oversight

Export-Import Bank: Enhancements Needed in Credit Program Underwriting Policies and Procedures

Published by the Government Accountability Office on 2019-05-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

            United States Government Accountability Office
            Report to Congressional Committees




            EXPORT-IMPORT
May 2019




            BANK

            Enhancements
            Needed in Credit
            Program Underwriting
            Policies and
            Procedures




GAO-19-43
                                               May 2019

                                               EXPORT-IMPORT BANK
                                               Enhancements Needed in Credit Program
                                               Underwriting Policies and Procedures
Highlights of GAO-19-43, a report to
congressional committees




Why GAO Did This Study                         What GAO Found
EXIM serves as the official export             GAO found that Export-Import Bank’s (EXIM) process for updating its
credit agency of the United States,            underwriting policies and procedures was properly designed and implemented.
providing a range of financial products        EXIM’s Loan, Guarantee and Insurance Manual (Manual) describes EXIM’s
to support the export of U.S. goods            underwriting policies and procedures for its short-, medium-, and long-term loans
and services. Following the 2007–2009          and loan guarantees. The Manual describes the responsibilities of divisions and
financial crisis, demand for EXIM              loan officers involved in the underwriting process and is required to be updated
support increased. However, from July          at least annually, except for material changes (e.g., changes resulting from
2015 to May 2019, EXIM lacked a                legislative actions or compliance with sanctions), which are required to be made
quorum on its Board of Directors and,
                                               as soon as possible.
as a result, was unable to approve
medium- and long-term transactions             EXIM has initiated a process to streamline the Manual, which consists of over
greater than $10 million.                      1,400 pages, by separating the policies and procedures, thus allowing for
The Export-Import Bank                         continuous reviews. The underwriting sections of the Manual are tentatively
Reauthorization Act of 2012 includes a         scheduled for review in 2019.
provision for GAO to evaluate EXIM’s           The primary guidance for designing and managing federal credit programs is
underwriting process. This report              Office of Management and Budget Circular A-129, Policies for Federal Credit
discusses the extent to which EXIM’s           Programs and Non-Tax Receivables. GAO found that EXIM‘s policies and
(1) process for updating its                   procedures were consistent with three of five areas of federal guidance; two
underwriting policies and procedures is
                                               areas related to lender and servicer eligibility and risk sharing practices were
properly designed and implemented
                                               partially consistent with federal guidance.
and (2) underwriting policies and
procedures for loan and loan                   Applicant screening. EXIM’s policies and procedures were consistent with
guarantee transactions are consistent          guidance in that they require applicants to provide relevant financial information
with guidance for managing federal             and assessments of applicant eligibility and creditworthiness.
credit programs. To address these
objectives, GAO evaluated EXIM’s               Loan documentation. EXIM’s process was consistent with guidance in that it
underwriting policies and procedures           requires the preparation of loan files, which include the application, credit
against federal guidance and                   reports, and related analyses, as well as collateral documentation and loan
discussed the underwriting process             agreements.
with EXIM officials.
                                               Collateral requirements. EXIM’s process was consistent with guidance in that it
What GAO Recommends                            requires a security interest in the financed export items.
GAO is making two recommendations              Lender and servicer eligibility. EXIM established eligibility and decertification
to enhance EXIM’s policies and                 procedures for short-term delegated authority lenders that were consistent with
procedures related to (1) the use of           guidance. However, it did not establish similar procedures for medium-term
medium-term delegated authority                delegated authority lenders.
lenders and (2) periodic program
reviews. EXIM concurred with GAO’s             Risk sharing practices. EXIM’s process was generally consistent with guidance
recommendations and described                  in that EXIM provides loan guarantee terms that officials stated were necessary
actions planned to address them.               to achieve program purposes. However, federal guidance also calls for an
                                               agency to periodically review programs in which the government bears more
                                               than 80 percent of any loss. While EXIM prepares various program reviews, it
                                               has not developed procedures to help ensure that its risk sharing practices are
                                               routinely reviewed.
                                               Without enhancements to its policies and procedures, EXIM may allow lenders
View GAO-19-43. For more information,          that are not qualified to underwrite transactions and runs the risk that it will not
contact James R. Dalkin at (202) 512-3133 or
dalkinj@gao.gov.
                                               effectively review its programs.



                                                                                         United States Government Accountability Office
Contents


Letter                                                                                   1
               Background                                                               4
               EXIM’s Process for Updating Its Underwriting Policies and
                 Procedures Was Properly Designed and Implemented                      14
               EXIM’s Underwriting Policies and Procedures Were Mostly
                 Consistent with Federal Guidance, but Could Be Enhanced               15
               Conclusions                                                             29
               Recommendations for Executive Action                                    29
               Agency Comments                                                         30

Appendix I     Objectives, Scope, and Methodology                                      32



Appendix II    Comments from the Export-Import Bank of the United States               34



Appendix III   GAO Contact and Staff Acknowledgments                                   36



Tables
               Table 1: GAO Assessment of EXIM’s Underwriting Policies and
                       Procedures against Federal Guidance                             16
               Table 2: GAO Assessment of EXIM’s Underwriting Policies and
                       Procedures for Applicant Screening against Federal
                       Guidance                                                        17
               Table 3: GAO Assessment of EXIM’s Underwriting Policies and
                       Procedures for Loan Documentation against Federal
                       Guidance                                                        20
               Table 4: GAO Assessment of EXIM’s Underwriting Policies and
                       Procedures for Collateral against Federal Guidance              22
               Table 5: GAO Assessment of EXIM’s Underwriting Policies and
                       Procedures for Lender and Servicer Eligibility against
                       Federal Guidance                                                24
               Table 6: GAO Assessment of EXIM’s Underwriting Policies and
                       Procedures for Risk Sharing Practices against Federal
                       Guidance                                                        27




               Page i                                          GAO-19-43 Export-Import Bank
Figures
          Figure 1: Export-Import Bank Loans and Loan Guarantees                                    6
          Figure 2: Export-Import Bank’s Total Authorizations by Type and
                   Length of Term for Fiscal Years 2014 through 2018                                 9
          Figure 3: Export-Import Bank’s Underwriting Process                                       11




          Abbreviations

          AFP                        Approved Finance Provider
          Credit Policy              Credit Policy Division
          CRTI                       character, reputational, and transaction integrity
          DUNS                       Dun & Bradstreet Data Universal Numbering
                                     System
          ECA                        export credit agency
          EXIM                       Export-Import Bank of the United States
          LTV                        loan-to-value
          Manual                     Loan, Guarantee and Insurance Manual
          MGA                        Master Guarantee Agreement
          OECD                       Organisation for Economic Co-operation and
                                     Development
          OGC                        Office of General Counsel
          OIG                        Office of Inspector General
          OMB                        Office of Management and Budget
          TIN                        taxpayer identification number
          Treasury                   Department of the Treasury



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          Page ii                                                     GAO-19-43 Export-Import Bank
                       Letter




441 G St. N.W.
Washington, DC 20548




                       May 14, 2019

                       The Honorable Mike Crapo
                       Chairman
                       The Honorable Sherrod Brown
                       Ranking Member
                       Committee on Banking, Housing, and Urban Affairs
                       United States Senate

                       The Honorable Maxine Waters
                       Chairwoman
                       The Honorable Patrick T. McHenry
                       Ranking Member
                       Committee on Financial Services
                       House of Representatives

                       The mission of the Export-Import Bank of the United States (EXIM) is to
                       support the export of U.S. goods and services through loans, loan
                       guarantees, and insurance, thereby supporting U.S. jobs. Following the
                       financial crisis of 2007–2009, EXIM’s outstanding financial commitments,
                       or risk exposure, grew to about $112 billion in 2014, primarily in its long-
                       term loans and loan guarantees. 1 However, EXIM’s risk exposure
                       subsequently decreased to about $61 billion in 2018 primarily because of
                       two factors. First, from July 1, 2015 to December 4, 2015, EXIM’s
                       authority to incur new obligations lapsed. 2 Second, from July 20, 2015 to
                       May 8, 2019, EXIM lacked a quorum on its Board of Directors, and as a
                       result, it was unable to approve transactions greater than $10 million. 3




                       1
                         All years in this report are federal fiscal years unless otherwise indicated. The federal
                       fiscal year runs from October 1 through September 30.
                       2
                        EXIM’s legal authorization includes a defined termination date, which has been
                       periodically extended by laws reauthorizing the entity. On July 1, 2015, this termination
                       date passed, and, although EXIM was permitted to continue to carry out existing
                       obligations, it lacked authority to execute new ones. Statutory authority to resume full
                       operation was restored by the Export-Import Bank Reform and Reauthorization Act of
                       2015, Pub. L. No. 114-94, div. E, § 54001, 129 Stat. 1312, 1768 (Dec. 4, 2015), which
                       extended the termination date to September 30, 2019.
                       3
                        A quorum of the Board of Directors consists of at least three members.




                       Page 1                                                         GAO-19-43 Export-Import Bank
EXIM is governed by a charter, which requires the transactions it
authorizes to have a reasonable assurance of repayment. 4 To comply
with this requirement, EXIM must manage multiple risks when it extends
export financing, including credit, political, market, and operational risks.
EXIM uses a number of risk-management techniques throughout the
different stages of a transaction, including underwriting, monitoring and
restructuring, and recovering on defaulted transactions.

