oversight

Rural Development: Availability of Capital for Agriculture, Business, and Infrastructure

Published by the Government Accountability Office on 1997-05-27.

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

                  United States General Accounting Office

GAO               Report to the Committee on Agriculture,
                  Nutrition, and Forestry, U.S. Senate



May 1997
                  RURAL
                  DEVELOPMENT
                  Availability of Capital
                  for Agriculture,
                  Business, and
                  Infrastructure




GAO/RCED-97-109
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division

                   B-276456

                   May 27, 1997

                   The Honorable Richard G. Lugar
                   Chairman
                   The Honorable Tom Harkin
                   Ranking Minority Member
                   Committee on Agriculture, Nutrition,
                     and Forestry
                   United States Senate

                   Because access to capital is a prerequisite for economic growth, you asked
                   us to examine the availability of capital in rural1 America for agriculture,
                   business, and community infrastructure. Specifically, you asked that we
                   describe the primary financial institutions that are used to finance
                   agriculture, rural businesses, and rural communities’ infrastructure, and
                   obtain the views of rural officials on (1) whether rural borrowers have
                   difficulty in obtaining access to capital, (2) whether rural borrowers have
                   adequate knowledge of the availability of financial assistance, and
                   (3) what potential alternatives may be used to improve the availability of
                   capital. To address these questions, we spoke with officials of federal,
                   state, regional, local rural development, and lending institutions in four
                   states—Alabama, Maine, Minnesota, and Washington. Additionally, we
                   spoke with officials of federal agencies and national associations.
                   Furthermore, in October 1996, we surveyed over 700 officials—members
                   of associations involved in rural development and officials of the
                   community and economic development departments in all 50 states—to
                   obtain their views on the availability of capital in rural areas. The groups
                   and individuals surveyed were chosen because of their experience in
                   working with rural lenders and borrowers. Although the survey
                   respondents were located throughout the United States, their responses
                   cannot be generalized to all rural localities.


                   Many sources of financial assistance are available to meet rural areas’
Results in Brief   demand for capital. While commercial banks and the Farm Credit System
                   are the primary providers of capital for agriculture and rural business,
                   rural communities more often turn to the public sector to obtain capital
                   for infrastructure.



                   1
                    For this report, rural refers to locations outside of metropolitan statistical areas. This definition
                   includes counties containing a city or an urbanized area with a population of less than 50,000 and a
                   total area population of less than 100,000.



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             Most rural business and agricultural borrowers that are creditworthy and
             rural communities with an adequate tax base generally have little difficulty
             in obtaining capital, according to rural officials. However, the officials we
             surveyed believe that certain borrowers in rural areas, such as start-up,
             expanding, and minority-owned businesses and financially struggling rural
             communities, have difficulty in obtaining capital. In their view, these
             borrowers have experienced difficulties because they lack (1) equity or
             collateral, (2) business or management skills, or (3) an adequate tax base.
             Rural officials could not quantify the severity of these difficulties.
             Nonetheless, the officials we surveyed believe that economic development
             in their areas is hindered by these borrowers’ difficulties in obtaining
             capital.

             Rural development and lending officials we surveyed also believe that
             potential agricultural and business borrowers are not always aware of the
             range of financial resources available to meet their capital demands.
             However, these officials do not believe that this lack of awareness should,
             by itself, prevent borrowers from obtaining capital. Rural development
             officials believe that the primary providers of capital in rural areas are
             familiar with alternative sources of funds and can appropriately direct
             borrowers to these sources.

             While the extent of rural areas’ difficulties in obtaining capital has not
             been determined, rural development officials suggested three proposals to
             make capital more available in rural areas. One proposal would use
             existing loan guarantee programs and technical assistance entities to
             target resources to borrowers that are having difficulty obtaining access to
             capital. Another proposal would modify the charters of some
             government-sponsored enterprises to expand their loan-making authority
             and/or require them to lend funds to borrowers that currently have
             difficulty in obtaining capital. The third proposal would allow
             community-based revolving loan funds financed with federal dollars to sell
             their loans into a secondary market. It is unclear, however, whether the
             potential benefits of these proposals for rural areas would exceed the
             potential financial losses to the federal government. Moreover, targeting
             funds to borrowers in rural areas that are having difficulty obtaining
             access to capital may result in fewer funds being available to creditworthy
             borrowers.


             About 2,300 of the 3,100 counties in the United States are classified as
Background   rural. Between 1990 and 1995, the population increased in about



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                        75 percent of these rural counties and decreased in the remaining
                        25 percent. Growth in rural communities depends in part on the ability of
                        rural borrowers to obtain capital—both debt and equity—for development
                        and expansion. Rural firms need access to capital to start and expand
                        businesses, and rural communities need access to capital to replace or
                        upgrade aging infrastructure. According to studies, such as one published
                        by the Federal Reserve Board of Kansas City,2 borrowers in rural areas
                        have traditionally had difficulty in obtaining access to capital, when
                        compared with their urban counterparts. According to the U.S.
                        Department of Agriculture’s (USDA) Economic Research Service, rural
                        economies are characterized by a preponderance of small businesses,
                        fewer and smaller local sources of financial capital, less diversification of
                        business and industry, and fewer ties to nonlocal economic activity.3
                        These rural attributes may exacerbate businesses’ funding difficulties. In
                        recent years, a number of changes have occurred that could affect the
                        availability of capital for businesses and communities in rural areas, such
                        as pressures to reduce government spending and mergers of small rural
                        community banks with large banks not located in rural areas.4


                        Many sources of financial assistance are available to meet rural areas’
Wide Range of           demand for capital.5 Table 1 shows the primary sources of loans, loan
Commercial              guarantees, equity capital, and grants for business and agriculture and
Institutions and        infrastructure in rural America.

