Housing and Urban Development: Use and Oversight of the Economic
Development Loan Fund (Letter Report, 08/20/97, GAO/RCED-97-195).

Pursuant to a congressional request, GAO examined how changes to the
Department of Housing and Urban Development's (HUD) Economic Development
Loan Fund has affected the program, focusing on: (1) the extent to which
communities are using the loan fund; (2) factors affecting communities'
willingness to use the fund; (3) the types of projects being financed
with loan proceeds; and (4) HUD's procedures for overseeing the program.

GAO noted that: (1) from the loan program's inception through fiscal
year (FY) 1996, HUD made 930 loan commitments totaling $4.4 billion; (2)
about 38 percent of the Community Development Block Grant (CDBG)
entitlement communities have received one or more loan commitments; 16
states, on behalf of their nonentitlement communities, have also
received loans; (3) although communities' and states' use of the loan
program has fluctuated--generally, 50 or fewer loans were approved each
year--program activity increased sharply in FY 1994 through 1996, when
the Department approved about 400 loans and nearly 60 percent of the
dollars loaned since the program's inception; (4) according to HUD and
associations representing community development officials, the key
factor responsible for communities' and states' increased willingness to
use the loan program has been the availability of Economic Development
Initiative (EDI) grants to loan recipients; (5) in 1994, when the
Department provided $19 million in grants, loan activity doubled--88
loans compared with 43 the previous year; in 1995, when the Department
awarded $350 million in grants, the number of loans jumped to 218;
however, in 1996, when no EDI grants were awarded, the number of loans
dropped to 89; (6) the officials attributed any unwillingness to use the
loan program to communities' concerns over collateral requirements and
their reluctance to pledge future CDBGs as collateral for loans; (7)
communities and states reported to HUD that they have used about 73
percent of their loans to finance economic development activities; (8)
other eligible CDBG activities for which loans were reported to be used
included acquisition of real property, housing rehabilitation, and
public property rehabilitation; (9) the Department requires an annual
review of grantees to determine, among other things, whether the
activities funded by CDBGs are being carried out in a timely manner and
in accordance with Department-approved plans; and (10) however,
according to officials in 5 of the 30 field offices responsible for the
loans in GAO's sample, they did not routinely include the loans in their
annual reviews because they: (a) did not believe they had guidance on
how to monitor the program; (b) did not believe they had a
responsibility to monitor the loans; (c) had other priorities; or (d)
lacked loan-specific information.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-97-195
     TITLE:  Housing and Urban Development: Use and Oversight of the 
             Economic Development Loan Fund
      DATE:  08/20/97
   SUBJECT:  Community development programs
             Government guaranteed loans
             Economic development
             Federal aid for housing
             Intergovernmental relations
             Block grants
             Grant monitoring
IDENTIFIER:  Community Development Block Grant
             Economic Development Loan Fund
             HUD Section 108 Loan Program
             Economic Development Initiative Grant
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Housing and Community
Opportunity, Committee on Banking and Financial Services, House of
Representatives

August 1997

HOUSING AND URBAN DEVELOPMENT -
USE AND OVERSIGHT OF THE ECONOMIC
DEVELOPMENT LOAN FUND

GAO/RCED-97-195

HUD's Economic Development Loan Fund

(385660)


Abbreviations
=============================================================== ABBREV

  CDBG - Community Development Block Grant
  EDI - Economic Development Initiative
  FMD - Financial Management Division
  HUD - Department of Housing and Urban Development
  OMB - Office of Mangement and Budget

Letter
=============================================================== LETTER


B-276545

August 20, 1997

The Honorable Rick Lazio
Chairman, Subcommittee on Housing
 and Community Opportunity
Committee on Banking and Financial Services
House of Representatives

Dear Mr.  Chairman: 

The Department of Housing and Urban Development's (HUD) Economic
Development Loan Fund, formerly known as the Section 108 Loan
Guarantee Program, was established by the Congress in 1974 as a
component of the Community Development Block Grant (CDBG) Program. 
Under the loan fund, communities may borrow up to 5 times their
current year's CDBG allotment using their current and future CDBG
grants as the principal collateral.  Initially, only CDBG entitlement
communities--large metropolitan areas and urban counties that receive
CDBG grants directly--were eligible for the loan fund; in 1990,
nonentitlement communities--small cities and rural areas that receive
CDBG grants through their states--became eligible for the fund. 

Loan proceeds may be used, for the most part, for the same activities
as CDBG grants; but because the loan amount can be substantially
larger than the annual CDBG grant, communities may use the loan
proceeds to finance much larger community development efforts.  HUD
approves loan commitments but does not directly fund the loan
program.  Rather, the loans are financed through periodic public
offerings of pooled loans on the private sector-capital market and
are guaranteed by the full faith and credit of the U.S.  government. 
To encourage communities to make greater use of the loan program, the
Congress substantially increased the amount of funds available for
the program in 1993.  In 1994, it established Economic Development
Initiative (EDI) grants, which communities may use to help fund
projects or to pay for some of the costs associated with borrowing
under the loan program. 

Concerned about how these changes had affected the loan program, you
asked us to examine (1) the extent to which communities are using the
loan fund, (2) factors affecting communities' willingness to use the
fund, (3) the types of projects being financed with loan proceeds,
and (4) HUD's procedures for overseeing the program.  This report is
based on HUD's data over the life of the program and a representative
sample of 100 loans made in fiscal years 1990 through 1996 that had
funding advances.  The loan sample was designed to allow us to
estimate the types of activities that have been financed by
communities and states for those years. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

From the loan program's inception through fiscal year 1996, the
Department of Housing and Urban Development made 930 loan commitments
totaling $4.4 billion.  About 38 percent of the Community Development
Block Grant entitlement communities have received one or more loan
commitments; 16 states, on behalf of their nonentitlement
communities, have also received loans.  Although communities' and
states' use of the loan program has fluctuated-- generally, 50 or
fewer loans were approved each year--program activity increased
sharply in fiscal years 1994 through 1996, when the Department
approved about 400 loans and nearly 60 percent of the dollars loaned
since the program's inception.  The program experienced its greatest
activity in fiscal year 1995, with 218 loans totaling $1.8 billion. 
However, the level of loan commitments has often been well below the
level approved by the Congress.  For example, although the Department
approved $2.6 billion in loans in fiscal years 1994 through 1996, the
appropriated level would have supported about $5.6 billion in loans. 

According to the Department of Housing and Urban Development and
associations representing community development officials, the key
factor responsible for communities' and states' increased willingness
to use the loan program has been the availability of Economic
Development Initiative grants to loan recipients.  Program activity
appears to support this view.  In 1994, when the Department provided
$19 million in grants, loan activity doubled--88 loans compared with
43 the previous year; in 1995, when the Department awarded $350
million in grants, the number of loans jumped to 218; however, in
1996, when no Economic Development Initiative grants were awarded,
the number of loans dropped to 89.  The officials attributed any
unwillingness to use the loan program to communities' concerns over
collateral requirements and their reluctance to pledge future
Community Development Block Grants as collateral for loans.  The
Department does not know the extent to which communities have used
Community Development Block Grant funds for loan payments when other
intended payment sources did not materialize because it does not
track this information. 

Communities and states reported to the Department of Housing and
Urban Development that they have used about 73 percent of their loans
to finance economic development activities.  Other eligible Community
Development Block Grant activities for which loans were reported to
be used included acquisition of real property, housing
rehabilitation, and public property rehabilitation.  Within the
category of economic development, communities and states reported
that loans were used for activities such as constructing shopping
centers, creating revolving loan funds, and rehabilitating hotels and
restaurants.  Overall, communities reported that about 88 percent of
the loans were to benefit people from households earning less than 80
percent of a local area's median income.  The Department requires an
annual review of grantees to determine, among other things, whether
the activities funded by Community Development Block Grants are being
carried out in a timely manner and in accordance with
Department-approved plans.  However, according to officials in 5 of
the 30 field offices responsible for the loans in our sample, they
did not routinely include the loans in their annual reviews because
they (1) did not believe they had guidance on how to monitor the
program, (2) did not believe they had a responsibility to monitor the
loans, (3) had other priorities, or (4) lacked loan-specific
information.  These five offices oversee about 26 percent of all
loans.  In addition, in 7 of the 30 field offices in our sample,
Department personnel responsible for reviewing block grants told us
that they did not have enough information on loans to carry out their
loan monitoring responsibilities. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The loan program provides communities and states with a way of
leveraging their CDBG awards to obtain additional resources for
financing larger community revitalization projects without waiting
for the actual CDBG award.  The loans can have repayment terms of up
to 20 years. 

In the loan program, as in the CDBG program, communities and states
must use their loan proceeds only for activities that meet one or
more of three national objectives:  (1) benefit low- and
moderate-income people--that is, households earning less than 80
percent of the local area's median income; (2) aid in the prevention
and elimination of slums or blight; or (3) meet other urgent
community development needs.  In addition, the loan proceeds must be
used to help finance one or more of the activities cited in section
108 of the 1974 act.  These activities include, among others, the
acquisition of real property; the rehabilitation of real property,
either publicly owned or acquired; housing rehabilitation and
preservation; and economic development. 