The Export-Import Bank Reauthorization Act of 2012 included a provision
for GAO to evaluate, among other things, EXIM’s underwriting process for
its loan and loan guarantee transactions. 5 This is our second report in
response to the act, and it examines the extent to which EXIM’s (1)
process for updating its underwriting policies and procedures is properly
designed and implemented and (2) underwriting policies and procedures
for loan and loan guarantee transactions are consistent with guidance for
managing federal credit programs. 6

To assess the extent to which EXIM’s process for updating its
underwriting policies and procedures is properly designed and
implemented, we reviewed EXIM’s policies and procedures for updating
the Loan, Guarantee and Insurance Manual (Manual), discussed the
process with EXIM officials, and assessed the process based on
Standards for Internal Control in the Federal Government. 7 We did not
evaluate EXIM’s compliance with its process for updating its underwriting
policies and procedures or assess its operating effectiveness.



4
 As a government corporation, the statutory text establishing EXIM and governing its
operations is referred to as a charter. See Export-Import Bank Act of 1945, Pub. L. No. 79-
173 (July 31, 1945), classified in part, as amended, at 12 U.S.C. §§ 635-635t.
5
 Pub. L. No. 112-122, § 17(a), 126 Stat. 350, 359 (May 30, 2012). The underwriting
process encompasses EXIM’s underwriting guidelines, lending policies, due diligence
procedures, and content guidelines. Content guidelines refer to EXIM’s foreign content
eligibility criteria and limitations on the level of foreign content that may be included in
EXIM’s financing package. EXIM’s foreign content eligibility states that in order to be
eligible for EXIM financing, goods and services in a U.S. supply contract must be shipped
from the United States to a foreign buyer.
6
 The first report GAO issued in response to the act was issued in September 2014. GAO,
Export-Import Bank: Enhancements Needed in Loan Guarantee Underwriting Procedures
and for Documenting Fraud Processes, GAO-14-574 (Washington, D.C.: Sept. 9, 2014).
7
 GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
(Washington, D.C.: September 2014).




Page 2                                                        GAO-19-43 Export-Import Bank
To assess the extent to which EXIM’s underwriting policies and
procedures governing loan and loan guarantee transactions were
consistent with guidance for managing federal credit programs, we
reviewed relevant requirements and guidance, including the Office of
Management and Budget’s (OMB) Circular A-129 Policies for Federal
Credit Programs and Non-Tax Receivables and the Department of the
Treasury (Treasury) Bureau of the Fiscal Service’s Managing Federal
Receivables: A Guide for Managing Loans and Administrative Debt, to
identify key guidance for managing federal credit programs, including
standards for extending credit, managing and overseeing credit
programs, and managing guaranteed loan lenders and servicers.

We compared EXIM’s Manual—which describes, among other things,
procedures for assessing loan and loan guarantee applications and
preparing loan documentation—to federal guidance for managing federal
credit programs. As part of this comparison, we assessed whether
policies and procedures included in EXIM’s Manual were consistent with
federal guidance. However, because of EXIM’s limited lending authority
during the period of our audit, we did not verify EXIM’s compliance with its
underwriting policies and procedures or assess their operating
effectiveness. In areas where we found EXIM’s policies and procedures
to be consistent with federal guidance, there may still be opportunities to
improve operating effectiveness.

We also reviewed EXIM’s Office of Inspector General (OIG) reports since
2014 related to underwriting issues, various laws applicable to EXIM, and
GAO reports related to EXIM. We discussed underwriting requirements
and the due diligence process with EXIM officials. We also discussed
export credit financing and risk sharing practices with an official from the
Organisation for Economic Co-operation and Development (OECD). 8




8
 OECD provides a forum in which governments work together to seek solutions to
common problems, share experiences, and identify best practices to promote better
policies. OECD’s role in export credits involves maintaining the Arrangement on Officially
Supported Export Credits (Arrangement), which stipulates the financial terms and
conditions for official export credits. The main purpose of the Arrangement is to provide a
framework for the orderly use of officially supported export credits. This provides a level
playing field, whereby exporters compete on the basis of the price and quality of their
products, rather than the financial terms provided, and eliminates trade distortions and
subsidies. OECD consists of 36 member countries, as of January 2019, including the
United States.




Page 3                                                       GAO-19-43 Export-Import Bank
             We conducted this performance audit from January 2017 to May 2019 in
             accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives. Appendix I provides more
             information on our scope and methodology.


             EXIM is an independent executive branch agency and a wholly owned
Background   U.S. government corporation. EXIM is the official export credit agency
             (ECA) of the United States, and its mission is to support the export of
             U.S. goods and services, thereby supporting U.S. jobs. 9 EXIM’s charter
             states that it should not compete with the private sector. Rather, EXIM’s
             role is to assume the credit and country risks that the private sector is
             unable or unwilling to accept, while still maintaining a reasonable
             assurance of repayment. EXIM must operate within the parameters and
             limits authorized by law, including, for example, statutory mandates that it
             support small business and promote sub–Saharan African and
             environmentally beneficial exports. In addition, EXIM is authorized to
             provide financing on a competitive basis with other ECAs and must
             submit annual reports to Congress on its actions.

             EXIM operates under the leadership of a president who also serves as
             Chairman of EXIM’s Board of Directors. The board is structured to include
             five members. All positions are appointed for 4-year terms by the
             President of the United States with the advice and consent of the Senate.
             The board is responsible for adopting and amending bylaws for the
             proper management and functioning of EXIM. Furthermore, the board
             approves EXIM’s financing either directly or through delegated authority.
             On May 8, 2019, the Senate confirmed a new president and two other
             board members, ending the lack of a quorum needed to approve
             transactions over $10 million that had existed since July 20, 2015.

             EXIM’s organizational structure includes various offices and divisions
             operating under its president. The Office of Board Authorized Finance is

             9
              ECAs provide export credits with explicit government backing, where either the
             government or the government-owned ECA assumes all or a portion of the risk.
             Governments provide official export credits support through ECAs for national exporters
             competing for foreign sales.




             Page 4                                                     GAO-19-43 Export-Import Bank
subdivided into business divisions that are responsible for underwriting
related to loans and loan guarantees, including processing applications,
evaluating the compliance of transactions with credit and other policies,
performing financial analyses, negotiating financing terms, coordinating
and synthesizing input to credit recommendations from other divisions,
and presenting credit recommendations for approvals.

EXIM facilitates support for U.S. exports through three major products: (1)
loans; (2) loan guarantees, which include working capital guarantees; and
(3) export credit insurance. 10 All EXIM obligations carry the full faith and
credit of the U.S. government. Based on its mission to support U.S.
employment, EXIM currently requires a certain amount of U.S. content for
an export contract to receive EXIM financing. 11 EXIM’s loans generally
carry fixed-interest rate terms under the Arrangement on Officially
Supported Export Credits negotiated among OECD members. EXIM’s
loan guarantees cover loans disbursed by private lenders by committing
to pay the lenders if the borrower defaults. Both loans and loan
guarantees may be classified as short-, medium-, or long-term.

From fiscal year 2008 to fiscal year 2017, EXIM was “self-financing” for
budgetary purposes—financing its operations from receipts collected from
its customers—and operating within the parameters and limits authorized
by Congress. However, according to EXIM, because of the lack of
quorum on the Board of Directors, in fiscal year 2018 it was unable to
approve transactions over $10 million and, as a result, was not able to
generate sufficient cash inflows to fully self-finance program and
administrative costs. EXIM reported that when it is back to being fully
operational, it plans to regain full self-financing status. See figure 1 for
additional details on EXIM’s loans and loan guarantees.




10
 Export credit insurance was not included in the scope of our audit.
11
  Content is the amount of domestic and foreign costs from labor, materials, overhead,
and other inputs associated with producing an export.




Page 5                                                      GAO-19-43 Export-Import Bank
Figure 1: Export-Import Bank Loans and Loan Guarantees




                                       a
                                        The financed amount is the total amount of the EXIM support. For medium- and long-term
                                       transactions, EXIM provides up to 85 percent financing with the remaining 15 percent paid by the
                                       borrower or financed separately. EXIM financing could be less than 85 percent depending on the U.S.
                                       content. EXIM’s medium- and long-term loan guarantees generally cover 100 percent of the financed
                                       amount if the borrower defaults.




