

appraised close to the commitment date of the lender. The

property should be reappraised if the appraisal is more than 6

months old.
Credit Extension

3-14

Major elements addressed on the appraisal include:

C neighborhood analysis, including data related to the

economic background of the region, city and neighborhood;

C site analysis, including data related to the size and shape of

the property, the types of buildings on the property, front

footage and parking;

C improvement analysis. A lot is considered "improved" if it

contains a structure. The improvement analysis focuses on

the structure or other dwelling(s), such as floor plans,

energy efficiency, and age; and

C property condition and appraiser comments. The

appraiser must express an opinion about the condition of the

property.

The “Subject Property Section” of the appraisal provides a

complete description of the property and its surroundings. A map,

floor plan, and photographs of the property reflecting the

property’s “curb appeal” should also be attached.

The appraiser uses the sales price of similar properties and

estimated replacement costs to estimate the property's market

value. This estimate will be documented in the report's valuation

section.

In some credit programs, the primary purpose of the loan is to

finance the acquisition of an asset, such as a single family home,

which then serves as collateral for the loan. Lenders and Federal

agencies should ensure that borrowers assume an equity interest in

such assets to reduce defaults and losses. Federal agencies should

explicitly define the components of the loan-to-value ratio (LTV)

for both direct and guaranteed loan programs. Lenders and

agencies will review and approve the appraisal report containing

the estimated market value in order to determine the maximum

available loan on the property (loan-to-value ratio). The approved

appraisal report will be placed in the permanent loan file.
Credit Extension

3-15

Unless exempted or otherwise authorized by law, agencies should

establish:

C a maximum acceptable LTV ratio. This could be in the

range of 80 to 95%. Financing should be limited by not

offering terms (including the financing of closing costs) that

result in a LTV equal to or greater than 100 percent. 

Further, the loan maturity should be shorter than the

estimated useful economic life of the collateral;

C limitations on the proportion of up-front fees or transaction

related expenses that a borrower can finance;

C an acceptable minimum down-payment amount; and

C a process for assessing higher loan premiums on loans with

higher loan-to-value ratios.

Loan Closing

Processing a Loan to Loan Closing

YES 

Application Completed 

Credit Analysis acceptable

Appraisal supports loan amount

Applicant Information verified

Private funding available

Non-delinquency verified

Eligible for type of credit

Loan Approved 

YES 

STOP 

STOP 

STOP 

STOP 

STOP 

YES 

STOP 

NO 

NO 

NO 

NO 

NO 
Credit Extension

3-16

Loan closing occurs after the completion of the processing of a

loan which results in loan approval. At loan closing, the agency or

lender will collect any loan documents or monies due. The agency

is responsible for ensuring that all legal documents including the

promissory note, collateral documents (such as security agreement,

mortgage, and/or deeds of trust), loan agreement, certification of

non-delinquency, and debt collection certification statement, are

signed by both the borrower(s) and co-borrower(s). 

Where appropriate, the loan documents will state the terms of

repayment, including:

C the frequency, due dates, and amount of principal and

interest payments. Generally, loan payments should be

monthly unless the borrower’s projected cash flow would

make monthly installments inappropriate;

C the amount of escrow payments, if required;

C the length of the loan - loan maturity should be shorter than

the useful economic life of the asset being financed;

C the acceptable means of repayment, i.e., checks, money 

orders, credit cards, pre-authorized debit or electronic

payment via the internet (see, for example, www.Pay.gov);

C an explicit statement of borrower's rights and remedies;

C any special exemptions, such as cases of possible

forbearance or deferment;

C Federal delinquent debt collection policies and procedures;

C agency policies regarding the assessment of late charges on

delinquent payments. Amounts and/or rates to be assessed

should also be provided, when possible; and

C agency policies regarding the acceleration of the debt in the

event of a delinquency.
Credit Extension

3-17

Non-Loan Screening

Where financial responsibility is a factor, an agency should screen

its potential contractors and grant applicants, in accordance with

all statutory and regulatory requirements. Standards in Part 9 of

the Federal Acquisition Regulations (FAR) apply to the screening

of contractors. As part of the application process, the agency must

obtain the following information from contractors and grant

applicants:

C taxpayer identification number(s); and

C certification of non-delinquent status. The applicant will

certify that he/she is not delinquent on a Federal

Government debt, including tax debt. Agencies should

include the certification statement on the application form.

