Credit Programs: Key Agencies Should Better Document Procedures for Estimating Subsidy Costs
Highlights
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.
Key Elements of the Subsidy Cost Estimation Process
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.
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.
Recommendations
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.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Housing and Urban Development | To help ensure that subsidy cost estimates for the Mutual Mortgage Insurance Fund are supported, reliable, and reasonable, the Secretary of Housing and Urban Development should direct the Principal Deputy Assistant Secretary for the Office of Housing to 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 costs estimates. |
The Department of Housing and Urban Development (HUD) agreed with this recommendation. HUD stated that a contract was issued to address the documentation needed for the Mutual Mortgage Insurance (MMI) Fund's cash flow models and the subsidy cost estimation processes. In April 2020, in response to this recommendation, HUD provided documentation for the Federal Housing Administration's (FHA) MMI Single Family Forward and Home Equity Conversion Mortgage subsidy cost estimates. The documentation detailed policies and procedures, user guides, and technical notes that provided an overview, assumptions, estimation procedures, sensitivity analysis, and simulations used for each cash flow model.
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| Department of Education | To help ensure that subsidy cost estimates for the Direct Student Loan Program are supported, reliable, and reasonable, the Secretary of Education should direct the Assistant Secretary for the Office of Planning, Evaluation and Policy Development to 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. |
The Department of Education (Education) agreed with this recommendation. Education stated that it has detailed procedures for developing and validating subsidy cost estimates. These procedures include, but are not limited to, establishing a baseline scenario, documenting each assumption individually, comparing estimates to actual data, and management review and sign-off. Education has begun drafting a more detailed document that will further describe its policies and procedures. In July 2018, in response to this recommendation, Education developed the Cost Estimation and Analysis Division Policies and Procedures related to credit reform cost estimates. This document addressed the official baseline (i.e., current law) subsidy estimates, reestimates, and modification cost estimates. The document specifies the roles and responsibilities of those involved in the subsidy cost estimation process, the various documentation to be developed to support subsidy cost estimates, and the review and approval process for each key activity.
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| Department of Education | To help ensure that subsidy cost estimates for the Direct Student Loan Program are supported, reliable, and reasonable, the Secretary of Education should direct the Assistant Secretary for the Office of Planning, Evaluation and Policy Development to develop detailed documentation of the cash flow model used to estimate subsidy costs, including the rationale for model calculations, all formulas and assumptions used in the model, data sources, the process to update and document changes to the model, and the process to document management review and approval of the model, which may be based on an independent verification and validation of the model to ensure that calculations are accurate and consistent with the model documentation. |
The Department of Education (Education) agreed with this recommendation. Education stated that it is committed to continuous improvements in its cash flow model and how it is documented. The cash flow model includes inputs of modeled data, referred to as assumptions, together with program-determined static values, such as interest rates and fees. Education stated that it will update its detailed documentation of its cash flow model. In addition, Education is investing staff and resources into developing a new cash flow model to estimate subsidy costs. Detailed documentation of this new cash flow model will be prepared before the model becomes operational. We will review Education's new cash flow model documentation once it is completed. In July 2018, in response to this recommendation, Education developed the Cost Estimation and Analysis Division Policies and Procedures related to credit reform cost estimates. This document addressed the official baseline (i.e., current law) subsidy estimates, reestimates, and modification cost estimates. The document provides detailed narratives related to, among other things, (1) data used for credit subsidy estimates; (2) the process to develop and support cash flow assumptions; (3) the process to develop, update, operate, and maintain the cash flow model; (4) a process to perform independent verification and validation of the model; and (5) a process to document management review and approval of key aspects of the credit subsidy estimation process.
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| Department of Education | To help ensure that subsidy cost estimates for the Direct Student Loan Program are supported, reliable, and reasonable, the Secretary of Education should direct the Assistant Secretary for the Office of Planning, Evaluation and Policy Development to document the procedures and results of such procedures used to develop or support key elements of the subsidy cost estimation process, addressing at a minimum (1) the reliability of historical data, (2) the rationale for informed opinion when applicable, (3) the methods used to calculate cash flow assumptions, (4) the process to ensure that subsidy cost estimates are consistent with the terms and conditions of the program, (5) the process to assess estimated cash flows for reasonableness, and (6) the process used to perform sensitivity analysis. |
The Department of Education (Education) agreed with this recommendation. Education stated that it will work on developing more detailed policies and procedures which will address the key elements referenced in this recommendation. In July 2018, in response to this recommendation, Education developed the Cost Estimation and Analysis Division Policies and Procedures related to credit reform cost estimates. This document addressed the official baseline (i.e., current law) subsidy estimates, reestimates, and modification cost estimates. The document included procedures and documentation requirements related to (1) extracting and validating data used for subsidy cost estimates, (2) review and approval of the use of informed opinion, (3) updating and evaluating model assumptions, (4) a process to ensure subsidy cost estimates are consistent with the program's legislation, (5) a process to evaluate assumptions and model results for reasonableness, and (6) procedures for performing sensitivity analysis.
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