BEA 1997 (Contents)
Budget Enforcement Act of 1997
Section 10117
Title X—Budget Enforcement and Process Provisions
Subtitle A—Amendments to the Congressional Budget and Impoundment Control Act of 1974
SEC.10117. AMENDMENTS TO SECTION 303.
(a) Section 502.—Section 502 of the Federal Credit Reform Act of 1990 is amended as follows:
(1) In the second sentence of paragraph (1), insert “and financing arrangements that defer payment for more than 90 days, including the sale of a government asset on credit terms” before the period.
(2) In paragraph (5)(A), insert “or modification thereof” before the first comma.
(3) In paragraph (5), strike subparagraphs (B) and (C) and insert the following:
“(B) The cost of a direct loan shall be the net present value, at the time when the direct loan is disbursed, of the following estimated cash flows:
“(i) loan disbursements;
“(ii) repayments of principal; and
“(iii) payments of interest and other payments by or to the Government over the life of the loan after adjusting for estimated defaults, prepayments, fees, penalties, and other recoveries; including the effects of changes in loan terms resulting from the exercise by the borrower of an option included in the loan contract.
“(C) The cost of a loan guarantee shall be the net present value, at the time when the guaranteed loan is disbursed, of the following estimated cash flows:
“(i) payments by the Government to cover defaults and delinquencies, interest subsidies, or other payments; and
“(ii) payments to the Government including origination and other fees, penalties and recoveries; including the effects of changes in loan terms resulting from the exercise by the guaranteed lender of an option included in the loan guarantee contract, or by the borrower of an option included in the guaranteed loan contract.”.
(4) In paragraph (5), amend subparagraph (D) to read as follows:
“(D) The cost of a modification is the difference between the current estimate of the net present value of the remaining cash flows under the terms of a direct loan or loan guarantee contract, and the current estimate of the net present value of the remaining cash flows under the terms of the contract, as modified.”.
(5) In paragraph (5)(E), insert “the cash flows of” after “to”.
(6) In paragraph (5), by adding at the end the following:
“(F) When funds are obligated for a direct loan or loan guarantee, the estimated cost shall be based on the current assumptions, adjusted to incorporate the terms of the loan contract, for the fiscal year in which the funds are obligated.”.
(7) Redesignate paragraph (9) as paragraph (11) and after paragraph (8) add the following new paragraphs:
“(9) The term ‘modification’ means any Government action that alters the estimated cost of an outstanding direct loan (or direct loan obligation) or an outstanding loan guarantee (or loan guarantee commitment) from the current estimate of cash flows. This includes the sale of loan assets, with or without recourse, and the purchase of guaranteed loans. This also includes any action resulting from new legislation, or from the exercise of administrative discretion under existing law, that directly or indirectly alters the estimated cost of outstanding direct loans (or direct loan obligations) or loan guarantees (or loan guarantee commitments) such as a change in collection procedures.
“(10) The term ‘current’ has the same meaning as in section 250(c)(9) of the Balanced Budget and Emergency Deficit Control Act of 1985.”.
(b) Section 504.—Section 504 of the Federal Credit Reform Act of 1990 is amended as follows:
(1) Amend subsection (b)(1) to read as follows:
“(1) new budget authority to cover their costs is provided in advance in an appropriations Act;”.
(2) In subsection (b)(2), strike “is enacted” and insert “has been provided in advance in an appropriations Act”.
(3) In subsection (c), strike “Subsection (b)” and insert “Subsections (b) and (e)”.
(4) In subsection (d)(1), strike “directly or indirectly alter the costs of outstanding direct loans and loan guarantees” and insert “modify outstanding direct loans (or direct loan obligations) or loan guarantees (or loan guarantee commitments)”.
(5) Amend subsection (e) to read as follows:
“(e) Modifications.—An outstanding direct loan (or direct loan obligation) or loan guarantee (or loan guarantee commitment) shall not be modified in a manner that increases its costs unless budget authority for the additional cost has been provided in advance in an appropriations Act.”.
