Detailed Information on the
Rural Business and Industry Guaranteed Loan Program Assessment

Tie program performance to budget requests.

Develop an efficiency measure such as 'cost per loan processed' to track administrative expenses and allow comparison among loan programs.

Complete a rewrite of program regulations to address identified concerns and deficiencies, such as lender performance and eligibility, borrower eligibility, priority goals, and underwriting requirements. These efforts coupled with improvements in program management will help the agency make targeted efforts to decrease delinquency and default rates.

Improve long-term performance measurement by comparing actual program data on the types of jobs supported each year with established benchmarks based upon Department of Labor and Bureau of Economic Analysis data. This will allow RBS to more accurately determine the extent of community benefits. Such information will also help guide agency decisions on how to manage the funds they receive.

Measure: Rural Jobs Created/Saved

Explanation:This measure tracks the total number of jobs created/saved for the program. Starting in 2006 the jobs will be tracked based on more extensive information provided by the new evaluation system, SEBAS.

Measure: Guaranteed Loan Delinquency Rate

Explanation:This measures the portfolio delinquency rate, not including bankruptcies based on the number of loans outstanding. Once a company is in bankruptcy the court controls the timing and amount of repayments.

Measure: Community Economic Benefits (million dollars) Measure assumes that for every $1 spent, the program provides an added value of $2.50 to the local economy. Measure is being revised based on actual program data. GDP will be the measure computed.

Explanation:This measure tracks the overall economic benefit. Prior research conducted by the Department of Labor determined that B&I loans provide overall economic benefits in the amount of 2.5 times the dollars obligated. The new evaluation program, SEBAS, collects more detailed and rich information allowing a GDP and other measurements to be accurately computed for rural communities and adjacent counties.

Is the program purpose clear?

Explanation: The B&I Guaranteed Loan Program helps finance business, industry, and the employment of rural residents for the purpose of improving the economic and environmental climate in rural communities with populations less than 50,000. This purpose is achieved by bolstering the existing private credit structure through the guarantee of loans intended to provide lasting community benefits. Such loans finance all segments of the economy, such as mining, manufacturing, and wholesale and retail sales. Loan funds are used to finance the purchase and development of land, buildings, equipment, facilities, machinery, and to pay start-up costs and to supply working capital.

Evidence: The program is authorized in Section 310B of the Consolidated Farm and Rural Development Act, as amended. The mission of the Rural Business-Cooperative Service is "to enhance the quality of life for rural Americans by providing leadership in building competitive businesses including sustainable cooperatives that can prosper in the global marketplace."

Does the program address a specific and existing problem, interest, or need?

Explanation: The Business and Industry (B&I) Guaranteed Loan Program addresses the need for capital for rural America, providing incentives to create and retain jobs in rural areas. Due to a number of reasons, businesses in rural areas may face difficulty obtaining credit from private lenders. For example, many small community banks lack adequate capitalization to make these loans without a guarantees. Rural business may also find it difficult to get credit from urban and larger banking institutions. Economic decline in rural areas has also limited the access and availability of rural capital. This program provides loan guarantees to give the assurance needed to extend credit in rural communities, and in some cases help to match rural borrowers with rural lenders.

Evidence: These needs are well documented: ' Congressional study, "The Credit Crunch: Its Impact on Business and Jobs," published July 12, 1993 ' Office of Advocacy, U.S. Small Business Administration, "Small Business Finance in Rural and Urban Regions" ' Federal Reserve Bank of Kansas City, Center for the Study of Rural America. 'The Impact of Bank Mergers and Acquisitions on Small Business Lending: A Conference Report" and "Financing Rural America" ' USDA Economic Research Service (ERS) "Credit in Rural America, Agricultural Economic Report no. 749, 1997."

Is the program designed so that it is not redundant or duplicative of any Federal, state, local or private effort?

