The $34 billion in domestic spending cuts endorsed last Wednesday by President Reagan would scale back or eliminate some established government credit programs, including Small Business Administration loans and loan guarantees, farm loans, lending by the Rural Electrification Administration and some student aid.
But the proposed cuts are just part of a larger Reagan administration assault on federal credit programs. The attack was renewed in August when the Office of Management and Budget issued a controversial set of guidelines, called Circular A-70, and continued last month with the release of a draft of strict new policies governing the screening of applicants.
Federal credit has exploded in recent years, growing from $45.5 billion a decade ago to $138.1 billion in loans and primary, or direct, loan guarantees in 1983, according to the Congressional Budget Office. Federal programs provide loans for everything from housing to military hardware for foreign countries.
In general, the OMB's new credit guidelines seek to share more of the cost and risk of loans with private lenders -- a reflection of the administration's emphasis on turning over government programs, where possible, to the private sector.
Among other things, Circular A-70:
* Stipulates that interest rates on new direct federal loans should vary with the private market interest rates. Currently, many federal loans -- such as some student loans -- are set at below-market rates and remain unchanged when interest rates rise. The federal government then has to make up the difference.
* Encourages agencies to guarantee something less than 100 percent of a government-backed loan. This would allow the government to share more of the risk with the private sector in case of default. OMB officials say that when the government backs all of a small business loan, for example, the private lender is less likely to review the loan carefully because the lender knows that the government will cover the whole loan in case of a default.
* States that the government should not provide guarantees for obligations that are exempt from federal taxes. Many apartment buildings are now built with tax-exempt revenue bonds backed by a government guarantee.
The Nov. 9 draft proposal called for stricter screening of potential borrowers to determine their ability to repay the government. Procedures would include "verification of information presented on the loan application, and verification of the applicants' current debt status relative to other federal programs and to private lending institutions."
Potential borrowers would be screened to see if they owe back taxes to the Internal Revenue Service, and government agencies would be required to report defaulters to credit-reporting services -- and then use those services to check the credit rating of applicants for government loans. After agencies comment, the OMB plans to release its final version in January.
John J. Lordan, the OMB's deputy assistant director for federal management, said current screening procedures are "probably pretty spotty in some agencies." He said the screening procedures and the OMB guidelines were generally "intended to be an improvement in the management of the programs that Congress authorizes," and ultimately reduce costs to taxpayers by reducing loan defaults and the number of bad credit risks.
But some critics fear that the guidelines portend a retreat from areas in which federal loans are often a last resort for many people -- such as in housing, student aid and farm support.
"In general, it is a tightening of federal credit policy," said Weldon Barton, agricultural representative of the Independent Bankers Association. The OMB's circular, he said, "is an attempt to tighten up the administration of credit programs, deemphasize direct lending by the agencies, and, to a significant degree, shift the risk over to the commercial and private lenders."
OMB officials have emphasized that the new credit guidelines are not mandatory and that agencies are free to request exemptions from the new rules as part of deliberations over the fiscal 1986 budget. "It is only a circular," said J. Gregory Ballentine, an OMB associate director. "It doesn't have the force of law. It's a statement of principles, but there are cases of exceptions and there are mechanisms for exceptions."
"There's some seeming ambiguity as to how compelling this is on the agencies," Barton said. "It was said that these were guidelines to the agencies. As a practical matter, it was a general directive."
Rich LaRochelle of the National Rural Electric Cooperative Association said, "The administration cannot, by releasing a circular, make changes in programs." But he added, "We're worried. More than likely, when they submit their budget proposal they may have accompanying legislation that would do all these things."
The OMB's Ballentine acknowleged that some of the principles in the circular will be proposed later as legislation. "We would expect to follow up on this," he said. But he denied that there was any attempt "to change by fiat what we couldn't do by legislation."
Many federal credit programs were approved by acts of Congress and can only be changed by legislation. Loan programs run by the Veterans Administration, the SBA and the Federal Housing Administration, the rural electrification program and some student aid programs all are governed by legislative provisions.
But critics in the housing industry said the changes may mean that home buyers who rely on government guarantees may be forced to make larger down payments or pay higher interest rates, because the private sector will be unlikely to assume the risk. Ballentine said it was still unclear whether any proposed changes would affect FHA or VA mortgage loans.
Next to the housing industry, America's agricultural sector is the most dependent upon federal credit and loan guarantees, and probably would be hit hard by any change that tightens credit, farm industry spokesmen say.
Asked about the potential effect of the OMB circular, Robert J. Mullins of the National Farmers Union replied, "From what little I know of it, we don't like it very much. With this debt situation in rural America, it doesn't bode well."
"They're going to try and move more and more of these programs into the commercial money markets, and that is going to hurt," Mullins said. "Farmers rely on federal credit a great deal, not only for operating loans, but land purchasing loans, commodity loans -- it's really pervasive. It cuts across everything and its going to affect a lot of farmers."
Cliff Ouse, legislative director of the National Rural Electric Cooperative Administration, said, "The 100 percent federal guarantee is absolutely essential to the program." Any federal guarantee less than 100 percent, he said, "would make it extremely difficult for any rural electric generation transmission to obtain financing."
Barton of the Independent Bankers Association, which represents 2,500 banks that make farm loans, said, "One of the ways some of these troubled agricultural loans are maintained on the books is to secure guarantees. The bank can restructure that note, but in the process may need a government guarantee. One of the reasons we have supported the guarantees is as a way of extending debt and even refinancing in some cases."
Although the OMB guidelines have generated some concern, lately there has been more dismay over the proposed budget cuts. "Right now, we're looking at the overall budget cuts," said Steve Melman, director of federal programs for the National Association of Home Builders. "A-70 is there, but there are other more important issues."