1. Background

2. Procedures for Complying With Credit Reform Requirements

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                |Credit Reform|


This section provides an overview of the Federal Credit Reform Act, examines how it applies to the HUD loan sales, and describes the application of the Act to the loan sale process.


The Federal Credit Reform Act of 1990 was enacted to provide a more realistic picture of the cost of U.S. government direct loans and loan guarantees. The credit subsidy cost of direct loans and loan guarantees is the net present value of the estimated long-term cost to the government for these credit activities, exclusive of administrative expenses. Beginning in fiscal year 1992, this calculation of credit subsidy cost occurs in the following situations:

The credit subsidy cost of a modification is the difference between the currently estimated net present value of the remaining cash flows under the terms of the unmodified loan or loan guarantee, and the currently estimated net present value of the cash flows under the terms of the modified loan or loan guarantee.

A loan sale is generally considered to be a modification requiring a calculation of the resulting credit subsidy cost. This credit subsidy cost is equal to the difference between net proceeds from the sale and the value to the government of the loans to be sold. The value to the government is calculated as the net present value of the expected cash flows of the unmodified loans immediately prior to the sale, discounted at the appropriate rate of government borrowing.

The process for applying credit reform to a loan sale is outlined in the next section. A more complete description of the implementation for budget calculations is detailed in OMB Circular A-11.


This section briefly outlines the general process that is followed to meet credit reform requirements.

HUD, as part of the budget process, informs OMB of its anticipated loan sales schedule for the upcoming fiscal year, including a preliminary estimate of the credit subsidy cost of each transaction. As the actual sales process proceeds, including due diligence, the credit subsidy estimate is refined and OMB concurrence is sought.

Prior to the mailing of bid packages to prospective purchasers, HUD reviews the proposed transaction, updating with any new information since the budget estimates were prepared, e.g., revised unpaid principal balance (UPB) of loans, number of loans, etc.

Approximately two weeks prior to auction date, the following calculations are made:

(1) The credit reform value to HUD. This value is essentially the net present value of the remaining stream of cash flow of the loans for sale if HUD were to continue servicing them in the future. The cash flows are discounted at the appropriate discount rate, which may be found in the Economic Bulletin Board maintained by the Department of Commerce.

(2) The estimated net proceeds from the sale using an approved methodology. Examples of the types of methods that may be employed include the Estimated Sales Value (ESV) method, which is based on the RTC's Derived Investment Value, or a simpler calculation of estimated cash-on-cash totals of subportfolios of loans, depending on their characteristics and quality.

(3) The difference between the value calculated in (1) and the estimate calculated in (2). The result is the estimated credit reform subsidy to HUD, which can be either positive or negative.

Once the value in (3) has been determined, the calculation is reviewed with HUD's Office of the Comptroller and the FHA program group involved (e.g., the Office of Single Family Housing). These offices then have the opportunity to provide any comments or additional assumptions, including methodology. After HUD has had the opportunity to comment and the results incorporated, an approval from OMB is sought. OMB review is necessary to insure consistency with budget targets and legislative and regulatory guidelines.