The U.S. government uses federal credit (direct loans and loan guarantees) to allocate capital to a range of areas including home ownership, education, small business, farming, energy, infrastructure investment, and exports. A direct loan is "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." A loan guarantee is "a pledge with respect to the payment of all or part of the principal or interest on any debt obligation of a non-federal borrower to a non-federal lender." At the end of fiscal year (FY) 2013, outstanding federal direct loans totaled $947 billion and outstanding guaranteed loans totaled $2,207 billion. Thus, at the end of FY2013, outstanding federal credit totaled $3,154 billion. The Federal Credit Reform Act of 1990 (FCRA) in the Omnibus Budget Reconciliation Act of 1990 ( P.L. 101-508 , §13201; 104 Stat. 1388, 1388-610) changed the budgetary treatment of federal credit from cash-flow accounting to accrual accounting. Cash flow accounting measured the cost of a new loan or new loan guarantee by its net cash flow in the fiscal year it was provided. FCRA measures the cost of new federal credit as the net present value of cash flows over the life of the loan or loan guarantee at the time the credit is extended, using Treasury interest rates to discount the value of future cash flows. The purpose of this report is to explain the provisions of FCRA; examine the implementation of credit reform, including credit reform provisions of the Balanced Budget Act of 1997 ( P.L. 105-33 , §1011; 111 Stat. 254,692); discuss proposed modifications of credit reform; and describe proposed legislation in the 113 th Congress. In order to achieve these objectives, it is necessary to initially discuss justifications for credit programs, federal credit concepts, and the budgetary treatment of federal credit before the enactment of FCRA. Before FY1992, the budgetary cost of a new loan or new loan guarantee was reported as its net cash flow for that fiscal year. This cash flow measure did not accurately reflect the cost of a loan or loan guarantee (federal credit) to the federal government because it did not provide a good measure of the economic and budgetary effects. Therefore, it was often difficult for policy makers to accurately monitor and therefore make informed decisions about federal credit. In addition, administrators at agencies could understate costs by using budgetary techniques such as generating "savings" from the fees on increased volumes of new guarantees, while ignoring the increase in expected losses, and offsetting the (cash) cost of new direct loans with current year collections from old loans. To remedy these problems, Congress included credit reform in the Omnibus Budget Reconciliation Act of 1990 (OBRA90). The President signed OBRA90 into law on November 5, 1990. The legislation added a new title to the Congressional Budget Act, Title V, the Federal Credit Reform Act of 1990 (FCRA). Beginning with FY1992, FCRA changed the methodology in the unified budget for measuring and reporting the cost of federal direct loans and federal loan guarantees. An effectively functioning federal government credit program can reduce existing imperfections in the market. Federal credit programs are justified economically on two grounds: equity and efficiency. Equity concerns the distributions of income, consumption, and wealth. The distribution of income has received the most emphasis among policy makers. Because economists cannot make interpersonal comparisons of utility, the optimal distributions of income, consumption, and wealth are normative; that is, they involve value judgments. In other words, economists cannot conclude that one distribution is better than another although the degree of inequality can be measured. Another aspect of the debate on equity concerns the appropriate method of redistribution, if desired. Some Members of Congress support redistributive programs, including credit programs, to lessen income disparities. For example, credit assistance to students from lower-income families may assist the students in pursuing higher education and thus reduce income inequality. Some critics maintain that direct subsidies can usually better target assistance to the needy than can credit programs. If an economy is productively efficient , it cannot produce more of one good without reducing the production of one or more other goods. For an economy to be efficient, private financial intermediaries should allocate capital to its most productive uses. Private financial intermediaries generally operate efficiently, but market imperfections exist, and these imperfections may cause an inadequate availability of credit in certain sectors of the economy. The Office of Management and Budget (OMB) states that market imperfections that can justify federal intervention "include information failures, monitoring problems, limited ability to secure resources, insufficient competition, externalities, and financial market instability." "Education, for example, generates positive externalities because the general public benefits from the high productivity and good citizenship of a well-educated person." Thus, arguably, credit assistance for higher education may improve economic efficiency. Numerous terms in financial