Jack Stevens and David Johnson: Understanding the Indian Loan Guarantee Program (Spoiler Alert: Canada Has Us Beat)

The Indian Loan Guarantee and Insurance Program administered by the Department of Interior’s Division of Capital Investment has supported well over a billion dollars’ worth of Native-owned businesses and projects in its half-century lifespan. Yet few understand how it works.

Everything one would want to know about the program can be found by reading its authorizing statute at 25 USC 1481 et seq. and its regulations at 25 CFR Part 103. They aren’t long or difficult, but let’s make it even easier by giving you a quick overview and addressing a few aspects that sometimes cause confusion.

Borrower Eligibility

The program is limited to federally recognized tribes and their enrolled members who are unable to obtain a commercial loan absent a guarantee. The borrower must already own assets worth 20 percent of the loan amount.

Applicant

Borrowers seek a commercial loan from a program-eligible lender. The lender determines whether the risk of the loan requires a program guarantee or, for some smaller loans, program insurance.  It is the lender, not the borrower, who applies for a program guarantee or insurance. Program guarantees and insurance typically pay up to 90% of any defaulted loan amount, which is enough of a cushion to allow lenders to extend loans they otherwise might not.

Program Funding

Most commercial projects in Indian Country are good risks, so the associated loans are paid as agreed. The program only needs funds to cover administrative costs and an occasional default, so with just a few million dollars in congressional funding the program can guarantee or insure many times that sum in commercial loans to Indian borrowers. That is how this program has had such a huge impact on businesses and projects in Indian Country, at such little cost. There is an annual limit to the loans the program can guarantee or insure, however, so lenders must consider which Indian projects to support with the program, and which are strong enough to receive a loan without using the program at all. The annual program limit is called its “ceiling.”

Some years, all guaranteed and insured loans are repaid in full, and none of the associated ceiling is paid out. Meanwhile, the Indian businesses who receive the loans enhance the local and national economy, reduce unemployment, improve the goods and services available in some of the poorest areas of the country, and help grow local and federal tax receipts.

Despite its success, however, the program has received only modest annual funding from Congress. In recent years, a few million in appropriations has given the program a ceiling of some $100 million, more or less.

By contrast, Prime Minister Mark Carney recently doubled the ceiling for Canada’s Indigenous Loan Guarantee Program from $5 billion to $10 billion.

Defaults vs. Losses

The Indian Loan Guarantee and Insurance Program is unique among federal programs of its kind. The nature of Indian Country can complicate loan recovery for lenders, so rather than require lenders to pursue the borrower’s other collateral first before seeking program repayment for a default, the program gives lenders the option to simply assign all loan repayment rights to the Division of Capital Investment in exchange for a much quicker loss repayment. So, in many cases, when the program pays a lender for a program default, the borrower’s collateral has not even been pursued. The Division of Capital Investment then enforces loan documents to recover some or all of the sum paid out. It is not unusual for a program default to be repaid in full, meaning there is no program loss at all.

Historically, program losses stay well under 5% of cumulative program guaranteed and insured loans.