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

EXIM serves as the official export credit agency of the United States, providing a range of financial products to support the export of U.S. goods and services. Following the 2007–2009 financial crisis, demand for EXIM support increased. However, from July 2015 to May 2019, EXIM lacked a quorum on its Board of Directors and, as a result, was unable to approve medium- and long-term transactions greater than $10 million.

The Export-Import Bank Reauthorization Act of 2012 includes a provision for GAO to evaluate EXIM's underwriting process. This report discusses the extent to which EXIM's (1) process for updating its underwriting policies and procedures is properly designed and implemented and (2) underwriting policies and procedures for loan and loan guarantee transactions are consistent with guidance for managing federal credit programs. To address these objectives, GAO evaluated EXIM's underwriting policies and procedures against federal guidance and discussed the underwriting process with EXIM officials.

GAO found that Export-Import Bank's (EXIM) process for updating its underwriting policies and procedures was properly designed and implemented. EXIM's Loan, Guarantee and Insurance Manual (Manual) describes EXIM's underwriting policies and procedures for its short-, medium-, and long-term loans and loan guarantees. The Manual describes the responsibilities of divisions and loan officers involved in the underwriting process and is required to be updated at least annually, except for material changes (e.g., changes resulting from legislative actions or compliance with sanctions), which are required to be made as soon as possible.

EXIM has initiated a process to streamline the Manual, which consists of over 1,400 pages, by separating the policies and procedures, thus allowing for continuous reviews. The underwriting sections of the Manual are tentatively scheduled for review in 2019.

The primary guidance for designing and managing federal credit programs is Office of Management and Budget Circular A-129, Policies for Federal Credit Programs and Non-Tax Receivables . GAO found that EXIM‘s policies and procedures were consistent with three of five areas of federal guidance; two areas related to lender and servicer eligibility and risk sharing practices were partially consistent with federal guidance.

Applicant screening. EXIM's policies and procedures were consistent with guidance in that they require applicants to provide relevant financial information and assessments of applicant eligibility and creditworthiness.

Loan documentation. EXIM's process was consistent with guidance in that it requires the preparation of loan files, which include the application, credit reports, and related analyses, as well as collateral documentation and loan agreements.

Collateral requirements. EXIM's process was consistent with guidance in that it requires a security interest in the financed export items.

Lender and servicer eligibility. EXIM established eligibility and decertification procedures for short-term delegated authority lenders that were consistent with guidance. However, it did not establish similar procedures for medium-term delegated authority lenders.

Risk sharing practices. EXIM's process was generally consistent with guidance in that EXIM provides loan guarantee terms that officials stated were necessary to achieve program purposes. However, federal guidance also calls for an agency to periodically review programs in which the government bears more than 80 percent of any loss. While EXIM prepares various program reviews, it has not developed procedures to help ensure that its risk sharing practices are routinely reviewed.

Without enhancements to its policies and procedures, EXIM may allow lenders that are not qualified to underwrite transactions and runs the risk that it will not effectively review its programs.

GAO is making two recommendations to enhance EXIM's policies and procedures related to (1) the use of medium-term delegated authority lenders and (2) periodic program reviews. EXIM concurred with GAO's recommendations and described actions planned to address them.

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

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

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

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

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

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

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

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

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

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

EXIM’s organizational structure includes various offices and divisions  operating under its president. The Office of Board Authorized Finance is  subdivided into business divisions that are responsible for underwriting  related to loans and loan guarantees, including processing applications,  evaluating the compliance of transactions with credit and other policies,  performing financial analyses, negotiating financing terms, coordinating  and synthesizing input to credit recommendations from other divisions,  and presenting credit recommendations for approvals.