Although current and future CDBG grants are the principal collateral
for loans, since 1995, communities have had to provide additional
collateral.  To meet this requirement, HUD has generally approved
loans only for those activities expected to generate a cash flow that
would allow the community to repay the guaranteed loan.  A 1994
amendment to the program expanded the list of eligible activities to
include the acquisition and restoration of public facilities, which
would generally not produce a cash flow to repay the debt.  In
addition to revenue generated from the project, communities and
states may designate tax revenues or other revenue sources as the
additional collateral.  The Treasury has never had to use public
funds to fulfill the federal guarantee, according to HUD's 1996
Consolidated Annual Report to Congress. 

Eligible applicants include the CDBG grantees:  (1) entitlement
communities--generally cities designated as central cities of
metropolitan statistical areas, other cities with populations of at
least 50,000, and qualified urban counties--that are directly
responsible for administering their grants and (2) nonentitlement
communities--smaller communities, including many rural communities
whose CDBG programs are administered by the state.\1

Nonentitlement communities became eligible for the loan program
through the Cranston-Gonzalez National Affordable Housing Act of
1990. 

Both HUD headquarters and field offices play a role in managing the
loan program.  Generally, headquarters provides final approval;
negotiates loan terms with applicants; and, through HUD's fiscal
agent, arranges for the sale of the loans.  The fiscal agent acts as
a trustee under contract to HUD and, among other duties, collects
loan payments from the communities and notifies HUD to take funds
from communities' CDBG allotment when payments are not received. 
Field offices assist communities and states in preparing
applications, make recommendations to headquarters to approve or deny
loans, and monitor funded activities. 

HUD has financial monitoring procedures to safeguard against
communities' or states' defaulting on their loans.  HUD's fiscal
agent must receive the loan payment 5 days before it is due. 
Payments are due either semiannually or quarterly.  If the payment is
not received, the fiscal agent notifies the HUD headquarters program
office, which contacts the cognizant community or state.  If the
fiscal agent does not receive payment within 72 hours of the
payment's due date, HUD will make the loan payment using funds from
the community's or state's CDBG allocation.  When payments are made
late, HUD will credit the community's or state's CDBG allocation. 


--------------------
\1 HUD administers the nonentitlement programs in New York State and
Hawaii and refers to these programs as its Small Cities Program.  For
the purposes of this report, nonentitlement communities include
state-administered programs and the HUD-administered Small Cities
Program. 


   LOAN PROGRAM RECENTLY
   EXPERIENCED SIGNIFICANT GROWTH
------------------------------------------------------------ Letter :3

Between fiscal years 1994 and 1996, communities and states used the
loan program in far greater numbers than ever before.  Over this
period, HUD approved nearly 60 percent of all the funds loaned, for a
total of $2.63 billion.  From the program's inception through
September 1996, HUD made 930 commitments to guarantee loans totaling
$4.4 billion.\2

Figure 1 shows the number of approved loan commitments from
1978--when the first loan application was approved--through September
1996. 

   Figure 1:  Number of Approved
   Loan Commitments, Fiscal Years
   1978-96

   (See figure in printed
   edition.)

Source:  GAO's analysis of HUD's data. 

Entitlement communities used the program significantly more than
nonentitlement communities.  About 38 percent of entitlement
communities have received 884 loan guarantees totaling $4.2 billion. 
Nonentitlement communities in 16 states have received 46 loan
guarantees totaling $235 million.  Even though the program has
recently experienced significant growth, the level of loan
commitments has always been below the level approved by the Congress. 
For example, in fiscal year 1995--the program's most active year--HUD
approved $1.8 billion in commitments, while the Congress had
appropriated $2.1 billion in commitments for that fiscal year. 
Figure 2 shows the level of commitments approved by the Congress and
actual loan commitment levels through September 1996. 

   Figure 2:  Actual Loan Dollars
   and Amount Approved by the
   Congress, Fiscal Years 1978-96

   (See figure in printed
   edition.)

Source:  GAO's analysis of HUD's data. 


--------------------
\2 In 1996 dollars, HUD's commitments totaled $5.2 billion from the
program's inception through September 1996.  When adjusted for
inflation, commitments from 1994 through 1996 represent 52 percent of
all commitments. 


   EDI GRANTS SPURRED PROGRAM
   GROWTH, BUT CONCERNS ABOUT
   COLLATERAL REMAIN
------------------------------------------------------------ Letter :4

According to HUD and associations representing community development
officials, EDI grants encouraged communities to make greater use of
the loan program.  HUD provided $369 million in EDI grants from
fiscal year 1994 through September 1996.  However, according to these
officials, the program continues to be underutilized because (1) many
communities and states are reluctant to pledge their future CDBG
funds as collateral for the loans, as the 1974 act, as amended,
requires, and (2) collateral requirements imposed in 1995 and new
procedural guidelines are likely to make communities even more
reluctant to use the program. 


      EDI GRANTS ENCOURAGED
      INCREASED LOAN PROGRAM USE
---------------------------------------------------------- Letter :4.1

Recent growth in the use of the loan program was primarily stimulated
by the introduction of EDI grants in fiscal year 1994, according to
HUD and associations representing community development officials. 
HUD provided EDI grants for 123 out of the 395 loan commitments made
between fiscal years 1994 and 1995.  These EDI grants totaled $369
million.  (App.1 provides detailed information on EDI grants approved
during fiscal years 1994 through 1995.)

The EDI grants enhance the program's use because the communities and
states can use the grant funds in a number of ways to cover the costs
of administering the program, such as creating a loss reserve and
writing down loan rates to businesses financing projects within the
program.  By helping to finance some of the projects' costs, the
grant money also strengthens the economic feasibility of the assisted
projects. 

According to one CDBG entitlement community, the ability to receive
an EDI grant along with a loan commitment from the loan fund was the
key factor making it possible for the community to take out the loan. 
If not for the EDI grant, this community would have sought funds from
alternative lending sources or issued bonds itself. 

Communities may use their EDI grants in different ways.  For example,
in 1994, Los Angeles was awarded a $300 million loan commitment--the
largest single loan amount granted under this program--to establish
and assist in funding a community development bank.  The bank's
mission is to stimulate economic development that will create and/or
retain jobs for Los Angeles' low- and moderate-income families.  In
addition to the loan commitment, the city was awarded a $100 million
EDI grant, bringing the bank's total reserves to $400 million.  The
bank will provide loans, loan guarantees, venture capital
investments, grants, and technical assistance to area businesses.  In
another instance, Kingston, New York, was awarded a $3.7 million loan
to establish two revolving loan funds, one to rehabilitate housing
and one to assist small businesses that are locating or expanding at
a former IBM facility.  In addition to the loan commitment, the city
was awarded a $555,000 EDI grant to establish a revolving loan fund
offering below-market interest rates for small businesses and a loan
loss reserve. 


      COLLATERAL REQUIREMENTS MAY
      DISCOURAGE USE OF THE LOAN
      PROGRAM
---------------------------------------------------------- Letter :4.2

Even though communities and states generally view the loan program
favorably, they have concerns about the current collateral
requirements and the proposed guidance to communities on the
collateral to be used when providing third-party loans.  As the law
requires, communities and states must pledge current and future CDBG
grants as the principal collateral for their loan.  According to
officials from five of six associations that represent community
development officials, the collateral requirements are a concern for
their members.  For example, one association representative told us
that while many of the association's members who used the program
viewed it positively, the overall membership was slow to use the
program because of the requirement to pledge future CDBG grants. 

Beginning in February 1995, HUD required all communities and states
to pledge collateral beyond their CDBG grant.  Previously, only
communities and states that had loan repayment terms for 10 years or
longer and, in some cases, loans with shorter repayment periods (such
as those with "balloon" payments), had to pledge additional
collateral.  HUD's new requirement was in response to the Credit
Reform Act of 1990 and resulting directives from the Office of
Management and Budget (OMB).  The 1990 act required agencies to
calculate subsidy costs for loan guarantee programs.  This cost is
the amount of appropriation an agency must have in order to cover
anticipated losses in the program.  In calculating this cost, OMB
told HUD that it cannot use future CDBG grants as the only source of
collateral for the loan.  If additional collateral were not required,
the subsidy cost on the loan program would be prohibitively high. 
According to HUD's requirements, for loans that financed some type of
tangible item, such as a building or equipment, the items themselves
can serve as additional collateral.  For public infrastructure
activities, additional collateral will generally come from income
related to CDBG activities, such as interest from repayments of
housing rehabilitation loans.  As a final option, communities can
pledge revenues from future tax collections. 

In addition to concerns about collateral, association officials
questioned the proposed more stringent guidelines on third-party
loans, such as loans that communities make to businesses.  HUD plans
to issue draft guidance for review and comment on the procedures that
communities and states may follow in granting loans from the loan
program to third parties.  The proposed guidelines would seek to
minimize third-party default rates by using commercial lending
practices as the benchmark for the communities' own loan activities. 
HUD's program manager recognized that the new guidance may make
communities more reluctant to use the program and acknowledged that
HUD will have to find ways to help communities adapt to the new
guidelines.  HUD stated that it is proposing this guidance in
response to the 1990 credit reform act, and we identified five
instances in which third parties had defaulted on the loans they had
received from the community that had secured the loan with its CDBG
allotment.  Nevertheless, several associations questioned this
guidance because it moves the loan program toward more stringent
commercial lending practices.  They believed the use of more
conservative lending practices as a benchmark for any public benefit
program is unrealistic and inappropriate because such projects by
their nature are riskier and would be unable to qualify in a
conservative lending environment. 

