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

Fully implement SEBAS.

Tie program performance to budget requests.

Identify and implement accurate measurements of the economic benefits of B&I guaranted loans in rural communities. These outcomes can be compared year to year relative to external factors including appropriated dollars.

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.

Rewriting program regulations and any Notices of Funding Availability to target the program more effectively. Increasing its relevancy, thus increasing demand for the program.

Obtaining internal efficiencies to decrease the amount of time it takes to approve and execute a loan.

Measure: Rural Jobs Created/Saved

Explanation:This measure tracks the total number of jobs created/saved for the program. FY 2007 actual figures are considerably less than the targets as a result of increasing job costs for the program, as well as the fact that target figures were based on the programs full usage of funding. Since, FY '06, the Agency also issued stricter guidelines on how to calculate the number of jobs created/saved which has resulted in significantly lower numbers being recorded. The fiscal year 2008 target is based on a program level of $993 million. Future targets are based on a program level of $1 billion. (Job targets and actuals are based on actual number of employees regardless of full time status). Targets are established assuming that job costs will increase over time while the program level remains at $1 billion.

Measure: The time it takes to process an Application.

Explanation:This measures the average time from receipt of a complete application until the loan is obligated/approved. Processing time exceeds what is typical for the lending community in part because of the length of time it takes the Agency to complete environmental reviews for NEPA compliance. Additionally, the lender and borrower may need time to meet Agency conditions for issuance of the Loan Note Guarantee. Agency State Office personnel are responsible for delivery many programs in addition to the B&I program, so their time is not solely devoted to B&I. The average loan size for B&I loans was $2.1 billion in FY '07. Some loans are more complex than others and require additional due diligence by the Agency prolonging the processing time.

Measure: Percentage of loan recipients in the Portfolio that are small business owners.

Explanation:As part of the Rural Development Strategic Plan, the Agency will increase economic opportunity in Rural America. Part of our strategy to enhance the capital formation and support of the creation of diverse, sustainable businesses is to focus our efforts and provide additional assistance to small rural businesses. Up until the end of 2007, the agency could not accurately measure assistance to small businesses using the SBA definition. They assumed loans less than $1 million with fewer than 50 employees were small businesses. It is hoped that computer technologies will allowed RBS to use the SBA definition Starting in 2008. At which point, they expect that most of their loans will qualify as small businesses. Targets increased at a constant 2.5%

Measure: Businesses remaining in existence 5 years after closed.

Explanation:Part of the Rural Development Strategic Plan 2005-2010 is to support the creation of diverse, sustainable businesses. It is the goal of the program to assist businesses that have a high likelihood of success while recognizing the realities of the business world that many new businesses fail. The fiscal year 2008 target is based on a program level of $993 million. Future targets are based on a $1 billion program level. For the 5-year period from FY '00-'04, we compared all loans closed to loans that have been paid in full and loans that are outstanding. We did not include loans for which losses were paid, as we assumed that those businesses were no longer operational.

Measure: Percentage of small Businesses remaining in existence 5 years after closed.

Explanation: It is the goal of the program to assist small businesses that have a high likelihood of success while recognizing the realities of the business world that many new businesses fail. The fiscal year 2008 target is based on a program level of $993 million. Future targets are based on a $1 billion program level. For the 5-year period from FY '00-'04, we compared all loans closed to loans that have been paid in full and loans that are outstanding. We did not include loans for which losses were paid, as we assumed that those businesses were no longer operational.

Is the program purpose clear?

Explanation: The Business and Industry (B&I) Guaranteed Loan Program was created to improve, develop, or finance business, industry, and employment and improve the economic climate in rural communities. The program helps finance business, industry, and the employment of rural residents for the purpose of improving the economic climate in rural communities with populations less than 50,000.

Evidence: The program is authorized in Section 310B of the Consolidated Farm and Rural Development Act, as amended. The mission of the Agency 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. The B&I proposed rule States "The B&I program guarantees loans that help create jobs and stimulate rural economies by providing financial backing for rural businesses. Loan guarantees expand the lending capability of private lenders who provide financing to credit worthy entities and individuals in rural areas, helping them make and service quality loans that provide lasting community benefits. Loan proceeds may be used for permanent working capital, machinery and equipment, buildings and real estate, and certain types of debt refinancing. The primary purpose is to create and maintain employment and improve the economic climate in rural communities."