Explanation: Numerous programs serve to stimulate economic development in rural communities. These include: the Small Business Administration's (SBA) 7(a) and Community Development (504) programs, the Economic Development Administration (EDA), the Tennessee Valley Authority's (TVA) Economic Development Loan fund, and other USDA programs that support business and community development. For example, an applicant from the Appalachian region may apply to programs administered by HUD, USDA and ARC to obtain financing for building construction. In other cases, two agencies may explicitly have the same goals and serve similar applicants'both SBA and USDA measure the number of jobs created. However, in some cases programs can be differentiated: SBA's 7(a) loan levels are limited to an exposure of not more than $1 million, with an average interest rate and fees higher than typically charged for the B&I Guaranteed Loan Program, and the 504 program is limited to development in specific geographic regions. Although there are a variety of state programs that serve a similar purpose, they also vary in degree of funding and rural availability.

Evidence: ' GAO report 00-220. 'Economic Development: Multiple Federal Programs Fund Similar Economic Development Activities' (September 2000) ' Catalog of Federal Domestic Assistance ' Small Business Financial Resource Guide ' SBA Budget Request and Performance Plan.

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: The guarantee loan structure is consistent with program objectives to improve the quality of life in rural areas and to meet business and credit needs in under-served areas. The B&I programs' average loan size is over $1 million. Without the provision of a guarantee, many smaller lenders in rural areas do not have adequate capitalization to make these large loans and are unable to make the necessary capital advances to the businesses they serve. In addition, rural businesses may find it difficult to obtain credit from urban and larger banking institutions. The program is structured to meet these needs by facilitating the provision of credit to those unable to obtain private credit for projects meeting the program's policy objectives of stimulating economic development in rural communities .

Evidence: Section 310B of the Consolidated Farm and Rural Development, as amended, and RD Instructions 4279-A, 4279-B, and 4287-B.

Is the program effectively targeted, so program resources reach intended beneficiaries and/or otherwise address the program's purpose directly?

Explanation: The B&I program is specifically targeted to rural residents, and is further prioritized to meet the greatest need of communities suffering from out migration, persistent poverty, long-term population decline and job deterioration, natural disasters, and fundamental structural changes in its economic base, as defined by 7 CFR 4279.155. The Agency, of its own accord and without specific direction from Congress, set funds aside for businesses in Empowerment Zones and Enterprise Communities (EZ/EC) and Rural Econoic Area Partnership (REAP) designated areas. However, prioritization only occurs when competition for program funds is strong. In recent years, demand for the program has slackened (due in part to weaker economic conditions) and in such circumstances applications are funded on a first-come, first-serve basis. Only when it appears that demand may exceed available funding, are applications rated based upon the prioritization process defined in program regulations.

Evidence: 7 CFR 4279.155. The set-aside for EZ/EC and REAP for FY '03 was $25.8 million or close to 3 percent of total available loan level.

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: Long-term measures focus on the key outcomes of the program: employment opportunities and community economic benefits. ' Employment opportunities: applicants are required to project the number of jobs created and RBS state offices routinely examine applicants to verify job creation estimates. While a long-term measure, the agency tracks the number of jobs created or saved on an annual basis. ' Community economic benefits: Data is based upon Department of Labor (DOL) information. Currently, RBS's baseline assumes that for every dollar of program funds expended, the overall community benefits are 2.5 times that amount. This measure looks at the value-add provided to the community as a result of the jobs created through the help of the program. RBS is also exploring additional methods and resources for measuring the effectiveness of the B&I Guaranteed Loan Program, including the comparison of program data (number of jobs, types of industries, etc.) against demographic/economic data to better understand the local/regional impact of the program on such problems as persistent poverty and high out-migration rates.