Government
Programs Available to
Assist Rural Areas


                        2
                         Mark Drabenstott, “Capital for Agriculture and Rural America: Redefining the Federal Role,”
                        Economic Review. Vol. 80, No. 3, Federal Reserve Bank of Kansas City, Third Quarter, 1995. This
                        article is based on testimony presented to the Senate Committee on Agriculture, Nutrition, and
                        Forestry on Mar. 31, 1995.
                        3
                        Are Revolving Loan Funds a Better Way to Finance Rural Development? Economic Research Service
                        Agriculture Information Bulletin 724-05, (Oct. 1996).
                        4
                         For more information on the issue of bank mergers, see Interstate Banking: Experiences in Three
                        Western States (GAO/GGD-95-35, Dec. 30, 1994). As noted in the report, according to some bankers
                        and focus group participants, in three states visited, large banks were credited with increasing credit
                        availability to those small businesses that met the large banks’ lending criteria. Other bankers and
                        participants mentioned, however, that the practices of centralizing and standardizing loan decisions,
                        common to large banks, could result in some small businesses’ having difficulty in obtaining credit in
                        markets where there are few alternatives to large banks.
                        5
                        For more detailed information on available programs, see Rural Credit: Availability of Credit for
                        Agriculture, Rural Development, and Infrastructure (GAO/RCED-93-27, Nov. 25, 1992).
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Table 1: Primary Sources of Funding in Rural America
                                                                          Type of assistance
                                      Agriculture and business                                       Community infrastructure
                                                       Loan                                                           Loan
Capital sources                    Loans          guarantees        Equity capital                 Loans         guarantees          Grants
Commercial banks                        X                                                                X
Farm Credit System                      X                                                                X
USDA                                    X                     X                                          X                    X          X
Small Business                          X                     X                     X
Administration
Other federal grant and                 X                     X                     X                    X                    X          X
loan programs
States’ programs                        X                     X                     X                    X                    X          X
Insurance companies                     X
Nonprofit community                     X                                           X
development corporations
Venture capital entities                                                            X
Merchants and dealers                   X
(e.g., leasing/trade credit)

                                         For agriculture and small businesses, the primary sources of capital are
                                         commercial banks and the Farm Credit System (FCS). The funds
                                         commercial banks use for lending are primarily derived from customers’
                                         deposits and are used for short-term loans.6 The Federal Home Loan Bank
                                         System (FHLBS) supplies loans (called advances) to its member banks. In
                                         addition, all banks have access to capital from the Federal Agricultural
                                         Mortgage Corporation (Farmer Mac), which operates in the secondary
                                         market. If the banks receive advances or package their loans and sell them
                                         into a secondary market, they can use the capital they receive to make
                                         longer-term loans.

                                         Commercial banks and others can have some of their loans guaranteed
                                         under federal and state loan guarantee programs, such as USDA’s and the
                                         Small Business Administration’s (SBA) loan guarantee programs for
                                         businesses. For example, USDA’s Business and Industry Guaranteed Loan
                                         Program, targeted to rural areas, was funded at $688 million for fiscal year
                                         1997. To qualify for loan guarantees under these programs, applicants
                                         must be unable to obtain financing elsewhere and must demonstrate an
                                         ability to repay their loan. In addition to guaranteed loans, USDA provides
                                         direct loans targeted to rural businesses and grants to rural entities that


                                         6
                                            Generally, any loan with a maturity of 1 year or less is considered a short-term loan.



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provide financial and technical assistance to rural businesses. SBA also
provides direct micro-loan financing to small business borrowers using
intermediaries, such as nonprofit community development corporations,
and provides grants to these intermediaries for technical assistance to
their borrowers. Furthermore, USDA participates with other federal
agencies in initiatives such as the Empowerment Zone/Enterprise
Community program and the Pacific Northwest Economic Adjustment
Initiative, which target federal funds to selected communities.

Like commercial banks, the FCS makes loans to farmers, ranchers, rural
homeowners, agricultural cooperatives, rural utility systems, and
agribusinesses. However, unlike commercial banks, FCS has its lending
authority established by the Congress. As of December 31, 1996, FCS’ loan
balance was $61.2 billion.

Furthermore, unlike commercial banks, FCS is not a depository institution.
Instead, it is cooperatively owned by its members—borrowers—who must
buy stock in FCS’ entities as a prerequisite for borrowing. FCS’ funds for
loans are raised through the sale of bonds and notes in global capital
markets and are frequently used for longer-term loans for agriculture and
agribusiness. FCS, like FHLBS and Farmer Mac, is a government-sponsored
enterprise (GSE).

The Congress created GSEs to help make capital available to certain
sectors of the economy, such as agriculture and housing, in which the
private market was perceived as not effectively meeting capital demands.
While the government has no legal obligation to protect GSE investors, the
federal ties cause these investors to believe that the federal government
would not let the GSE default on its obligations. As a result, GSEs can
borrow at interest rates that are usually only slightly higher than those
paid by the Department of the Treasury.

In addition to commercial banks and GSEs, nonprofit community
development corporations (CDC) are an important source of capital for
business entities that are unable to obtain capital from commercial banks
and FCS. A large number of rural CDCs have been established since the
1970s. These CDCs are organized as nonprofit entities to promote economic
development in certain target areas by providing a range of assistance.
They provide financing in their service area to organizations that are
unable to obtain commercial or public funds, most typically by
establishing revolving loan funds. In making loans, CDCs may participate
with other entities, commercial or public, in making loans. Their loan



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                         funds are capitalized by grants and/or long-term, low-interest loans from
                         federal agencies, such as the Department of Commerce’s Economic
                         Development Administration (EDA); states; and private sources, such as
                         nonprofit foundations and corporations.

                         Venture capitalists are another source of funding for agriculture and
                         businesses in rural areas. Venture capitalists are private investors and
                         organizations that provide funds and technical and managerial expertise to
                         help start and maintain new and emerging businesses by backing
                         entrepreneurs who have financially sound and marketable ideas. In
                         providing this assistance, venture capitalists seek partial ownership in the
                         business and a return commensurate with their assumed risk.

                         Merchants and dealers—equipment dealers and other suppliers—are
                         another important source of capital. For these lenders, a borrower’s
                         creditworthiness is of less concern because the credit either is secured by
                         the value of the asset provided to the borrower or is protected by a lien
                         against the borrower’s business.

                         For rural communities’ infrastructure, such as water and wastewater
                         systems and roads and bridges, state and local governments are the
                         principal source of capital. State and local governments finance
                         infrastructure through taxes, user fees, and bonds. Their funds are
                         supplemented by federal agencies, such as USDA, which, since 1965, has
                         provided about $28 billion in grant and loan funds for water and waste
                         disposal to financially struggling rural communities. Other sources of
                         federal financial assistance are a large number of programs in the
                         Department of Housing and Urban Development and EDA.


