August 22, 2016 •Anthony Curcio
More Federal lending programs are focusing their attention and scrutiny on the importance of procedural documentation. As part of this effort, Congress requested that the Government Accountability Office (GAO) examine the credit subsidy documentation for three Federal credit agencies:
- Department of Agriculture, Export Credit Guarantee Program (USDA)
- Department of Housing and Urban Development's Federal Housing Administration (HUD FHA), Mutual Mortgage Insurance (MMI) Fund
- Department of Education, Direct Student Loan Program (ED)
Read GAO's complete findings in their July 2016 report: "Credit Programs: Key Agencies Should Better Document Procedures for Estimating Subsidy Costs" (GAO-16-269).
GAO Offers 8 Key Elements for Estimating Subsidy Costs
As part of its report, GAO identified eight (8) key elements that should be outlined in every agency's documentation:
- Historical data validation
- Informed opinion documentation (as applicable)
- Cash flow assumption documentation
- Cash flow model documentation
- Program design comparison
- Analysis of estimated cash flows
- Sensitivity analysis
- Policies and procedures for estimating subsidy cost
Summary Results of the July 2016 GAO Report
While USDA passed the examination with flying colors, HUD FHA and ED received a more muted assessment. Only three programs were reviewed in this report, but others could be the subject of similar examinations in the future. All Federal credit programs should be prepared to address each of the key elements identified by GAO.
Summit's Experience with Credit Subsidy Documentation
The good news: Summit has supported USDA lending programs for almost 10 years, so we are intricately familiar with their credit subsidy documentation. Our recent training session, "An Introduction to Model Risk Management," stressed the importance of model and procedural documentation related to credit subsidy estimation.
Feel free to browse our other posts about model risk management here.