In a letter commenting on a draft of this report, HUD stressed that
the underwriting guidelines will not be issued as regulations and
their use will not be mandatory.  HUD noted that the guidelines are
not intended to be used in connection with improvements to public
facilities and other activities that do not generate revenue, and
that communities will still be able to use CDBG funds to repay loans
used to finance activities that do not generate revenue.  HUD also
noted, however, that communities will have to furnish alternative
security to protect the federal financial interest in the event that
future appropriations are not made for the CDBG program. 

According to one CDBG participant, that state chose not to
participate in the loan program for its nonentitlement communities
because pledging the state's future CDBG funds would put other
nonentitlement communities at risk of losing their CDBG funds if the
community receiving the funds were to default.  This official added
that while the benefits of leveraging future CDBG grants are
tempting, the risk posed by the loan on future CDBG awards is too
great because of the impact on countless low- and moderate-income
persons around the state who depend on CDBG-funded activities. 


      HUD DOES NOT TRACK
      COMMUNITIES' USE OF CDBG
      FUNDS TO MAKE LOAN PAYMENTS
---------------------------------------------------------- Letter :4.3

According to the director of HUD's loan program, communities intend,
in most instances, to repay loans with revenues generated by the
funded project or from another revenue source identified by the
community or state in its loan application.  The director emphasized
that identifying a viable source of revenue other than the CDBG for
loan payments was a critical consideration in HUD's review of a loan
application.  However, HUD was not able to provide information on
communities' actual use of CDBG funds to cover shortfalls when the
intended revenue sources for loan payments do not materialize because
it has not been tracking these payments.  The director agreed that
this is important information that HUD should be tracking to improve
its oversight of the program. 


   COMMUNITIES USED LOANS
   PRIMARILY FOR ECONOMIC
   DEVELOPMENT ACTIVITIES
------------------------------------------------------------ Letter :5

On the basis of our sample of 100 loans approved in fiscal years 1990
through 1996 that had funding advances, we estimated the types of
activities reported as funded by the program for these years.  Our
analysis relied on the information that the communities and states
reported to HUD.  (App.  II provides detailed information on loans
approved in fiscal years 1990 through 1996 that had funding advances,
and app.  III provides detailed information, estimates, and sampling
errors for the data presented in this report.)

By an overwhelming margin, both entitlement and nonentitlement
borrowers reported that they used their loan funds to finance
economic development activities.  However, nonentitlement communities
were more likely than entitlement communities to report that they
used their funds for economic development.  Table 1 shows our
estimates of the types of activities funded overall and by
entitlement and nonentitlement communities. 



                                Table 1
                
                    Proportion of Loans Used to Fund
                  Eligible Activities, as Reported by
                     Entitlement and Nonentitlement
                              Communities

                                              Entitlemen
                                                       t  Nonentitleme
                                     Overall  communitie            nt
                                    (percent           s   communities
Eligible activities                        )   (percent)     (percent)
----------------------------------  --------  ----------  ------------
Economic development                    73.2        72.1            87
Acquisition of real property\a          12.3        11.9          17.4
Housing rehabilitation\b                10.4        10.8           4.3
Public real property\                    8.5         9.2             0
 rehabilitation\c
Relocation costs\                        5.2         5.2           4.3
----------------------------------------------------------------------
Note:  Because all nonentitlement communities were included in our
sample, the percentages for these communities are actual and not
estimates.  The economic development activity is the only category in
which we found a statistical difference between entitlement and
nonentitlement communities.  Percentages do not add up to 100
because, in reporting to HUD, communities and states could indicate
more than one eligible activity. 

\a Projects such as the purchase of a commercial office property or
property to house a local shopping center. 

\b Projects such as the rehabilitation of a school to convert the
facility to housing units for the elderly. 

\c Projects such as engineering and design work associated with the
development and construction of three public schools. 

Source:  GAO's analysis of HUD's data. 

Loans for economic development were made for activities such as
constructing shopping centers, creating revolving loan funds,\3 and
rehabilitating hotels and restaurants.  On the basis of the
information provided to HUD by communities and states, we estimate
that at least $1.3 billion was used to finance an economic
development activity.  This estimate is conservative and includes
only instances in which the community reported funds being used for
only one purpose.  As noted earlier, in reporting to HUD, communities
and states could indicate more than one eligible activity for the
loan commitment. 

Figure 3 shows our estimates of the type of economic development
activities funded.  As the figure shows, 46 percent of the loans went
to support for-profit, start-up businesses or to retain for-profit
businesses. 

   Figure 3:  Estimates of the
   Types of Economic Development
   Activity Funded

   (See figure in printed
   edition.)

Establishing revolving loan funds is one method that communities use
to make even greater use of CDBG funds by providing funding for
businesses that might otherwise not qualify for commercial lending
opportunities.  While we estimate that only 6 percent of the loans
were used to establish or enhance such funds, about half of the
entitlement communities with the largest loans reported using loan
commitments to finance a revolving loan fund.  Only one
nonentitlement community reported using loan proceeds for this
purpose. 

These revolving loan funds are used to finance a variety of
businesses.  For example, Philadelphia, Pennsylvania, reported using
$20 million in loan proceeds to establish a revolving loan fund for
small and mid-sized inner-city businesses.  The program's goal is to
foster the retention and expansion of inner-city businesses. 
Eligible businesses will receive long-term, fixed-rate loans that
conventional banks have been unwilling to provide.  Businesses that
have received assistance from the fund include an insurance company,
a wholesale food distributor, a smelting and refining company, an
apparel warehouser and distributor, and a card and gift warehouser
and distributor. 

On the basis of the information in the loan files, we also estimate
that communities and states used about 88 percent of their loans to
finance activities that benefited low- and moderate-income people
from households earning less than 80 percent of the local area's
median income.  For example, Greene County, Alabama, reported to HUD
that it planned to use $9 million in loan proceeds to finance the
construction of a 85,000-square-foot facility to house a tire and
wheel assembly plant.  The county estimates that the plant will
create at least 180 new jobs, 51 percent of which will be for low-
and moderate- income persons.  Cheboygan, Michigan, reported using $3
million in loan proceeds to help a start-up, for-profit business
purchase a vacant paper plant and industrial equipment.  The plant
will benefit the community by creating 100 jobs for low- to
moderate-income persons, according to a state community development
official. 

About 23 percent of the loans funded activities that supported the
national objective of aiding in the elimination of slums and blight. 
However, none of the loans funded activities that supported the
national objective of addressing an urgent community development
need.  Percentages do not add up to 100 because, in reporting to HUD,
communities and states could indicate more than one national
objective. 


--------------------
\3 Revolving loan funds provide an on-going stream of funding to
small businesses by providing loans below the market rate. 


   SOME FIELD OFFICES ARE NOT
   INCLUDING THE LOAN PROGRAM IN
   CDBG MONITORING
------------------------------------------------------------ Letter :6

According to its regulations, the Department must conduct an annual
performance review of CDBG communities and states to determine
whether CDBG-funded activities are being carried out (1) in a timely
manner, (2) in accordance with approved plans, and (3) in compliance
with primary and national objectives.\4

Because the loan program is a component of the CDBG program, loan
commitments should be included in annual reviews of CDBG recipients. 
However, in 5 of the 30 field offices we contacted, these loan
commitments were not reviewed.  These five offices accounted for
about 26 percent of all loan commitments.  The five offices that did
not include loan fund activities said that they did not do so because
they (1) did not believe they had guidance on how to monitor the
program, (2) did not believe they had a responsibility to monitor the
loans, (3) had other priorities, or (4) lacked loan-specific
information.  Another two field offices did not monitor these loans
because one had recently opened and one had its records destroyed. 
The remaining 23 field offices included the loan fund activities in
their review. 

Even when the field offices include loan activities in the annual
CDBG review, their task is made more difficult by poor communication
between HUD headquarters and its field offices.  According to
officials in 7 of the 30 field offices we contacted, HUD
representatives did not have enough information on loans to fully
carry out their monitoring responsibilities.  According to the HUD
headquarters program director, field offices may not routinely
receive copies of all loan documentation, but he was surprised to
learn that some offices may not be receiving documentation containing
sufficient information for monitoring purposes. 


--------------------
\4 An annual review may consist of the field office's conducting (1)
an on-site review during which a team of specialists reviews various
aspects of a community's or state's activities to determine
compliance with CDBG program requirements or (2) an in-house
assessment during which HUD identifies areas in which communities are
doing well and those in which they need improvement. 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

Communities and states have made greater use of the loan program
since the EDI grants were instituted.  Nonetheless, the total amount
of money loaned has remained less than the amount that congressional
appropriations would support.  This may be due in part to
communities' and states' reluctance to risk having to use future CDBG
funds to repay loans.  However, because HUD does not track the use of
CDBG funds for loan payments, it does not know the extent to which
CDBG funds have been used in this manner. 

Furthermore, some HUD field offices have not been routinely including
loan commitments in their oversight of CDBG communities and states. 
Seven different field offices were not getting information from
headquarters on final loan terms, which affected their ability to
monitor loan activities; and five field offices were not including
loans in their monitoring of CDBG communities.  With the increased
growth in the loan program, the need to ensure that funds are being
spent as reported is of even greater importance. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :8

To determine the extent to which communities and states are using
CDBG allotments to repay loans, the Secretary of Housing and Urban
Development should implement procedures for tracking loan payments
made from communities' or states' CDBG allocations. 