Evidence: Draft Rural Development 2005 Performance Plan. Benchmark Input-Output Account tables published by the Department of Labor's Bureau of Labor Statistics. RBS study determined that for every dollar of program funds expended, the overall community benefits provided were realized two and a half times over. This was determined by averaging DOL statistics for the types of industries funded by the B&I program.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: Baselines have been established for both long-term measures, but targets are currently under development for the performance measure tracking the community economic benefits provided by the B&I program. Jobs created/saved: baselines and targets are established based on past and projected performance. Targets are established by assuming that one job is created for every $32,000 of program funds. This figure is projected based on past performance and is updated to reflect actual data based upon information collected from program applicants. Community economic benefits: Baseline of 2.5 times the amount of assistance expended through its supportable program level. This was determined by averaging DOL statistics for the types of industries funded by the B&I program. As a result of this PART evaluation, RBS will analyze actual program data on the types of jobs supported each year and compare those results to the DOL 2.5 multiplier or benchmark, in order to more accurately determine the extent of community benefits. The initial analysis will occur during FY 2005 and will be reviewed each third year thereafter.

Evidence: Proposed Budget Performance Integration measures for FY 2005; The Rural Development FY 2003 and 2004 Annual Performance Plan

Does the program have a limited number of specific annual performance measures that demonstrate progress toward achieving the program's long-term measures?

Explanation: The B&I Guaranteed Loan Program has specific annual measures and goals that support the longer-term goals and objectives of the program. Annual measures include: ' number of jobs created/saved (also used as a long-term measure) ' the portfolio's delinquency rate, which assesses the cost-effectiveness and efficiency of the program. Higher delinquency rates increase the cost of the program and may reflect poor lender servicing.

Evidence: The Rural Development FY 2003 and 2004 Annual Performance Plan and the Guaranteed Loan System.

Does the program have baselines and ambitious targets and timeframes for its annual measures?

Explanation: The target for the portfolio's delinquency rate is ambitious, given the recent downturn in the economy, which has affected borrowers' abilities to meet credit obligations. Maintenance of a relatively low delinquency rate in such circumstances will require strong oversight of lender servicing and loan making. Targets and baselines have also been established for the number of jobs created annually. The number of jobs are estimated by the borrower at the time the application is submitted. State Office personnel verify the number of jobs during required site visits and input the information into the Guaranteed Loan System.

Evidence: The Rural Development FY 2003 and 2004 Annual Performance Plan and the Guaranteed Loan System.

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, etc.) commit to and work toward the annual and/or long-term goals of the program?

Explanation: Through program regulations, the Agency/lender/borrower mutually agree to both creditworthiness standards and reporting requirements to document the goals and objectives of the program. Borrowers are required to estimate the number of jobs created/saved and the average wage rate. Lenders are required to certify that the guaranteed loan has a reasonable assurance of repayment based on the history, projections, equity, and collateral.

Evidence: Agency regulations, primarily 7 CFR 4279-B and 4287-B. The FY 2002-2005 Rural Development Long-range Strategic Plan has been made available to the public. The plan is delivered by program regulations that provide for the achievement of the goals identified therein. By signing the forms, the lenders and borrowers have given their complied consent to the goals and objectives expressed in the Strategic Plan.

Are independent and quality evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: As there are no independent evaluations that examine how well the program is accomplishing its mission and meeting its long-term goals, the program must receive a 'no' to this question. However, both GAO and OIG conduct audits, surveys, and investigations regarding specific aspects of program delivery and/or servicing. Lenders and borrowers are required to submit a variety of management tools, including, but not limited to, analysis of borrower financial statements, borrower status reports, classifications of guaranteed loans based upon the degree of risk. The Agency performs Management Control Reviews (MCR), Business Programs Assessment Reviews (BPAR), and other reviews of State activities. Such evaluations are used to improve the program's regulations and procedures. In addition, the Agency has contracted with the Farm Credit Administration (FCA) to perform an independent assessment of both lenders and State Office operations.

