When Government Guarantees the Risk, Private Lenders Collect the Profit
Ten lenders just expelled from the USDA's rural loan guarantee program held $620 million in delinquent loans, 47% of the program's total defaults, despite representing just 1.3% of participating lenders, according to the U.S. Department of Agriculture. The math reveals something more than bad luck: when government absorbs the risk while private companies collect the fees, the incentive structure breaks in predictable ways.
On May 12, 2026, Agriculture Secretary Brooke Rollins announced the removal of Bank of Montgomery, Byline Bank, Celtic Bank, Community Bank & Trust of West Georgia, Genisys Credit Union, Greater Nevada Credit Union, North Avenue Capital, Optus Bank, U.S. Eagle Federal Credit Union, and ReadyCap Commercial from the OneRD Guaranteed Lending Program, according to a USDA press release. The lenders are now barred from future participation in any USDA guaranteed lending program.
Rollins framed the action as zero tolerance: the Trump Administration has "absolutely no tolerance for the irresponsible and noncompliant actions of these lenders," she said in the announcement. But tolerance wasn't the design flaw. The program's structure was.
How Loan Guarantees Create Moral Hazard
The USDA doesn't make most rural loans directly. Instead, it guarantees loans made by private lenders, typically covering 80% to 90% of any loss if a borrower defaults, according to USDA program guidelines. The lender keeps the remaining 10% to 20% of risk exposure but collects all the origination fees, servicing fees, and interest payments while the loan performs.
This arrangement creates what economists call moral hazard: when someone else bears most of your risk, you rationally take more of it. A lender operating without guarantees carefully screens borrowers because every default hits their balance sheet directly. A lender with a government guarantee can approve riskier loans, collect fees on higher volume, and know taxpayers will cover most losses.
The concentration of defaults among these ten lenders suggests they understood the incentive structure perfectly. While more than 750 lenders participate in the program according to the USDA, this small subset generated nearly half of all delinquencies, a distribution that doesn't happen by accident.
What the Announcement Doesn't Say
The USDA characterized the lenders' behavior as "irresponsible and noncompliant" but provided no specifics about what that means. Were these lenders approving loans to borrowers who clearly couldn't repay? Failing to properly service loans once they were made? Misrepresenting borrower qualifications to secure guarantees? The agency hasn't said, and the expelled lenders haven't commented publicly.
The timeline matters too. The announcement doesn't reveal how long these lenders were accumulating bad loans before USDA intervened. Did the $620 million in delinquencies build up over months, years, or longer? At what point did the pattern become visible to federal overseers, and what took so long to act?
The enforcement action itself raises questions about whether this addresses causes or symptoms. The ten lenders are gone, but the 750 remaining participants operate under the same incentive structure. If the program design makes exploitation profitable, removing bad actors doesn't prevent the next ones from emerging.
Who Pays When the System Fails
Behind the $620 million in delinquent loans are individual borrowers who took out financing they apparently cannot repay, for homes, businesses, community facilities. The USDA announcement does not specify how many borrowers are affected, what types of loans are in default, or which rural communities face the greatest concentration of delinquencies. With $620 million spread across the program, the scale suggests hundreds or potentially thousands of individual loans now in jeopardy.
The USDA's rural development mission is to serve communities that traditional lenders ignore, which creates vulnerability: borrowers with limited options, lenders with limited accountability, and government guarantees that make the whole arrangement possible. When a guaranteed loan goes bad, the lender files a claim and the government pays, according to USDA procedures. Taxpayers absorb the loss. The borrower still owes the debt, now potentially facing foreclosure or renegotiation with whatever entity takes over servicing. The lender has already collected fees and moved on.
This same structure appears throughout federal lending programs. The Small Business Administration guarantees loans to entrepreneurs. The Federal Housing Administration guarantees mortgages. The Department of Education guarantees student loans. Each program privatizes the profits, lenders earn fees and interest, while socializing the losses when borrowers default.
Enforcement After the Damage
The USDA's action removes the worst performers but doesn't recover the $620 million, doesn't fine the lenders, and doesn't refer anyone for criminal prosecution, according to the agency announcement. The consequence for generating 47% of program defaults is expulsion from future participation, after the profitable period has ended.
For the remaining 750 lenders, the message is mixed. Extreme concentration of bad loans will eventually trigger removal, but the enforcement comes after the money is made and the damage is done. The program continues to guarantee 80% to 90% of losses, meaning the fundamental incentive, profit without proportional risk, remains unchanged.
Rural communities still need capital. Traditional lenders still avoid higher-risk rural markets. Government guarantees still make those loans possible. But the May 12 announcement reveals what happens when the entity collecting the profit isn't the entity bearing the risk: someone optimizes for volume over quality, and by the time anyone notices, the delinquencies are already on the books.