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Loan Guarantees

DESCRIPTION:

• Loan guarantees come in two forms:
  1. Repayment guarantees which insure the repayment of a portion of individual loans. These increase the chance of loan repayment by substituting the credit risk of the insurer for that of the borrower; and
  2. Reserve contributions to a loan loss reserve made on a loan-by-loan basis, but which accumulate for all loans in the pool.
• In either form, loan guarantees enhance the chances of repayment.
• In the case of repayment guarantees, that portion of a loan that is formally guaranteed can often be sold in a secondary market to an investor.

FUNCTION:

• Loan guarantees strengthen a secondary market source of repayment.
• When the guaranteed portion of a loan is sold on a secondary market, that sale can produce a profit for the lender. Such sales also help manage interest rate risk since the purchaser (investor) bears that risk.
• Both types of guarantees encourage lenders to take risks they would not normally take.

QUALIFICATION AND USE CRITERIA:

• Where repayment guarantees are involved, the originator usually certifies that the loan could not be made without the guarantee (i.e. SBA loans). However, some loan guarantees are entitlement (i.e. home loans to war veterans) and such assurances are not required.
• In the case of reserve contribution programs, the option of using the program is usually left to the lender. The only qualification is that the loan is of a type eligible for the program.

PROGRAM STRUCTURE:

• Pricing limits often apply on loans backed by specific repayment guarantees, but not on reserve program loans.
• Providers of guarantees in both types of programs usually set limits on amounts available to individual borrowers.
• Loans with specific repayment guarantees also have limits on the portion of the loan to be guaranteed.
• Loan guarantees can often be used in conjunction with other enhancement programs. However, limits may be placed on the combined use of loan guarantees in conjunction with other government resources.

DOWNLOADABLE DOCUMENTS (PDF):

• Bureau of Indian Affairs Loan Guarantee Fund
• Export-Import Bank Exporter Assistance
• FHA Title I Property Improvement and Manufactured Home Loan
• FHA-Insured Mortgage Program, Section 203(b)
• Farm Services Agency (FSA) Farmer Programs
• HUD Community Development Block Grant Program (CDBG)
• Mortgage Finance Authority 542(c) FHA-Insured Multifamily Loan Program
• Mortgage Finance Authority BUILD IT! Loan Guarantee Program
• Navajo Business and Industrial Development Fund
• Rural Development Business and Industry Guaranteed Loan Program
• Rural Development Community Programs Guaranteed Loan
• Rural Development Guaranteed Rural Housing Program
• Rural Development Guaranteed Rural Rental Housing Program
• Small Business Administration CAPLines
• Small Business Administration Defense Loan and Technical Assistance Program
• Small Business Administration Export Working Capital Program
• Small Business Administration International Trade Loans
• Small Business Administration Loan Guarantee Program
• Small Business Administration Pollution Control Loan Program
• Small Business Administration Qualified Employee Trusts Loan Program
• Veterans Affairs-Guaranteed Home Loan Program

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