                                       Page 6                                                           GAO-19-43 Export-Import Bank
•    Short-term loans and loan guarantees: Short-term financing
     consists of all transactions with repayment terms of less than 1 year,
     while Working Capital Guarantee program short-term financing may
     be approved for a single loan or a revolving line of credit that can be
     renewed for up to 3 years. In general, if the financed eligible product
     contains at least 50 percent U.S. content, then the entire transaction
     value is eligible for a working capital guarantee. Generally, for working
     capital guarantees, EXIM guarantees 90 percent of the loan’s
     principal and interest if the borrower defaults. Therefore, the lender
     maintains the risk of the remaining 10 percent. EXIM’s payment of
     working capital claims is conditional upon transaction participants’
     compliance with EXIM requirements such as underwriting policies,
     deadlines for filing claims, payment of premiums and fees, and
     submission of proper documentation. EXIM has reported that over 80
     percent of its working capital guarantee transactions are approved by
     lenders with delegated authority, which means that commercial
     lenders approve the guaranteed loans in accordance with agreed-
     upon underwriting requirements without first obtaining EXIM
     approval. 12 If a lender does not have delegated authority, EXIM
     performs its own underwriting procedures and approves the
     guaranteed loans.
•    Medium- and long-term loans and loan guarantees: For medium-
     and long-term loan and loan guarantee transactions, EXIM provides
     up to 85 percent financing with the remaining 15 percent paid by the
     borrower or financed separately. The financing could be less than 85
     percent depending on the U.S. content. 13 EXIM’s medium- and long-
     term loan guarantees generally cover 100 percent of the financed
     amount if the borrower defaults. EXIM’s guarantee to the lender is
     transferable and unconditional, meaning that EXIM must pay
     submitted claims regardless of the cause of default. EXIM generally
     underwrites medium- and long-term loans and loan guarantees for
     $10 million and less, and EXIM officials with delegated authority
     approve the transactions. Further, EXIM has provided certain lenders

12
  Delegated authority lenders are private financial institutions and nonfinancial companies,
subject to prior EXIM qualifications and criteria, that may be granted authority after a
review process to commit EXIM resources for certain extensions of credit.
13
  Financing 85 percent of the value of these transactions is considered full financing
because of provisions under the OECD Arrangement that export credit agencies generally
do not finance more than this for transactions with terms greater than 2 years. Eligible
goods could include foreign content if shipped from the United States. In addition, EXIM
guarantees can cover some local costs, such as on-site construction services, beyond the
value of the export contract.




Page 7                                                       GAO-19-43 Export-Import Bank
                      delegated authority to underwrite and approve these guarantees.
                      EXIM underwrites long-term loans and loan guarantees greater than
                      $10 million, and its Board of Directors approves the transactions.

EXIM’s Credit    As noted earlier, EXIM’s authority to approve transactions lapsed from
Authorizations   July 1, 2015, to December 4, 2015. Further, from July 20, 2015 to May 8,
                 2019, EXIM’s Board of Directors lacked a quorum, and, as a result, EXIM
                 was unable to approve transactions greater than $10 million.
                 Consequently, EXIM’s annual authorizations for loans, loan guarantees,
                 and export credit insurance decreased from about $20 billion in 2014 to
                 about $3 billion in 2018, a decrease of about 83 percent. 14 See figure 2
                 for EXIM’s total authorizations by type and length of term for 2014
                 through 2018.




                 14
                    An authorization is an export financing transaction for which EXIM has granted credit
                 approval. While authorizations greater than $10 million represent a small share of the total
                 number of authorizations, the total dollar value associated with these authorizations
                 represents a large share of the total dollar value of all authorizations. For example, in
                 fiscal year 2014, the last full year of normal operations, EXIM’s long-term loans and
                 guarantees accounted for less than 2 percent of the number of authorizations while
                 accounting for 62 percent of the total dollar value of all authorizations.




                 Page 8                                                       GAO-19-43 Export-Import Bank
Figure 2: Export-Import Bank’s Total Authorizations by Type and Length of Term for Fiscal Years 2014 through 2018




EXIM’s Policies and                      EXIM’s Manual describes EXIM’s underwriting policies and procedures
Procedures for Extending                 for each of its products offered, including short-, medium-, and long-term
                                         loans and loan guarantees. The Manual describes the responsibilities of
Credit
                                         EXIM’s divisions (e.g., Transportation, Structured and Project Finance, or
                                         Working Capital Finance) involved in the underwriting process.

                                         EXIM’s Office of Board Authorized Finance is in the process of
                                         streamlining the Manual, which is over 1,400 pages. A goal of this
                                         process is to separate procedures from policies, thus allowing for policies
                                         and procedures to be continuously reviewed. An EXIM official told us that
                                         these steps should improve the agency’s efficiency, transparency, and
                                         accountability. The underwriting sections of the Manual are tentatively
                                         scheduled for review in 2019.




                                         Page 9                                                GAO-19-43 Export-Import Bank
Overview of EXIM’s     EXIM loan officers perform the underwriting for loans and long-term loan
Underwriting Process   guarantees. The underwriting of medium-term or working capital loans
                       guaranteed by EXIM is performed by either EXIM loan officers or qualified
                       lenders with delegated authority, which allows the lender to authorize a
                       loan that EXIM guarantees in accordance with agreed-upon underwriting
                       requirements without first obtaining EXIM approval. 15 When the
                       underwriting and credit decision is delegated to approved lenders, EXIM
                       does not perform the underwriting procedures.

                       EXIM’s underwriting process calls for thorough credit assessments by
                       subject matter experts and loan officers. These assessments evaluate
                       key transactional risks, such as the borrower’s industry, competitive
                       position, operating performance, liquidity position, leverage, and ability to
                       service debt obligations. Frequently, credit enhancements are included in
                       the structure of long-term financing (often in the form of collateral) in order
                       to decrease the risk of a borrower default but also to increase the
                       recovery in the event of a default. A risk rating is assigned to the
                       transaction based on this evaluation which, in turn, determines the
                       transaction fee that a borrower pays and assists in establishing the level
                       of loss reserves EXIM must set aside. The credit assessments undergo
                       multiple levels of internal review.

                       All transactions of EXIM carry some risk; however, transactions approved
                       through delegated authority lenders potentially carry a higher level of
                       inherent risk because third-party financial institutions make the decisions.
                       To mitigate the risk, EXIM reviews medium-term transactions approved
                       by delegated authority lenders before the transactions are executed to
                       assure compliance with EXIM’s delegated authority lending policies. For
                       working capital guarantee delegated authority, EXIM conducts periodic
                       examinations of the lenders, reviewing ongoing transactions and lender
                       compliance with the delegated authority program. The examinations are
                       intended to identify lenders that are not satisfactorily managing the
                       requirements of the delegated authority program.

                       To mitigate the risk for its internal credit process, EXIM developed and
                       documented underwriting processing steps from the time the application
                       is received through the approval of the appropriate credit structure. These
                       15
                         External delegated authority has been granted to certain lenders under the Working
                       Capital Guarantee program and a few lenders under the medium-term guaranteed loan
                       program for loans of $10 million and less.




                       Page 10                                                   GAO-19-43 Export-Import Bank
                                        steps serve to (1) establish a framework for sound credit decisions, (2)
                                        communicate to EXIM employees the requirements governing the
                                        extension of credit, and (3) encourage documentation and the consistent
                                        application of EXIM’s credit policies and procedures. According to EXIM
                                        officials, the underwriting process also serves as EXIM’s primary method
                                        for preventing fraud because of the due diligence performed on the
                                        proposed transaction. Figure 3 summarizes EXIM’s underwriting process.

Figure 3: Export-Import Bank’s Underwriting Process




                                        Application intake. When an application is initially received, it is
                                        screened for basic completeness, follow-up on incomplete or
                                        unacceptable applications is performed, and it is assigned to a processing
                                        division.

                                        Application screening. After an application is determined to be
                                        complete, it is assigned to the applicable EXIM division that oversees the
                                        applicable type of project. For example, an application for the purchase of
                                        an aircraft would be assigned to the Transportation Division. Once
                                        assigned, a loan officer in that division is to assess the eligibility of the
                                        transaction. To ensure compliance with laws and regulations, the loan
                                        officer is to obtain and assess various certifications from transaction
                                        participants. Loan officers are also required to submit the corporate and
                                        individual names and addresses of lenders, borrowers, guarantors, and
                                        other transaction participants to the EXIM Library. Library staff are then to
                                        conduct a Character, Reputational, and Transaction Integrity (CRTI)
                                        review—a procedure designed to provide a level of due diligence over
                                        various risks and to help prevent fraud by checking loan participants’
                                        information against 28 databases.




                                        Page 11                                            GAO-19-43 Export-Import Bank
Risk assessment and due diligence. Once the transaction is
considered minimally eligible for EXIM support, the loan officer is required
to perform a series of due diligence activities to determine (1) whether the
transaction provides a reasonable assurance of repayment, (2) any
potential material issues regarding the transaction or the participants that
would preclude EXIM support, and (3) the appropriate risk level and
pricing for the transaction. As part of the financial evaluation of the
transaction, the loan officer is required to obtain and analyze the
borrower’s financial statements, 16 credit reports or rating agency
reports, 17 financial projections, and other relevant information. As
applicable, the loan officer is required to obtain input from other EXIM
staff, such as attorneys or engineers, to conclude on the legal, technical,
economic, or environmental risks of the transaction. Based on this due
diligence, the loan officer is to assess the transaction for risk and assign
an overall risk rating. This rating is used to calculate the exposure fee
EXIM will charge the borrower for guaranteeing the transaction. Greater
perceived risks result in higher fees.

Credit structure. After the risk assessment and due diligence is
performed, the loan officer determines the financing terms and conditions
to be recommended. The loan officer is generally required to structure the
transaction to include a security interest (collateral) in the financed goods
or other assets of the borrower. If it is determined that collateral is not
necessary, the loan officer is to document the explanation and mitigating
factors (e.g., EXIM support is small relative to a borrower’s size). For all
aircraft transactions, the loan officer is required to perform an assessment
and loan-to-value analysis of the collateral, and the financing terms must
include requirements for the borrower to maintain ownership and
condition of the collateral.