                         Rural development officials we surveyed reported that creditworthy
Rural Development        agricultural and business borrowers and rural communities with an
Officials Report That    adequate tax base have little difficulty in obtaining capital. However,
Certain Types of         certain types of rural borrowers, such as start-up, expanding, and minority
                         businesses, as well as financially struggling rural communities, are finding
Borrowers Have           it difficult to obtain access to capital, primarily because they do not have
Difficulty in            adequate equity, business operating skills, or an adequate tax base. These
                         officials acknowledged that these types of potential rural borrowers
Qualifying for Capital   consist of those that (1) are never likely to meet traditional commercial
                         lending standards and (2) might be able to meet them. While some rural
                         officials say that concerns over access to capital have increased in recent
                         years, they could not quantify the number of borrowers that have



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                                       experienced difficulties in obtaining capital. Most survey respondents
                                       noted that the difficulties some borrowers experience in obtaining capital
                                       not only affects the individual borrowers but also hinders rural
                                       communities’ economic development. A number of federal, state, local,
                                       and private initiatives have been developed to increase the availability of
                                       capital.


Certain Types of                       As shown in table 2, over half of the survey respondents who claimed to be
Borrowers Have Difficulty              knowledgeable about rural capital issues reported that start-up and
in Obtaining Access to                 expanding farms and businesses, minority-led enterprises, and financially
                                       struggling rural communities find it difficult to obtain debt and equity
Capital                                capital. In addition, according to studies we reviewed, borrowers that are
                                       unlike other local businesses, such as a software developer in a
                                       community that depends primarily on agriculture, may have difficulty in
                                       obtaining capital from local sources.

Table 2: Percentage of Survey
Respondents Who Believe That                                              Percent responding “moderate to very great difficulty
Certain Borrowers Have Difficulty in                                                     in obtaining capital”a
Obtaining Capital                      Type of borrower                                            Debtb                         Equityc
                                       Production agriculture
                                       Beginning farmers                                             85.7                            87.2
                                       Minority farmers                                              69.8                            77.2
                                       Expanding farmers                                             61.1                            71.1
                                       Business
                                       Start-up                                                      88.6                            93.3
                                       Minority-owned                                                74.5                            82.1
                                       Expanding                                                     64.8                            75.4
                                       Infrastructure
                                       Communities                                                   55.2                            58.8d
                                       Note: Our survey results did not show any significant differences by geographic region.
                                       a
                                        Percentages are based on the number of respondents who were knowledgeable or had at least
                                       some experience with rural capital issues. As shown in app. II, fewer respondents were familiar
                                       with production agriculture issues than with business or infrastructure issues.
                                       b
                                       Debt capital is borrowed funds paid back over time with interest.




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c
 Equity capital is ownership funds that become part of the capital base, yielding a return based
on the profitability of the business over time.

d
These represent grant funds, tax revenues, and user fees.


Source: GAO’s analysis of questionnaire data.


According to rural development officials we spoke with and the studies we
reviewed, a number of factors account for the difficulties certain
borrowers face. (See bibliography for a listing of the literature reviewed.)
First, the borrowers that are having difficulties obtaining access to capital,
such as beginning farmers and start-up businesses, lack sufficient equity or
collateral to qualify for debt capital at most banks. Therefore, these
borrowers have to turn to lenders that specialize in providing capital to
higher-risk ventures, such as venture capitalists, for their primary funding.
Similarly, financially struggling rural communities have difficulty financing
their infrastructure requirements because their declining tax base makes it
difficult to incur debt.

Second, those we surveyed and the studies and testimonies we reviewed,
such as a 1995 Washington State Development Finance Report and a 1996
testimony by a researcher on rural capital markets, suggest that the lack of
business skills is a major impediment for start-up and expanding
businesses. These potential borrowers cannot effectively prepare sound
business and marketing plans, financial statements, applications, and
other documents required to secure the capital they seek. Likewise, many
small communities do not have, nor can they afford, professional
managers who know how to identify and apply for the financing programs
available to the communities and how to comply with the programs’ rules
and regulations. In the view of those we interviewed, many of the
traditional lenders do not have the time or inclination to provide these
borrowers with the level of attention needed to make them successful.
Furthermore, even when dealing with a loan guaranteed by a federal or
state guarantee program such as SBA’s, the borrowers are not required by
the guarantor agencies to obtain technical assistance as a precondition for
qualifying for the loan.

Third, borrowers seeking funds for nontraditional businesses may not be
able to obtain capital because commercial banks in rural areas may be
unable or unwilling to evaluate these lending opportunities. For example,
several studies we reviewed reported that while local bankers may
thoroughly understand lending for production agriculture, they may not



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                                      have the management expertise to evaluate the profitability of loans to a
                                      software developer.

                                      Finally, several studies, such as the 1995 Washington State Development
                                      Finance Report and a 1993 report on minority and seed capital, report that
                                      some minority borrowers may not be able to obtain capital, even though
                                      they meet commercial lending standards. Some officials who assist
                                      minority agricultural and business owners have charged that
                                      discrimination prevents some minority borrowers from obtaining capital.


Survey Respondents                    The majority of those we surveyed who were familiar with rural capital
Believe That Problems in              issues reported that economic development in rural areas is at least
Obtaining Capital May                 moderately hindered by the difficulties agriculture, businesses, and
                                      communities face in obtaining capital. Table 3 reports the percentage of
Hinder Economic                       respondents who believe that limitations on the availability of capital
Development                           hinder rural economic development.

Table 3: Percentage of Survey
Respondents Reporting That                                                 Percent responding that economic development is
Limitations on Capital Availability                                           hindered to a moderate or very great extenta
Hinder Economic Development in        Type of borrower                                            Debt                            Equity
Rural Areas
                                      Production agriculture                                       57.4                             67.6
                                      Business                                                     73.0                             78.1
                                      Community infrastructure                                     64.9                             68.6
                                      a
                                       Percentages are based on the number of respondents who were knowledgeable or had at least
                                      some experience with rural capital issues. As shown in app. II, fewer respondents were familiar
                                      with production agriculture issues than were familiar with business or infrastructure issues.



                                      Source: GAO’s analysis of questionnaire data.


                                      A January 1997 report by the Rural Finance Task Force of the Rural Policy
                                      Research Institute is consistent with our questionnaire results.7 The
                                      Institute reported that difficulties in obtaining access to debt capital
                                      present a significant impediment to broadening the economic base of a
                                      rural community.




                                      7
                                       The Current Adequacy of Rural Financial Markets: Rural Economic Development Impacts of Seven
                                      Key Policy Issues. This report was prepared for the Senate Committee on Agriculture, Nutrition and
                                      Forestry, the House Agriculture Committee, and the USDA. Rural Policy Research Institute. Columbia,
                                      Mo.: Jan. 1997.