Evidence: GAO report 99-10. Rural Business Cooperative Service's Lending and the Financial Condition of its Loan Portfolio (January 1999). GAO report 99-249. Rural Business Cooperative Service's Business Loan Losses (August 1999). USDA's Office of Inspector General routinely audits state offices regarding the status of loan portfolio and lender servicing. Recent reports include: ' Rural Business Cooperative Service Lender Servicing of Business and Industry Guaranteed Loans Columbus, GA (February 2002) ' Liquidation of a Business and Industry Guaranteed Loan Washington State (December 2002). OIG is currently performing an audit of the program

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: The Agency is attempting to include these measures and goals in a clear and concise manner, however at the present time this has not been accomplished.

Evidence: The FY 2005 Budget and Performance Integration process will require a greater effort to tie the Budget request to program performance.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: The Agency is undertaking a complete rewrite of program regulations to address identified concerns and deficiencies, such as lender performance and eligibility, borrower eligibility, priority goals, and underwriting requirements. The Agency is also rewriting its strategic plan to include new indicators that more accurately reflect program goals and objectives. The Agency has just completed an automated loan and grant processing system (GLS) to provide a more comprehensive monitoring of program activities.

Evidence: Both processing and servicing regulations are to be published as a proposed rule. Publication of these rules are proposed for March 2004.

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: The Agency monitors program funding activities of the various State Offices and provides for a pooling of unobligated funds that are then made available nationwide in an effort to meet the greatest need. Delinquencies are monitored on a quarterly basis. The Agency also conducts annual lender reviews. Borrowers/lenders are required to submit current financial statements and changes in guaranteed loan classifications as they occur. State Offices frequently meet with the Small Business Administration regarding outreach conferences in an effort to obtain feedback from constituent groups, as well as to provide current program information. As a result of these efforts, the agency is undertaking a rewrite of program regulations to address identified concerns and deficiencies, such as lender performance and eligibility, borrower eligibility, priority goals, and underwriting requirements.

Evidence: The Agency receives and responds to OIG/GAO audit recommendations. The Agency receives quarterly problem and delinquent loan reports from the State Offices. Lender/borrower reports are received on timetables established in 7 CFR 4279-B and 4287-B.

Are Federal managers and program partners (grantees, subgrantees, contractors, cost-sharing partners, etc.) held accountable for cost, schedule and performance results?

Explanation: Program Directors are rated on their performance in processing and servicing B&I Guaranteed Loans. Lenders are held accountable for prudent loan making and servicing activities based on written contracts. States not meeting the regulatory requirements for sound underwriting and servicing may have their loan authority removed. State Directors, National Office Division Directors, Deputy Administrator Business Program, and the Administrator all sign an attestation as to the accuracy and completeness of the data that reports program results. This is required by 7 CFR 2000-I.

Evidence: 7 CFR 4279-A, 4279-B, 4287-B, 2006-I, and 1901-A.

Are all funds (Federal and partners') obligated in a timely manner and spent for the intended purpose?

Explanation: All appropriated funds are obligated for credit-worthy projects. Field and National Office staff monitors the use of funds through the use of the Guaranteed Loan System. The National Office provides written guidance through the use of RD Instruction 1940-L, Exhibit A, Attachment 1, to assure funds are appropriately obligated and otherwise committed.

Evidence: The Agency prepares RD Instruction 1940-L, Exhibit A, Attachment 1, annually. This provides the field with the allocations for the fiscal year, procedures for accessing National Office reserve funds, and pooling of unobligated funds. Monitoring of these activities is accomplished through the Guaranteed Loan System.

Does the program have procedures (e.g., competitive sourcing/cost comparisons, IT improvements, approporaite incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: The agency recently acquired Moody's Financial Analyst software to make credit analyses more consistent. In addition, RBS recently adopted an automated forms package for the program called "B&I Loanpak," which will expedite the processing of loans and is also developing a short application form to expedite processing of loans in the amounts of $400,000 or less ($600,000 as of FY '04).