To ensure that HUD's field offices have accurate and timely
information for monitoring loan fund activities and that loan fund
activities are routinely reviewed, the Secretary of Housing and Urban
Development should

  -- develop procedures to ensure that the information necessary to
     monitor program performance and compliance with program
     requirements is promptly provided to the cognizant field offices
     and

  -- direct field offices to include a review of loan fund activities
     when they review CDBG communities and states. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :9

We provided a draft of this report to HUD for its review and comment. 
We obtained comments in a meeting with the Deputy Assistant Secretary
for Grant Programs and other HUD officials and subsequently received
written comments.  In our meeting, the Deputy Assistant Secretary
stated that HUD generally agreed with the information in our report
and with our recommendations.  He stressed HUD's commitment to making
sure that it effectively oversees the loan program.  The Deputy
Assistant Secretary and the other officials provided suggestions for
clarifying the report, which we incorporated as appropriate. 

In its letter, HUD noted that it views the growth in the loan program
as positive and encourages communities to use the program to create
jobs and revitalize distressed neighborhoods.  At the same time, HUD
stated, it is mindful of its stewardship responsibilities and
therefore considers our report as constructive and generally agrees
with our recommendations.  HUD raised several points about collateral
requirements that, while consistent with our report, provided details
of HUD's intent.  HUD emphasized that the underwriting guidelines
will not be issued as regulations and their use is not mandatory;
rather, HUD views them as a tool for communities to underwrite
revenue-generating projects financed with the loan fund.  These
guidelines will assist communities in protecting their CDBG programs
and in providing adequate security for the loan guarantees.  HUD also
noted that the guidelines were not intended to be used for loans used
to finance public facilities or other activities that do not generate
income.  Although HUD points out that the guidelines will not be
mandatory, it was clear during our work that associations
representing communities perceive the guidelines as requirements. 
Accordingly, we believe that the program may benefit from HUD's
opening and maintaining a dialogue with communities as it develops
these guidelines to ensure that they are understood and not viewed as
an obstacle to using the program. 

In connection with our recommendations, HUD agreed to implement
procedures to require reporting of unplanned use of CDBG funds to
make loan payments.  However, our first recommendation goes beyond a
reporting requirement.  We believe that routine tracking of these
data will provide HUD and communities with useful information on,
among other things, the likelihood that communities may need to use
future CDBG funds to repay loans when other intended revenue sources
fail to materialize.  In connection with our second recommendation,
HUD noted that the distribution of oversight information needed by
the field offices must be comprehensive and that while HUD has
improved in this area in recent years, the current system is
inadequate for accomplishing that result.  HUD plans to implement our
recommendation to correct this problem through a design change to its
integrated disbursement and information system --a computer-based
information system.  HUD noted that it will consult with its field
offices to ensure that they are receiving the information needed for
monitoring.  HUD also agreed to develop procedures to ensure that
loan information is provided promptly to field offices and to direct
field offices to include loan activities in their monitoring of CDBG
recipients, as we recommend.  HUD's written comments and our response
appear in appendix VI. 


---------------------------------------------------------- Letter :9.1

We performed our review from November 1996 through July 1997 in
accordance with generally accepted government auditing standards.  As
arranged with your office, unless you announce its contents earlier,
we plan no further distribution of this report until 7 days after the
date of this letter.  At that time, we will send copies to
appropriate congressional committees, the Secretary of Housing and
Urban Development, and the Director of the Office of Management and
Budget.  We will also make copies available to others upon request. 

Please call me on (202) 512-7631 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
VII. 

Sincerely yours,

Judy A.  England-Joseph
Director, Housing and Community
 Development Issues


EDI GRANTS AND ECONOMIC
DEVELOPMENT LOAN FUND LOANS,
FISCAL YEARS 1994 AND 1995
=========================================================== Appendix I

This appendix presents information on Economic Development Initiative
(EDI) grants and corresponding loans from the Economic Development
Loan Fund for fiscal years 1994 and 1995. 



                               Table I.1
                
                 Economic Development Initiative Grants
                   and Economic Development Loan Fund
                        Loans, Fiscal Year 1994

Community                             Grant amount         Loan amount
------------------------------------  ------------  ------------------
Selma, Alabama                            $330,000          $2,200,000
San Francisco, California                  600,000           6,000,000
San Diego, California                      720,000           7,200,000
Compton, California                        500,000           5,000,000
Los Angeles County, California           1,000,000          10,000,000
Inglewood, California                      500,000           5,000,000
San Bernadino, California                  344,000           2,295,000
Lakewood, Colorado                          45,000             450,000
Washington, D.C.                         1,000,000          11,500,000
Miami Beach, Florida                     1,000,000          12,670,000
Miami, Florida                             300,000           2,000,000
Atlanta, Georgia                           185,017           1,850,170
Atlanta, Georgia                           617,000           6,170,000
Athens/Clarke County, Georgia              500,000           5,000,000
Atlanta, Georgia                           197,983           1,979,830
Chicago, Illinois                        1,000,000          10,000,000
Gary, Indiana                              380,000           2,550,000
Indianapolis, Indiana                      450,000           3,000,000
Louisville, Kentucky                       700,000           7,000,000
Boston, Massachusetts                      300,000           2,000,000
Lowell, Massachusetts                      500,000           5,000,000
Worcester, Massachusetts                   500,000           5,000,000
Prince George's County, Maryland           600,000            6,000,00
Jackson, Michigan                          315,000           2,110,000
Detroit, Michigan                          243,000           1,626,521
Detroit, Michigan                           90,000             600,000
Wilmington, North Carolina                 150,000           1,000,000
Newark, New Jersey                         129,000           1,290,000
Atlantic City, New Jersey                  300,000           3,000,000
Syracuse, New York                         129,000           1,290,000
Buffalo, New York                          500,000           5,000,000
Babylon, New York                           90,000             600,000
Buffalo, New York                          129,000           1,290,000
Utica, New York                            600,000           6,000,000
Rochester, New York                        700,000           7,000,000
Cleveland, Ohio                            306,000           2,044,250
Toledo, Ohio                               129,000           1,290,000
Dayton, Ohio                               129,000           1,290,000
Cleveland, Ohio                             86,000             573,750
Philadelphia, Pennsylvania               1,000,000          10,000,000
Providence, Rhode Island                   500,000           5,000,000
Columbia, South Carolina                   227,000           1,515,000
Harris County, Texas                       129,000           1,290,000
Fort Worth, Texas                          660,000           6,600,000
Tacoma, Washington                         165,000           1,135,000
======================================================================
Total fiscal year 1994                 $18,975,000        $181,409,521
----------------------------------------------------------------------


                               Table I.2
                
                EDI Grants and Economic Development Loan
                      Fund Loans, Fiscal Year 1995

Community                             Grant amount         Loan amount
------------------------------------  ------------  ------------------
Selma, Alabama                            $450,000            $450,000
South Gate, California                     475,000           2,370,000
Alhambra, California                       675,000           2,025,000
San Francisco, California                1,000,000          10,000,000
San Jose, California                       475,000           2,710,000
San Bernadino County, California           475,000           1,360,000
Oakland, California                     22,000,000          27,000,000
Fresno, California                       1,000,000           1,630,000
Riverside, California                      950,000           4,130,000
Sacramento, California                   1,500,000           8,000,000
Pico Rivera, California                    750,000           1,850,000
Los Angeles County, California          25,000,000          25,000,000
Los Angeles, California                100,000,000         300,000,000
San Diego, California                    1,000,000           1,000,000
Denver, Colorado                         1,000,000           3,330,000
Bridgeport, Connecticut                    475,000           1,580,000
New Haven, Connecticut                   1,000,000           2,000,000
Fort Myers, Florida                        500,000             500,000
Miami, Florida                             670,000           2,700,000
Gary, Indiana                            1,000,000           4,680,000
Kansas City, Kansas                      7,800,000           7,800,000
Louisville, Kentucky                     4,000,000           4,000,000
Boston, Massachusetts                   22,000,000          22,000,000
Fall River, Massachusetts                1,155,000           1,210,000
Lynn, Massachusetts                        899,000           1,200,000
Lawrence, Massachusetts                  1,000,000           6,670,000
Boston, Massachusetts                    1,000,000           2,000,000
Lewiston, Maine                            500,000           5,000,000
Detroit, Michigan                          250,000           2,390,000
Detroit, Michigan                           70,000             400,000
Detroit, Michigan                           90,000             450,000
Saint Paul, Minnesota                    1,000,000           4,000,000
Kansas City, Missouri                   14,200,000          14,200,000
St. Louis, Missouri                      1,000,000           1,000,000
Moss Point, Mississippi                    475,000           1,900,000
Hudson County, New Jersey                1,000,000           8,300,000
Syracuse, New York                         475,000             475,000
Buffalo, New York                        1,000,000           3,400,000
Rochester, New York                        475,000           1,900,000
Yonkers, New York                           40,000             180,000
Elmira, New York                           385,000           2,420,000
New York, New York                       4,600,000          13,800,000
Kingston, New York                         555,000           3,700,000
Yonkers, New York                           41,000             170,000
Yonkers, New York                           94,000             380,000
Warren, Ohio                               170,000           1,000,000
Trumbull County, Ohio                      340,000           2,000,000
Columbiana County, Ohio                    102,000             600,000
Columbus, Ohio                           1,000,000           9,000,000
Youngstown, Ohio                           340,000           2,000,000
Akron, Ohio                                300,000           1,700,000
Cleveland, Ohio                         87,000,000          87,000,000
Cuyahoga County, Ohio                    1,000,000           6,670,000
East Liverpool, Ohio                        21,000             120,000
Youngstown, Ohio                           435,000           3,300,000
Mahoning County, Ohio                      170,000           1,000,000
Oklahoma City, Oklahoma                  1,000,000           3,330,000
Tulsa, Oklahoma                          1,000,000           2,800,000
Philadelphia, Pennsylvania               1,000,000           6,000,000
Pittsburgh, Pennsylvania                 1,000,000           4,010,000
McKeesport, Pennsylvania                 1,000,000           2,000,000
Harrisburg, Pennsylvania                 1,000,000           2,430,000
Columbia, South Carolina                   200,000             200,000
Houston, Texas                          22,000,000         175,000,000
Abilene, Texas                           1,000,000           2,800,000
Hidalgo County, Texas                      250,000           1,000,000
Austin, Texas                              475,000             475,000
Fillmore, Utah                             200,000             650,000
Fairfax County, Virginia                   150,000           1,000,000
Kitsap County, Washington                  348,000           1,500,000
Tacoma, Washington                         475,000           2,380,000
Kitsap County, Washington                  475,000             920,000
Seattle, Washington                        350,000           2,400,000
Spokane, Washington                      1,000,000           6,610,000
Milwaukee, Wisconsin                     1,000,000           1,700,000
Huntington, West Virginia                  350,000           3,500,000
Cheyenne, Wyoming                          105,000             695,000
Laramie, Wyoming                           300,000           1,500,000
======================================================================
Total fiscal year-1995                $350,055,000        $848,550,000
----------------------------------------------------------------------