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Initiatives to Help Increase   To attempt to overcome the difficulties that potential borrowers
Capital Availability           encounter, several initiatives are either planned or ongoing. To help
                               borrowers that are having difficulty obtaining access to capital, federal
                               and state governments have set up programs to assist beginning farmers,
                               start-up businesses, and small communities that want to fund water and
                               sewer projects. For example, although no funds have been appropriated,
                               the 1996 farm bill established in USDA a venture capital demonstration
                               program for rural America. The program would fund up to 10 venture
                               capital organizations for community development to provide capital to
                               private business enterprises.

                               Similarly, Minnesota created Minnesota Technology, Incorporated, in 1992
                               with $7 million to provide equity capital to start-up, small, and expanding
                               businesses located predominantly in rural areas. As of June 1996, this fund
                               had invested about $2.6 million in 10 firms.

                               At the local level, hundreds of revolving loan funds have been established
                               to help start-up and expanding businesses eventually obtain capital from
                               commercial lending sources. For example, in Minnesota alone, about 180
                               community-based revolving loan funds have been established to provide
                               financial assistance to small rural businesses.

                               In Fayetteville, Arkansas, the Community Resource Group, Incorporated,
                               created a community loan fund in 1992 with funds primarily from USDA and
                               a major private foundation to provide capital for water and wastewater
                               projects. The fund’s efforts are targeted to financially struggling small
                               rural communities in seven southern states. Since 1992, the fund has made
                               66 loans that have a total value of over $3.2 million.

                               Several federal, state, and private programs, such as SBA’s Small Business
                               Development Centers, have been developed to provide technical
                               assistance to prospective borrowers. However, the majority of rural
                               development officials we surveyed did not believe that these programs
                               were sufficient. Our questionnaire showed that 59 percent of those
                               surveyed believe that the technical assistance provided to agricultural and
                               business borrowers is marginal or inadequate. According to several rural
                               development officials we interviewed, this negative response may be due
                               in part to the fact that technical assistance resources are insufficient to
                               meet the demand.

                               Finally, to help minority borrowers, numerous federal and state programs
                               have been targeted to these borrowers. For example, SBA has set-aside



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                                          programs for minority-owned businesses, and states, such as Alabama,
                                          have loan programs targeted to minority-owned enterprises.


                                          Many rural development officials we surveyed reported that potential
Rural Officials Believe                   borrowers were unaware of available financial resources and did not
That Many Potential                       know how to apply for debt and equity capital.8 According to these
Borrowers Are Not                         officials, this was particularly the case for borrowers seeking assistance
                                          for businesses. (See table 4.)
Aware of the Variety
of Financial
Resources Available


Table 4: Views of Rural Development
Officials on Potential Rural Borrowers’                                             Percent responding          Percent responding
Awareness of and Knowledge of How                                               “probably or definitely “probably or definitely do
to Apply for Financial Assistance                                             unaware of availability of not know how to apply for
                                          Type of financing sought               financial assistance”a      financial assistance”a
                                          Production agriculture                                       47.4                             64.1
                                          Business                                                     55.9                             70.1
                                          Community infrastructure                                     31.0                             49.7
                                          a
                                           Percentages are based on the number of respondents who were knowledgeable or had at least
                                          some experience with rural capital issues. As shown in app. II, fewer respondents were familiar
                                          with production agriculture issues than with business or infrastructure issues.



                                          Source: GAO’s analysis of questionnaire data.


                                          This perceived lack of awareness of financial assistance occurs even
                                          though federal and state agencies and commercial entities have made
                                          considerable efforts to better inform rural public and financial institutions
                                          about available assistance. For example, the federal government publishes
                                          The Catalog of Federal Domestic Assistance, which details federal
                                          assistance programs, and agencies supplement this publication with
                                          information on their own programs.

                                          Similarly, states and commercial entities, such as banking associations and
                                          utility companies, have developed and disseminated numerous
                                          publications to advertise the financial resources and programs available to

                                          8
                                          For more information on this issue, see Rural Development: Patchwork of Federal Programs Needs to
                                          Be Reappraised (GAO/RCED-94-165, July 28, 1994).



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                          assist rural borrowers. They also conduct outreach workshops, seminars,
                          and other types of meetings to inform prospective agricultural, business,
                          and community customers of the sources of available assistance.

                          According to rural development officials we interviewed, banks and other
                          capital providers are generally knowledgeable about available sources of
                          capital and can refer borrowers to these sources. They also believe that
                          borrowers’ need for business operating knowledge is often greater than
                          their need for more knowledge about how to find capital. Finally, these
                          officials believe that, in financing infrastructure, rural areas have great
                          difficulty in discovering the types of support potentially available and
                          completing the documentation required to apply and qualify for loan and
                          grant assistance.


                          In the view of many rural development officials, including respondents to
Alternatives Have         our survey, funding for existing federal grant and loan programs is
Been Proposed for         insufficient to satisfy the potential rural borrowers not served by available
Improving the             capital sources. However, given current budgetary constraints, most
                          officials we interviewed believe that additional federal support is unlikely
Availability of Capital   to be forthcoming. Consequently, rural development officials proposed
in Rural Areas            three alternatives that could improve the availability of capital for certain
                          borrowers that are experiencing difficulty in obtaining capital. While these
                          alternatives may not require federal appropriations, these officials
                          acknowledged that these alternatives present risks to taxpayers that may
                          result in some future costs. These alternatives are (1) using existing loan
                          guarantee programs and technical assistance entities to target resources to
                          borrowers having difficulties obtaining access to capital, (2) expanding the
                          charters of some GSEs and/or requiring them to target some of their funds
                          to borrowers having difficulties obtaining access to capital, and
                          (3) authorizing federal agencies that have provided capital to state- and
                          community-based revolving loan funds to allow these revolving loan funds
                          to sell their loans into a secondary market. It is unclear, however, whether
                          the potential benefits of these proposals for rural areas would exceed the
                          potential financial losses to the federal government. Moreover, targeting
                          funds to borrowers in rural areas having difficulty obtaining access to
                          capital may result in having fewer funds available to creditworthy
                          borrowers.

                          We have not performed a detailed analysis of the needs for or merits of
                          these alternatives because adequate historical information is not available.
                          However, we discussed their potential benefits, limitations, and risks with



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                            B-276456




                            knowledgeable officials in the Department of the Treasury, FCS, the Farm
                            Credit Administration, and the federal agencies that initially provided
                            grants to the community-based revolving loan funds. Each alternative is
                            discussed below.