economics have specific meanings for federal budget practices. These terms include federal credit, federal credit subsidies, and the unified budget. Some of these terms are defined in FCRA—and are summarized in the sections below. The Office of Management and Budget defines federal credit as federal direct loans and federal loan guarantees. The federal government extends federal credit by entering into a direct loan obligation or a loan guarantee commitment. FCRA defines a direct loan as "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" [Section 502(1)]. According to FCRA, a direct loan obligation is "a binding agreement by a federal agency to make a direct loan when specified conditions are fulfilled by the borrower" [Section 502(2)]. FCRA defines a loan guarantee as a "pledge with respect to the payment of all or a part of the principal or interest on any debt obligation of a non-federal borrower to a non-federal lender" [Section 502(3)]. A loan guarantee commitment is "a binding agreement by a federal agency to make a loan guarantee when specified conditions are fulfilled by the borrower, the lender, or any other party to the guarantee agreements" [Section 502(4)]. When either a direct loan obligation or a loan guarantee commitment is extended, the federal government determines future credit flows because the government signs a contract to provide credit. In some cases the specified conditions may not be met, and, consequently, credit will not be provided even though a contract was signed. Furthermore, there is a time lag between the signing of these contracts and the actual disbursement of a direct loan by the federal government or the actual disbursement of a guaranteed loan by a private lender. In some cases, particularly for credit for construction, credit may be disbursed by either the federal government or a private lender in increments over several fiscal years. Federal credit recipients obtain funds on more favorable terms than they could receive from the private market. OMB has described subsidies from federal direct loans as consisting of one or more of the following: interest rates below commercial levels, longer maturities than fully private loans, deferral of interest, allowance of grace periods, waiver or reduction of loan fees, higher loan amount in relation to the value of the underlying enterprise than a fully private loan, and availability of funds to borrowers for purposes for which the private sector would not lend—at virtually any interest rate under virtually any repayment terms. Concerning loan guarantee subsidies, OMB stated the following: The recipient of a federal loan guarantee receives a subsidy because the federal government covers part or all of the default risk—a subsidy conveyed by lower interest payments. Also, the federal government either levies no loan guarantee fee or charges a smaller fee than a private insurer would charge. Consequently, a private lender with a federal guarantee can charge the borrower a lower interest rate. In addition, with some guaranteed loans the federal government may pay to the lender part of the interest due on a guaranteed loan. Thus, a federal loan guarantee with or without a federal interest payment may provide a lower, equal, or higher level of subsidy than a federal direct loan. An important budget reform that preceded credit reform was the adoption of a unified budget. Before 1967, the federal government most frequently used an administrative budget, which was not comprehensive in coverage because it excluded the trust funds (for example, the Social Security trust fund). The federal government also used two other broad budgets: the consolidated cash budget and the national income accounts budget. Each of these three budgets had a different coverage of federal programs and a different accounting method; consequently each had a different surplus or deficit. Each of these budgets had weaknesses, and the simultaneous use of three different budget concepts caused confusion. In March 1967, the President's Commission on Budget Concepts was created and instructed to make "a thorough and objective review of budgetary concepts." In October 1967, the commission produced a comprehensive report with detailed recommendations on implementing a unified budget. In its report, the commission stated that the two basic functions of the federal budget are resource allocation and macroeconomic stabilization. For resource allocation, the commission believed that the budget should "provide the integrated framework for information and analyses from which the best possible choices can be made in allocating the public's money among competing claims." This function of resource allocation should include comparisons among government programs and between the public and private sectors. For macroeconomic stabilization, the commission maintained that the budget should contain detailed and accurate information in order to evaluate the effects of federal fiscal activities. Furthermore, the commission stated that the budget should include data necessary to undertake discretionary countercyclical fiscal policy. Thus, the commission recommended a unified budget that would be composed of all federal activities, including the trust funds and federal credit activities.