LOAN FUND COMMITMENTS, FISCAL
YEARS 1990-96
========================================================== Appendix II

                                                                     Fiscal
State   Community       Project description                  Amount    year  Status
------  --------------  -----------------------------  ------------  ------  ------------
Ala.    Gadsden                                          $1,000,000      90

Ala.    Mobile                                            1,000,000      94

Ala.    Florence                                            800,000      95

Ala.    Birmingham                                        3,300,000      95

Ala.    Bessemer        Construction of a business        1,000,000      92  Underway
                        incubator facility

Ala.    Selma           Renovation of a hospital into     2,200,000      95  Underway
                        a medical clinic

Ala.    Mobile          Acqusition/Rehabilitation of      2,000,000      91  Completed
                        a hotel

Ala.    Greene County   Financial assistance for          9,000,000      95  Underway
                        business start up costs;
                        construct plant

Ariz.   Little Rock                                       1,800,000      91

Ariz.   Yuma                                              1,500,000      94

Ariz.   Pima County                                       1,200,000      90

Calif.  Riverside                                         4,130,000      95

Calif.  Oakland                                           2,500,000      94

Calif.  Norwalk                                           2,500,000      95

Calif.  Los Angeles                                       1,060,000      90
        County

Calif.  Lancaster                                         4,000,000      95

Calif.  Westminster                                       2,900,000      95

Calif.  Sacramento                                          805,000      93

Calif.  Livermore                                           185,000      94

Calif.  Sacramento                                        8,000,000      95

Calif.  Sacramento                                        2,020,000      93
        County

Calif.  Sacramento                                        1,000,000      94
        County

Calif.  Vacaville                                           555,000      92

Calif.  Sacramento                                          400,000      94

Calif.  San Bernardino                                      500,000      94

Calif.  Sacramento                                        1,500,000      90
        County

Calif.  San Diego                                         4,400,000      94

Calif.  Pasadena                                          3,725,000      93

Calif.  Sacramento                                        1,250,000      90

Calif.  San Diego                                         1,760,000      95

Calif.  San Diego                                           990,000      94

Calif.  San Bernardino                                    7,350,000      95

Calif.  Sacramento      Establishment of a loan fund      1,000,000      93  Underway

Calif.  Los Angeles     Fund the Los Angeles            300,000,000      95  Underway
                        Community Development Bank

Calif.  San Diego       Construction of a shopping        7,200,000      95  Underway
                        center

Calif.  Chula Vista                                         750,000      91

Calif.  Bakersfield     Purchase of furniture and         2,500,000      94  Completed
                        fixtures for a convention
                        center hotel

Calif.  Los Angeles     Housing rehabilitation,          60,000,000      93  Underway
                        revolving loan fund

Calif.  Oakland         Renovation of the Martin         10,945,000      95  Underway
                        Luther King, Jr. Plaza

Calif.  Oakland         Finance Enterprise Community     27,000,000      95  Underway
                        economic development
                        activities

Calif.  Santa Ana       Acquisition of land for          20,000,000      93  Completed
                        street widening

Calif.  Sacramento      Low interest loans for              360,000      90  Completed
        County          rehabilitation

Calif.  San Francisco   Capitalization of an existing    50,000,000      95  Underway
                        revolving loan

Calif.  Alhambra                                          3,000,000      95

Calif.  Carlsbad                                          1,200,000      94

Calif.  Santa Ana                                        13,900,000      95

Calif.  Huntington                                        2,970,000      95
        Park

Calif.  San Mateo                                         2,000,000      95
        County

Calif.  Woodland                                            800,000      95

Calif.  Fresno                                            3,150,000      95

Calif.  Downey                                            1,700,000      91

Colo.   Denver          Establishment of three           15,000,000      93  Completed
                        interim financing programs

Colo.   Lakewood                                          2,805,000      94

Colo.   Lakewood        Construction of public            2,050,000      95  Underway
                        facilities; infrastructure
                        improvements

Colo.   Denver                                            1,300,000      93

Colo.   Denver                                            7,000,000      94

Conn.   Bridgeport                                        5,000,000      95

Conn.   New Haven                                         5,000,000      91

D.C.    Washington                                        5,000,000      92

Fla.    Fort Myers      Construction of a shopping          500,000      95  Underway
                        center

Fla.    Miami                                             2,500,000      93

Fla.    Fort Myers      Acquisition/Redevelopment of        750,000      93  Completed
                        land for low-income housing

Fla.    Jacksonville\a  Acquisition/Renovation of a       2,850,000      90  Underway
                        waterfront resturant

Fla.    West Palm       Rehabilitation of two             1,095,000      94  Don't know
        Beach           privately owned rental
                        housing complexes

Fla.    Jacksonville                                      3,845,000      95

Fla.    Pompano Beach                                     2,000,000      91

Fla.    Jacksonville                                     10,000,000      94

Fla.    Miami                                             8,000,000      90

Fla.    Boca Raton                                          700,000      94

Ga.     Savannah        Rehabilitation of 74 unit         1,855,000      92  Completed
                        low-and moderate-income
                        rental housing

Ga      Atlanta                                           6,170,000      95

Ga      Atlanta                                           6,825,000      95

Ga      Atlanta                                           4,980,000      93

Ga      Macon                                               500,000      95

Ga      Macon                                             2,500,000      93

Ia      Des Moines                                        1,000,000      94

Ia      Des Moines                                        1,000,000      95

Ia      Des Moines                                          407,000      90

Ia      Sioux City                                          600,000      92

Ia      Dubuque                                           1,000,000      91

Ia      Dubuque         Acquisition of land;              1,200,000      90  Completed
                        construction of a hotel

Ill.    Chicago         Finance seven economic and       50,000,000      95  Underway
                        community development
                        programs

Ill.    Rockford                                            250,000      94

Ill.    Schaumburg                                          550,000      93

Ill.    Moline          Acquisition of land to            3,000,000      92  Underway
                        redevelop harbor area

Ind.    South Bend                                          450,000      92

Ind.    Hammond                                           1,050,000      93

Ind.    South Bend                                        1,050,000      94

Ind.    East Chicago                                      3,500,000      95

Ind.    Gary                                              7,440,000      94

Ind.    South Bend                                          750,000      90

Ind.    Gary            Construction of a building        3,470,000      95  Completed
                        leased to US Postal Service

Ind.    Indianapolis                                      3,200,000      95

Kans.   Kansas City                                       7,800,000      95

Kans.   Baxter Springs  Construct manufacturing           7,000,000      94  Completed
                        facility; purchase equipment

La.     Kenner                                              700,000      92

La.     Jefferson                                         6,800,000      90
        Parish

La.     New Orleans     Conversion of a building into     5,600,000      91  Underway
                        hotel suites

La.     Jefferson       Acquisition of equipment;         2,625,000      94  Underway
        Parish\a        refinance loan; working
                        capital for for-profit
                        business

Mass.   Malden          Finance handicapped                 500,000      95  Completed
                        accessibility improvements

Mass.   Boston          Establishment of the             22,000,000      95  Underway
                        Enterprise Community Economic
                        Development Loan program

Mass.   Lawrence                                            700,000      93

Mass.   Lynn                                              7,890,000      92

Mass.   Lowell                                           10,000,000      94

Mass.   Springfield     Construction of a medical           900,000      94  Completed
                        center

