Federal guarantee laws set out the United States government's promise to pay a debt if the original debtor defaults on the loan. A number of federal guarantee laws exist in a variety of programs, ranging from student loans to utilities. Federal guarantee laws typically enable a debtor to qualify for a loan at better terms than would be available without the guarantee of payment.
The Federal Deposit Insurance Corp. (FDIC) is the result of one of the larger guarantee laws, ensuring that funds deposited by citizens in their banks will remain intact. Financial laws such as those authorizing the FDIC ensure investor confidence and the stability of the banking system. Without a federal guarantee, the market could repeat a crash that triggered a run on banks in 1929, repeating a deep depression such as that in the 1930s.
Other federal guarantee laws are designed to bolster a segment of the market that might otherwise flounder in the absence of government backing. For example, many rural consumers would find utilities difficult to get and expensive to maintain in the absence of federal guarantees in the utility markets. The Small Business Administration bolsters the economy by making loans to entrepreneurs at favorable rates that would be unavailable for a risky venture through a private lender. Students can afford to attend college through many federal guarantee laws that ensure favorable rates on student loans. In exchange, the United States benefits from a more educated pool of labor.
Important community programs to assist citizens can obtain low-interest loans through federal guarantee laws. The charitable nature of many programs would make obtaining loans to improve services or make capital improvements difficult in the absence of the federal guarantee. The Pension Benefit Guarantee Corp. (PBGC) ensures that retired workers will continue to receive their pensions if the company doling them out folds.
The federal government does not directly lend money to applicants under the guarantee program, but rather indemnifies the bank that does lend the money. If the applicant defaults, then the U.S. Treasury will pay the balance to the bank. This rate of default is factored into the costs and interest rates associated with the program.
There also are state guarantee laws that operate to a lesser extent under the same principle. One example of this is a state's guarantee of insurance. All insurance policies are governed by state law, but each state has a different guarantee of payment in case the insurance company becomes insolvent.
