Appendix 7: Answers to Reinforcement Quizzes
Answers to Reinforcement Quiz ñ Section I, Chapter 3
Explain the difference between direct loans and guaranteed loans.
Answer: A direct loan exists when a government agency disburses
funds directly to the borrower and is repaid directly by the borrower. A
direct loan becomes an outlay for the government agency at the time
the loan is made.
In a guaranteed loan, the loan to the borrower is made by a qualified
lending institution, such as a bank. In these cases, the agency has a
liability and has to expend funds to the lending institution only if the
borrower defaults on the loan.
What action results in the government becoming a collector of a
guaranteed loan?
Answer: A government agency becomes a collector of a guaranteed
loan if the borrower fails to make payments on the loan to the lending
institution. In these cases, the agency is obligated to pay off the loan
to the original lending institution and it becomes both the lender and
collector of the loan.
What are the four Cís of credit?
a. character, capacity, communication, collectability
b. character, communication, collateral, capital
character, capacity, collateral, capital
d. character, capital, collectability, communication
Answer: (c). The four Cís of credit are character, capacity, collateral
and capital. Character refers to the borrowerís willingness to pay,
capacity refers to ability to pay, collateral is the property that secures
the loan, and capital is the financial interest the borrower has in the
4. Name and describe the principal tools available to government agencies
for the collection of delinquent debt.
Answer: It is important to remember that other than administrative
offset, which exists as a common-law right, a government agency may
only take those steps that are defined in the lending agreement or are
defined by laws. Most agencies would have the following tools
a. Dunning letters. Sending the borrower a series of
demand letters expressing increasing concern and urgency. These
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Appendix 7: Answers to Reinforcement Quizzes
letters should include a list of steps the agency intends to take if the
account is not made current.
b. Offset. Agencies have a common-law right to offset
defaulted loan amounts against payments owed to the borrower,
including salary payments if the borrower is also an employee of the
government. There are statutory limits as to the amount of a salary that
may be offset.
c. Tax Refund Offset. IRS tax refunds due to delinquent
debtors by may be offset to satisfy the debt. Many states have similar
provisions with respect to state income tax refunds.
d. Collection Agencies. Government agencies may hire
private collection agencies to pursue the collection of delinquent debts.
Usually these firms charge a percentage of the loans collected.
e. Asset Sales. Federal law and some state laws permit the
sales of portfolios of delinquent loans or individual delinquent loans.
Purchasers would then have the responsibility of collecting the debts
f. Referral for Litigation. Government agencies that are
frustrated in their attempts to collect debts may request their respective
legal authorities (U.S. Department of Justice, for example) to file suit in
court to recover the debt.
5. If a person defaults on a debt, the government will immediately bring legal
action to collect the debt. True or false?
Answer: False. Government agencies are usually the lender of last
resort. The purpose of the program, which results in the loan, is more
likely to be furthered if the loan can be re-scheduled or re-negotiated,
than if the loan is foreclosed immediately.
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AGA CGFM Study Guide 3: Governmental Financial Management and Control