Mass.   Boston          Construction of hotel and        40,000,000      94  Underway
                        parking garage

Mass.   Lynn            Acquisition/Site preparation      3,400,000      95  Completed
                        work for schools and
                        firehouses

Mass.   Westfield       Working capital for local         2,200,000      94  Underway
                        manufacturer

Mass.   Malden          Acquisition/Relocation/           1,800,000      92  Underway
                        Demolition of commercial
                        buildings

Mass.   Salem                                               600,000      95

Mass.   Springfield                                         350,000      94

Mass.   Lynn                                              3,000,000      95

Mass.   Cambridge                                         1,000,000      94

Mass.   Gloucester                                        1,750,000      94

Mass.   Medford                                           3,500,000      94

Mass.   Cambridge                                         5,000,000      93

Mass.   Malden                                            3,000,000      95

Mass.   Springfield                                       2,000,000      95

Mass.   Malden                                              475,000      90

Md.     Baltimore                                         4,700,000      93

Md.     Cumberland                                          550,000      94

Md.     Baltimore                                        14,000,000      95

Md.     Annapolis                                           210,000      94

Md.     Prince          Acquisition/Renovation of a       6,000,000      95  Underway
        George's        shopping center
        County

Md.     Prince                                            1,600,000      93
        George's
        County

Md.     Baltimore                                         6,750,000      91

Me.     Lewiston                                            500,000      95

Mich.   Cheboygan       Assistance to for-profit          3,000,000      93  Completed
                        business for purchase of a
                        vacant paper plant and
                        machinery

Mich.   Royal Oak                                         2,400,000      92

Mich.   Saginaw         Rehabilitation of a parking       1,715,000      93  Completed
                        garage

Mich.   Bay City        Renovation of commercial            350,000      90  Completed
                        property into printing,
                        graphics arts and sales
                        facility

Mich.   Muskegon        Purchase private property ;         650,000      92  Completed
                        removal/installation of
                        public facilities and
                        improvements

Mich.   Royal Oak                                         3,097,000      90

Mich.   Detroit                                           2,000,000      90

Mich.   Norton Shores                                       250,000      94

Mich.   Detroit                                           3,060,000      95

Mich.   Waterford                                           255,000      93

Mich.   St. Clair                                         1,250,000      91
        Shores

Mich.   Detroit                                           2,000,000      92

Mich.   Detroit         Construction of 23,000 sq         1,150,000      95  Completed
                        foot addition to Riverbend
                        Shopping Center

Mo.     Kansas City                                       1,600,000      95

Mo.     Kansas City                                       1,500,000      95

Mo.     Kansas City                                       1,500,000      94

Mo.     Kansas City                                         500,000      94

Mo.     Kansas City                                       5,000,000      94

Mo.     Kansas City                                       2,000,000      92

Mo.     Kansas City                                       3,250,000      92

Mo.     Kansas City                                       3,000,000      90

Mo.     Kansas City     Construction/Rehabilitation         250,000      94  Completed
                        of a building used by public
                        service organization

Mo.     St. Joseph\a    Renovation of building and        1,260,000      93  Underway
                        provide business expansion
                        opportunities

Mo.     St. Louis       Housing and neighborhood         15,000,000      90  Completed
                        development; land
                        acquisition; economic
                        development activities

Mo.     Kansas City     Acquisition/Relocation/           4,500,000      92  Completed
                        Demolition of blighted and
                        substandard properties

Miss.   Greenville      Construction of water and         2,445,000      93  Underway
                        sewer facilities; acquisition
                        of real property; relocation
                        costs

Mont.   Billings                                            400,000      90

N.C.    Greensboro                                        1,640,000      94

N.C.    Gastonia                                          3,305,000      94

N.C.    Charlotte       Rehabilitation of a historic      1,645,000      95  Completed
                        mill into low-income housing
                        units

Nebr.   Lincoln                                             675,000      91

Nebr.   Lincoln                                             315,000      94

N.H.    Portsmouth      Acquisition/Rehabilitation of       820,000      94  Completed
                        the Mariner's Village housing
                        complex

N.J.    Jersey City                                       8,000,000      95

N.J.    Elizabeth                                         5,000,000      91

N.J.    Trenton                                           6,000,000      92

N.J.    Hudson County                                     5,000,000      92

N.J.    Camden                                              475,000      92

N.J.    Camden                                            3,000,000      90

N.J.    West Windsor    Provide working capital,            870,000      96  Underway
        Township        acquire office property and
                        machinery

N.J.    Camden          Construction of an industrial       180,000      92  Underway
                        building and provide
                        permanent financing

N.J.    Egg Harbor      Finance for-profit business'      3,550,000      93  Underway
        City            acquisition of fixed assets
                        and provide working capital

N.J.    Pohatcong       Acquisition/Rehabilitation of     4,495,000      93  Underway
        Township        a facility into a hotel

N.J.    Buena Vista     Assistance to for-profit          1,400,000      93  Terminated
        Township\b      business; working capital and
                        expansion

N.J.    Wanaque         Acquisition of land and           2,310,000      95  Underway
                        construction of a supermarket

N.Y.    Rochester                                           500,000      94

N.Y.    Utica                                             9,000,000      92

N.Y.    Rochester                                         2,000,000      94

N.Y.    Union                                             2,000,000      95

N.Y.    Middletown                                           70,000      95

N.Y.    Buffalo                                           5,000,000      95

N.Y.    Rochester                                        10,000,000      94

N.Y.    Nassau County                                     6,025,000      92

N.Y.    Binghamton                                        4,205,000      92

N.Y.    Buffalo                                           1,000,000      93

N.Y.    Buffalo                                           5,000,000      92

N.Y.    Newburgh                                          1,500,000      92

N.Y.    Syracuse                                         14,395,000      92

N.Y.    Suffolk County                                    1,500,000      95

N.Y.    Rochester                                         4,000,000      91

N.Y.    Buffalo                                           8,000,000      90

N.Y.    Rochester       Establishment of revolving        5,000,000      92  Don't know
                        loan fund for commercial and
                        industrial projects

N.Y.    Buffalo         Refinance an existing Section     2,200,000      94  Completed
                        108 loan and make
                        improvements to hotel.

N.Y.    Yonkers         Provide working capital for      18,000,000      95  Underway
                        credit worthy businesses,
                        finance site improvement

N.Y.    Kingston        Assistance in capitalization      3,700,000      95  Underway
                        of a revolving loan fund

N.Y.    Babylon         Acquisition/Rehabilitation of     1,600,000      94  Underway
                        shopping centers

N.Y.    Monroe County   Expansion of an ice arena and     6,345,000      94  Don't Know
                        various other projects.

N.Y.    Binghamton      Refinance an existing Section       800,000      94  Completed
                        108 loan to retain 119 jobs

N.Y.    Buffalo         Purchase 5 new fire trucks        2,235,000      95  Underway

N.Y.    Buffalo         Refinance loan, renovate          3,000,000      94  Don't know
                        property, re-open restaurant

N.Y.    Buffalo         Rehabilitation of a vacant        1,290,000      95  Has not
                        store and establish a                                started
                        revolving loan fund

O.H.    Youngstown                                        1,250,000      90

O.H.    Youngstown                                        1,275,000      90

O.H.    Euclid                                            1,250,000      93

O.H.    Columbus        Rehabilitation of 400 room        8,360,000      95  Underway
                        ocupancy units in YMCA

O.H.    Cleveland       Establishment of two loan        87,000,000      95  Don't know
                        programs for economic
                        development activities

O.H.    Warren                                              650,000      90

O.H.    Youngstown                                          810,000      92

O.H.    Cleveland                                         2,100,000      95

O.H.    Youngstown                                          850,000      94

O.H.    Cleveland                                           700,000      92
        Heights

O.H.    Cincinnati                                        9,400,000      90

O.H.    Youngstown                                          650,000      94

O.H.    Canton                                            5,000,000      94

O.H.    Youngstown                                        2,500,000      93

O.H.    Akron                                             1,700,000      95

O.H.    Lake County                                       3,000,000      93

O.H.    Lorain                                              170,000      92

O.H.    Toledo                                              550,000      96

O.H.    Lorain                                              350,000      91

O.H.    Youngstown                                        2,300,000      96

O.H.    Youngstown                                          300,000      95

O.H.    Toledo                                              650,000      95

O.H.    Lorain                                            2,200,000      92

O.H.    Youngstown      Construction of a                 4,000,000      93  Completed
                        manufacturing facility,
                        equipment acquisition

O.H.    Cleveland       Renovation of 3 vacant            2,100,000      95  Completed
                        buildings in the city's
                        historic warehouse district

O.H.    Barberton       Renovation of theater,            2,225,000      93  Completed
                        restaurant, and amusement
                        center

Okla.   Shawnee                                             450,000      95

Okla.   Oklahoma City   Establishment of a loan fund     20,000,000      93  Has not
                        for business creation and                            started
                        expansion

Pa.     Allentown                                         1,900,000      91

Pa.     Berks County                                      2,000,000      94

Pa.     Bethlehem                                         1,364,000      91

Pa.     Easton                                            1,000,000      94

Pa.     Erie                                              2,000,000      93

Pa.     Harrisburg                                        1,680,000      90

Pa      Johnstown                                         5,500,000      94

Pa.     Montgomery                                          500,000      90
        County