Changing the Federal Loan   Rural development and lending officials we interviewed suggested that
Guaranty Program(s) and     existing loan guarantee programs, such as SBA’s Business Loan Guarantee
Linking Them to Technical   Program, be modified to require that a small percentage of their
                            guaranteed loan funds be targeted to those borrowers that are having
Assistance                  difficulties obtaining access to capital, such as start-up and expanding
                            businesses. This program change would require that guarantor agencies
                            apply less stringent lending standards to these applicants. However,
                            because of the higher risk associated with these borrowers, the officials
                            suggested that loan approval be contingent on a borrower’s agreeing to
                            work closely with a technical assistance provider, such as SBA’s Small
                            Business Development Centers. Technical assistance has been beneficial
                            in other loan programs. For example, revolving loan fund officials told us
                            that they have been able to reduce their loan default rates by providing
                            extensive technical assistance.

                            We identified two consequences of applying less stringent lending
                            standards. First, the risks of financial losses to the federal government
                            could increase. Second, because a share of funds would be targeted to
                            borrowers in rural areas having difficulty obtaining access to capital,
                            fewer funds might be available for guaranteed loans to creditworthy
                            borrowers.

                            In commenting on a draft of this report, SBA stated that it believes that
                            insufficient resources are available to meet the technical assistance needs
                            of rural America’s small businesses. To ensure that borrowers needing
                            technical assistance are aware of its partners’ services and locations, SBA
                            currently notifies all its guaranteed loan recipients of the services and
                            location of its nearby technical assistance partners. However, given the
                            limited funding currently available to the Small Business Development
                            Centers, SBA believes that this alternative’s requirement that all borrowers
                            receive technical assistance would not be cost-effective.


Changing Federal            Rural development and lending officials we interviewed told us that the
Government-Sponsored        charter of FCS and the FHLBS could be revised to expand the availability of
Enterprises


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capital in rural America. While these proposals may have merit, they also
have limitations.

The ideas proposed for revising FCS include (1) providing capital to
nonagricultural businesses and/or (2) requiring that a certain amount of
FCS’ portfolio include loans to borrowers that have encountered particular
difficulty in obtaining access to capital, such as beginning farmers; start-up
and expanding businesses; and small, financially struggling rural
communities. FCS has also proposed legislation that would give it authority
to provide capital to nonagricultural businesses. However, this proposed
legislation did not seek authority for targeting loans to borrowers that
have encountered difficulties in obtaining access to capital.

According to rural development officials, both ideas have merit because
FCS has an important presence in rural America, with 1,476 offices and
more than 80 years of experience in serving agriculture and
agriculture-related cooperative business entities. Furthermore, FCS already
has access to global capital markets.

However, according to officials we spoke with, these two ideas present
some financial risk to the federal government. Allowing FCS to lend to
nonagricultural businesses may increase its exposure to losses because its
loan officers may not have the expertise necessary to evaluate the risks
associated with business or infrastructure projects unrelated to
agriculture. FCS officials acknowledge the limitations of their current
staffing but believe that they could overcome this limitation by developing
or hiring the staff needed to implement any new authority.

A proposal that a certain amount of FCS portfolio include loans to
borrowers that have had difficulties in obtaining capital also presents
financial risk to the federal government because it would increase the FCS’
exposure to losses. Additionally, targeting a share of FCS’ funds to
borrowers having difficulty obtaining access to capital may result in fewer
funds being available to lend to creditworthy borrowers. Furthermore, FCS
may be reluctant to make such loans because doing so conflicts with
regulatory requirements to ensure that funds are loaned to borrowers that
are likely to repay their loans.

Similarly, the rural development and lending officials’ proposed revision to
the charter of FHLBS would have limitations. The proposed revision would
expand FHLBS’ authority beyond providing advances to members for home
mortgages to include providing advances for loans for rural development



Page 14                                       GAO/RCED-97-109 Rural Development
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activities, such as financing smaller businesses and communities’
infrastructure. This proposal also raises concerns about exposure to loss,
lack of expertise in evaluating loan applications outside the historical
experience of FHLBS and its member institutions, and potential
unwillingness to lend to higher-risk borrowers. In addition, fewer funds
may be available to borrowers that have traditionally borrowed from
FHLBS’ member institutions.


The proposal to revise FHLBS is similar to changes specified in H.R. 3167,
“The Enterprise Resource Bank Act of 1996,” which we examined in a
June 1996 letter to the Chairman of the House Committee on Banking and
Financial Services.9 We concluded that the proposed mission is broader
than FHLBS’ original mission, which focused the GSE’s activity on a specific
sector of the economy that the Congress perceived as being characterized
by some degree of market failure. We concluded that the broader mission,
expanded membership, and additional eligible collateral proposed under
the bill could lead to an increase in taxpayers’ exposure to risk because
the proposal is likely to lead to expanded activities by FHLBS. We also
noted that the government would have little assurance that FHLBS would
use this expanded authority to actually channel significant amounts of
additional credit to the new mission-related activities.

Our concerns over the potential risk to taxpayers of expanding the role of
GSEs are not new. In a December 1993 report on FHLBS,10 we developed
criteria to be used in judging whether such activities are appropriate.
Among these criteria are (1) the new activity should be consistent with the
FHLBS’ mission, (2) the GSE should have the expertise needed for the new
activity, and (3) any new activity should be properly priced after any risk
adjustments. According to a Department of the Treasury official, the
expansion of GSEs raises a broader policy question about whether GSEs
should be used solely to correct for market imperfections or also to
subsidize credit to borrowers that would not obtain credit in the private
market.




9
 Enterprise Resource Bank Act (GAO/GGD-96-140R, June 27, 1996).
10
 Federal Home Loan Bank System: Reforms Needed to Promote Its Safety, Soundness, and
Effectiveness (GAO/GGD-94-38, Dec. 8, 1993).



Page 15                                                 GAO/RCED-97-109 Rural Development
                                         B-276456




Allowing the Sale of                     Officials we interviewed, as a well as a 1991 study by the Federal Reserve
Federally Subsidized                     Bank of Kansas City, have proposed creating secondary markets for rural
Community Development                    businesses and community infrastructure loans as a way of increasing
                                         capital availability in rural areas while allowing market forces to operate.11
Loans                                    Under this proposal, rural, community-based revolving loan funds would
                                         be able to sell their loans into a secondary market, thereby making funds
                                         currently tied up in existing loans available for new loans. Figure 1 shows
                                         the flow of funds from revolving loan funds through an intermediary that
                                         packages the loans for sale to investors in the secondary market.