Credit decision. The loan officer is to document the due diligence in a
credit or board memo, which includes the loan officer’s recommendation
to approve or decline the transaction. These memos and applicable

16
  EXIM evaluates financial statements to assess the financial condition of the primary
source of repayment. EXIM also determines the quality of the financial statements on
factors such as whether the financial statements are audited and who performed the audit.
17
   A credit report is a document created by a credit reporting agency that summarizes the
financial history of a party (a person or a business). Examples of information found in a
credit report include the amount of credit available to a party, how much of its credit limit a
party tends to rely on for purchases, whether the party has a history of paying bills on
time, and whether a party has previously gone through bankruptcy.




Page 12                                                        GAO-19-43 Export-Import Bank
                        supporting documentation are then to be forwarded to the approving
                        party. The credit memo applicable to working capital or medium-term
                        transactions is to be provided to EXIM officials with individual delegated
                        authority to approve transactions of $10 million and less. Board memos
                        for long-term transactions or transactions greater than $10 million are to
                        be provided to the EXIM Board of Directors for approval. From July 2015
                        to May 2019, EXIM lacked a quorum on its Board of Directors, and as a
                        result, EXIM was unable to approve new transactions greater than $10
                        million.


Management of Federal   Government-wide guidance for federal agencies to follow for the
Credit Programs         management and operation of federal credit programs, such as loan and
                        loan guarantee programs, include the following: 18

                        •   OMB Circular A-129, Policies for Federal Credit Programs and Non-
                            Tax Receivables, revised in January 2013, describes policies and
                            procedures for designing and managing federal credit programs. The
                            guidance addresses various standards for applicant screening, loan
                            documentation, collateral requirements, determining and monitoring
                            lender and servicer eligibility, and lender and borrower stake in full
                            repayment. In addition, it details risk sharing practices that agencies
                            should follow, such as ensuring that lenders and borrowers who
                            participate in federal credit programs have a substantial stake in full
                            repayment in accordance with the loan contract.
                        •   Treasury’s Bureau of the Fiscal Service’s Managing Federal
                            Receivables provides federal agencies with an overview of standards,
                            guidance, and procedures for successful management of credit
                            activities, including screening applicants for creditworthiness and
                            financial responsibility, and managing, processing, evaluating and
                            documenting loan applications and awards for loan assistance.
                            Furthermore, it details how federal agencies should manage lenders
                            and servicers that participate in federally insured guaranteed loan
                            programs.




                        18
                          Although presented as “guidance,” in some cases the standards contained in these
                        documents are derived from statutes or executive orders with which federal agencies must
                        comply.




                        Page 13                                                   GAO-19-43 Export-Import Bank
                        We found that EXIM’s process for updating its underwriting policies and
EXIM’s Process for      procedures was properly designed and implemented. 19 Standards for
Updating Its            Internal Control in the Federal Government states that management
                        should design control activities to achieve objectives and respond to risks.
Underwriting Policies   Management’s design of internal control establishes and communicates
and Procedures Was      the who, what, when, where, and why of internal control execution to
                        personnel. Management should clearly document internal control in a
Properly Designed       manner that allows the documentation to be readily available and properly
and Implemented         managed and maintained. Further, management should also implement
                        control activities through policies and periodically review policies,
                        procedures, and related control activities for continued relevance and
                        effectiveness in achieving the entity’s objectives or addressing related
                        risks.

                        Underwriting policies and procedures are documented in EXIM’s Manual,
                        which consists of 26 chapters, covering various topics by product (e.g.,
                        long-term loans and loan guarantees) or process (e.g., application intake
                        or credit structure). We found that the Manual provides EXIM’s divisions
                        involved in the underwriting process with direction and guidance for
                        making credit decisions and is to be updated at least annually, except for
                        material changes, which are required to be incorporated as soon as
                        possible. The Credit Policy Division (Credit Policy) maintains and
                        manages the process for updating of the Manual and relies on EXIM’s
                        divisions for additions, updates, and revisions to it.

                        Credit Policy maintains an assignment list of the primary officer, the
                        primary reviewer, and the Office of General Counsel (OGC) reviewer,
                        who are responsible for each chapter in the Manual. Each year, the
                        process calls for Credit Policy to send an email to the primary officer and
                        two reviewers assigned to each chapter. This communication requests
                        that the officer review the assigned chapters for any needed changes.
                        After the assigned officer has reviewed the chapter, if there are no
                        contemplated changes, the primary officer assigned to the chapter is
                        required to notify Credit Policy of this determination by email with the
                        concurrence of the respective primary and OGC reviewers. If changes are
                        needed, the assigned officer is required to provide the updated chapter to



                        19
                          We did not evaluate EXIM’s compliance with its process for updating underwriting
                        policies and procedures or assess their operating effectiveness.




                        Page 14                                                    GAO-19-43 Export-Import Bank
                      Credit Policy by email with the concurrence of the primary and OGC
                      reviewers.

                      According to EXIM’s process, when material changes to the Manual are
                      needed, the necessary revisions do not wait for the annual update.
                      Instead, the responsible division is required to incorporate such changes
                      into the applicable chapter(s) of the Manual and submit them to Credit
                      Policy as soon as possible. EXIM officials stated that examples of
                      material changes that would be addressed immediately include
                      recommendations from oversight bodies, such as the EXIM OIG or GAO,
                      and changes resulting from legislative actions, such as updates to EXIM’s
                      charter or changes in compliance procedures related to sanctions.


                      The underwriting policies and procedures in EXIM’s Manual for its loan
EXIM’s Underwriting   and loan guarantee transactions were mostly consistent with OMB and
Policies and          Treasury guidance for managing federal credit programs. We evaluated
                      these policies and procedures for (1) applicant screening, (2) loan
Procedures Were       documentation, (3) collateral requirements, (4) lender and servicer
Mostly Consistent     eligibility, and (5) risk sharing practices. 20 As shown in table 1, EXIM’s
                      underwriting policies and procedures for the loan and loan guarantee
with Federal          programs were consistent with 12 of 15 applicable standards for
Guidance, but Could   managing federal credit programs and were partially consistent with
                      three. 21 Three other standards were not applicable to EXIM’s
Be Enhanced           underwriting.




                      20
                        Guidance for managing federal credit programs also includes additional criteria not
                      related to underwriting, which we did not assess.
                      21
                        While we assessed the design and implementation of EXIM’s underwriting policies and
                      procedures with guidance for managing federal credit programs, we did not evaluate
                      EXIM’s compliance with its underwriting policies and procedures or assess their operating
                      effectiveness. In areas where we found EXIM’s policies and procedures to be consistent
                      with federal guidance, there may still be opportunities to improve operating effectiveness.




                      Page 15                                                      GAO-19-43 Export-Import Bank
Table 1: GAO Assessment of EXIM’s Underwriting Policies and Procedures against Federal Guidance

 Federal guidance categories                                       Federal guidance standards                                                      Assessment
 Applicant screening                                               1.   Program eligibility                                                        Consistent
                                                                   2.   Delinquency on federal debt                                                Consistent
                                                                   3.   Creditworthiness                                                           Consistent
                                                                   4.   Delinquent child support                                                   Consistent
                                                                   5.   Taxpayer identification number                                             Consistent
 Loan documentation                                                6.   Loan documentation                                                         Consistent
                                                                                                                                                                    a
 Collateral requirements                                           7.   Appraisal of real property                                                 Not applicable
                                                                   8.   Loan-to-value ratio                                                        Consistent
                                                                                                                                                                    a
                                                                   9.   Liquidation of real property collateral                                    Not applicable
                                                                                                                                                                    a
                                                                   10. Asset management standards and systems                                      Not applicable
 Lender and servicer eligibility                                   11. Participation criteria                                                      Consistent
                                                                   12. Review of eligibility                                                       Partially consistent
                                                                   13. Fees                                                                        Consistent
                                                                   14. Decertification                                                             Partially consistent
                                                                   15. Loan servicers                                                              Consistent
 Risk sharing practices                                            16. Private lenders stake in full repayment                                     Consistent
                                                                   17. Borrowers stake in full repayment                                           Consistent
                                                                   18. Program reviews                                                             Partially consistent
Source: GAO analysis of Office of Management and Budget, Department of the Treasury, and Export-Import Bank (EXIM) documents. | GAO-19-43
                                                               a
                                                                This standard is not applicable to EXIM because the primary collateral for EXIM’s transactions is the
                                                               asset financed, and EXIM does not finance real property.