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

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

Short-term loans and loan guarantees: Short-term financing  consists of all transactions with repayment terms of less than 1 year,  while Working Capital Guarantee program short-term financing may  be approved for a single loan or a revolving line of credit that can be  renewed for up to 3 years. In general, if the financed eligible product  contains at least 50 percent U.S. content, then the entire transaction  value is eligible for a working capital guarantee. Generally, for working  capital guarantees, EXIM guarantees 90 percent of the loan’s  principal and interest if the borrower defaults. Therefore, the lender  maintains the risk of the remaining 10 percent. EXIM’s payment of  working capital claims is conditional upon transaction participants’  compliance with EXIM requirements such as underwriting policies,  deadlines for filing claims, payment of premiums and fees, and  submission of proper documentation. EXIM has reported that over 80  percent of its working capital guarantee transactions are approved by  lenders with delegated authority, which means that commercial  lenders approve the guaranteed loans in accordance with agreed- upon underwriting requirements without first obtaining EXIM  approval. If a lender does not have delegated authority, EXIM  performs its own underwriting procedures and approves the  guaranteed loans.

Medium- and long-term loans and loan guarantees: For medium-  and long-term loan and loan guarantee transactions, EXIM provides  up to 85 percent financing with the remaining 15 percent paid by the  borrower or financed separately. The financing could be less than 85  percent depending on the U.S. content. EXIM’s medium- and long- term loan guarantees generally cover 100 percent of the financed  amount if the borrower defaults. EXIM’s guarantee to the lender is  transferable and unconditional, meaning that EXIM must pay  submitted claims regardless of the cause of default. EXIM generally  underwrites medium- and long-term loans and loan guarantees for  $10 million and less, and EXIM officials with delegated authority  approve the transactions. Further, EXIM has provided certain lenders  delegated authority to underwrite and approve these guarantees.  EXIM underwrites long-term loans and loan guarantees greater than  $10 million, and its Board of Directors approves the transactions.

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

EXIM’s Policies and Procedures for Extending Credit

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

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

EXIM loan officers perform the underwriting for loans and long-term loan  guarantees. The underwriting of medium-term or working capital loans  guaranteed by EXIM is performed by either EXIM loan officers or qualified  lenders with delegated authority, which allows the lender to authorize a  loan that EXIM guarantees in accordance with agreed-upon underwriting  requirements without first obtaining EXIM approval. When the  underwriting and credit decision is delegated to approved lenders, EXIM  does not perform the underwriting procedures.

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

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

To mitigate the risk for its internal credit process, EXIM developed and  documented underwriting processing steps from the time the application  is received through the approval of the appropriate credit structure. These  steps serve to (1) establish a framework for sound credit decisions, (2)  communicate to EXIM employees the requirements governing the  extension of credit, and (3) encourage documentation and the consistent  application of EXIM’s credit policies and procedures. According to EXIM  officials, the underwriting process also serves as EXIM’s primary method  for preventing fraud because of the due diligence performed on the  proposed transaction. Figure 3 summarizes EXIM’s underwriting process.

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

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

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

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

Credit decision. The loan officer is to document the due diligence in a  credit or board memo, which includes the loan officer’s recommendation  to approve or decline the transaction. These memos and applicable  supporting documentation are then to be forwarded to the approving  party. The credit memo applicable to working capital or medium-term  transactions is to be provided to EXIM officials with individual delegated  authority to approve transactions of $10 million and less. Board memos  for long-term transactions or transactions greater than $10 million are to  be provided to the EXIM Board of Directors for approval. From July 2015  to May 2019, EXIM lacked a quorum on its Board of Directors, and as a  result, EXIM was unable to approve new transactions greater than $10  million.

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

OMB Circular A-129, Policies for Federal Credit Programs and Non- Tax Receivables, revised in January 2013, describes policies and  procedures for designing and managing federal credit programs. The  guidance addresses various standards for applicant screening, loan  documentation, collateral requirements, determining and monitoring  lender and servicer eligibility, and lender and borrower stake in full  repayment. In addition, it details risk sharing practices that agencies  should follow, such as ensuring that lenders and borrowers who  participate in federal credit programs have a substantial stake in full  repayment in accordance with the loan contract.

