About 40 percent of the $1 billion in loans made or guaranteed by the Economic Development Administration are "seriously delinquent or belly-up" and the situation is expected to get worse before it gets better, according to Commerce Department officials and a private audit of the agency.
The number of bad loans could rise as high as 50 percent as economic conditions for businesses worsen, Commerce Department officials said.
"You talk about cut the budget here, cut there, but in this one program you're about to lose half a billion dollars," said Mary Nimmo, director of public affairs for the department.
The EDA is fast becoming one of the examples the Reagan administration likes to publicize in its campaign to rid the government of waste, fraud and abuse.
The president originally proposed getting rid of the politically popular agency but later kept a scaled-down version in return for support in Congress on the budget reconciliation bill. The agency has long been a popular way to shell out money for projects to the voters back home.
When the EDA loan program was started in the 1960s it was designed to provide direct loans or loan guarantees to encourage businesses to move into or expand in economically distressed areas. At that time only 15 percent of the country was designated as economically distressed. Today nearly 85 percent of the nation has been so designated.
"The general philosophy of this agency has been to get the money out; it's good politics," said Thomas Dunne, a consultant for the Commerce Department.
But the EDA was so badly managed that when it tried to find out how many loans were outstanding, an outside accounting firm, Alexander Grant & Co., had to be called in because agency officials did not know how many loans they had made, Dunne said.
The accounting firm report found EDA had a portfolio of $509 million in direct loans and $446 million in guarantees to banks. Of that amount about 40 percent "is delinquent or has stopped," the firm's report said.
This fiscal year it is likely that from $30 million to $100 million in guarantees will be have to be honored by Commerce, the report continued. Handling the collateral on defaulted loans during 1982 is expected to involve between 30 and 40 projects at a cost between $2 million and $5 million.
And things will get worse, the report said. Because distressed loans usually do not improve, "it is likely that the number of problem loans will increase in the near future," it said.
"It is reasonable to project that between 50 and 100 loans not now in a problem category will enter such a category during 1982," according to the firm. "And loans becoming seriously troubled could easily range from 40 to 60." The agency has 923 loans and guarantees in its portfolio.
Commerce officials said EDA had little contact with either the borrowers or lending banks and few reports had been filed by those banks because they knew if the firms involved failed the government would pay them off.
"The government has to be more serious about debt collection," Dunne said. When the government must pay a bank on a guaranteed loan that has defaulted, the money is taken from a special EDA revolving fund stocked by proceeds from good loans, Dunne said. But he added it would be "embarrassing" if all the loans had to be called in at once.
President Reagan last month proposed no more money for grants or loans for 1982, but $28 million for defaults on loan guarantees.
EDA has had problems with its grants program, too. A private audit has not been done on the grants program, but officials said disbursements for that program have been frozen.