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

Explanation: The B&I Guaranteed Loan Program addresses the need for capital in rural communities. Due to a number of reasons, many businesses in rural areas (of 50,000 people or less) currently face difficulty in obtaining credit from private lenders. Many small community banks lack adequate capitalization to make these loans without government guarantees. Rural businesses may also find it difficult to obtain 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 help to match rural borrowers with rural lenders.

Evidence: These needs are well documented: 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, Credit in Rural America, Agricultural Economic Report no. 749, 1997. The Economic Research Service has a study underway reviewing the B&I program and its affects on rural communities. Its estimated completion date is Fall 2008. RBS will supplement the PART upon its completion.

Is the program designed so that it is not redundant or duplicative of any other 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, the Tennessee Valley Authority's 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 specific cases, programs can be differentiated: SBA's 7(a) loan levels are limited to $2 million 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: Guaranteed loan programs are a cost effective method of providing credit needs in under-served areas. The use of guaranteed loans has multiplied throughout the federal government to advance economic development in a wide arena of locations. The B&I program is structured to meet the needs of rural communities 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. To ensure that the program is free from major design flaws, the Agency performs its due diligence through a general review of the lenders' credit analyses. Agency personnel review the eligibility of the project and whether the credit meets the intent of the program. RD closely reviews credit quality, cash flow, and collateral. Projections are compared to industry averages for reasonableness. When determining the minimum tangible balance sheet equity requirement, the Agency considers the current status of the industry, collateral coverage, personal or corporate guarantees, cash flow, and management. RD also reviews the interest rate charged to ensure it is no more than what the lender would customarily charge a borrower if there were no guarantee.

Evidence: Section 310B of the Consolidated Farm and Rural Development Act, as amended, and RD Instructions 4279-A, 4279-B, and 4287-B. , and RD AN No. 4280 (4279-A and 4279-B), " Due Diligence."

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

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. To be eligible for a loan, the project must be located in a city or town with a population of less than 50,000. The Agency has a rural area identifier that can be accessed by the public as well as Agency personnel. This website is frequently used by the field to verify that the project location is in an eligible area. While the program is lender driven, the Agency performs its due diligence through a general review of the lenders' credit analyses. Agency personnel review the eligibility of the project and whether the credit meets the intent of the program. We closely review credit quality, cash flow, and collateral. Projections are compared to industry averages for reasonableness. When determining the minimum tangible balance sheet equity requirement, the Agency considers the current status of the industry, collateral coverage, personal or corporate guarantees, cash flow, and management. We also review the interest rate charged to ensure it is no more than what the lender would customarily charge a borrower if there were no guarantee. State Offices are required to take all B&I loans and servicing requests of a monetary nature to a State Office Loan Committee. Projects exceeding the State Director's approval authority are reviewed and analyzed a second time by a National Office Loan Specialist and are considered by a National Office Loan Committee. Funding prioritization only occurs when competition for program funds exceeds programmatic funding. In past years the agency set aside funds for businesses in Empowerment Zones and Enterprise Communities (EZ/EC) and Rural Economic Area Partnership (REAP) designated areas. In recent years, demand for the program has slackened and in 2007 and 2008 applications are funded on a first-come, first-served basis.

Evidence: 7 CFR 4279.155. The set-aside for EZ/EC/REAP for FY07 was $6.7 million. Due to an abundance of B&I program funds in FY '08, the Agency did not see a need to set aside funds for EZ/EC/REAP. Funds were set aside for other programs with less funds.

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: The B&I Long-term measures focus on the key outcomes of the program: long term success of small businesses and long term economic development. The two long term measures are: Businesses remaining in existence 5 years after the loan is closed and Percentage of small Businesses remaining in existence 5 years after the loan is closed. The core goal of the B&I guaranteed loan program is to support sustainable long term development in rural communities. These two measures focus on the big picture, capturing how successful the program is in choosing recipients that will play a role in these communities long into the future.