Treasury’s Bureau of the Fiscal Service’s Managing Federal  Receivables provides federal agencies with an overview of standards,  guidance, and procedures for successful management of credit  activities, including screening applicants for creditworthiness and  financial responsibility, and managing, processing, evaluating and  documenting loan applications and awards for loan assistance.  Furthermore, it details how federal agencies should manage lenders  and servicers that participate in federally insured guaranteed loan  programs.

EXIM’s Process for Updating Its Underwriting Policies and Procedures Was Properly Designed and Implemented

We found that EXIM’s process for updating its underwriting policies and  procedures was properly designed and implemented. Standards for  Internal Control in the Federal Government states that management  should design control activities to achieve objectives and respond to risks.  Management’s design of internal control establishes and communicates  the who, what, when, where, and why of internal control execution to  personnel. Management should clearly document internal control in a  manner that allows the documentation to be readily available and properly  managed and maintained. Further, management should also implement  control activities through policies and periodically review policies,  procedures, and related control activities for continued relevance and  effectiveness in achieving the entity’s objectives or addressing related  risks.

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

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

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

EXIM’s Underwriting Policies and Procedures Were Mostly Consistent with Federal Guidance, but Could Be Enhanced

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

EXIM’s Policies and Procedures Were Consistent with Federal Guidance Related to Applicant Screening

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

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

EXIM’s underwriting process requires screening of applicants for  eligibility, which is partly completed through the CRTI review. As part of  the CRTI review, EXIM screens the corporate and individual names and  addresses of lenders, borrowers, guarantors, and other transaction  participants against 28 databases that include various U.S. government  and international debarment and sanctions lists for red flags. If a match  is identified, EXIM’s Credit Review and Compliance Division works with  the loan officers to determine the legitimacy of the match and, as  necessary, works with OGC to determine what additional due diligence  measures may be required and whether to continue the underwriting  process.

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

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

EXIM’s Policies and Procedures Were Consistent with Federal Guidance Related to Loan Documentation

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

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

EXIM’s Policies and Procedures Were Consistent with Federal Guidance Related to Collateral

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

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

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

EXIM’s Policies and Procedures Were Not Fully Consistent with Federal Guidance Related to Lender and Servicer Eligibility

Federal guidance calls for policies and procedures related to lender and  servicer eligibility, monitoring, and recertification. As shown in table 5,  EXIM’s policies and procedures were consistent with three and partially  consistent with two of five federal standards for lender and servicer  eligibility.

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

However, for medium-term delegated authority lenders, EXIM has not  established documented policies and procedures for (1) determining their  eligibility for continued participation in the program and (2) decertifying or  taking other appropriate actions for those that do not meet compliance or  eligibility standards. EXIM officials told us that currently EXIM has only  three medium-term delegated authority lenders: two were renewed for  continued participation and one became inactive in 2018. Further,  according to EXIM officials, since 2009 only 2.3 percent of all medium- term guarantee authorizations have been delegated authority  authorizations ($71 million out of $3.1 billion).

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

EXIM’s Policies and Procedures Were Not Fully Consistent with Federal Guidance Related to Risk Sharing Practices

OMB Circular A-129 calls for lenders and borrowers who participate in  federal credit programs to have a substantial stake in full repayment but  also states that the level of guarantee should be no more than necessary  to achieve program purposes. As shown in table 6, EXIM’s underwriting  policies and procedures were generally consistent with the federal  guidance related to certain risk sharing practices for lenders and  borrowers to have a stake in full repayment and were partially consistent  with the federal guidance related to periodic program reviews.