EXIM’s Policies and                                            Applicant screening refers to determining an applicant’s eligibility and
Procedures Were                                                creditworthiness for a loan or loan guarantee. Federal guidance for
                                                               applicant screening includes specific standards related to the applicant’s
Consistent with Federal
                                                               (1) program eligibility, (2) delinquency on federal debt, (3)
Guidance Related to                                            creditworthiness, (4) delinquent child support, and (5) taxpayer
Applicant Screening                                            identification number (TIN). As shown in table 2, EXIM’s underwriting




                                                               Page 16                                                                      GAO-19-43 Export-Import Bank
                                             policies and procedures were consistent with federal guidance for
                                             applicant screening. 22

Table 2: GAO Assessment of EXIM’s Underwriting Policies and Procedures for Applicant Screening against Federal Guidance

Federal guidance standards                        EXIM’s policies and procedures                                          Assessment
Program eligibility – Lenders shall determine     •    EXIM must screen the application to determine if the               Consistent
the applicants’ program eligibility, and               applicant and the proposed transaction meet initial eligibility
applicants must certify and document their             and completeness requirements.
inability to obtain credit from private sources   •    Applicants must certify that they are unable to obtain credit
on reasonable terms and certify the accuracy           from private sources on reasonable terms and provide EXIM
of information in the application.                     with documentation to make a credit assessment.
                                                  •    Applicants must certify on the applications that the
                                                       representation made and the facts stated in the application
                                                       are true and that they have not misrepresented or omitted any
                                                       material facts.
Delinquency on federal debt – Lenders must        •    Applicants must certify that neither they nor any of their         Consistent
determine whether an applicant is delinquent           principals have within the past 3 years been delinquent on
on federal debt, suspend application                   federal debt, which loan officers verify by obtaining and
processing for those who are delinquent, and           reviewing credit reports.
continue application processing only when the     •    As part of its Character, Reputational, and Transaction
debt is satisfactorily resolved (for example,          Integrity review, EXIM screens the corporate and individual
debt is paid in full or a new repayment plan is        names and addresses of lenders, borrowers, guarantors, and
negotiated).                                           other transaction participants against 28 databases for red
                                                       flags.
                                                  •    EXIM must suspend the application processing and contact
                                                       the Office of General Counsel for further guidance for
                                                       applicants with delinquent federal debt or other insufficient or
                                                       negative credit information.
Creditworthiness – Lenders must determine         •    EXIM must perform a due diligence review, risk assessment          Consistent
whether the applicant has the ability to repay         (financial and nonfinancial risks), and credit worthiness
the loan, considering credit reports and               analysis. Loan officers must document this in a credit
supplementary data sources.                            memorandum and recommend transaction approval or denial.
                                                  •    Loan officers must evaluate whether the transaction provides
                                                       reasonable assurance of repayment.




                                             22
                                               In 2018, EXIM’s OIG issued two reports related to operating effectiveness of certain
                                             EXIM applicant screening procedures. Based on findings identified in its review of certain
                                             long- and medium-term transactions, OIG made several recommendations for EXIM to
                                             enhance policies and procedures in areas related to applicant screening, including
                                             eligibility requirements and the CRTI process. See Export-Import Bank of the United
                                             States, Office of Inspector General, Audit of the Export-Import Bank’s Medium-Term Early
                                             Problem Credits, OIG-AR-18-06 (Washington, D.C.: Sept. 26, 2018), and Evaluation of
                                             EXIM’s Additionality Policy and Procedures, OIG-EV-19-01 (Washington, D.C.: Nov. 27,
                                             2018).




                                             Page 17                                                      GAO-19-43 Export-Import Bank
 Federal guidance standards                                           EXIM’s policies and procedures                                                      Assessment
 Delinquent child support – The agency should                         •      EXIM must evaluate delinquency on child support as part of                   Consistent
 deny an applicant who is subject to                                         the credit review process for working capital guarantee
 administrative offset (interception of certain                              transaction applicants.
 federal payments) to collect delinquent child
                    a
 support payments.
 Taxpayer identification number – The agency                          •      EXIM requires applicants to submit TINs where appropriate.                   Consistent
 must obtain the taxpayer identification number                              The applications for working capital guarantees require TINs.
 (TIN) of applicants.                                                        For long- and medium-term transactions, the applicants and
                                                                             borrowers are mainly non-U.S. persons and entities and thus
                                                                             would not have TINs. However, all applicants submit a Dun &
                                                                             Bradstreet Data Universal Numbering System (DUNS)
                                                                                                                                        b
                                                                             number, which EXIM must use in its due diligence process.
Source: GAO analysis of Office of Management and Budget, Department of the Treasury, and Export-Import Bank (EXIM) documents. | GAO-19-43
                                                               a
                                                                Because applicants for EXIM’s medium- and long-term loans and loan guarantees are generally
                                                               foreign buyers or borrowers, this standard is only applicable to working capital guarantees.
                                                               b
                                                                The DUNS number is a unique nine-digit identification number for each physical location of a
                                                               business. The DUNS number is used to establish a credit file on a particular business to help predict
                                                               the reliability, financial stability, or both of the company in question.



                                                               For all loan and loan guarantee applications, EXIM requires applicants to
                                                               provide identifying information, such as name, address, phone number,
                                                               and Dun & Bradstreet Data Universal Numbering System (DUNS)
                                                               number. 23 Applicants are also required to provide relevant financial
                                                               information, such as income, assets, cash flows, liabilities, financial
                                                               statements, and credit reports.

                                                               EXIM’s underwriting process requires screening of applicants for
                                                               eligibility, which is partly completed through the CRTI review. As part of
                                                               the CRTI review, EXIM screens the corporate and individual names and
                                                               addresses of lenders, borrowers, guarantors, and other transaction
                                                               participants against 28 databases that include various U.S. government
                                                               and international debarment and sanctions lists for red flags. 24 If a match
                                                               is identified, EXIM’s Credit Review and Compliance Division works with

                                                               23
                                                                 The DUNS number is a unique nine-digit identification number for each physical location
                                                               of a business. The DUNS number is used to establish a credit file on a particular business
                                                               to help predict the reliability, financial stability, or both of the company in question.
                                                               24
                                                                 EXIM uses World-Check, a database and screening tool managed by Thomson Reuters,
                                                               to screen transaction participants. World-Check is used to carry out due diligence or other
                                                               screening activities in accordance with legal or regulatory obligations or risk management
                                                               procedures designed to combat financial crime. World-Check creates a profile based on
                                                               global media reports, watch lists, and other regulatory and law enforcement lists. The
                                                               profile lists identification numbers; aliases; and any crimes, including fraud, corruption,
                                                               and money laundering.




                                                               Page 18                                                                      GAO-19-43 Export-Import Bank
                           the loan officers to determine the legitimacy of the match and, as
                           necessary, works with OGC to determine what additional due diligence
                           measures may be required and whether to continue the underwriting
                           process.

                           In addition to the CRTI review process, loan officers must obtain and use
                           credit reports to assess creditworthiness and identify whether transaction
                           applicants are delinquent on federal tax or nontax debts, including
                           judgment liens against property for a debt to the federal government, and
                           are therefore not eligible to receive federal loans and loan guarantees.
                           EXIM’s policies and procedures contain instructions to suspend
                           application processing and contact OGC for further guidance upon finding
                           federal debt delinquencies or other insufficient or negative information on
                           applicant credit reports. Loan officers must document any issues
                           encountered on applicant credit reports and explain why a transaction is
                           creditworthy if they recommend it for approval.

                           Lastly, OMB Circular A-129 requires agencies to obtain the TIN of all
                           persons doing business with the agency. The working capital guarantee
                           application form requests the TIN for transaction applicants, which an
                           EXIM official stated are used to obtain applicant credit reports. EXIM does
                           not require the TIN for medium- and long-term applications. EXIM officials
                           stated that applicants for medium- and long-term transactions are likely
                           foreign entities and thus would not have federal TINs. However, all
                           applications request the DUNS number which EXIM must use to perform
                           the credit review and CRTI due diligence procedures.


EXIM’s Policies and        Federal guidance calls for the maintenance of loan files containing key
Procedures Were            information used in loan underwriting. As shown in table 3, EXIM’s
                           underwriting policies and procedures were consistent with the federal
Consistent with Federal
                           guidance related to loan documentation.
Guidance Related to Loan
Documentation




                           Page 19                                           GAO-19-43 Export-Import Bank
Table 3: GAO Assessment of EXIM’s Underwriting Policies and Procedures for Loan Documentation against Federal Guidance

 Federal guidance standard                                            EXIM’s policies or procedures                                                       Assessment
 Loan documentation – The loan origination                            EXIM must maintain loan files that include                            Consistent
 file should contain loan applications, credit                        •  loan or guarantee application including an analysis of the
 bureau reports, credit analysis, loan                                   application;
 contracts, and other documents necessary
                                                                      •  credit report and the related credit memorandum;
 to conform to private sector standards for
 that type of loan.                                                   •  verification documents and legal documents relating to the loan;
                                                                      •  debt collection certification, nondelinquency on federal debt
                                                                         certification, and support that applicant has paid all origination
                                                                         fees;
                                                                      •  assessment of collateral; and
                                                                      •  loan or services agreement with the debtor.
Source: GAO analysis of Office of Management and Budget, Department of the Treasury, and Export-Import Bank (EXIM) documents. | GAO-19-43




                                                               EXIM’s underwriting policies and procedures state that loan officers must
                                                               maintain a loan file on the transaction applicant and other participants,
                                                               which includes the completed application, credit bureau reports, credit
                                                               analysis, certifications, verifications and other legal documents, and loan
                                                               or service agreements with the debtor, as appropriate. EXIM’s process
                                                               calls for obtaining debt collection certification statements for the working
                                                               capital guarantee applications because the applicants are domestic
                                                               entities. 25 While the debt collection certification statement is not
                                                               applicable for medium- and long-term applications, because the
                                                               applicants are foreign entities, EXIM’s executed credit agreements and
                                                               promissory notes define the terms of the transactions, including defaults
                                                               and the remedies EXIM may take, such as declaring default and
                                                               accelerating debt repayment, and pursuing restructuring or recovery
                                                               actions, including possible litigation.




                                                               25
                                                                 A Debt Collection Certification Statement is a statement signed by the applicant detailing
                                                               the consequences of delinquency (i.e., credit bureau reporting, hiring a collection agency
                                                               to collect the delinquent loan, offsetting the income tax refund or other amounts due from
                                                               the federal government, suspending or debarring the entity from doing business with the
                                                               federal government, referring the loan to the Department of Justice for litigation,
                                                               foreclosing on the collateral or taking other actions as permitted in the loan instruments, or
                                                               a combination of these) and certifying that the federal government’s debt collection
                                                               policies were discussed with the applicant at the time of application.




