Treasury Warned on Lending Plan
Thursday, February 5, 2009
A $200 billion government program to encourage consumer lending is at risk of significant fraud, and the Treasury Department should not participate in the plan until proper safeguards are put in place, a federal watchdog agency has concluded.
Neil M. Barofsky, the special inspector general for the financial bailout, raised alarms about the program in his office's first report. The initiative is funded partly by the Treasury's $700 billion rescue of the financial sector, and Barofsky cautioned that this wider effort could fail if the money is not spent wisely.
"The long-term success of the program is not assured," says the opening paragraph of the 188-page report, which is scheduled to be released today.
The report says the consumer lending program, known as the Term Asset-Backed Securities Loan Facility, is vulnerable to "fraud, waste, and abuse" because it gives participants the authority to set a value on the collateral they post in return for loans. The collateral consists of pools of consumer debt. Participants could defraud the federal government by overvaluing this collateral and then walking away with the loans, the report says.
The watchdog agency says in the report that the program, run primarily by the Federal Reserve with $20 billion from Treasury, should impose minimum underwriting standards and other anti-fraud measures. The report also says Treasury should refrain from participating "until such time as an appropriate compliance program is put into effect." "I don't think that's a particularly difficult standard to meet," Barofsky said in an interview.
The report, which includes a lengthy description of the bailout program in layman's terms, was the latest attempt by Barofsky to bring transparency to the plan since his Senate confirmation in December. Treasury last month adopted his recommendation to post bailout agreements on its Web site and imposed new requirements on recipients of government aid.
Barofsky said his office, which has about 18 full-time employees, will send letters by the end of the week to all bailout recipients asking them to account for how they are spending the taxpayer funds. The requests were held up over a dispute with a White House agency, but Barofsky said he was given the green light by Obama administration officials on Tuesday.
The key goal of his first report, Barofsky said, was to be clear about how both the program and his office are operating. But he said he cannot tell if the bailout is effective because his agency has yet to complete audits of the program.
"The question of whether it is working or not is difficult to answer," he said. "Stay tuned for that one."