Evidence: 2007 USDA Business Programs Performance Plan. Rural Development Strategic Plan FY 2005-2010. Guaranteed Loan System (GLS). Performance Measures listed in PARTweb

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

Explanation: The B&I program has baselines and ambitious targets for both of its long term measures, the number of businesses remaining in existence 5 years after the loan closes, and the number of small businesses remaining in existence 5 years after the loan closes. For both measures, a long term target of 95% is extremely ambitious. Research indicated that the number of new businesses open after two years ranges from 66 to 76 percent; new businesses open after four years range from 47 to 50 percent, and new businesses open after six years ranges between 38 and 40 percent. Given these statistics, a target of 95% is extremely ambitious. The RBS chose these targets based off of 2000-2004 data. To obtain these targets the agency will need to maintain a high level of oversight. Only approve loans for businesses that appear likely to succeed in the long term.

Evidence: PART measures in this PART. The Rural Development FY 2007 and 2008 Annual Performance Plan and budget summary. The USDA Rural Development Strategic Plan fiscal years 2005-2010. Performance measures have been entered into the Department's performance measure tracking system, MITS. Headd, Brian. Redefining Business Success: Distinguishing Between Closure and Failure. Small Business Economics 21: 51-61, 2003.

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

Explanation: The B&I Guaranteed Loan Program has three specific annual measures/goals that support the longer-term goals and objectives of the program. These measures are: 1) The number of rural jobs created/saved, 2) the time it takes to process an application, and 3) the percentage of loan recipients that are small business owners. Though measures one and two are output measures, they require the agency to focus on types of loans they give out as well as improve their efficiencies. Though not directly tied to RBS's long term measures, they support the goals of the program and lead to its overall success. Measure three, an outcome measure, requires the agency to refocus their efforts on small businesses which are made up of a larger conglomerate of professions than the big businesses the agency has funded in the past. Focusing on small businesses will increase the diversity of the local community and promote a more sustainable economic infrastructure. Measure 1, Jobs created/saved captures the effect of the loan on the rural community; the more jobs created, in theory, the more economic impact the loan will have on the rural community. To obtain increased internal efficiencies, measure 2 was agreed upon. RBS has historically taken more time to review and approve guaranteed loans than the private sector, though they act in similar capacities. To improve their efficiencies and push them to reach private level application rates, measure 2 was created.

Evidence: Performance measures listed within this PART. The Rural Development FY 2007 and 2008 Annual Performance Plan, budget summary, and the Guaranteed Loan System. The USDA Rural Development Strategic Plan fiscal years 2005-2010. GLS.

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

Explanation: Ambitious Targets have been set and baselines established for all three annual performance measures. The targets for performance measure 1, jobs created/saved, remain constant and are considered ambitious at 16,625 for out years because we expect the loan level to remain constant for the foreseeable future and the cost of creating jobs will continue to increase. The agency is expected to choose loans that will be more effective at creating jobs with less nominal dollars. Targets for measure 2, the time it takes to process an application, are ambitious as they require the agency to cut processing time by 5 days annually. I.e., the agency is required to increase efficiencies by 9%, 10%, 11%, and 12.5% respectively. This will require the agency to make managerial changes to ensure improved response time. Targets for measure 3, percentage of loan recipients in the portfolio that are small business owners, are ambitious; they require the agency to make a concerted effort to distribute loans to small businesses. This will require new regulations, as well as training and coordinative efforts throughout the States.

Evidence: Performance Measures listed in this PART. The Rural Development FY 2007 and 2008 Annual Performance Plan, budget summary, and the Guaranteed Loan System. The USDA Rural Development Strategic Plan fiscal years 2005-2010. GLS.

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) 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 as well as provide other financial information. Lenders are required to certify that the guaranteed loan has a reasonable assurance of repayment based on the history, projections, equity, and collateral. In FY 2007, the Agency conducted a lenders conference that provided our partner/lenders the opportunity to convey their views on the program's strengths and weaknesses. The questions raised and Agency's subsequent responses are posted on our webpage. Agency performance measures are incorporated into management's individual elements and standards as part of their annual performance ratings.

Evidence: Agency regulations, primarily 7 CFR 4279-B and 4287-B. The FY 2005-2010 USDA Rural Development 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 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. The Agency's National Headquarters 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 routine independent assessments of both lenders and State Office operations. In the past FCA also reviewed National Office operations and program delivery. Rural Development engaged the services of Ernst and Young, LLP to provide an evaluation of how to monitor the servicing of Rural Development's guaranteed lenders efficiently and effectively, while meeting the statutory or Government-wide administrative requirements and maintaining internal controls. The Final Task Report, submitted to Rural Development on July 17, 2007, provides recommendations to improve operational and risk management processes. At FCA's and Ernst and Young's recommendation, the agency is moving toward a risk management approach to program delivery.