Pa.     Philadelphia                                      8,915,000      94

Pa.     Philadelphia                                        800,000      92

Pa.     Norristown                                          550,000      90

Pa.     Philadelphia                                      3,000,000      94

Pa.     Lancaster                                         1,500,000      94

Pa.     Scranton                                          1,000,000      92

Pa.     Reading                                             580,000      92

Pa.     Philadelphia    Establishment of loan pool       20,000,000      95  Underway
                                                                             (all
                                                                             projects)

Pa.     Cambria County  Acquisition/Modernization of      3,000,000      94  Completed
                        former steel facility

Pa.     Philadelphia    Expansion/Enhancement of an      30,000,000      95  Has not
                        existing Section 108 loan                            started
                        program

Pa.     Philadelphia    Renovation of building into a    16,000,000      95  Underway
                        351 room hotel

Pa.     Allentown       Acquisition/Clearance of          4,000,000      95  Underway
                        obsolete structures for
                        installation of public
                        facilities

Pa.     Scranton        Assistance to for-profit          9,957,000      91  Don't know
                        business in the development
                        of a downtown mall

P.R.    Caguas          Final improvements on Civic       2,800,000      91  Completed
                        Center Complex

P.R.    Cayey                                             4,800,000      95

P.R.    Vieques         Construction of a sports          5,000,000      94  Underway
                        complex

P.R.    Ponce           Acquisition of building and      20,600,000      95  Underway
                        land, district redevelopment,
                        and construction

P.R.    Cayey                                             5,000,000      95

P.R.    Vega Baja                                         6,455,000      95

P.R.    Vega Baja                                         4,500,000      94

P.R.    Carolina                                          8,000,000      93

P.R.    Toa Baja                                          7,600,000      92

P.R.    Toa Baja                                          9,550,000      95

P.R.    Fajardo                                           2,500,000      95

P.R.    Fajardo                                           3,700,000      91

P.R.    Trujillo Alto                                     1,600,000      90

P.R.    Aguadilla                                         3,200,000      90

P.R.    Arecibo                                           9,575,000      94

P.R.    Guaynabo        Rehabilitation of a public        9,870,000      95  Underway
                        facility and make various
                        site improvements

P.R.    Dorado          Rehabilitation of public          4,105,000      95  Underway
                        facilities for arts theater;
                        acquisition/rehabilitiation
                        of commercial property

P.R.    Barceloneta     Site improvements on land         2,800,000      95  Completed

R.I.    Providence                                        9,000,000      92

R.I.    Providence      Partially finance the             2,000,000      94  Don't know
                        rehabilitation of the
                        Performing Arts Center

R.I.    Newport         Acquisition/Rehabilitation of     1,350,000      94  Completed
                        a closed and vacant school

R.I.    Providence                                        2,000,000      93

R.I.    Cranston                                            285,000      93

R.I.    Providence                                        1,500,000      94

S.C.    Greenville                                          750,000      95

S.C.    Lexington       Partially fund the start up      12,000,000      94  Underway
        County          of a regional airline carrier

S.C.    Columbia                                          1,515,000      94

S.C.    Charleston                                        4,250,000      94

S.C.    Berkeley        Acquisition of a closed          12,000,000      95  Foreclosure
        County\c        industrial facility

S.C.    Columbia        Assistance in the acquisition     1,515,000      95  Underway
                        of a 25 acre site for
                        redevelopment

Tenn.   Nashville                                         2,500,000      90

Tenn.   Memphis                                           3,350,000      94

Tex.    Abilene                                             190,000      90

Tex.    Fort Bend                                         1,030,000      95

Tex.    Bryan                                               500,000      94

Tex.    Port Arthur                                         565,000      94

Tex.    Hidalgo County                                      335,000      90

Tex.    Tyler                                               400,000      90

Tex.    Abilene                                           1,865,000      92

Tex.    Harris County                                     1,290,000      95

Tex.    San Benito\d    Business expansion                  820,000      90  Terminated

Tex.    Dallas          Rehabilitation/Conversion of     25,000,000      94  Some
                        building into multi-family                           underway;
                        rental units                                         some haven't
                                                                             started

U.T.    Fillmore City   Construction of a facility,         650,000      95  Underway
                        acquisition of machinery;
                        training

U.T.    Salt Lake                                         5,000,000      93
        County

Va.     Fairfax County                                    5,691,000      90

Va.     Fairfax County                                    2,120,000      91

Va.     Fairfax County                                    4,755,000      92

Va.     Fairfax County                                      500,000      94

Va.     Fairfax County                                      500,000      95

Va.     Fairfax County                                       80,000      95

Va.     Roanoke                                           3,470,000      91

Va.     Roanoke                                           2,530,000      92

Va.     Richmond        Acquisition/Rehabilitation of    15,000,000      92  Underway
                        real property, clearance and
                        relocation

Va.     Virginia Beach  Housing rehabilitation in         2,000,000      93  Underway
                        three targeted neighborhoods

Wash.   Seattle         Assistance in                     2,400,000      95  Completed
                        financing,expanding and
                        stabalizing a shopping center

Wash.   Spokane                                           5,555,000      91

Wash.   Tacoma                                            1,135,000      95

Wash.   Bellingham      Gap financing for private         1,755,000      90  Completed
                        businesses to revitalize
                        central business district

Wash.   Hoquiam         Working capital to acquire        3,300,000      94  Completed
                        and reopen a paper mill

Wash.   Tacoma          Acquisition of first mortgage     5,180,000      93  Completed
                        on downtown hotel

Wash.   Ocean Shores    Finance construction and          3,600,000      94  Completed
                        permanent financing of a full
                        service hotel

Wash.   Leavenworth     Finance land, equipment, and      2,220,000      95  Completed
                        other costs to develop
                        amusement center

Wash.   Seattle         Acquisition of a building to     24,200,000      94  Completed
                        eliminate slum and blight on
                        a spot basis

Wis.    Wausau                                            2,000,000      95

Wyo.    Cheyenne                                            800,000      95

Wyo.    Laramie         Assistance in financing a         1,500,000      95  Completed
                        distribution and
                        manufacturing facility

=========================================================================================
TOTAL                                                  $1,738,916,0
                                                                 00
-----------------------------------------------------------------------------------------
Note:  Project descriptions are included for the 100 loans in our
sample. 

\a Loan to a for-profit business is in default.  The community is
repaying the loan. 

\b Loan to a for-profit business is in default.  The state is
repaying the loan

\c State is foreclosing on for-profit business.  The state is
repaying the loan. 

\d HUD terminated the project due to the community's mismanagement of
loan funds.  The community is repaying the loan. 


ESTIMATES AND RELATED SAMPLING
ERRORS FOR PROJECTED DATA
========================================================= Appendix III

                                                              Confidence interval
                                                       ----------------------------------
Description                Estimate  Sampling error                From                To
-----------------  ----------------  ----------------  ----------------  ----------------
What type of activity was financed with the loan? (%)
-----------------------------------------------------------------------------------------
Economic                       73.2  9.0                           64.2              82.2
 development
 activities
Acquisition of                 12.3  6.1                            6.2              18.4
 real property
Housing                        10.4  6.1                            4.3              16.5
 rehabilitation
Public property                 8.5  5.7                            2.8              14.2
 rehabilitation

What type of activity was financed with the loan by entitlement communities? (%)
-----------------------------------------------------------------------------------------
Economic                       72.1  9.4                           62.7              81.5
 development
 activities
Acquisition of                 11.9  6.5                            5.4              18.4
 real property
Housing                        10.8  6.5                            4.3              17.3
 rehabilitation
Public property                 9.2  5.9                            3.3              15.1
 rehabilitation
Relocation costs                5.2  4.7                            0.5               9.9

What type of activity was financed with the loan by non-entitlement communities? (%)
-----------------------------------------------------------------------------------------
Economic                       87.0  Not applicable
 development
 activities
Acquisition of                 17.4  Not applicable
 real property
Housing                         4.3  Not applicable
 rehabilitation
Public property                   0  Not applicable
 rehabilitation
Relocation costs                4.3  Not applicable

What percentage of loans fulfilled the national objectives?
-----------------------------------------------------------------------------------------
National                       88.4  6.7                           81.7              95.1
 objective to
 benefit low-and
 moderate-income
 people
National                       23.2  8.4                           14.8              31.6
 objective to
 reduce slums and
 blight

What amount of loan proceeds were used to finance economic development activities?
-----------------------------------------------------------------------------------------
At least this        $1,303,483,421  $2,738,961          $1,300,744,460    $1,306,222,382
 amount of loan
 proceeds to
 finance economic
 development
 activities

What number of loans were used to finance economic development activities?
-----------------------------------------------------------------------------------------
At least this                   210  20                             190               230
 number of loans
 to finance
 economic
 development
 activities

What percentage of loans financed specific types of economic development activities?
-----------------------------------------------------------------------------------------
Financing                      36.6  11.4                          25.2              48.0
 acquisition,
 construction, or
 renovation of
 commercial
 properties
Financing                       9.6  6.9                            2.7              16.5
 acquisition,
 construction, or
 renovation of
 public property
Financing                      46.4  11.6                          34.8              58.0
 business start
 up or retention
 of for-profit
 business/
 revolving loan
 funds