(c) Section 505.—Section 505 of the Federal Credit Reform Act of 1990 is amended as follows:
(1) In subsection (c), by inserting before the period at the end of the second sentence the following: “, except that the rate of interest charged by the Secretary on lending to financing accounts (including amounts treated as lending to financing accounts by the Federal Financing Bank (hereinafter in this subsection referred to as the ‘Bank’) pursuant to section 406(b)) and the rate of interest paid to financing accounts on uninvested balances in financing accounts shall be the same as the rate determined pursuant to section 502(5)(E). For guaranteed loans financed by the Bank and treated as direct loans by a Federal agency pursuant to section 406(b), any fee or interest surcharge (the amount by which the interest rate charged exceeds the rate determined pursuant to section 502(5)(E)) that the Bank charges to a private borrower pursuant to section 6(c) of the Federal Financing Bank Act of 1973 shall be considered a cash flow to the Government for the purposes of determining the cost of the direct loan pursuant to section 502(5). All such amounts shall be credited to the appropriate financing account. The Bank is authorized to require reimbursement from a Federal agency to cover the administrative expenses of the Bank that are attributable to the direct loans financed for that agency. All such payments by an agency shall be considered administrative expenses subject to section 504(g). This subsection shall apply to transactions related to direct loan obligations or loan guarantee commitments made on or after October 1, 1991”.
(2) In subsection (c), by striking “supercede” and inserting “supersede”.
(3) By amending subsection (d) to read as follows:
“(d) Authorization for Liquidating Accounts.—(1) Amounts in liquidating accounts shall be available only for payments resulting from direct loan obligations or loan guarantee commitments made prior to October 1, 1991, for—
“(A) interest payments and principal repayments to the Treasury or the Federal Financing Bank for amounts borrowed;
“(B) disbursements of loans;
“(C) default and other guarantee claim payments;
“(D) interest supplement payments;
“(E) payments for the costs of foreclosing, managing, and selling collateral that are capitalized or routinely deducted from the proceeds of sales;
“(F) payments to financing accounts when required for modifications;
“(G) administrative expenses, if—
“(i) amounts credited to the liquidating account would have been available for administrative expenses under a provision of law in effect prior to October 1, 1991; and
“(ii) no direct loan obligation or loan guarantee commitment has been made, or any modification of a direct loan or loan guarantee has been made, since September 30, 1991; or
“(H) such other payments as are necessary for the liquidation of such direct loan obligations and loan guarantee commitments.
“(2) Amounts credited to liquidating accounts in any year shall be available only for payments required in that year. Any unobligated balances in liquidating accounts at the end of a fiscal year shall be transferred to miscellaneous receipts as soon as practicable after the end of the fiscal year.
“(3) If funds in liquidating accounts are insufficient to satisfy obligations and commitments of such accounts, there is hereby provided permanent, indefinite authority to make any payments required to be made on such obligations and commitments.”.
(d) Section 506.—Section 506 of the Federal Credit Reform Act of 1990 is amended—
(1) by striking “(a) In General.—”;
(2) by striking “(1)” and inserting the following: “(a) In General.—”;
(3) by striking “(2) The” and inserting the following: “(b) Study.—The”;
(4) by striking “(3)” and inserting the following: “(c) Access to Data.—”; and
(5) in subsection (c) (as redesignated) by striking “paragraph (2)” and inserting “subsection (b)”.
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COUNSEL NOTES
Codification
This section was not classified to the U.S. Code.
EXPLANATORY STATEMENT OF MANAGERS
(H. CONF. REPT. 105-217)
The joint explanatory statement of managers for the conference committee on H.R. 2014 summarized this section as follows:
18. Amendments to Title V of the Congressional Budget Act (Credit Reform)
HOUSE BILL
No provision.
SENATE AMENDMENT (SECTION 1612)
The Senate amendment contains technical corrections and conforming amendments to the Federal Credit Reform Act of 1990. All of the proposed changes to Credit Reform in this amendment are taken from suggestions made by OMB. In general they reflect the experience with implementing Credit Reform since 1990 and codify current working definitions used by the Congressional Budget Office and the Office of Management and Budget.
The amendments to section 502 clarify the definition of a direct loan by explicitly including the sale of assets on credit terms. These amendments also clarify the law to reflect current practice concerning the treatment of modifications of outstanding direct loans and loan guarantees that affect their cost, adding a definition of the term “modification.”
The amendments to section 504 clarify that appropriation action is required before direct loans and loan guarantees can be made (subsidy costs must be appropriated in advance), except for mandatory programs that are exempt from this requirement. The existing language with respect to modifications is also made clearer.
