Questions concerning this policy chapter should be directed to:

0701 Overview

This chapter establishes the Department of Veterans Affairs (VA) financial policies regarding measuring, recognizing, and reporting of loans receivable.

Key points covered in this chapter:

  • VA will separately account for direct loans, where VA serves as the lender, and guaranteed loans (i.e., VA-backed home loans, where VA guarantees a portion of the loan from a private lender);
  • VA will comply with the statutory and regulatory requirements to measure, recognize, estimate, and report loans receivable and the associated subsidy;
  • VA will apply different accounting standards to pre-1992 and post-1991 loans in accordance with the Federal Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) 2, 18, and 19;
  • VA will account for loan modifications, sales, write-offs, and foreclosure in accordance with applicable laws (including the Federal Credit Reform Act of 1990, FCRA) as well as, guidance issued by FASAB, the Office of Management and Budget (OMB), and Treasury; and
  • VA will, in accordance with OMB Circular A-136, report loans receivable on the consolidated balance sheet and disclose required information in the accompanying notes.

0702 Revisions

See changelog.

0703 Definitions

Credit Reform Accounting – An accounting concept and methodology established by the FCRA that measures more accurately the cost of federal credit programs. Its objective is to recognize the costs of providing credit at the time the costs are incurred by requiring that direct loans obligated, and loan guarantees committed be accounted for on a present value basis.

Cohort – A set of direct loans obligated or loan guarantees committed by a program in the same year even if disbursements occur in subsequent years.

Direct Loan –A disbursement of funds by the Federal government to a nonfederal borrower under a contract that requires the repayment of such funds within a certain time with or without interest. This term includes the purchase of, or participation in, a loan made by another lender as well as disbursements on behalf of a Federal agency by the Direct Loan Fund as required under section 12(c) of the FCRA; financing arrangements that defer payment for more than 90 days, including the sale of a Government asset on credit terms; and loans financed by the Federal Financing Bank (FFB) pursuant to agency loan guarantee authority.

Discount Rate – An interest rate that is applied in present value calculations to estimate the value of future payments.

Financing Account – A non-budgetary account that is used to record cash flow resulting from post-1991 direct loans or loan guarantees.

Interest Rate Re-estimate – A re-estimate due to a change in interest rates from those that were assumed in budget preparation and used in calculating the subsidy expense to the interest rates that are prevailing during the time periods in which the direct or guaranteed loans are disbursed.

Liquidating Account – A budget account that records all cash flows to and from the U.S. Government resulting from pre-1992 direct loan obligations or loan guarantee commitments unless they have been modified and transferred to a financing account.

Loan Guarantee – Any guarantee, insurance, or other pledge with respect to the payment of all or a part of the principal or interest on any debt obligation of a non-Federal borrower to a non-Federal lender in the event the borrower defaults. This term also shall include any agreement or contract made by an agency, the primary purpose or result of which, as determined by the Secretary, is to make private credit available, or available on more favorable terms than in the absence of the agreement or contract, to a non-Federal entity by indirectly or directly assuming the risk involved. For the purposes of carrying out the provisions of the FCRA, loan guarantees may be grouped and treated as a single loan as agreed to by the Secretary and the head of the affected agency.

Modification (Direct Loan or Loan Guarantee) – A federal government action, including new legislation or administrative action, that directly or indirectly alters the estimated subsidy cost and the present value of outstanding direct loans, or the liability of loan guarantees. Direct modifications are actions that change the subsidy cost by altering the terms of existing contracts or by selling loan assets. Indirect modifications are actions that change the subsidy cost by legislation that alters the way in which an outstanding portfolio of direct loans or loan guarantees is administered.

Present Value – The current value of future cash flows.

Program Account – A budget account that receives and obligates appropriations to cover the subsidy cost of a direct loan or loan guarantee and disburses the subsidy cost to the financing account.

Recognize – To formally record or incorporate an item into the Agency’s financial statements as an asset, liability, revenue, expense, etc.

Re-estimate – A re-estimate due to changes in projected cash flows of outstanding direct loans and loan guarantees after reevaluating the underlying assumptions and other factors that affect cash flow projections as of the financial statement date, except for any effect of the interest rate re-estimates.