What number of loans financed specific types of economic development activities?
-----------------------------------------------------------------------------------------
Financing                        84  28                              56               112
 acquisition,
 construction, or
 renovation of
 commercial
 properties
Financing                        22  14                               8                36
 acquisition,
 construction, or
 renovation of
 public property
Financing                       106  29                              77               135
 business start
 up or retention
 of for-profit
 business/
 revolving loan
 funds

What percentage of loans financed revolving loan funds?
-----------------------------------------------------------------------------------------
Financing                       6.2  3.7                            2.5               9.9
 revolving loan
 funds-all loans
Financing                      45.0  Not applicable
 revolving loan
 funds-top 20
 entitlement
 communities
Financing                       4.3  Not applicable
 revolving loan
 funds-non-
 entitlement
 communities

What number of loans financed revolving loan funds?
-----------------------------------------------------------------------------------------
Financing                        19  12                               7                31
 revolving loan
 funds-all loans
Financing                         9  Not applicable
 revolving loan
 funds-top 20
 entitlement
 communities
Financing                         1  Not applicable
 revolving loan
 funds-non-
 entitlement
 communities

What percentage of loans received reviews?
-----------------------------------------------------------------------------------------
Receiving                      24.2  8.8                           15.4              33.0
 technical
 assistance
Receiving an on-               29.4  8.6                           20.8              38.0
 site inspection
Receiving an                   54.9  9.6                           45.3              64.5
 annual in-house
 assessment
Receiving another               7.9  5.4                            2.5              13.3
 type of review

For the field offices that do not routinely include a review of Economic Development Loan
Fund loans, what is the percentage
-----------------------------------------------------------------------------------------
Loan                           26.5  8.8                           17.7              35.3
 responsibility
 for the 5 field
 offices not
 routinely
 including a
 review of the
 loan in their
 regular CDBG
 monitoring
Loan                           39.6  9.8                           29.8              49.4
 responsibility
 for the 7 field
 offices who did
 not routinely
 have the final
 loan terms

For the field offices that do not routinely include a review of Economic Development Loan
Fund loans, what is the amount of l
-----------------------------------------------------------------------------------------
Amount of funds        $292,746,316  $735,649              $292,010,767      $293,481,965
 for the 5 field
 offices not
 routinely
 including a
 review of the
 loan in their
 regular CDBG
 monitoring
Amount of funds        $792,141,053  $1,128,487            $791,012,566      $793,269,540
 for the 7 field
 offices that did
 not routinely
 have the final
 loan terms
-----------------------------------------------------------------------------------------

OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================== Appendix IV

As requested, we reviewed (1) the extent to which communities and
states are using the loan fund; (2) factors affecting communities'
and states' willingness to use the program; (3) the types of projects
being financed with loan proceeds; and (4) the Department of Housing
and Urban Development 's (HUD) procedures for overseeing the program. 

To obtain information on the loan fund, we reviewed the program's
history, regulations, policies, and procedures.  We also reviewed
HUD's annual reports to the Congress for community development
programs for 1994 and 1996.\5 We interviewed the Director, Office of
Block Grant Assistance; the Director, Financial Management Division
(FMD) (the loan fund program office); FMD representatives; HUD
Community Planning and Development officials in HUD field offices in
Atlanta, Georgia; Columbia, South Carolina; and Portland, Oregon.  We
also interviewed community development officials for the states of
Georgia and South Carolina, and the cities of Atlanta, Georgia, and
Columbia, South Carolina.  We reviewed Inspector General reports
issued as of January 7, 1997. 

To determine the extent to which communities and states use the
program, we obtained and analyzed FMD's database of HUD's loan fund. 
We identified the manner in which the data were collected and
summarized.  We reviewed annual reports to the Congress for community
development programs for 1994 and 1996.  We interviewed the Director,
Financial Management Division, and Community Planning and Development
officials at HUD's field offices in Atlanta, Georgia, and Columbia,
South Carolina. 

To identify the factors affecting communities' willingness to use the
program, we interviewed officials of associations that represent
communities eligible for the program, including the Council of State
Community Development Agencies, the National Congress for Community
Economic Development, the National Council for Urban Economic
Development, the U.S.  Conference of Mayors, the National Community
Development Association, and the National Association of State
Development Agencies.  We discussed this issue with the Director of
HUD's Financial Management Division; and HUD Community Planning and
Development officials at two HUD field offices.  In addition, we
interviewed state community development officials in Georgia and
South Carolina, and city development officials in Atlanta and
Columbia.  We also reviewed documentation obtained during these
interviews. 

To identify the types of projects financed with loan proceeds, we
obtained and analyzed FMD's database of HUD's loan fund.  We
developed two data collection instruments to obtain additional
information about loan commitments.  With the first, we recorded data
from loan files on the activities communities and states financed
with loan proceeds.  With the second, we conducted a telephone survey
with HUD community planning and development officials at HUD field
offices responsible for monitoring loan commitments in our sample. 
HUD program officials reviewed and commented on the telephone data
collection instrument, and we incorporated their suggested changes. 
(App.  V shows the locations of HUD field offices contacted.) In
developing these instruments, we interviewed program officials,
reviewed Economic Development Loan Fund legislation and regulations,
and examined selected loan fund files. 

We used these data collection instruments to collect information
about a sample of loan commitments.  We selected a stratified random
sample of 100 loan commitments approved (out of 313 loan commitments)
in fiscal years 1990 through 1996 that had funding advances.  We
included all loan commitments of $15 million and above (20 loans)
given to entitlement communities and states, all loan commitments to
nonentitlement communities (23 loans), and a random sample of the
remaining loan commitments to entitlement communities and states (57
of 270 loans).  We appropriately weighted the information to take
into consideration the stratification used to select loan
commitments. 

Since we used a sample (called a probability sample) of loan
commitments to develop our estimates, each estimate has a measurable
precision, or sampling error, that may be expressed as a plus/minus
figure.  A sampling error indicates how closely we can reproduce from
a sample the results that we would obtain if we were to take a
complete count of the universe using the same measurement methods. 
By adding the sampling error to and subtracting it from the estimate,
we can develop upper and lower bounds for each estimate.  This range
is called a confidence interval.  Sampling errors and confidence
intervals are stated at a certain confidence level--in this case, 95
percent.  For example, a confidence interval at the 95-percent
confidence level means that in 95 out of 100 instances, the sampling
procedure we used would produce a confidence interval containing the
universe value we are estimating. 

To determine HUD's monitoring of the program, we conducted a
telephone survey of HUD community planning and development officials
in HUD field offices responsible for monitoring loan fund commitments
in our sample.  This resulted in our interviewing HUD officials in 30
of 44 field offices.  We also obtained and reviewed HUD reports of
the most recent monitoring activities performed on the CDBG
communities or states that held the respective loan commitments. 

Using the information collected about the sample of 100 loans, we are
able to provides estimates for the 313 loan commitments approved in
fiscal years 1990 and 1996 which had funding advances.  Appendix IV
provides the sampling errors of estimates, referred to in this
report, that were made from the above mentioned data collection
instruments.  In contrast, information obtained from the 30 of 44
field offices is not projectable to the program, as a whole. 
However, we were able to describe these offices in terms of the
number of loan commitments for which they were responsible. 


--------------------
\5 The fiscal year 1996 contains program results for 1995 and 1996. 


HUD FIELD OFFICES SURVEYED
=========================================================== Appendix V



   (See figure in printed
   edition.)




(See figure in printed edition.)Appendix VI
COMMENTS FROM THE DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
=========================================================== Appendix V



(See figure in printed edition.)



(See figure in printed edition.)


GAO's Comments

1.  We revised the title of the report after we sent it to HUD for
comment. 

2.  We added a discussion of HUD's view of the underwriting
guidelines to the text and at the end of the report.  As we point
out, although HUD may not regard the collateral guidelines as
mandatory, the associations we spoke with perceived that they will be
required.  We believe the program may benefit if HUD would open and
maintain a dialogue with communities as it develops these guidelines
to ensure that they are understood and not viewed as an obstacle to
using the program. 

3.  HUD's comment addressed the first part of our second
recommendation.  HUD noted that the distribution of oversight
information needed by the field offices must be comprehensive and
that, while HUD has improved in this area in recent years, the
current system--as our report points out-- is inadequate to
accomplish that result.  HUD plans to implement our recommendation
through a design change to its integrated disbursement and
information system--a computer-based information system.  As we
discussed, HUD noted that it will consult with its field offices to
ensure that the field offices are receiving the information needed
for monitoring. 

4.  HUD's comment addressed the first and second part of our second
recommendation.  As we discussed, HUD agreed to develop procedures to
ensure that the necessary monitoring information is provided promptly
to field offices and to direct field offices to include loan
activities in their monitoring of CDBG recipients as we recommend. 
We discuss this at the end of our report. 

5.  HUD's comment addressed our first recommendation.  HUD agreed to
implement procedures to require reporting of unplanned use of CDBG
funds to make loan payments.  However, our recommendation goes beyond
a reporting requirement.  As we discussed, we believe that routine
tracking of these data will provide HUD and communities with useful
information on, among other things, the likelihood that communities
may need to use future CDBG funds to repay loans when other intended
revenue sources fail to materialize. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII

Erin Lansburgh
Signora J.  May
Johnnie E.  Barnes
Sherrill C.  Dunbar
Alice G.  Feldesman
John T.  McGrail


*** End of document. ***