OMB Bulletin No. 96-04

December 26, 1995

OMB BULLETIN NO. 96-04

TO THE HEADS OF EXECUTIVE DEPARTMENTS AND AGENCIES

SUBJECT: New Credit Data requirement for Credit Programs

1. Purpose. This Bulletin informs Federal agencies of new credit data reporting requirements included in the report language of the Treasury-Postal Appropriations Act of 1996, P.L. 104-52. For both performing and non-performing loans, the report language requires the Administration to provide two estimates of the value of the Government's outstanding loan portfolio: (1) expected cash flows to the Government (along with a separate estimate of the administrative costs); and (2) expected cash flows to or from a private holder (if the loans were sold) for both the financing and liquidating accounts. Data collected in accordance with this report language will be used by Congress and OMB to determine whether it would be worthwhile to pursue loan asset sales. These data will be included in the FY 1997 Budget.

2. Background. Report language accompanying the Treasury-Postal Appropriations Act of 1996 instructs OMB to "direct, and coordinate with, the Federal agencies involved in credit programs to evaluate the value of their credit programs, including the cost of annual administrative expenses and develop a plan for the privatization [sic] of such credit programs." For the purposes of this analysis, "outstanding portfolio" is defined as direct loans and loan guarantees outstanding as of September 30, 1995.

The Treasury/Postal conferees believe that the private sector is willing to pay substantially more than the Government's expected value of its portfolio. The report language states that "[u]sing conservative estimates, it may be that between $20,000,000,000 to $50,000,000,000 could be realized if much of the Federal credit program was to be turned over to the private sector."

To allow for the comparison of the value of different types of loans, agencies are asked to divide the outstanding portfolios in the liquidating and financing accounts as of September 30, 1995, into two categories: Category A (substantially performing) and Category B (non-performing). Substantially performing loans are defined as loans that are current or delinquent less than 90 days. Non-performing loans are those loans delinquent for 90 days or more. For international programs, Category B loans include loans to countries that currently have a rescheduling or a debt reduction program with the Paris Club.

3. Action required. Provide the information outlined below for each loan program. To assist in the data collection, a Lotus spreadsheet ("port _yal.wk3") will be sent with this Bulletin. Data should be delivered to the OMB examiner with primary responsibility using this spreadsheet by February 9, 1996.

A. Loan categorization. Agencies are asked to categorize loans outstanding as of September 30, 1995, into either Category A (substantially performing) or Category B (non-performing). For Loan Guarantee programs, please specify the cumulative balance of defaulted loans that were previously guaranteed and have resulted in loans receivable. Agencies are requested to provide the weighted average number of years remaining to maturity for Categories A and B.^1/

B. Scheduled direct loan repayments. For direct loan programs, agencies are asked to report the scheduled repayments (the amounts that would be received if there were no defaults or recoveries) for each direct loan program. If scheduled repayments are not known, agencies are asked to report best estimates of scheduled repayments.

C. Expected cash flows to Government. Agencies are asked to report the loan program's expected net cash flows to (+) or from (-) the Government, excluding administrative costs. For direct loan programs, expected cash flows (primarily principal and interest payments, net of defaults and recoveries) should be positive (+). For loan guarantee programs, as a result of claim payments, expected cash flows will typically be negative (-). Note: Please separate the defaulted loan guarantees that resulted in a loan receivable from the rest of the loan guarantee cash flows.

D. Factors affecting cash flow assumptions to the Government. Agencies are asked to provide the assumptions (default rate, recovery rate, weighted-average remaining maturity, weighted-average interest rate, fees, etc.) used in estimating the expected cash flows to the Government.

E. Expected cash flows to private sector. Agencies are asked to report for each direct loan and loan guarantee program the expected net cash flows for Category A and Category B if these loans and guarantees were sold to the private sector with no Federal guarantee (recourse) on the sale transaction.

F. Factors affecting private sector cash flow assumptions. Agencies are asked to list the assumptions and conditions which could cause cash flows to a private purchaser to differ from the expected cash flows to the Government.Some examples of generic conditions may be:

The private sector would lose the IRS tax offset, if currently used by the agency.

Differences in efficiency and quality of servicing and liquidating practices.

The private sector can be expected to pursue non-current loans more aggressively because of the profit motive.

Some examples of conditions specific to individual loans programs may be:

Legal or regulatory forbearance procedures. Agency regulations may allow purchasers to take more aggressive collection steps than the Government. For example, HUD must hold assigned mortgages for at least three years and practice detailed forbearance procedures.

Different recovery rates on collateral pledged on loans.

Type and value of collateral pledged.

Connections to other benefits (grants).

Other provisions that could change the value of proceeds.

G. Administrative costs. Agencies are asked to estimate the annual expenses directly associated with administering the loans outstanding on September 30, 1995. Administrative costs should be defined consistent with OMB Circular No. A-11, Section 33.5(n).

Agencies may use Method I: their own methodology for projecting administrative expenses or Method II: the methodology contained in the Lotus spreadsheet ("port_val.wk3") which accompanies this guidance. Method II relies on per loan costs in FY 1995 for projecting future administrative costs. If using Method II, agencies must:

(1) estimate the number of loans outstanding each year until maturity;

(2) project the net growth in administrative expenses (rising wages, productivity gains, and other factors should be taken into consideration); and

(3) project the percent of substantially performing loans as of September 30, 1995, that will become non-performing each year.

Agencies may modify Method II to more accurately reflect the expected annual administrative costs of their outstanding portfolios on September 30, 1995.

4. Comparison of cash flow projections. Using the data provided by agencies, OMB will compare: (1) the net present value of the Government's expected cash flows and administrative expenses, to (2) the expected net proceeds from selling the loans to the private sector, which is the net present value of the projected cash flows if the loans were sold to the private sector. Consistent with the estimation of loan modification cost (as defined in OMB Circular No. A-34, Section 65.3), Governmental cash flows will be discounted at the "applicable interest rate (yield) in the quarter when the modification occurs." For the purposes of this analysis, present value calculations will assume the Government's loan portfolio was sold to the private sector on September 30, 1995. Calculating the values as of the end of FY 1995 will minimize the assumptions underlying this analysis, such as the size of the portfolio outstanding and appropriate discount rates.

5. Due Date. Estimates should be delivered to the OMB examiner with primary responsibility for the credit account using this spreadsheet by February 9, 1996.

Alice M. Rivilin
Director

^1/ Consistent with guidance on modifications in OMB Circular No. A-34, Section 65.3, the average years remaining to maturity will determine the appropriate discount rate for net present value calculations of Governmental cash flows.