Figure 1: Flow of Funds From Revolving Loan Funds Through an Intermediary to Secondary Market Investors



                                                                                  Sales
   Traditional sources of capital:   Lendable                                   proceeds          Secondary market
                                       funds        Revolving loan
                                                                                                  intermediary:
     Governments                                        funds
     Foundations                                                               Loan notes
                                                                                                    Pools loans and creates
     Charitable contributors, such
                                                                                                    bonds for sale to investors
     as individuals and
     corporations

                                                    Loans Repayments
                                                                                                        Purchase
                                                                                                         bonds            $$




                                                        Borrowers                                             Investors




                                         While some rural, community-based revolving loan funds now sell into a
                                         secondary market, most do not. The revolving funds that do not sell into a
                                         secondary market are often partially capitalized with federal funds that
                                         cannot be sold at a discount from face value unless the managers of the
                                         revolving funds receive permission from the concerned federal agencies.
                                         USDA officials told us that even though selling these loans into a secondary
                                         market could make more funds available, they hesitate to provide

                                         11
                                           Regional Economic Development and Public Policy, Federal Reserve Bank of Kansas City, May 1991.



                                         Page 16                                                  GAO/RCED-97-109 Rural Development
B-276456




permission because of the potential adverse public reaction to selling
federally subsidized loans at less than face value.

According to rural development officials, allowing the sale of federally
subsidized community development loans could make a substantial
amount of additional capital available to rural areas. Studies by EDA and a
privately sponsored secondary market entity state that funds invested in
economic development loans might be freed up for further investments.
According to an official of a privately sponsored secondary market entity,
these loans would represent a major untapped source of potential
financing for community development initiatives across the country if they
were sold in a secondary market. For example, a privately sponsored
survey of revolving loan funds in 15 states identified more than 24,000
economic development loans, totaling more that $1.2 billion. According to
EDA, another study suggested that as much as $6 billion in economic
development loans may be available for sale in a secondary market.

However, according to the official of the privately sponsored secondary
market, uncertainty exists about whether this secondary market proposal
would be successful without federal financial assistance. This uncertainty
occurs because revolving loan funds make some loans at less than market
rates and/or for more lengthy terms to certain borrowers. Therefore,
because of the additional risk and the lack of higher interest rates to
compensate investors for this risk, these loans would have to be
purchased at a discount so that investors could earn a return that is
competitive with current market rates. This discount would have to be
subsidized by either the private or public sector, or both, in order to
encourage revolving loan funds to sell these loans. According to this
official, if the private sector is unwilling to provide these funds, a federal
subsidy might be required.

Another limitation of this proposal, according to some rural officials, is
that revolving loan fund managers might be reluctant to sell more of their
loans to a secondary market. Currently, these managers rely primarily on
an infusion of capital from federal and state government, foundations, and
charitable contributors to make new loans. Managers we interviewed said
that they are reluctant to sell their loans because they need the income
from their existing loan portfolio to fund their administrative expenses.

Furthermore, rural development officials expressed concerns about the
adequacy of revolving loan funds’ loan-making and -servicing practices and
the existence of an active demand for capital from these institutions,



Page 17                                       GAO/RCED-97-109 Rural Development
B-276456




which are funded in part by federal agencies, such as USDA and EDA. They
told us that many of these revolving loan funds may not have sufficient
management expertise to evaluate the risk associated in lending to
borrowers that cannot obtain capital from traditional sources or meet
demand for capital and technical assistance. A potential benefit of a
secondary market of this type may be its ability, over time, to develop
information on the performance of revolving loan funds. This information
could be useful in evaluating whether federal financial assistance to these
entities should be continued.

In commenting on our draft report, USDA noted that, in support of this
concept, it is considering providing additional capital in rural areas
through a demonstration project that would allow the sale of third-party
recipient loans by lenders in the Department’s Intermediary Relending
Program. Under this program, USDA lends funds to intermediaries, that, in
turn, provide loans to recipients who are developing business facilities or
community development projects in rural areas. Eligible intermediaries
include public bodies, nonprofit corporations, Indian tribes, and
cooperatives.

EDA, in commenting on the draft report, stated that while it is aware of the
drawbacks and barriers associated with the development of a secondary
market, it is eager to further explore securitization by pursuing a
demonstration program involving the sale of securities in a secondary
market. EDA believes that the risks related to such a demonstration are
more than offset by the potential to accelerate the development of a
secondary market for economic development loans and the benefits of
private investment in economic development lending programs.
Accordingly, EDA, pursuant to discussions with Treasury officials and other
agencies that sponsor revolving loan fund programs, and in consultation
with congressional oversight committees, is poised to undertake a
demonstration of actual securitization transactions.

In seeking to demonstrate securitization, EDA reported that it plans to
allow the transactions to occur without influencing the pricing of the
transactions—that is, EDA is not planning to permit its funds to be used for
credit enhancement or other schemes designed to influence the pricing of
the transactions. In this way, EDA hopes that the demonstration will reveal
the true value of economic development loans and give a realistic picture
of the investor community’s interest in seeking out loan-backed securities
for economic development.




Page 18                                      GAO/RCED-97-109 Rural Development
                  B-276456




                  We provided copies of a draft of this report to USDA, SBA, and the
Agency Comments   Department of Commerce for their review and comment. Their comments
                  and our responses are in appendixes III, IV, and V.

                  In commenting on the draft report, USDA noted that its Rural
                  Business-Cooperative Service programs, while relatively small when
                  compared with SBA’s programs, are, in some localities, the only source of
                  federal funding for business and economic development activities. With
                  respect to the alternative proposed by rural development officials to allow
                  the sale of federally subsidized community development loans in a
                  secondary market, USDA stated that it is currently developing a
                  memorandum of agreement to initiate a demonstration project that will
                  allow the sale of loans into a secondary market. We incorporated USDA’s
                  comments into our report where appropriate.

                  SBA, in commenting on the draft report, agreed that certain borrowers in
                  rural areas, such as start-up, expanding, and minority-owned businesses
                  have difficulty in obtaining capital, and stated that, in some areas,
                  insufficient resources are available to meet technical assistance
                  requirements. SBA noted, however, that given its limited funding for
                  technical assistance, SBA’s approach of notifying borrowers of available
                  services and locations is significantly more cost-effective than requiring
                  that all borrowers receive technical assistance as a condition of receiving
                  a loan. We incorporated these comments where appropriate.

                  In commenting on the draft report, the Department of Commerce’s EDA
                  stated that the report did not provide a balanced assessment of the
                  potential for secondary marketing of economic development loans. EDA
                  stated that the potential benefits of developing such a secondary market
                  outweigh the possible shortcomings. In our report, we discuss both
                  potential benefits and limitations of the alternatives and do not take a
                  position on this matter. We incorporated EDA’s comments where
                  appropriate.