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 Audit Report September 30, 2003, National Report on the Business and Industry Loan Program. FCA National Office Business and Industry Guaranteed Loan Program Operational and Policy Review Report, September 30, 2005. Ernst and Young Final Report, July 17, 2007.

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: No, the The Rural Development Program budgets are not explicitly tied to the accomplishments of performance goals. Rural Development's Salaries and Expenses are a separate line item; not included in the funding request for the program. This along with the Agency's assumption that the program's loan level will remain constant at $1 billion makes it unlikely that funding will be tied to program performance in the future.

Evidence: President's 2009 Budget; PART performance measures.

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. This regulation will incorporate four Rural Development guaranteed loan programs into one rule. The Agency is also rewrote its strategic plan to include new indicators that more accurately reflect program goals and objectives. The Agency utilizes an automated loan and grant processing system (GLS) to provide comprehensive monitoring of program activities. Agency management and Loan Specialists have performance measures incorporated into their elements and standards and are part of the employee's annual performance rating.

Evidence: The proposed rule was published on September 14, 2007.

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. Overall delinquencies are monitored on a monthly basis and reported to the National Office on a quarterly basis. Reports on delinquent borrowers are required on a quarterly basis and are required to provide immediate notification in at risk situations. The lender analyzes the financial statements and provides the Agency servicing office with a written summary of the lender's analysis and conclusions, including trends, strengths, weaknesses, extraordinary transactions, and other indications of the financial condition of the borrower. The information is compared to industry standards and recommendations for corrective actions are made and taken when necessary. Data/information collected is used to plan the direction of the field, assistance visits, training, and other actions needed to manage the program and improve performance. For example, information obtained from renewable energy lenders indicated that successful renewable energy projects required tangible balance sheet equity of between 40 and 50 percent. As a result, the Agency amended its governing regulations to require between 25 to 40 percent equity for energy projects as opposed to the standard Agency practice of 10 percent for existing businesses and 20 percent for new businesses. The Guaranteed Loan System (GLS) is the Agency's current database for the B&I Guaranteed Loan program. GLS contains detailed information on the performance of the loan (delinquency rates and payment history), lender characteristics (type, key personnel, lender branch data), borrower characteristics (entity type, project information, security inspections, and status of insurance), and performance data (jobs created/saved, small businesses assisted). All of the information collected from our partners is used to improve program management and performance and accurately set meaningful performance goals and targets. The Agency prepares an annual report covering the performance of all programs administered by Business Programs. 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, incorporating four Rural Development guaranteed loan programs into one regulation to address identified concerns and deficiencies, such as lender performance and eligibility, borrower eligibility, priority goals, and underwriting requirements. In FY 2007, the Agency conducted a lenders conference that provided our partner/lenders the opportunity to convey their views on the program's strengths and weaknesses. The questions raised and Agency's subsequent responses are posted on our webpage. We have incorporated many of these comments into the proposed rule.

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. Rural Development webpage, www.rurdev.usda.gov.

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: The Administrator, Deputy Administrator, National Office managers, State Directors, and S/O Business Programs Directors are rated on their performance in processing and servicing B&I Guaranteed Loans. Their Performance elements and standards incorporate program performance goals linked to the PART, Strategic Plan, and Annual Performance Plan. 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 2006-I. Agency management and Loan Specialists have performance measures incorporated into their elements and standards and are part of each employee's annual performance rating. The program contains an efficiency measure to track the time frames associated with B&I application processing. Managers and staff will be held accountable for meeting the targets and ensuring improved performance.

Evidence: 7 CFR 4279-A, 4279-B, 4287-B, 2006-I, and 1901-A. Form 4279-04, Lender's Agreement Business and Industry Guaranteed Loan Program.