The amendments to section 505 provide technical instructions concerning the interest rate charged to Government agencies by Treasury to finance credit programs, including the interest rate charged on loans financed by the Federal Financing Bank (FFB). The amendments require Treasury, including the FFB, to use the same rate as the one used to calculate the cost of a direct loan or loan guarantee. That is the current practice for Treasury financing other than financing by the FFB. The FFB is permitted to add a surcharge to the Treasury rate of interest, which is paid by the borrower and, in turn, by the agency. Current law does not provide instructions for dealing with the surcharge. The amendments specify that the surcharge will be credited to the credit program’s financing account along with other interest paid to the Government. Currently, a fraction of the surcharge is used to finance the FFB’s administrative expenses. The amendments allow the FFB to require reimbursement from an agency to cover the FFB’s administrative expenses. The agency will pay for its administrative expenses out of appropriations for that purpose, as is required now for other administrative expenses of most credit programs.
CONFERENCE AGREEMENT (SECTION 10117)
The Conference agreement adopts the Senate Amendment with additional changes for clarification.
Amendments to section 502 clarify the definition of the term ‘cost,’ including a modification of the requirement concerning the ‘discount rate’ used to determine cost so that it is based on the timing of the cash flows, as opposed to the term of the loan. Under this approach, a claim payment that will occur in year 1 of a guaranteed loan is discounted using the rate on a 1-year Treasury security, while a claim payment that will occur in year 30 is discounted using the rate on a 30-year Treasury security. The total cost is the sum of the present values of each year’s cash flows over the life of the direct loan or loan guarantee. This change increases accuracy and reduces bias. Accuracy is improved because each cash flow is discounted by the interest rate on a Treasury security having the same maturity as the period of that cash flow. Under the present practice, the rate on a Treasury security of similar maturity to the loan is based on the pattern of interest and principal payments for the security (semi- annual interest payments and full principal repayment on the last payment date). The estimated cash flows for credit programs almost never match this pattern. Bias is reduced because loans with the same cash flows but different maturities would be priced using the same basket of discount rates, and would therefore have the same cost.
Also under the definition of ‘cost,’ the amendments requires that, for purposes of an agency obligating funds for the cost of a credit program, the cost estimate will be based on the assumptions used in the President’s budget for the fiscal year in which the direct loan or loan guarantee is obligated, adjusted for differences between the projected and actual terms of the contract. For example, assuming no difference between the projected and actual terms of the loan contract, the cost estimate for the obligation of a direct loan in 1998 would be based on the assumptions used in the President’s 1998 budget. This incorporates by statute OMB’s current guidelines for calculating the cost estimate when funds are obligated for a direct loan or loan guarantee. For one-year funds, it provides Congress with the assurance that loan volume will not be affected by changes in assumptions during the period of program execution. In effect, it means that Congress will get the volume it paid for when it appropriated funds for the credit program. For programs with multi- year funds, the cost estimate will reflect more recent assumptions.
Workouts are not assumed to be included in the definition of modifications. The conference agreement does not change the treatment of workouts as implemented under the Federal Credit Reform Act of 1990. OMB and CBO shall report recommendations for any changes in such treatment to the House and Senate Committees on the Budget not later than March 30, 1998. Such report shall include data on the extent of the use of workouts and the resulting costs or savings.
The amendments add a definition of the term “current,” which is used in other credit definitions with regard to credit assumptions. By referring to GRH, the definition is the same as the one that is used for Budget Enforcement Act purposes.
U.S. Congress, Joint Explanatory Statement on the Committee of Conference on the Balanced Budget Act of 1997; (Conference Report), Committee on the Budget, House of Representatives, 105th Congress, 1st Session, Washington D.C. 1997, pp. 996-997.
Congressional Research service report
CRS issued a report on the Budget Enforcement Act of 1997 (Pub. L. 105-33), including this description of this section:
Section 10117. Amendments to Title V. Title V of the CBA, known as the Federal Credit Reform Act of 1990, was added by the BEA of 1990. Title V established a system for controlling the subsidized costs of loans, requiring that budget authority and outlays be budgeted for the estimated subsidy cost of direct and guaranteed loans. This cost is defined as the estimated long-term cost to the federal government of a direct loan or a loan guarantee, calculated on a net present value basis, excluding administrative costs.
Section 10117 of the act amends Sections 502, 504, and 505 of the CBA, essentially to incorporate technical and conforming changes recommended over the years by OMB. In particular, Section 10117 clarifies the definition of “cost” and other terms. The conferees indicated their intent that OMB and CBO report recommendations on certain technical aspects of the credit process by March 30, 1998.
CRS – Budget Enforcement Act of 1997: Summary and Legislative History by Robert Keith (97-931 GOV) October 8, 1997, pp. 14-15.
LEGISLATIVE HISTORY NOTES
Pub. L. 105–33, title X, §10000, Nov. 5, 1990, 111 Stat. 692; (Budget Enforcement Act of 1997).
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