                  We conducted our review from May 1996 through April 1997 in accordance
Scope and         with generally accepted government auditing standards. Our scope and
Methodology       methodology are discussed in detail in appendix I. The reports we
                  reviewed concerning rural capital are listed in a bibliography.




                  Page 19                                      GAO/RCED-97-109 Rural Development
B-276456




As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from the
date of this letter. At that time, we will send copies of this report to the
House Committee on Agriculture, other interested congressional
committees, the Secretaries of Agriculture and Commerce, and the
Administrator of SBA. We will also make copies available to others upon
request.

If you have any questions about this report, please call me at
(202) 512-5138. Major contributors to this report are listed in appendix VI.




Robert A. Robinson
Director, Food and
  Agriculture Issues




Page 20                                       GAO/RCED-97-109 Rural Development
Page 21   GAO/RCED-97-109 Rural Development
Contents



Letter                                                                1


Appendix I                                                           24

Scope and
Methodology
Appendix II                                                          26

Summary of
Responses to
Questionnaire to
Rural Development
Officials
Appendix III                                                         47
                        GAO Comments                                 54
Comments From the
U.S. Department of
Agriculture
Appendix IV                                                          55
                        GAO Comments                                 58
Comments From the
Small Business
Administration
Appendix V                                                           59
                        GAO Comments                                 61
Comments From the
Department of
Commerce
Appendix VI                                                          62

Major Contributors to
This Report



                        Page 22        GAO/RCED-97-109 Rural Development
               Contents




Bibliography                                                                            63


Tables         Table 1: Primary Sources of Funding in Rural America                      4
               Table 2: Percentage of Survey Respondents Who Believe That                7
                 Certain Borrowers Have Difficulty in Obtaining Capital
               Table 3: Percentage of Survey Respondents Reporting That                  9
                 Limitations on Capital Availability Hinder Economic
                 Development in Rural Areas
               Table 4: Views of Rural Development Officials on Potential Rural         11
                 Borrowers’ Awareness of and Knowledge of How to Apply for
                 Financial Assistance

Figure         Figure 1: Flow of Funds from Revolving Loan Funds Through an             16
                 Intermediary to Secondary Market Investors




               Abbreviations

               CDC        community development corporation
               EDA        Economic Development Administration
               FCS        Farm Credit System
               FHLBS      Federal Home Loan Bank System
               GSE        government-sponsored enterprise
               SBA        Small Business Administration
               USDA       U.S. Department of Agriculture


               Page 23                                    GAO/RCED-97-109 Rural Development
Appendix I

Scope and Methodology


             To describe the primary financial institutions that are used to fund rural
             agriculture, business, and infrastructure, we reviewed the literature on
             economic development in rural America and obtained information from
             federal, state, and local officials concerned with rural development.

             To obtain the views of rural officials on potential borrowers’ awareness of
             the sources of finance, the availability of capital, and possible legislative
             proposals for closing identified gaps, we sent a questionnaire to over 700
             rural development officials who are members of the National Association
             of Development Organizations; the National Association of Regional
             Councils; and the agricultural and rural affairs steering committee of the
             National Association of Counties. We also surveyed all 50 state
             departments of community and economic development, or their
             equivalents.1 Our survey questionnaire was designed to obtain information
             on rural capital issues for production agriculture, businesses, and
             community infrastructure. We did not include commercial banks and the
             Farm Credit System in our survey because surveys performed by others
             had included these traditional suppliers of capital.

             Before mailing our questionnaires, we solicited expert review to determine
             the validity of the instrument by pretesting a preliminary version on
             officials from selected state, local, and other community organizations of
             varying size and in different parts of the United States. We pretested in
             four cities: Richmond, Virginia; Jackson, Mississippi; Boise, Idaho; and
             Indianapolis, Indiana. On the basis of the comments from these four
             pretests, we revised the questionnaire so that the questions would be
             uniformly interpreted and understood. Once we were confident that the
             questionnaire was free of any design flaws, we conducted a first mailing to
             officials from state, local, and community organizations.

             The officials were given approximately 10 days to complete and return the
             questionnaire. After a 2-week period, we sent out a “follow-up” letter to
             those recipients who had not yet returned their questionnaire. After
             another 2-week period, if questionnaires were still not returned, we mailed
             reminder postcards requesting the return of the questionnaires.



             1
              The National Association of Development Organizations’ goals include promoting economic
             development, focusing primarily on rural areas and small towns and providing technical assistance to
             its members. These members are drawn primarily from multicounty planning and development
             agencies. The National Association of Regional Councils’ principal mission is advocacy on behalf of
             regional councils, both rural and urban, at the national level. The National Association of Counties
             provides research and reference services for county officials and represents county officials at the
             national level.



             Page 24                                                    GAO/RCED-97-109 Rural Development
Appendix I
Scope and Methodology




We edited the returned questionnaires to ensure that they were complete
and filled out correctly. The questionnaire data were then converted into
electronic data for statistical analyses.

We received responses from about 67 percent of those surveyed. In
presenting the survey results, we only included the responses from those
who claimed at least some experience in agriculture, business, or
community infrastructure, which accounted for about 74 percent of those
returning the questionnaire. Our survey results are shown in detail in
appendix II.

We also interviewed rural development officials in four states—Alabama,
Maine, Minnesota, and Washington. These officials included bankers and
representatives of community development organizations; venture
capitalists; members of the rural finance task force of the Rural Policy
Research Institute; and representatives of federal and state governments.

Furthermore, we interviewed officials of federal agencies in Washington,
D.C., that provide capital to rural America. These agencies included USDA,
the Department of Commerce’s Economic Development Administration
(EDA), and the Small Business Administration (SBA). We also interviewed
officials of national associations in Washington, D.C., that represent the
interests of businesses, farmers, lenders, developmental organizations, and
local communities across the country. These associations included the
American Bankers Association, Independent Bankers Association of
America, Farm Credit Council, Farm Credit Administration, National
Federation of Independent Businesses, National Small Business United,
the American Farm Bureau Federation, the National Farmers Union, the
National Association of Development Organizations, the National
Association of Regional Councils, the National Association of Counties,
the Council of State Community Development Agencies, and the National
Association of Towns and Townships.