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

Explanation: Due to a lack of demand, the program has not fully obligated funds for the last two years; having extensive levels of carryover. This carryover has lead to the President's Budget proposal of a $700 million loan level in 2009, assuming a carryover loan level of $300 million. Though the program may not obligate funds in a timely manner, their 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: FY 2007 and 2008 Apportionments. 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, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: The National Office Loan Specialists make use of Moody's Financial Analyst software to make Agency credit analyses and reviews of lenders' credit analyses more consistent. In addition, RBS developed a short application form to expedite processing of loans in the amounts of $600,000. The Agency has noted that significant loan losses occur when the borrower ceases to operate the B&I funded facility. The regulations governing the B&I Guaranteed Loan program have numerous loan servicing requirements. These requirements are in place to give B&I borrowers every opportunity to be successful in maintaining the product or service to the rural community while continuing to meet their financial obligations to USDA Rural Development. The regulations governing the B&I program require that the Agency make every effort to recover the maximum level of Federal dollars once it becomes evident that the business will not succeed. The regulations have a significant number of loan recovery requirements related to transfers, sale of collateral, and loan restructuring. A reduction in loan losses ultimately requires the Federal Government to provide less subsidized funds for each project creating a more cost effective program. Each State Business Programs Director is held directly responsible for loan servicing of each B&I delinquency. Delinquency rates and loan losses have been incorporated into the performance plan for senior managers at the National Office level. The program has shown increased efficiencies in program delivery. Number of loan losses paid over the last 5 fiscal years have averaged 1.7 percent and percentage of dollars lost is .77 percent compared to historical losses of 21.94 percent and 10.58 percent, respectively, over program history. Evidence of improved efficiency is shown by declining subsidy rates: FY 2005 - 5.03%; FY '06 - 4.79%; FY '07 - 4.36%; and FY '08 - 4.32%. In addition to these internal efficiency measures, the agency has also agreed to the PART efficiency measure "The time it takes to process an Application". This measure requires the Agency to achieve time efficiencies, becoming more responsive to the lending community and supporting processing times at levels closer to the private sector.

Evidence: 7 CFR 4279-B contains the guidance and requirements to help Agency credit analyses and reviews of its lenders' credit analyses more consistent. Section 6019 of the 2002 Farm Bill contains the statutory authority for the short application form.

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. There is currently a GAO audit underway that is pursuing ways for SBA and Rural Development to collaborate on projects and program delivery. RBS is working 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. Other programs with which we have had joint funding of projects include Community Development Block Grants and other Rural Development programs. Currently the Agency has MOUs with the Farm Credit Administration, the Federal Deposit Insurance Corporation, the National Rural Utilities Cooperative Finance Corporation, the Export-Import Bank of the United States, the Department of the Army, the National Association of Government Guaranteed Lenders, Inc., Colson Services Corporation, the United States of Commerce-Minority Business Development Agency, and the U.S. Department of the Treasury Financial Management Service.

Evidence: The Rural Development FY 2007 and 2008 Annual Performance Plan, and http://www.rurdev.usda.gov/regs/regs_toc.html#2000.

Does the program use strong financial management practices?

Explanation: The most recent OIG audits (both program specific and general agency audits) and Management Control Reviews (MCR) of the Business and Industry Guaranteed Loan Program have identified no material weaknesses. The B&I program is undergoing an MCR in FY '08. No audit or review has identified any instance of the B&I program failing to meet the requirements of the Federal Credit Reform Act of 1990, the Debt Collection Improvement Act, or applicable guidance under OMB Circular A-129. Rural Development undergoes an annual financial audit; the Agency received a clean opinion on its latest financial audit and has no material internal control weaknesses. In addition to a mandatory 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. To obtain and maintain a loan, the lender analyzes the financial statements (annual submission required) and provides the Agency servicing office with a written summary of the lender's analysis and conclusions, including trends, strengths, weaknesses, extraordinary transactions, and other indications of the financial condition of the borrower. The information is compared to industry standards and recommendations for corrective actions are made and taken when necessary. Field staff monitor the use of funds through project completion to ensure that monies are obligated in a timely manner and are used for intended purposes. National Office staff monitors funds usage and program operations on an ongoing basis throughout the year. The lender must ensure that all project facilities must be designed utilizing accepted architectural and engineering practices and must conform to applicable Federal, state, and local codes and requirements. The lender will also ensure that the project will be completed with available funds and, once completed, will be used for its intended purpose and produce products in the quality and quantity proposed in the completed application approved by the Agency. The lender will monitor the progress of construction and undertake the reviews and inspections necessary to ensure that construction conforms with applicable Federal, state, and local code requirements; proceeds are used in accordance with the approved plans, specifications, and contract documents; and that funds are used for eligible project costs. For all construction contracts in excess of $10,000, the contractor must comply with Executive Order 11246, entitled "Equal Employment Opportunity," as amended by Executive Order 11375, and as supplemented by applicable Department of Labor regulations (41 CFR, part 60). The borrower and lender are responsible for ensuring that the contractor complies with these requirements. B&I Guaranteed Loans which involve the construction of or addition to facilities that accommodate the public and commercial facilities, as defined by the ADA, must comply with the ADA. The lender and borrower are responsible for compliance. Program procedures are in place to assure that loss payments are reviewed in the State, National, and Finance Offices before a final loss payment is made to the lender. Procedures are also in place to assure that future recoveries are collected from former, borrowers, guarantors, and lenders.