                                                               Page 20                                                                      GAO-19-43 Export-Import Bank
EXIM’s Policies and       Collateral refers to the assets used to secure a loan. For many types of
Procedures Were           loans, the government can reduce its risk of default and potential losses
                          through well-managed collateral requirements. However, several of the
Consistent with Federal
                          collateral requirements contained in federal guidance relate specifically to
Guidance Related to       real property. Since EXIM’s mission is to support U.S. exports, it does not
Collateral                finance real property and, accordingly, does not accept real property as
                          the primary collateral. As a result, three of the four federal guidance
                          standards were not applicable to EXIM’s underwriting. As shown in table
                          4, EXIM’s underwriting policies and procedures were consistent with the
                          applicable federal guidance related to collateral.




                          Page 21                                           GAO-19-43 Export-Import Bank
Table 4: GAO Assessment of EXIM’s Underwriting Policies and Procedures for Collateral against Federal Guidance

 Federal guidance standards                                              EXIM’s policies and procedures                                                 Assessment
                                                                                                                                                                         a
 Appraisal of real property – The agency                                 •     EXIM does not accept real property as primary collateral.                Not applicable
 should require real property appraisals to be                                 Therefore, this standard is not applicable.
 consistent with the Uniform Standards of
 Professional Appraisal Practice and prepared by
 a state-licensed or state-certified appraiser.
 Loan-to-value (LTV) ratio – (1) Borrowers                               •     For medium- and long-term transactions, EXIM provides up                 Consistent
 should assume an equity interest in assets                                    to 85 percent financing with the remaining 15 percent paid
 whose acquisition is being financed by loans,                                 by the borrower or financed separately. EXIM financing
 (2) the agency should explicitly define the                                   could be less than 85 percent depending on the U.S.
 components of the LTV ratio, (3) the agency                                   content.
 should limit financing by not offering terms                            •     For short-term transactions, EXIM guarantees up to 90
 (including the financing of closing costs) that                               percent of the transaction, with lenders/borrowers
 result in an LTV ratio equal to or greater than                               assuming the remaining 10 percent.
 100 percent, and (4) the loan maturity period
                                                                         •     For aircraft transactions, EXIM defines the LTV ratio as the
 should be shorter than the estimated useful
                                                                               comparison of the expected future values of the financed
 economic life of the collateral.
                                                                               aircraft with the estimated outstanding balance on the loan
                                                                               guaranteed by EXIM, plus estimated recovery costs, over
                                                                               the term of the financing.
                                                                         •     The repayment term that EXIM offers is based on the
                                                                               contract value and shall not exceed the effective remaining
                                                                               useful life of the asset financed.
                                                                                                                                                                         a
 Liquidation of real property collateral –                               •     EXIM does not accept real property as primary collateral.                Not applicable
 Lenders should be required to liquidate any real                              Therefore, this standard is not applicable.
 property collateral for a defaulted guaranteed
 loan before filing a claim.
                                                                                                                                                                         a
 Asset management standards and systems –                                •     EXIM does not accept real property as primary collateral.                Not applicable
 The agency should establish policies,                                         Therefore, this standard is not applicable.
 procedures, and cost tracking systems for the
 acquisition, management, and disposal of real
 property.
Source: GAO analysis of Office of Management and Budget, Department of the Treasury, and Export-Import Bank (EXIM) documents. | GAO-19-43
                                                               a
                                                                This standard is not applicable to EXIM because the primary collateral for EXIM’s transactions is the
                                                               asset financed, and EXIM does not finance real property.



                                                               EXIM’s underwriting policies and procedures state that it should have a
                                                               security interest in the financed export items. The loan officer and a
                                                               transaction engineer will evaluate the export sales contracts, and this
                                                               evaluation will be used as the assessment of collateral for the transaction.
                                                               If using the financed export items as collateral is not possible, the loan
                                                               officer should secure the EXIM financing with other assets owned by the
                                                               primary source of repayment that are at least of comparable value to the
                                                               financed items. Collateral that could be considered includes fixed assets,
                                                               inventory, accounts receivable, or a third-party guarantee.




                                                               Page 22                                                                      GAO-19-43 Export-Import Bank
                           While OMB Circular A-129 requires a real property appraisal and contains
                           specific criteria defining acceptable appraisals, the standard was not
                           applicable to EXIM’s loans and loan guarantees. According to EXIM
                           officials, EXIM rarely takes real property as collateral because the primary
                           collateral for EXIM’s transactions is the asset financed, and EXIM does
                           not finance real property. Further, EXIM officials stated that the U.S.
                           appraisal standards cannot be applied to foreign real property. However,
                           if real property is taken as collateral, it would be as secondary or
                           additional collateral. When EXIM accepts real property as additional
                           collateral for a transaction, EXIM officials stated that an independent
                           third-party appraisal in accordance with regional practices is obtained.


EXIM’s Policies and        Federal guidance calls for policies and procedures related to lender and
Procedures Were Not        servicer eligibility, monitoring, and recertification. As shown in table 5,
                           EXIM’s policies and procedures were consistent with three and partially
Fully Consistent with
                           consistent with two of five federal standards for lender and servicer
Federal Guidance Related   eligibility.
to Lender and Servicer
Eligibility




                           Page 23                                            GAO-19-43 Export-Import Bank
Table 5: GAO Assessment of EXIM’s Underwriting Policies and Procedures for Lender and Servicer Eligibility against Federal
Guidance

Federal guidance standards                            EXIM’s policies and procedures                                        Assessment
Participation criteria – The agency should            In May 2016, EXIM published a Federal Register notice containing       Consistent
establish and publish in the Federal Register         its current lender and servicer eligibility criteria
lender and servicer eligibility criteria, including   [See 81 Fed. Reg. 29858 (May. 13, 2016)]. The notice contained
requirements that the lender or servicer not be       eligibility requirements concerning
debarred or delinquent on government debt,            •    debarment/suspension,
qualification requirements for principal officers
and staff, appropriate bonding or insurance,          •    delinquency on federal debt,
and financial and capital requirements for            •    qualification requirements for principal officers, and
lenders not supervised by a federal financial         •    financial and capital requirements for lenders not regulated by a
institution regulator.                                     federal financial institution regulatory agency.
Review of eligibility – The agency should (1)         Lenders must continue to meet performance standards and renew         Partially
review and document a lender’s or servicer’s          their Approved Finance Provider (AFP) applications every 3 years to consistent
eligibility for continued participation at least      remain active in EXIM’s program. EXIM reviews the renewal
every 2 years and (2) consider lender or              packages for the lender’s continued eligibility. If approved, an AFP
servicer performance as a critical factor in          may enter into one or more Master Guarantee Agreements (MGA),
determining continued eligibility for                 which include the general terms and conditions of the lender’s
participation.                                        agreement with EXIM and allow the AFP to provide loans
                                                      guaranteed by EXIM.
                                                      •    EXIM’s process calls for assessing the eligibility of previously
                                                           approved Working Capital Guarantee program delegated
                                                                             a                    b
                                                           authority lenders at annual intervals unless more frequent
                                                           exams are required. EXIM uses a quarterly Exam Status
                                                           Report, which documents when EXIM last examined each
                                                           lender. To continue participating in the delegated authority
                                                           program and to increase lending limits, the delegated authority
                                                                                                                          c
                                                           lender must receive at least a pass with qualification rating.
                                                      •    EXIM analyzes medium-term lender performance, but has not
                                                           established written policies and procedures for determining
                                                           continued eligibility for the delegated authority lenders.
                                                      •    EXIM’s Credit Review and Compliance Division is responsible
                                                           for reviewing medium-term transactions approved by delegated
                                                           authority lenders to monitor compliance with EXIM’s policies,
                                                           including due diligence procedures. These reviews may be risk-
                                                           based or random.
                                                      •    EXIM performs the underwriting of loan guarantees not
                                                           processed by delegated authority lenders.
Fees – The agency should incorporate steps            While EXIM does not charge fees specifically to lenders and           Consistent
to assess nonrefundable fees to defray the            servicers, EXIM charges processing, commitment, and exposure
costs of determining and reviewing lender or          fees on various applications and approved credit structures. These
servicer eligibility when authorized and              fees are intended to defray, among other things, the costs of
appropriated for such purposes.                       determining and reviewing lender and servicer eligibility.