Evidence: 7 CFR 4279-B contains the guidance and requirements to help agency credit analyses more consistent. Section 6019 of the 2002 Farm Bill contains the statutory authority for the short application form (B&I Loanpak).

Does the program collaborate and coordinate effectively with related programs?

Explanation: The program has joint goals with other Agency programs to target rural communities and customers with the greatest need. State Offices deliver other Rural Development programs, such as Community Facilities and Water and Waste Disposal, which provide associated infrastructure necessary to foster economic development and support the businesses financed under the B&I program. The goals of all programs are clustered to meet this objective, as is the goal for creation and retention of jobs. In addition, the agency is working to revise its Memorandum of Understanding (MOU) with the U.S. Small Business Administration (SBA) to update the agreement to reflect current program needs. RBS also plans to work with the Department of Commerce and minority lending institutions to leverage other efforts and outreach initiatives aimed at assisting minority and other high-priority communities.

Evidence: The Rural Development FY 2003 and 2004 Annual Performance Plan.

Does the program use strong financial management practices?

Explanation: In addition to the lender's analysis, the Agency performs an underwriting process to ensure compliance with sound financial management practices. The Agency is currently rewriting the B&I program regulations in an effort to strengthen its current and future loan portfolio. The Agency has recently acquired Moody's Financial Analyst software to help make Agency credit analyses more consistent.

Evidence: Quarterly problem and delinquent loan reports and periodic OIG audits are evaluated and appropriate actions taken as a result. The Agency has recently acquired Moody's Financial Analyst software to help make Agency credit analyses more consistent.

Has the program taken meaningful steps to address its management deficiencies?

Explanation: In addition to the lender's analysis, the Agency performs an underwriting process to ensure compliance with sound financial management practices. The Agency is currently rewriting the B&I program regulations in an effort to strengthen its current and future loan portfolio. The Agency has recently acquired Moody's Financial Analyst software to help make Agency credit analyses more consistent.

Evidence: In FY 2001, a team of field and National Office employees reviewed loan files for all B&I loans for which final losses were paid or were repurchased in FY 2000. The results of this review and recommended actions were conveyed to the field and web-based training is used to improve loan making and servicing activities. In addition, the Agency has contracted with the Farm Credit Administration (FCA) to perform an independent assessment of both lenders and State Office operations.

Is the program managed on an ongoing basis to assure credit quality remains sound, collections and disbursements are timely, and reporting requirements are fulfilled?

Explanation: Management Control Reviews (MCRs) and Business Programs Assessment Reviews (BPARs) are conducted on a 5-year rotational basis. Results are analyzed on an ongoing basis to assure that funds are being committed appropriately, servicing activities are undertaken in a timely manner, and management reports are received as required by the program regulations. In addition, the Agency has contracted with the Farm Credit Administration (FCA) to perform an independent assessment of both lenders and State Office operations. In cooperation with OIG, RBS has taken agressive action to prevent or remedy abuses of the program by lenders. Examples include the debarment of principal owner of a lender, denied payment of loss requests, and substantially reduced loss claims as a result of lender negligence. In response to an OIG audit, the Agency has issued an Unnumbered Letter and an Administrative Notice (AN) addressing how to ensure that appraisals submitted adequately reflect the value of collateral. The Agency has also issued ANs on collateral, equity, feasibility studies, and financial reporting requirements, in response to OIG audits.

Evidence: Compliance with MCR requirements and documentation of corrective actions taken on BPARs are steps taken to address management deficiencies, as well as 7 CFR 4279-B and 4287-B. In addition, the Agency has contracted with the Farm Credit Administration (FCA) to perform an independent assessment of both lenders and State Office operations.

Do the program's credit models adequately provide reliable, consistent, accurate and transparent estimates of costs and the risk to the Government?