Evidence: Quarterly problem and delinquent loan reports and periodic OIG audits are evaluated and appropriate actions taken as a result. The Agency acquired Moody's Financial Analyst software to help make Agency credit analyses and reviews of its lenders' credit analyses more consistent. Loan Specialist Accreditation Plan, Management Control Reviews.

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

Explanation: BPAR , MCRs, and SIRs are conducted periodically, as are assistance visits. BPARs, MCRs, and SIRs, identify concerns and establish timeframes for the State Office to respond with proposed corrective actions. Program managers constantly conduct program evaluations and monitor operations in order to identify and correct any deficiencies. State Offices are required to submit postreview material on all loans approved. Identified problems, such as lack of Agency due diligence, are addressed via Administrative Notices. The regulations governing the B&I program require that the Agency make every effort to recover the maximum level of Federal dollars once it becomes evident that the business will not succeed. The regulations have a significant number of loan recovery requirements related to transfers, sale of collateral, and loan restructuring. A reduction in loan losses ultimately requires the Federal Government to provide less subsidized funds for each project creating a more cost effective program. Each State Business Programs Director is held directly responsible for loan servicing of each B&I delinquency. Delinquency rates and loan losses have been incorporated into the performance plan for senior managers at the National Office level. National Office reviews of postreview material revealed that Conditional Commitments varied in length and content. As a result, we developed a standardized Conditional Commitment incorporating "best practices" from different State Office Conditional Commitments. In addition to the lender's analysis, the Agency performs an underwriting process to ensure compliance with sound financial management practices.

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. FCA individual State Office and non-traditional lender reports. FCA report dated September 30, 2005, National Office Business and Industry Guaranteed Loan Program Operational and Policy. Ernst and Young Final Report, July 17, 2007. Loan Specialist Accreditation Plan.

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. State Internal Reviews are conducted periodically. 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 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. Each B&I loan application received is independently reviewed by the State Rural Development staff. A complete application is presented to the State Loan Committee, chaired by the State Director, for action. The Risk Management Association ratios are compared with the application's financial projections and actuals, where applicable. Each State Office will develop and maintain written procedures that identify elements of the State loan committee process, such as the members of the committee, what documents are to be prepared for and signed by the committee, and procedures for resolving any differences of opinion among members. Each State Office has been delegated certain loan making and servicing authority. The National Office has the Moody's software that provides an independent analysis of loan applications. All B&I loan applications in excess of their delegated authority is forwarded to the National Office for action. These B&I loan applications are presented to either the National Office Executive Loan (NOEL) Committee or the National Office Business and Industry (NOBI) Committee to review all B&I loan applications, changes in conditions, and loan servicing actions of a monetary-type nature that are in excess of authorities delegated to State Directors. These committees are advisory in nature as the approval official is responsible for the decisions. All recommendations will be in written form based on an objective analysis conducted by a National Office loan specialist. All requests for exceptions being considered by the Administrator will be reviewed by the NOEL Committee. Any use of the Administrator's Exception authority must be concurred in by the Office of the General Counsel and the Undersecretary's Office. Management capabilities, economic and industry trends, and collateral position are analyzed to ensure that the Federal Government recovers the maximum repayment of its investment. The B&I program is in compliance with the Debt Collection Improvement Act and reports and resolves delinquency in accordance with Department of Treasury guidance. Reports on delinquent borrowers are required on a quarterly basis and are required to provide immediate notification in at risk situations. The lender analyzes the financial statements and provides the Agency servicing office with a written summary of the lender's analysis and conclusions, including trends, strengths, weaknesses, extraordinary transactions, and other indications of the financial condition of the borrower. The information is compared to industry standards "best practices" and recommendations for corrective actions are made and taken when necessary. National Office managers monitor obligation reports from GLS on a weekly basis and more frequently as necessary. Other management reports are monitored as they are issued. The USDA OIG conducts periodic reviews to ensure that funds are spent for intended purposes and that proper loanmaking and servicing procedures are used. The Agency is subject to and adheres to the requirements of OMB Circular A-123, dealing with risk assessments and internal controls, as well as the Improper Payment Act, and related legislation.