                                                Page 24                                                     GAO-19-43 Export-Import Bank
 Federal guidance standards                                           EXIM’s policies and procedures                                                       Assessment
 Decertification – The agency should                                  •      After providing proper notice, EXIM may decertify lenders and        Partially
 establish specific procedures to decertify                                  terminate an MGA with an AFP that exhibits reputational              consistent
 lenders, end servicing contracts, or take other                             problems, commits or appears implicated in fraud, or otherwise
 appropriate action for lenders that do not meet                             mismanages EXIM’s programs.
 compliance or eligibility standards.                                 •      Working Capital Guarantee program delegated authority
                                                                             lenders who receive a “fail” rating during EXIM’s lender
                                                                             examinations are not in compliance with the program and
                                                                             immediate suspension of delegated authority is required.
                                                                      •      While EXIM performs assessments of medium-term delegated
                                                                             authority lenders, it has not established written policies and
                                                                             procedures for decertifying lenders or taking other appropriate
                                                                             actions for lenders that do not meet compliance or eligibility
                                                                             standards.
 Loan servicers – The agency should ensure                            •      For guaranteed loans, the MGAs specifically state that the           Consistent
 that lenders or agencies transferring or                                    lenders shall not assign, transfer, negotiate, or sell any of their
 assigning the right to service loans should use                             interests, obligations, or rights in any loan facility without prior
 only servicers meeting applicable agency                                    written consent of EXIM.
 standards or are approved by a government-                           •      For loans, EXIM does not sell or transfer loans where it was the
 sponsored enterprise or similar organization.                               source of financing, and therefore, this standard is not
                                                                             applicable.
Source: GAO analysis of Office of Management and Budget, Department of the Treasury, and Export-Import Bank (EXIM) documents. | GAO-19-43
                                                               a
                                                                Delegated authority lenders are private financial institutions and nonfinancial companies, subject to
                                                               prior EXIM qualifications and criteria, that may be granted authority after a review process to commit
                                                               EXIM resources for certain extensions of credit.
                                                               b
                                                                Annual intervals are defined as from 10 to 16 months on average because of program activity and
                                                               available resources.
                                                               c
                                                                 At the completion of a delegated authority lender examination, the lender is issued a “pass,” “pass
                                                               with qualification,” or “fail” rating. Lenders that receive “pass with qualification” or “fail” ratings must
                                                               implement corrective actions.



                                                               OMB Circular A-129 calls for agencies to establish specific procedures to
                                                               continuously review lender and servicer eligibility and decertify lenders
                                                               and servicers that fail to meet the agency’s standards for continued
                                                               participation. EXIM’s policies and procedures related to requirements for
                                                               working capital guarantee delegated authority lenders were consistent
                                                               with federal guidance.

                                                               However, for medium-term delegated authority lenders, EXIM has not
                                                               established documented policies and procedures for (1) determining their
                                                               eligibility for continued participation in the program and (2) decertifying or
                                                               taking other appropriate actions for those that do not meet compliance or
                                                               eligibility standards. EXIM officials told us that currently EXIM has only
                                                               three medium-term delegated authority lenders: two were renewed for
                                                               continued participation and one became inactive in 2018. Further,
                                                               according to EXIM officials, since 2009 only 2.3 percent of all medium-




                                                               Page 25                                                                      GAO-19-43 Export-Import Bank
                            term guarantee authorizations have been delegated authority
                            authorizations ($71 million out of $3.1 billion).

                            EXIM reviews the performance of its primary medium-term lenders
                            quarterly. In these reviews, EXIM officials evaluate the lenders’ portfolio
                            performance, underwriting capabilities, and a set of qualitative factors.
                            However, without documented policies and procedures for determining
                            the eligibility of the medium-term delegated authority lenders’ continued
                            participation in the program and for decertifying such lenders, as
                            appropriate, EXIM may allow lenders who are not qualified to underwrite
                            transactions, thus increasing the risk for improper underwriting and
                            defaults. EXIM officials stated that they are in the process of updating and
                            enhancing the Manual and will include procedures for medium-term
                            delegated authority lender reviews and the consequences of an
                            unfavorable assessment.


EXIM’s Policies and         OMB Circular A-129 calls for lenders and borrowers who participate in
Procedures Were Not         federal credit programs to have a substantial stake in full repayment but
                            also states that the level of guarantee should be no more than necessary
Fully Consistent with
                            to achieve program purposes. As shown in table 6, EXIM’s underwriting
Federal Guidance Related    policies and procedures were generally consistent with the federal
to Risk Sharing Practices   guidance related to certain risk sharing practices for lenders and
                            borrowers to have a stake in full repayment and were partially consistent
                            with the federal guidance related to periodic program reviews.




                            Page 26                                           GAO-19-43 Export-Import Bank
Table 6: GAO Assessment of EXIM’s Underwriting Policies and Procedures for Risk Sharing Practices against Federal
Guidance

 Federal guidance standards                                           EXIM’s policies and procedures                                                      Assessment
 Private lenders stake in full repayment –                            •      For medium- and long-term transactions, EXIM provides up to                  Consistent
 The agency should include standards to                                      85 percent financing with the remaining 15 percent paid by the
 ensure that private lenders who extend credit                               borrower or financed separately. EXIM financing could be less
 should have substantial stake in full                                       than 85 percent depending on the U.S. content.
 repayment and bear at least 20 percent of the                        •      Working capital guarantee covers 90 percent of the principal.
 loss from a default. The level of guarantee                                 The lender must retain 10 percent risk in the transaction.
 should be no more than necessary to achieve
                                                                      •      EXIM’s charter specifically allows EXIM to provide loan
 program purposes. In addition, borrowers who
                                                                             guarantees with up to 100 percent of the financed amount.
 pose less of a risk receive a lower guarantee.
                                                                             Further, EXIM is authorized to provide loan guarantees at
                                                                             rates and terms and other conditions that are, in the opinion
                                                                             of the EXIM Board of Directors, competitive with those
                                                                             provided by the official export credit agencies of other
                                                                             countries.
 Borrowers stake in full repayment –                                  •      Borrowers are required to make a minimum cash payment of                     Consistent
 Borrowers should have equity interest in asset                              15 percent of the value of the export contract for medium- and
 financed with credit assistance and substantial                             long-term transactions in support of export sales and leases
 capital or equity at risk in their business.                                equivalent to sales. However, borrowers may secure
                                                                             alternative financing for the cash payment, which is
                                                                             permissible as long as such financing is not officially
                                                                             supported by EXIM or another U.S. government agency.
                                                                      •      The maximum borrowing level on a working capital guarantee
                                                                             is up to 75 percent of the value of export-related inventory or
                                                                             up to 90 percent of the invoice value of export-related goods
                                                                             or services.
 Program reviews – The agency should                                  •      EXIM officials stated that annually, EXIM prepares a budget                  Partially
 periodically review programs in which the                                   justification and a competitiveness report. According to EXIM                consistent
 government bears more than 80 percent of                                    officials, to prepare these documents, EXIM analyzes its
 any loss.                                                                   programs, market trends, strategies, and actions by
                                                                             competitor export credit agencies. However, EXIM does not
                                                                             have documented policies and procedures for performing
                                                                             these periodic reviews, including determining whether the
                                                                             private sector could bear more risk.
Source: GAO analysis of Office of Management and Budget, Department of the Treasury, and Export-Import Bank (EXIM) documents. | GAO-19-43




                                                               Although OMB Circular A-129 calls for lenders who extend credit to have
                                                               substantial stake in full repayment and bear at least 20 percent of any
                                                               loss from a default, it also states that the level of guarantee should be no
                                                               more than necessary to achieve program purposes. However, consistent
                                                               with its charter, EXIM is authorized to provide terms that are competitive
                                                               with those of other ECAs, such as up to 100 percent loan guarantee
                                                               coverage. EXIM does not require lenders to bear 20 percent of the risk of
                                                               default. For working capital guarantees, EXIM offers 90 percent
                                                               guarantee coverage and lenders retain 10 percent risk. For medium- and
                                                               long-term loan guarantees, EXIM provides up to 85 percent financing with



                                                               Page 27                                                                      GAO-19-43 Export-Import Bank
the remaining 15 percent paid by the borrower or financed separately.
EXIM financing could be less than 85 percent depending on the U.S.
content. According to EXIM, guaranteeing 100 percent of the amount it
finances permits it to explore capital markets and is more desirable to
banks for large and long-term projects. As a result, the lender may not
retain any risk of default in the transaction. According to an OECD official,
guaranteeing 100 percent of the financed amount is consistent with other
ECAs. For example, the ECAs of Canada, Germany, and the United
Kingdom also provide guarantees up to 100 percent of the financed
amount on certain products.

OMB Circular A-129 states that borrowers should have equity interest in
assets financed with credit assistance and substantial capital or equity at
risk in their business. However, consistent with its charter, EXIM is
authorized to provide terms that are competitive with those of other ECAs.
EXIM does not specifically require borrowers to have an equity interest in
the transaction or to contribute the minimum cash payment. EXIM’s
policies and procedures state that in practice, buyers often secure
alternative financing for the cash payment, which is permissible as long
as the financing is not officially supported by EXIM or another U.S.
government agency. EXIM officials noted that during the analysis of
creditworthiness, loan officers examine supporting documents for the
alternative financing to assure that it is not guaranteed by EXIM or
another U.S. government agency. 26

OMB Circular A-129 states that the agency should periodically review
programs in which the government bears more than 80 percent of any
loss. The review is intended to evaluate the extent to which credit
programs achieve intended objectives and whether the private sector has
become able to bear a greater share of the risk. EXIM officials stated that
EXIM performs program reviews through annual budget justifications
submitted to OMB and annual competitiveness reports submitted to


26
   In September 2018, EXIM’s OIG issued a report on its review of certain medium-term
guarantee transactions that exhibited early problems between the time the transaction
was approved and when the claims were filed by the guaranteed lenders. Based on
findings identified in its review, the OIG made several recommendations for EXIM to
enhance its policies and procedures, including, requiring the identification and validation of
the borrower’s source of down payment prior to the lender’s cash disbursement and
including all supporting documentation in the credit file. See Export-Import Bank of the
United States, Office of Inspector General, Audit of the Export-Import Bank’s Medium-
Term Early Problem Credits.