Explanation: The B&I program uses historical information on portfolio performance to develop subsidy estimates. An annual subsidy rate is calculated using an audited cash flow that was approved by the OIG in 2001 and 2002. The subsidy rate is formulated, re-estimated and apportioned within all OMB guidelines. While the magnitude of change in subsidy reestimates is modest, in recent years the actual cost of the program has been consistently higher than that projected in the program's subsidy model largely as due to differences between default assumptions and actual data. As a result RBS has recently acquired Moody's Financial Analyst software to make credit analyses more consistent.

Evidence: Program subsidy model and audited cash flows, Federal Credit Supplement, apportionments and the Budget Appendix

Has the program demonstrated adequate progress in achieving its long-term outcome performance goals?

Explanation: The number of jobs created or saved has been achieved or exceeded in virtually every year. However, RBS has revised its performance measure regarding "community economic benefits" to update performance assumptions and to incorporate actual data. Performance data under this revised approach will not be available until the FY 2005 President's Budget.

Evidence: Rural Development annual program performance reports.

Does the program (including program partners) achieve its annual performance goals?

Explanation: Over the last 3 years, on average, the Agency exceeded its annual performance goals. However, the delinquency rate has increased dramatically in this program, thereby increasing the federal government's risk of loss. While poor economic conditions contribute to borrowers' difficulties in meeting credit obligations, inadequate servicing by lenders has also increased the likelihood of loss in this program.

Evidence: Annual performance plan

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program performance goals each year?

Explanation: The subsidy rate, which measures the cost of the program, has increased over the last couple of years due in large part to increasing defaults. The delinquency rate also rose substantially over the last year. This is in part a result of adverse economic conditions but is also related to the effectiveness of lender servicing. Recent OIG reports recommend that lender oversight be strengthened in a number of areas.

Evidence: Federal Credit Supplement USDA OIG report: Rural Business Cooperative Service Lender Servicing of Business and Industry Guaranteed Loans Columbus, GA (February 2002) USDA OIG report: Rural Development'Liquidation of a Business and Industry Guaranteed Loan Washington State (December 2002).

Does the performance of this program compare favorably to other programs, including government, private, etc., that have similar purpose and goals?

Explanation: Regarding financial performance and cost-effectiveness, the B&I program compares fairly well other programs with similar purposes and goals. For example, the program's subsidy rate is comparable to the SBA 7(a) program even though the B&I program has a lower guarantee fee. The B&I program is also cost-competitive with the 7(a) program. In FY 2001, the cost per job created for B&I was $24,372 as compared to $29,786 per job created by the 7(a) program. However, as no performance evaluations have been conducted to compare the economic impact of similar programs such as SBA's 7(a) and 504 programs, it is difficult to compare these programs' performance in strengthening the rural economy.

Evidence: RBS 2001 Annual Report and the SBA 2003 Budget Request and Performance Plan.

Do independent and quality evaluations of this program indicate that the program is effective and achieving results?

Explanation: No independent performance evaluations have been conducted to assess the program's impact on improving economic opportunities in rural communities. To date, evaluations have largely focused on loan making and serving activities and the financial performance of the portfolio. Recent Office of Inspector General (OIG) reports suggest that oversight of lender servicing and state office training need improvement. Report findings include: ' loan funds have been disbursed for unauthorized purposes and loans were approved for borrowers that had other delinquent debt; ' lenders have not complied with agency instructions regarding loan making and approval; and ' the agency has guaranteed loans based on incomplete and improperly prepared analysis However, these audits were selective in that reviews were often skewed toward delinquent loans and were not representative of the quality of the entire portfolio. As a result, the OIG is currently performing an audit of the B&I Guaranteed Loan Program, but the audit is not complete. In addition, the Agency has contracted with FCA to perform an independent assessment of both lenders and State Office operations.

Evidence: USDA OIG report: Rural Business Cooperative Service Lender Servicing of Business and Industry Guaranteed Loans Columbus, GA (February 2002) USDA OIG report: Rural Development'Liquidation of a Business and Industry Guaranteed Loan Washington State (December 2002). OIG Examination Plan for the B&I program.