Page 25                                     GAO/RCED-97-109 Rural Development
Appendix II

Summary of Responses to Questionnaire to
Rural Development Officials




              Page 26          GAO/RCED-97-109 Rural Development
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Summary of Responses to Questionnaire to
Rural Development Officials




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Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 28                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 29                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 30                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 31                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 32                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 33                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 34                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 35                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 36                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 37                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 38                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 39                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 40                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 41                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 42                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 43                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 44                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 45                                    GAO/RCED-97-109 Rural Development
Appendix II
Summary of Responses to Questionnaire to
Rural Development Officials




Page 46                                    GAO/RCED-97-109 Rural Development
Appendix III

Comments From the U.S. Department of
Agriculture

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




                             Page 47   GAO/RCED-97-109 Rural Development
                 Appendix III
                 Comments From the U.S. Department of
                 Agriculture




See comment 2.




                 Page 48                                GAO/RCED-97-109 Rural Development
Appendix III
Comments From the U.S. Department of
Agriculture




Page 49                                GAO/RCED-97-109 Rural Development
                 Appendix III
                 Comments From the U.S. Department of
                 Agriculture




See comment 3.




                 Page 50                                GAO/RCED-97-109 Rural Development
                 Appendix III
                 Comments From the U.S. Department of
                 Agriculture




See comment 4.




                 Page 51                                GAO/RCED-97-109 Rural Development
Appendix III
Comments From the U.S. Department of
Agriculture




Page 52                                GAO/RCED-97-109 Rural Development
Appendix III
Comments From the U.S. Department of
Agriculture




Page 53                                GAO/RCED-97-109 Rural Development
               Appendix III
               Comments From the U.S. Department of
               Agriculture




               The following are GAO comments on the U.S. Department of Agriculture’s
               (USDA) letters dated April 21-25, 1997.


               1. We have added more detail on USDA’s financial and technical assistance
GAO Comments   programs that are targeted to rural areas for business and economic
               development.

               2. USDA included some attachments that provided additional detailed
               information about specific agency programs. We have not included these
               attachments in the report.

               3. We have revised the report to recognize that USDA plans to conduct a
               demonstration project allowing the sale of loans to third-party recipients.

               4. We recognize that certain restrictions exist with respect to the sale of
               tax-exempt bonds to finance community infrastructure needs. However, a
               complete discussion of this issue is beyond the scope of this report.




               Page 54                                      GAO/RCED-97-109 Rural Development
Appendix IV

Comments From the Small Business
Administration

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




                             Page 55   GAO/RCED-97-109 Rural Development
                 Appendix IV
                 Comments From the Small Business
                 Administration




See comment 1.




                 Page 56                            GAO/RCED-97-109 Rural Development
Appendix IV
Comments From the Small Business
Administration




Page 57                            GAO/RCED-97-109 Rural Development
               Appendix IV
               Comments From the Small Business
               Administration




               The following are GAO comments on the Small Business Administration’s
               (SBA) letter dated April 18, 1997.


               1. We have revised the report to recognize that SBA officials believe that,
GAO Comments   given the limited funding currently available, requiring that all borrowers
               receive technical assistance would not be as cost-effective as the practice
               of notifying guaranteed loan recipients of the services that are available.




               Page 58                                      GAO/RCED-97-109 Rural Development
Appendix V

Comments From the Department of
Commerce

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




                             Page 59   GAO/RCED-97-109 Rural Development
                 Appendix V
                 Comments From the Department of
                 Commerce




See comment 2.




                 Page 60                           GAO/RCED-97-109 Rural Development
               Appendix V
               Comments From the Department of
               Commerce




               The following are GAO comments on the Department of Commerce’s
               Economic Development Administration’s (EDA) letter dated May 6, 1997.


               1. The report recognizes both the potential benefits and limitations of the
GAO Comments   alternatives. We revised the report to recognize that EDA officials believe
               that the potential benefits of developing secondary markets for economic
               development loans outweigh the possible shortcomings.

               2. We revised the report to recognize that EDA officials plan to explore
               secondary markets by pursuing a demonstration program involving the
               sale of loans into secondary markets.




               Page 61                                      GAO/RCED-97-109 Rural Development
Appendix VI

Major Contributors to This Report


               Robert C. Summers, Assistant Director
               Dale A. Wolden, Evaluator-in-Charge
               James L. Dishmon, Jr.
               Kelly S. Ervin
               William F. Mayo
               Mary Jane Meek
               Carol Herrnstadt Shulman
               John C. Smith




               Page 62                                 GAO/RCED-97-109 Rural Development
Bibliography


               1995 Development Finance Report. Washington State Lenders Network.
               1995.

               1996 Annual Report. Community Reinvestment Fund. Minneapolis, Minn:
               1996.

               Agricultural Income and Finance: Situation and Outlook Report. Annual
               Lender Issue. U.S. Department of Agriculture, Economic Research Service.
               1996.

               Are Revolving Loan Funds A Better Way To Finance Rural Development?
               USDA, Economic Research Service, Agriculture Information Bulletin, No.
               724-05. 1996.

               Armstrong, Judy, et al. Rural Economic Development: A Profile of Eight
               Rural Areas Located in the Lower Mississippi Delta Region. Federal
               Reserve Bank of St. Louis, Community Affairs Department. 1995.

               Barry and Associates. Agency Market Funds, Commercial Banks, and
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               Barry, Peter J. The Effects of Credit Policies on U.S. Agriculture. AEI
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               _____, Bruce J. Sherrick, and Paul N. Ellinger. Farmer Mac’s New
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               Bugbee, Anton, and Associates. Business Capital Needs in Greater
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               Can Federal Action Improve Efficiency in the Market for Farm Loans?
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               Cole, R., et al. Financial Services Used by Small Businesses: Evidence from
               the 1993 National Survey of Small Business Finances. Federal Reserve
               Bulletin. 1995.




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Credit Availability for Small Businesses and Small Farms. Submitted by
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Dewar, Margaret E. “Loans to Business to Encourage Rural Economic
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Drabenstott, Mark. “Capital for Agriculture and Rural America: Redefining
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_____. Regional Economic Development and Public Policy. Federal
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_____ and Tim R. Smith. “The Changing Economy of the Rural Heartland.
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Duncan, Marvin, et al. The Current Adequacy of Rural Financial Markets:
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Duncan, Marvin, Laurence Crane, and Cole Gustafson. “North Dakota’s
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Duncan, Marvin, and Mark Edelman. Rural Finance Reform: A Rural
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Eisinger, Peter. “Review Essay—The State of State Venture Capitalism.”
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Flora, Jan L., et al. From the Grassroots: Case Studies of Eight Rural
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(150423)   Page 67                                     GAO/RCED-97-109 Rural Development
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