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. FCA individual State Office and non-traditional lender reports. FCA report dated September 30, 2005, National Office Business and Industry Guaranteed Loan Program Operational and Policy. Ernst and Young Final Report, July 17, 2007.

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 OMB's Federal Credit Reform subsidy model, an audited cash flow model, which was approved by the OIG and OMB in 2001 and 2002. This model computes the risk of the loan guarantee program for the Federal government. The current subsidy rate calculation is a very credible estimate of the Government's NPV costs for the B&I program. The agency undertakes a rigorous analysis of input assumption and subsidy rates. Cash flows are revised and reviewed annually. The subsidy rate is formulated, re-estimated and apportioned within all OMB guidelines. While the magnitude of change in subsidy re-estimates 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 acquired Moody's Financial Analyst software, recognized as an industry standard and "best practice," to make National Office credit analyses and reviews of lenders' 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 performance goals?

Explanation: This program shows progress in achieving all of its long term measures (in 2006 measure 4 was at 85.7 percent and measure 5 was at 90.3%). Progress is being made towards achieving the long term measures. However, since both measures have only one year of data, a small extent is warranted.

Evidence: Rural Development annual program performance reports. Part measures in this PART.

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

Explanation: This program met two of its three annual measures in 2007. This trend supports that progress is being made. However, since data is only available for 2007, with a baseline of 2006, a small extent is warranted.

Evidence: Annual performance plan; Performance measures in PART.

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

Explanation: The program achieved its processing goal of 55 days for 2007 (the actual was 54.2 days). As the agency only has one year of data, it was given a small extent. This program has had problems in the past approving and executing loans. In 2006, it took an average of 59 days to process a loan; well over the 30 day average in the private sector. The agency continues to increase its efficiencies with the goal of a 40 day processing time by 2010. They are working on additional efficiency measures to better identify areas in need of improvement.

Evidence: Performance Measures and data

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

Explanation: The B&I program compares fairly well other programs with similar purposes and goals in its financial performance and cost effectiveness. For example, the program's subsidy rate would be comparable to the SBA 7(a) program if the SBA had a smaller annual fee. However, SBA's guarantee and annual renewal fees for the 7(a) program are twice that of the B&I. The B&I program is also cost-competitive with 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 2007 Annual Report and the SBA Annual Budget Request and Performance Plan.

Do independent evaluations of sufficient scope and quality 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 or review the full implementation of the program. To date, evaluations have largely focused on loan making and servicing activities and the financial performance of the portfolio. The Office of Inspector General (OIG) has completed numerous reports, but they are targeted on specific issues like lender oversight, or renewable energy activities. In 2003, USDA's OIG did an audit report of the B&I program.. The Agency has also contracted with FCA to perform routine assessments of both lenders and State Office operations, as well as contracted with FCA to conduct a review of National Office operations and program delivery. Rural Development engaged the services of Ernst and Young, LLP to provide an evaluation of how to monitor the servicing of Rural Development's guaranteed lenders efficiently and effectively, while meeting the statutory or Government-wide administrative requirements and maintaining internal controls. The Final Task Report was submitted to Rural Development on July 17, 2007.

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). USDA OIG report: National Report on the Business and Industry Loan Program (September 2003). FCA individual State Office and non-traditional lender reports. FCA report dated September 30, 2005, National Office Business and Industry Guaranteed Loan Program Operational and Policy. Ernst and Young Final Report, July 17, 2007.