Securitization –The pooling of assets in order to repackage them into interest-bearing securities.

Subsidy Cost for a Direct Loan– The estimated long-term cost to the Government of a loan, calculated on a net present value basis, excluding administrative costs. Specifically, the cost of a loan is the net present value of estimated cash flows at the time when the direct loan is disbursed.

Subsidy Cost for a Guaranteed Loan – The estimated long-term cost to the Government of a loan guarantee, calculated on a net present value basis, excluding administrative costs. Specifically, the cost of a loan guarantee is the net present value, at the time when the guaranteed loan is disbursed by the lender.

0704 Roles and Responsibilities

Accounting Policy and Reporting Division (APRD), Veterans Benefits Administration (VBA) is responsible for providing guidance on the methods used to measure, recognize, estimate, and re-estimate loans receivable in accordance with authoritative guidance. APRD assists OFR in the reporting of loans receivable.

Administrative and Loan Accounting Center (ALAC), VBA is responsible for providing financial management support to VA’s housing programs by performing accounting, financial reporting assistance, voucher examining, payments, and collections.

Loan Guaranty Service (LGY), VBA is responsible for operating and managing loan programs for eligible borrowers to obtain, retain, and adapt homes .

Insurance Service, VBA is responsible for operating and managing insurance programs that provide Veterans with life insurance benefits that may not be available from the commercial insurance industry.

Veteran Readiness and Employment Service (VR&E), VBA is responsible for operating and managing VR&E programs that assist entitled Veterans and service members with service-connected disabilities and an employment handicap to prepare for, find, and maintain a job.

Debt Management Center (DMC) is responsible for collecting debts resulting from an individual’s participation in VA’s programs. The DMC consults with Veterans and their families in the management and liquidation of their debts.

0705 Policies

070501 General Policies

  1. VA will comply with the following authorities to measure, recognize, estimate, and report loans receivable.
    • Federal Credit Reform Act (FCRA) of 1990;
    • Chapter 37 of title 38, U.S.C.;
    • Federal Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) No. 2, 18, and 19;
    • OMB Circulars A-11, A-129, and A-136;
    • Treasury Financial Manual (TFM) and credit reform case studies; and
    • VBA home loan guidance.
  2. In accordance with the FCRA, direct loans may be grouped and treated as a single loan as agreed to by the Secretary or the head of the affected agency. Guaranteed loans may also be grouped and treated as a single loan as agreed to by the Secretary or the head of the affected agency.
  3. VA will establish and maintain budgetary and financing control of loan programs through three types of accounts: program, liquidating, and financing. Program and liquidating accounts are budgetary accounts, while financing accounts are  proprietary accounts.
    1. The program account contains appropriations for the subsidy cost and indirect cost of administering the credit programs.
      1. Obligations for the subsidy cost and administrative expenses are separately recorded in the program account.
      2. When a loan is disbursed, outlays are recorded, and a subsidy transferred from the program account to the financing account.
    2. The financing account combines the subsidy transfer from the program account with borrowing from Treasury to finance direct and guaranteed loans.
      1. Actual cash flows to and from VA are recorded in the financing accounts.
      2. The financing account repays Treasury over time (with interest) using payments from the borrowers.
      3. In accordance with FCRA, VA’s financing accounts will have permanent indefinite authority to borrow from Treasury and be subject to apportionment.
      4. The loan guarantee financing account will hold the subsidy payment from the program account as a reserve against default claims on loan guarantees. The reserve, together with interest earnings on this reserve from Treasury, is used to pay default claims over the life of the loans.
    3. The liquidating account records activities for pre-1992 loans.
      1. Collections received in the liquidating account will be used to pay obligations, but not to finance any new direct loans.
      2. FCRA provides VA the permanent indefinite authority to cover obligations and commitments if funds in the liquidating accounts are otherwise insufficient.
      3. DMC may perform collections activities on LGY debts. DMC has records of VA LGY debts that have been placed in inactive collection status due to lack of payment. If the debtor is awarded a subsequent benefit (VA Compensation or VA Pension only), DMC will revert the debt to active collection status so the VA benefit may be withheld to recoup the loss to VA. See Volume XII, Chapter 2, Benefit Debts.
  4. LGY will and manage home loan programs for eligible borrowers to obtain, retain, and adapt homes. Home loans are the largest portion of loans receivable within VA.   
  5. VBA’s Insurance Service will operate and manage life insurance programs that provide policy loans to policy holders of permanent plans. Insurance policy loans allow eligible Veterans to borrow against the cash value of their policies. The policy holder can take up to 94 percent of the cash surrender value of the policy or the paid-up additional insurance.
  6. VBA’s VR&E Service will operate and manage a loan program that provides non-interest direct loans to eligible beneficiaries to start, continue, or reenter vocational rehabilitation training if an unforeseen hardship occurs.

