As of September 30, 2015, 21 federal agencies reported that they had  direct loans or loan guarantees outstanding. Subsidy Cost Estimates and Reestimates

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. Key Elements Agencies Should Consider When Preparing Subsidy Cost Estimates

Agencies develop subsidy cost estimates based on relevant budgeting  and accounting guidance. Agencies Addressed Several Key Elements in Their Subsidy Cost Estimation Processes, but FHA and Education Lacked Adequate Documentation Supporting Certain Processes

Based on our review of the subsidy cost estimation processes for USDA’s  Credit Commodity Corporation’s (CCC) Export Credit Guarantee (GSM- 102) 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. As of September 30, 2015, FHA had  approximately $1.1 trillion in forward mortgage loan guarantees  outstanding. 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. 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  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. GAO staff members who made key contributions to  this report are listed in appendix IV. Appendix I: Objectives, Scope, and Methodology

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. 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 (GSM- 102) 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).
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 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.
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.

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.