Page 28                                                       GAO-19-43 Export-Import Bank
                      Congress. 27 EXIM officials also stated that there are established timelines
                      for preparing these reviews that must be followed to ensure that EXIM
                      meets deadlines for submitting its budget documentation and the June 30
                      deadline for the annual competitiveness report. In addition, EXIM employs
                      a detailed summary of the products and terms that other countries’ official
                      ECAs offer. However, EXIM does not have documented policies or
                      procedures related to performing periodic program reviews. As a result,
                      EXIM runs the risk that it will not effectively review its programs to
                      determine whether the private sector could bear a greater share of the
                      risk.


                      EXIM’s Manual provides a framework for making credit decisions so that
Conclusions           only qualified applicants that demonstrate reasonable assurance of
                      repayment are provided loans or loan guarantees. This framework helps
                      ensure consistent application of procedures for assessing an applicant’s
                      creditworthiness and for overseeing certain delegated authority lenders.
                      However, EXIM’s underwriting process could be improved by additional
                      procedures. For example, the Manual did not address medium-term
                      delegated authority lenders’ eligibility requirements for continued
                      participation and decertification procedures for lenders who fail to meet
                      agency’s standards. Further, EXIM has not documented its process for
                      periodic program reviews to determine whether the private sector could
                      bear a greater share of the risk. Improvements in these areas could help
                      enhance the oversight of lenders and the usefulness of program reviews.


                      We are making the following two recommendations to EXIM:
Recommendations for
Executive Action      •    The Chief Operating Officer of EXIM should consider establishing
                           documented policies and procedures for (1) determining medium-term
                           delegated authority lenders’ eligibility for continued participation in
                      27
                        As required by its charter, EXIM annually assesses how its policies, practices, and
                      programs compare with those of major foreign ECAs in its Annual Competitiveness Report
                      to Congress. The report does not encompass all EXIM products for the period; rather, it
                      covers a portion of EXIM’s operations and its position in comparison with the foreign
                      ECAs. The content varies year to year depending on the global export credit environment.
                      For example, in its 2015 competitiveness report, EXIM evaluated its long-term policies in
                      comparison to major competing ECAs (Germany, Japan, France, Italy, Canada, the
                      United Kingdom, South Korea and China). EXIM assessed multiple factors, including
                      interest rates, risk appetite, transaction fees, and flexibility (willingness to offer extended
                      repayment terms) and concluded on its competitiveness on those factors in relation to the
                      foreign ECAs.




                      Page 29                                                        GAO-19-43 Export-Import Bank
                      EXIM’s programs and (2) decertifying or taking other appropriate
                      actions for such lenders that do not meet compliance or eligibility
                      standards. (Recommendation 1)
                  •   The Chief Operating Officer of EXIM should establish documented
                      policies and procedures for periodically reviewing credit programs in
                      which the government bears more than 80 percent of any loss to
                      determine whether private sector lenders should bear a greater share
                      of the risk. (Recommendation 2)

                  We provided a draft of this report to EXIM for review and comment. In
Agency Comments   written comments on a draft of this report, which are reproduced in
                  appendix II, EXIM concurred with our two recommendations. EXIM also
                  provided technical comments that we incorporated into the final report, as
                  appropriate.

                  In its written comments, EXIM described planned actions to address our
                  recommendations. Specifically, EXIM stated that it will consider
                  establishing documented policies and procedures for determining
                  medium-term delegated authority lenders' eligibility for continued
                  participation in EXIM's programs and decertifying or taking other
                  appropriate actions for such lenders that do not meet compliance or
                  eligibility standards. Further, EXIM will establish documented policies and
                  procedures for periodically reviewing credit programs in which the
                  government bears more than 80 percent of any loss to determine whether
                  private sector lenders should bear a greater share of the risk. If
                  implemented effectively, EXIM’s planned actions should address the
                  intent of our recommendations.


                  We are sending copies of this report to appropriate congressional
                  committees, the Chairman of the Export-Import Bank, and the EXIM
                  Inspector General. In addition, the report is available at no charge on the
                  GAO website at http://www.gao.gov.




                  Page 30                                            GAO-19-43 Export-Import Bank
If you or your staff have any questions about this report, please contact
me at (202) 512-3133 or dalkinj@gao.gov. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made key contributions to this report
are listed in appendix III.




James R. Dalkin
Director, Financial Management and Assurance




Page 31                                          GAO-19-43 Export-Import Bank
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              Our objectives were to determine the extent to which Export-Import
              Bank’s (EXIM) (1) process for updating its underwriting policies and
              procedures is properly designed and implemented and (2) underwriting
              policies and procedures for loan and loan guarantee transactions are
              consistent with guidance for managing federal credit programs.

              To assess the extent to which EXIM’s process for updating its
              underwriting policies and procedures was properly designed and
              implemented, we reviewed EXIM’s policies and procedures for updating
              its Loan, Guarantee and Insurance Manual (Manual) and interviewed
              EXIM officials. We assessed EXIM’s process to determine whether it
              sufficiently communicated the procedures to be performed and
              documentation to be prepared and was consistent with Standards for
              Internal Control in the Federal Government. 1 We did not evaluate EXIM’s
              compliance with its process for updating its underwriting policies and
              procedures or assess their operating effectiveness.

              To assess the extent to which EXIM’s underwriting policies and
              procedures for loan and loan guarantee transactions were consistent with
              guidance for managing federal credit programs, 2 we reviewed relevant
              requirements and guidance, including the Office of Management and
              Budget’s (OMB) Circular A-129, Policies for Federal Credit Programs and
              Non-Tax Receivables, and the Department of the Treasury’s Bureau of
              the Fiscal Service’s Managing Federal Receivables: A Guide for
              Managing Loans and Administrative Debt.

              Specifically, we focused on OMB Circular A-129’s Section II (C)(1)(a)
              through (c), Section III (A)(1) through (3), and Section III (C)(1)(a) through
              (e)), which contain standards pertinent to risk management for loan and
              loan guarantee programs, including standards for (1) applicant screening
              (program eligibility, delinquency on federal debt, creditworthiness,
              delinquent child support, and taxpayer identification number); (2) loan
              documentation; (3) collateral (appraisal of real property, loan-to-value
              ratio, liquidation of real property collateral, and asset management
              standards and systems for real property disposal); (4) lender and servicer
              eligibility (participation criteria, review of eligibility, fees, decertification,
              and loan servicers); and (5) risk sharing practices (private lenders stake

              1
               GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
              (Washington, D.C.: September 2014).
              2
              Export credit insurance was not included in the scope of our audit.




              Page 32                                                     GAO-19-43 Export-Import Bank
Appendix I: Objectives, Scope, and
Methodology




in full repayment, borrowers stake in full repayment, and program
reviews). From the Bureau of the Fiscal Service’s Managing Federal
Receivables, we identified key guidance related to credit extension (ch. 3)
and management of guaranteed lenders and servicers (ch. 5).

We reviewed EXIM’s policies and procedures related to underwriting for
the loan and loan guarantee programs contained in its Manual and other
documentation, such as its charter. 3 We also discussed EXIM’s policies
and procedures related to underwriting with EXIM officials. We compared
EXIM’s underwriting processes to federal guidance for managing federal
credit programs. As part of this comparison, we assessed whether
policies and procedures included in EXIM’s Manual were consistent with
federal guidance. However, because of EXIM’s limited lending authority
during the period of our audit, we did not verify EXIM’s compliance with its
underwriting policies and procedures or assess their operating
effectiveness. In areas where we found EXIM’s policies and procedures
to be consistent with federal guidance, there may still be opportunities to
improve operating effectiveness. Further, guidance for managing federal
credit programs includes additional requirements not related to
underwriting, which we did not assess.

In addition, we reviewed EXIM’s Office of Inspector General (OIG) reports
since 2014 related to underwriting issues, various laws applicable to
EXIM, and GAO reports related to EXIM. We also reviewed EXIM’s
annual reports and competitiveness reports. We also discussed EXIM
underwriting process with EXIM OIG officials and export credit financing
and risk sharing practices with an official from the Organisation for
Economic Co-operation and Development.

We conducted this performance audit from January 2017 to May 2019 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.



3
 As a government corporation, the statutory text establishing EXIM and governing its
operations is referred to as a charter. See Export-Import Bank Act of 1945, Pub. L. No. 79-
173 (July 31, 1945), classified in part, as amended, at 12 U.S.C. §§ 635-635t.




Page 33                                                     GAO-19-43 Export-Import Bank
Appendix II: Comments from the Export-
              Appendix II: Comments from the Export-Import
              Bank of the United States



Import Bank of the United States




              Page 34                                        GAO-19-43 Export-Import Bank
Appendix II: Comments from the Export-Import
Bank of the United States




Page 35                                        GAO-19-43 Export-Import Bank
Appendix III: GAO Contact and Staff
                  Appendix III: GAO Contact and Staff
                  Acknowledgments



Acknowledgments


                  James R. Dalkin, (202) 512-3133 or dalkinj@gao.gov
GAO Contact
                  In addition to the contact named above, Marcia Carlsen (Assistant
Staff             Director), Dragan Matic (Analyst in Charge), Sarah Lisk, Erika Szatmari,
Acknowledgments   and Jingxiong Wu made key contributions to this report.




(101523)
                  Page 36                                          GAO-19-43 Export-Import Bank
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