070502 Measurement and Recognition of Pre-1992 Loans Receivable

  1. VBA will apply the allowance for loss method to pre-1992 direct loans. Under this method, loans receivable is offset by an allowance for loan loss (estimated uncollectible loans).
  2. VBA will recognize the loss of pre-1992 loans when it is more likely than not that the loans will not be totally collected.

070503 Measurement and Recognition of Post-1991 Loans Receivable

  1. VBA will adhere to the requirements of FCRA and use the present value method to account for post-1991 direct and guaranteed loans.
  2. VBA will record direct loans disbursed and outstanding as assets at the present value of their estimated net cash inflows.
  3. VBA will recognize the difference between the outstanding principal balance of direct loans and the present value of their net cash inflows as a subsidy cost allowance.
  4. VBA will recognize a subsidy expense for new direct or guaranteed loans disbursed during the fiscal year.
    1. The subsidy expense for new direct loans comprises of interest subsidy cost, default cost, other costs, and fees and other collections.
    2. VA’s total direct loan subsidy expense is a combination of subsidy expense for new direct loans disbursed in the current year (as noted in paragraph number 1. above) plus modifications to existing loans, and interest rate and technical re-estimates made to existing loans.
    3. Appropriations for the subsidy cost are made to the program account and are recorded as budget authority. Obligations for the subsidy cost are recorded when VA enters into a loan obligation or guarantee commitment. Outlays are recorded when the direct loan or guaranteed loan is disbursed to the public and simultaneously the subsidy is paid from the program account to the financing account. The program account also receives appropriations for the direct costs of administering the credit program.
  5. The Department must receive appropriations for the subsidy cost before VBA can enter into direct loan obligations or loan guarantee commitments. Any unsubsidized portion will be financed by borrowing from Treasury and fee collections. 

070504 Subsidy Estimates, Re-estimates, and Amortization

  1. A subsidy estimate will be performed when a loan is disbursed or modified. VBA will provide subsidy estimates for all budget accounts that have post-1991 direct loan obligations and loan guarantees, or modifications of pre-1992 direct loans.
  2. VBA will re-estimate the subsidy costs to reflect the actual loan performance and expected changes in estimates of future loan performance. The re-estimate will include both interest rate re-estimates and technical re-estimates.
    1. The Office of Financial Management within VBA will perform re-estimates in both August and November timeframes.
      1. The re-estimate in August is for the purpose of preparing the financial statements. The Office of Management within VBA will review the re-estimate and the VBA Deputy Chief Financial Officer within this office will approve the re-estimate.
      2. The re-estimate in November is for the purpose of preparing budget formulation. The Director of Credit Reform will prepare the re-estimate. The Office of Budget may review the re-estimates. VA will submit the re-estimate to OMB for approval.
    2. APRD will prepare the journal vouchers for the re-estimates and ALAC will enter them into VA’s accounting system. The re-estimate for financial statements will be recorded in August, while the re-estimate for budget formulation will be recorded after VA’s receipt of a reapportionment of the re-estimates from the Office of Budget.
  3. VBA will use the interest method to calculate the amortization of allowance for subsidy in order to reflect the difference between effective interest and nominal interest on VA direct loans in accordance with SFFAS 2.
    1. ALAC will calculate the subsidy allowance amortization every month. The amortized amount will be recognized as an increase or decrease in interest income where the offsetting accounts are either the allowance for subsidy for direct loans or loan guaranty liability for guaranteed loans.
    2. Under the interest method of amortization, the amortization of each period equals the effective interest of the outstanding direct loans minus the nominal interest. Therefore, subsidy allowance amortization is the process of netting interest revenue and interest expense to zero so there are no cumulative results of operation in a financing fund.
      1. For any period for which interest is to be paid (a fiscal year in this example), the effective interest equals the book value (which is also the present value) of the direct loans at the beginning of the period multiplied by the applicable Treasury rate.
      2. The nominal interest equals the outstanding nominal balance of the loans at the beginning of the period, multiplied by the interest rate stated in the loan contract.
    3. ALAC will prepare the subsidy allowance amortization journal vouchers based on the above calculation and will process the vouchers in VA’s accounting system every month.
    4. For funds with borrowing authority from Treasury, VA will receive its interest expense from Treasury after the month-end closing. APRD will record both the interest expense from Treasury borrowing and subsidy allowance amortization in VA’s financial reporting system. These journal vouchers will lag a month behind due to the timing of the information received from Treasury.

