All electricity loans on which RUS has provided repayment guarantees in recent years have been made by the Treasury’s Federal Financing Bank (FFB). Opportunities Exist to Make the Loan Programs More Effective and Less Costly

RUS’ electricity and telecommunications loans are intended to assist in the development of the nation’s rural areas. First, lending practices could be modified to ensure that the loans benefit areas with low populations, thereby more effectively using the agency’s limited loan funds. Currently, borrowers serving areas that are heavily populated sometimes receive loans. Second, RUS’ subsidized direct loans could be focused on borrowers that are not capable of using their own resources or of obtaining loans from the private sector to fund their utility projects. Targeting subsidized direct loans to borrowers in need of federal assistance could result in the more effective use of the loan funds.Currently, financially healthy borrowers sometimes receive these subsidized loans. As a result, RUS’ loans are sometimes made to financially healthy borrowers that may not need federal assistance to fund their utility projects. Modifying certain aspects of both loan programs could reduce the agency’s vulnerability to losses on new loans. First, loan and indebtedness limits could be imposed. Currently, the loan programs generally lack limits, and, as a result, some borrowers have obtained large-dollar loans and accumulated large levels of debt. Second, the repayment guarantee that RUS places on loans made by other lenders could be reduced so that the lenders participating in RUS’ programs would share in the risk of the loans they make. Currently, RUS guarantees 100 percent of other lenders’ loans. While RUS did not make or guarantee loans to such borrowers during the period covered by our review, there are no policies to prevent loans to such borrowers from being made in the future. However, because all guaranteed loans in recent years have been made by the FFB, the risk to the federal government as a whole would not be reduced if the FFB continues to be the sole source of loan funds. Commercial Lending for Rural Electricity and Telecommunications Purposes

RUS is not the only provider of credit to rural utilities. These two commercial lenders had a combined total of $13.1 billion in outstanding principal on loans for rural electricity and telecommunications purposes as of June 30, 1997. GAO Comments

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. They also requested that we compile loan information on commercial lenders that have a significant level of lending for rural electricity and telecommunications purposes.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Rural Utilities Service's electricity and telecommunication loan programs, focusing on: (1) ways to make the loan programs more effective and less costly for the government; (2) ways to decrease the Rural Utilities Service's vulnerability to loan losses; and (3) loan information on commercial lenders that have a significant level of lending for rural electricity and telecommunication purposes.

What GAO Found

GAO noted that: (1) because loan programs are intended to assist in the development of the nation's rural areas, targeting loans to borrowers that provide services to areas with low populations could result in the more effective use of the agency's limited loan funds; (2) current lending practices sometimes result in loans to borrowers serving areas that are heavily populated; (3) targeting subsidized direct loans to borrowers that need the agency's assistance to fund their utility projects could result in the more effective use of the loan funds and reduce the level of subsidized loans and program costs; (4) the agency sometimes makes its subsidized direct loans to borrowers capable of using their own resources or of obtaining loans from the private sector to fund their utility projects; (5) graduating the agency's financially viable borrowers from direct loans to commercial credit could also reduce program costs; (6) opportunities also exist to decrease the Rural Utilities Service's vulnerability to losses; (7) the agency's vulnerability could be lessened if loan and indebtedness limits were established; (8) borrowers have been able to obtain large-dollar loans and accumulate large amounts of debt because such limits are generally lacking; (9) the repayment guarantee that the agency places on loans made by other lenders could be reduced so that lenders holding the guaranteed loans bear some portion of the financial risk; (10) the agency guarantees the repayment of loans made by other lenders at 100 percent; (11) because all guaranteed loans in recent years have been made by the Treasury's Federal Financing Bank, the risk to the federal government as a whole would not be reduced if the Federal Financing Bank continues to be the sole source of loan funds; (12) although the agency did not make or guarantee loans to such borrowers during the period covered by GAO's review, there are no policies prohibiting additional loans to such borrowers; (13) the Rural Utilities Service is not the only provider of credit to rural utilities; (14) two commercial lenders are actively involved in lending to rural electricity and telecommunications providers; and (15) these two lenders had approximately $13.1 billion in outstanding principal on loans for rural electricity and telecommunication purposes.