Overview
This section outlines the authority and framework for providing government-backed loan guarantees to contractors under Section 301 of the Defense Production Act to support national defense performance. It defines the roles of the guaranteeing agencies, private financial institutions, and the Federal Reserve Board in facilitating these financing arrangements.
Key Rules
- Authority and Scope: Loan guarantees are authorized for contract performance related to national defense, subject to statutory limits and Congressional authorizations.
- Guarantee Limits: Guarantees must be for less than 100% of the loan unless the agency determines the situation is exceptional, the operations are vital to national defense, and no other suitable financing exists.
- Administration: Private financial institutions disburse, collect, and administer the loans, which are structured similarly to conventional private-sector loans.
- Role of the Federal Reserve: Federal Reserve Banks act as fiscal agents on behalf of guaranteeing agencies; the Federal Reserve Board supervises these actions and sets interest rates, fees, and uniform forms.
- Agency Responsibility: The guaranteeing agency is responsible for certifying the contractor's eligibility and determining the maximum loan amount and maturity date required to meet contract performance needs.
- Restrictions: Loan guarantees are not available for other government agencies.
Practical Implications
- Risk Sharing: The government incentivizes private lenders to support defense contractors by agreeing to purchase a percentage of the loan and share losses in the event of a default.
- Financing of Last Resort: Because 100% guarantees are restricted to vital and exceptional cases, contractors must generally demonstrate a level of private risk-sharing or a lack of other viable financing options before receiving full government backing.