070505 Loan Modification, Sale, Write-off, and Foreclosure

  1. If the modification of a direct or guaranteed loan changes the subsidy cost, VBA will recognize modification costs in accordance with SFFAS 2.
    1. When a post-1991 direct loan is modified, VBA will adjust the loan’s book value to the present value of the loan’s net cash inflows projected under the modified terms from the time of modification to the maturity and discounted at the original discount rate.
    2. When a pre-1992 direct loan is modified VBA will perform the following:
      1. For a direct modification, transfer the loans to the financing account and adjust the book value equal to the post-modification value.  Any subsequent modification will be treated as a post-1991 loan modification.
      2. For an indirect modification, keep the loan in the liquidating account and reassess and adjust the bad debt allowance to reflect amounts that would not be collected due to the modification.
    3. Changes in book value of direct loans from modification and the cost of a modification will normally differ. VBA will recognize this difference as a gain or loss.
  2. VA may, upon such terms and conditions as VA determines appropriate, issue or approve the issuance of, and guarantee the timely payment of principal and interest on, certificates or other securities evidencing an interest in a pool of mortgage loans made in connection with the sale of properties acquired. To that end, VA may publish planned loan sales and securitizations in the President’s budget. Such a sale or securitization of the direct loans will close them out in the Direct Loan Financing Account.
    1. These loans will then become guaranteed loans in the Veterans Housing Benefit Program Fund, Loan Sale Securities, Guaranteed Loan Financing Account.
    2. As guaranteed loans, they will be accounted for comparable to guaranteed loans covered in the Volume VI, Chapter 6 –Liabilities for Loan Guarantees financial policy.
  3. VBA will treat unplanned loan sales as volume estimates or loan modifications and adopt the same accounting principles and guidance as described in the Subsidy Estimates, Re-estimates, and Amortization section regarding loan modification.
  4. Loan write-offs will be performed based either on the terms of VBA’s contract with the Loan Portfolio Service Contractor or according to LGY’s approval. A write-off is a write-down of principal balance and any unpaid accrued interest and fees on continuing direct home loans or the write-off of a home loan balance in its entirety. When a direct loan is written off VBA will perform the following:
    1. For post-1991 direct loans, remove the unpaid principal of the loan from loans receivable and reduce the same amount in the allowance for subsidy costs.
    2. For pre-1992 direct loans, reduce the loans receivable in the amount of the non-recoverable principal and any unpaid accrued interest and reduce the same amount in resources payable to Treasury.
  5. Upon foreclosure of either post-1991 or pre-1992 direct loans, the acquired property will be recognized as an asset at the present value of its estimated future net cash inflows. See Volume V, Chapter 10A, Foreclosed Property Acquired, for details.

070506 Reporting and Disclosure for Loans Receivables

  1. VA will report loans receivable in accordance with SFFAS 2, and OMB circulars A-11 and A-136.
  2. VA will only separately display and disclose loan programs that materially affect the financial statements and notes.
  3. VA will establish and disclose the nature of each of its programs in the notes to the financial statements. This includes but is not limited to: (1) home loans; (2) insurance policy loans; and (3) Veteran Readiness and Employment (VR&E) loans.

0706 Authorities and References

0707 Rescissions

VA Financial Policy, Volume V, Assets, Chapter 7 – Loan Receivables (VBA) dated November 2019.

0708 Policy Approval

This policy was approved by the VA Chief Financial Officer’s Council on August 10, 2023.