Although OMB Circular A-129 calls for lenders who extend credit to have  substantial stake in full repayment and bear at least 20 percent of any  loss from a default, it also states that the level of guarantee should be no  more than necessary to achieve program purposes. However, consistent  with its charter, EXIM is authorized to provide terms that are competitive  with those of other ECAs, such as up to 100 percent loan guarantee  coverage. EXIM does not require lenders to bear 20 percent of the risk of  default. For working capital guarantees, EXIM offers 90 percent  guarantee coverage and lenders retain 10 percent risk. For medium- and  long-term loan guarantees, EXIM provides up to 85 percent financing with  the remaining 15 percent paid by the borrower or financed separately.  EXIM financing could be less than 85 percent depending on the U.S.  content. According to EXIM, guaranteeing 100 percent of the amount it  finances permits it to explore capital markets and is more desirable to  banks for large and long-term projects. As a result, the lender may not  retain any risk of default in the transaction. According to an OECD official,  guaranteeing 100 percent of the financed amount is consistent with other  ECAs. For example, the ECAs of Canada, Germany, and the United  Kingdom also provide guarantees up to 100 percent of the financed  amount on certain products.

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

OMB Circular A-129 states that the agency should periodically review  programs in which the government bears more than 80 percent of any  loss. The review is intended to evaluate the extent to which credit  programs achieve intended objectives and whether the private sector has  become able to bear a greater share of the risk. EXIM officials stated that  EXIM performs program reviews through annual budget justifications  submitted to OMB and annual competitiveness reports submitted to  Congress. EXIM officials also stated that there are established timelines  for preparing these reviews that must be followed to ensure that EXIM  meets deadlines for submitting its budget documentation and the June 30  deadline for the annual competitiveness report. In addition, EXIM employs  a detailed summary of the products and terms that other countries’ official  ECAs offer. However, EXIM does not have documented policies or  procedures related to performing periodic program reviews. As a result,  EXIM runs the risk that it will not effectively review its programs to  determine whether the private sector could bear a greater share of the  risk.

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

We are making the following two recommendations to EXIM:

The Chief Operating Officer of EXIM should consider establishing  documented policies and procedures for (1) determining medium-term  delegated authority lenders’ eligibility for continued participation in  EXIM’s programs and (2) decertifying or taking other appropriate  actions for such lenders that do not meet compliance or eligibility  standards. (Recommendation 1)

The Chief Operating Officer of EXIM should establish documented  policies and procedures for periodically reviewing credit programs in  which the government bears more than 80 percent of any loss to  determine whether private sector lenders should bear a greater share  of the risk. (Recommendation 2)

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

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

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

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

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

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

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

Specifically, we focused on OMB Circular A-129’s Section II (C)(1)(a)  through (c), Section III (A)(1) through (3), and Section III (C)(1)(a) through  (e)), which contain standards pertinent to risk management for loan and  loan guarantee programs, including standards for (1) applicant screening  (program eligibility, delinquency on federal debt, creditworthiness,  delinquent child support, and taxpayer identification number); (2) loan  documentation; (3) collateral (appraisal of real property, loan-to-value  ratio, liquidation of real property collateral, and asset management  standards and systems for real property disposal); (4) lender and servicer  eligibility (participation criteria, review of eligibility, fees, decertification,  and loan servicers); and (5) risk sharing practices (private lenders stake  in full repayment, borrowers stake in full repayment, and program  reviews). From the Bureau of the Fiscal Service’s Managing Federal  Receivables, we identified key guidance related to credit extension (ch. 3)  and management of guaranteed lenders and servicers (ch. 5).

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

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

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

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Marcia Carlsen (Assistant  Director), Dragan Matic (Analyst in Charge), Sarah Lisk, Erika Szatmari,  and Jingxiong Wu made key contributions to this report.

The Export-Import Bank helps finance U.S. companies' exports when private lenders are unable or unwilling to do so. The Bank is backed by the U.S. government—so taxpayers could be responsible for financial losses.

We reviewed the Bank's process to approve financing for exports and found that it appropriately assesses applicants' creditworthiness prior to approval. However, the Bank could improve how it oversees certain lenders authorized to make loans it guarantees, and how it conducts periodic program reviews.

We made two recommendations to enhance these processes.