Processing of contractor agreements and grant applications shall be

suspended when applicants are delinquent on Federal tax or nontax debts, including judgment liens against property for a debt to

the Federal Government. Processing should continue only when

the debtor satisfactorily resolves the debt(s) (e.g., pays in full or

negotiates a new repayment plan). 

Agencies shall obtain and use credit reports to verify the

information provided by contractors and grant applicants, assess

financial condition, and ascertain other financial agreements, if

any, between the applicant and the Federal Government. The

agency should also check the "List of Contractors Indebted to the

United States" (Army Hold-Up List), published by the Defense

Finance and Accounting Service as part of its contractor eligibility

evaluation and verification process.

When an applicant is listed as debarred or suspended in the "List of

Parties Excluded from Federal Procurement or Non-procurement

Programs," the agency will not make an award except as

authorized under agency regulations implementing Executive

Order 12549 or FAR 9.4.
Credit Extension

3-18

LOAN AGREEMENT

_________________________________

_________________________________

_________________________________

_________________________________ 

_________________________________

_________________________________

_________________________________ 

_________________________________

_________________________________

_________________________________

_________________________________

_________________________________

_________________________________ 

9 Signed Loan Application 

9 L oan C om m itm ent 

9 C redit R eport 

9 V erification D ocum ents 

9 CAIVRS and Debt Check 

9 Debt Collection Certification 

9 N on-delinquency C ertification 

9 C redit Analysis 

9 Appraisal 

Credit Extension Documentation

Credit Extension Documentation

Loan origination files should contain loan applications, credit

bureau reports, credit analyses, loan closing documents, and other

documents necessary to conform to private sector standards for

that type of loan. Accurate and complete documentation is critical

to providing proper servicing of the loan, pursuing collection of

delinquent debt, and, in the case of guaranteed loans, processing

claim payments.

At loan origination, the agency or lender will start building the

loan file with the following documents, as applicable:

C original signed loan application including the certification

by the borrower of non-delinquency of Federal debts;

certification by the borrower that he/she sought private

sector financing and was denied or a copy of the application

form for private sector financing with the letter denying the

loan; and certification by the borrower of the accuracy of the

information provided on the loan application; 
Credit Extension

3-19

• supporting papers including credit approval documentation

(credit report(s) and agency analysis of credit information,

along with records of subsequent approval action); and an

appraisal of the property along with supporting

documentation;

C statement that the borrower has not been suspended,

debarred, or voluntarily excluded from procurement or nonprocurement dealings with the Federal Government;

C signed certificate that the borrower was informed of the

Federal Government’s debt collection policies and

procedures;

C financial and market analyses for commercial loans;

C copies of all related audits for previous five (5) years for

commercial loans;

C insurance documents;

C copy of the loan commitment and the terms and conditions

of the loan, including a complete payment schedule for

principal and interest;

C original copy of the accepted loan commitment signed by

the applicant(s);

C all original internal review documents required for financial

and legal findings (all letters, memoranda, legal opinions

and requisitions for disbursement concerning negotiations

and closure of the loan, including summary of written,

telephone, and electronic mail contacts between lending

officials and applicant);

C evidence of necessary public record filings securing loan

collateral including current Uniform Commercial Code

filings and searches; and

C list of scheduled reports required by the agency, including

financial statements from the borrower.
Credit Extension

3-20

Lenders and agencies should use a manual or automated checklist

to ensure that they have fully documented their credit extension

activities. (See Appendix 2). While much of this information may

be contained in an automated system, lenders and agencies may

still need to maintain all original documentation to support

possible future legal action. 

Questions regarding this chapter can be directed to the Agency

Enterprise Solutions Division, Federal Finance, Financial

Management Service at 202-874-6875.