Pursuant to a legislative requirement, GAO provided information on the federal costs and risks of a proposed program for the Department of Veterans Affairs (VA) to guarantee small business loans to veterans, focusing on: (1) the federal credit costs and risks of the proposed program; (2) the cost impact of alternative borrower requirements in the implementation of the proposed program; and (3) the administrative issues resulting from VA's implementation of the proposed program.

GAO noted that: (1) the federal credit costs and risks of the proposed program could be similar to the Small Business Administration's (SBA) 7(a) or 504 loan guarantee programs, depending on which program it most resembled; (2) a proposed VA program designed like SBA's 7(a) program could require a similar federal credit subsidy because fees collected from program participants likely would not cover federal guarantee payments; (3) based on SBA's most recent estimates, the credit subsidy rates for the 7(a) program for fiscal years 1992 through 1999 have been under 2 percent; (4) alternatively, if the proposed program were designed like SBA's 504 program, its credit subsidy rate would be harder to predict; (5) SBA's most recent estimates showed the credit subsidy rates were around 4 or 5 percent for fiscal years 1992 through 1996; (6) fees charged to 504 program participants were increased in 1996, and the program has not required a federal subsidy since 1997; (7) based on historical patterns of the 504 program, it is uncertain whether a federal subsidy will be required in the future; (8) based on historic experience and the design of the program, including the differing fee structures, the subsidy rate for SBA's 7(a) program is generally expected to be higher than for SBA's 504 program; (9) GAO's analysis of veteran loan performance indicated that credit costs resulting from borrower defaults on loan payments would be about the same for veterans who could participate in the proposed program; (10) an economic downturn or other events could increase the proposed program's federal credit costs; (11) alternative borrower requirements, such as requiring personal equity as a down payment, have the potential to lower credit costs; (12) GAO was not able to quantify the impacts of alternative borrower requirements on federal credit costs of the proposed program because SBA does not generally maintain these data for the benchmark programs; (13) VA's lack of experience in administering a small business loan guarantee program could create administrative challenges and may lead to higher administrative costs than the benchmark SBA programs; (14) VA officials said that while they have the expertise to adequately evaluate mortgage applications, they do not have the knowledge of human capital resources to adequately evaluate business loan applications; and (15) in February 2000, VA, SBA, and the Association of Small Business Development Centers entered into a Memorandum of Understanding to share expertise with the intent to expand small business opportunities for veterans.

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REPORTNUM: GGD-00-158
TITLE: Department of Veterans Affairs: Credit Costs and Risks of Proposed VA Small Business Loan Guarantee Program
DATE: 06/30/2000
SUBJECT: Small business loans
Veterans
Government guaranteed loans
Loan accounting systems
Risk management
IDENTIFIER: SBA 7(a) Loan Program
SBA 504 Program
VA Small Business Loan Guarantee Program