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Federal guarantee laws promise to pay a debt if the original debtor is unable to pay the loan. These laws range from student loans to utilities and ensure investor confidence and stability in the banking system. The federal government indemnifies the bank that lends the money, and there are also state warranty laws that operate on the same principle.
Federal guarantee laws establish a promise by the US government to pay a debt if the original debtor is unable to pay the loan. There are a number of federal collateral laws in a variety of programs, ranging from student loans to utilities. Federal collateral laws typically allow a borrower to qualify for a loan on better terms than would be available without the payment guarantee.
The Federal Deposit Insurance Corp. (FDIC) is the result of one of the largest guarantee laws, which ensures that the funds deposited by citizens in their banks 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 the banks in 1929, repeating a deep depression like that of the 1930s.
Other federal guarantee laws are designed to strengthen a segment of the market that could otherwise founder in the absence of government support. For example, many rural consumers would find utilities difficult to obtain and expensive to maintain in the absence of federal guarantees in utility markets. The Small Business Administration supports the economy by providing loans to entrepreneurs at favorable rates that would not be available to a risky business through a private lender. Students can afford to attend college through many federal guarantee laws that guarantee favorable rates on student loans. In return, the United States benefits from a better educated workforce.
Major community programs assist citizens in obtaining low-interest loans through federal guarantee laws. The charitable nature of many programs would make it difficult to obtain loans to improve services or make it difficult to improve capital in the absence of the federal guarantee. The Pension Benefit Guarantee Corp. (PBGC) guarantees that retired workers will continue to receive their pensions if the company that pays them goes bankrupt.
The federal government does not lend money directly to applicants under the guarantee program, but rather indemnifies the bank that lends the money. If the applicant defaults, the US Treasury will pay the balance to the bank. This default rate is factored into the costs and interest rates associated with the program.
There are also state warranty laws that operate to a lesser extent on the same principle. An example of this is a state’s insurance guarantee. All insurance policies are governed by state law, but each state has a different payment guarantee in the event the insurance company becomes insolvent.
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