oversight

Recreational Projects Financed by Farmers Home Administration Provide Benefits to a Limited Number of Rural Residents

Published by the Government Accountability Office on 1971-08-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

REPORT TO




Recreational Projects Fin
By Farmers Home Administration
Provide Benefits To A Limited     3
Number of Rural Resitients B.114873
Department   of Agriculture




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES
                     COMPTROLLER     GENERAL     OF     THE    UNITED   STATES
                                   WASHINGTON.    DC.     20546




      B- 114873




      To the President   of the Senate and the
LA/   Speaker  of the House of Representatives

               This is our report    pointing   out that recreational       projects
      financed     by the Farmers     Home Administration,        Department         of
      Agriculture,      provide  benefits   to a limited  number      of rural
      residents.

             Our review was made pursuant    to the Budget and Account-
      ing Act, 1921 (31 U.S.C. 53), and the Accounting   and Auditing
      Act of 1950 (31 U.S.C. 67).

               Copies of this report  are being sent to the Director,
      Office of Management       and Budget, and to the Secretary     of
      Agriculture.




                                                        Comptroller              General
                                                        of the United            States




                           50TH ANNIVERSARY                   1921- 1971
        COMPTROLLERGENERAL'S                            RECREATIONAL PROJECTS FINANCED BY THE
I       REPORT TO THE CONGRESS                        1 FARMERS HOME ADMINISTRATION PROVIDE BENEFITS         3&9
I                                                       TO A LIMITED NUMBEROF RURAL RESIDENTS
I                                                   &Department     of Agriculture B-114873   I/-IL
I
I                                                   /
I

I       DIGEST
        __----
I
I
I
I       WHY THE REVIEW WAS MADE
I
I
I              The Farmers Home Administration       (FHA), Department of Agriculture,     makes
               loans to public    and nonprofit   organizations   for the development   of
               rural recreational    projects   under three loan programs.     The programs
               are

                     --the    association    recreation  loan program,
                     --the    resource    conservation  and development      loan   program,       and
                     --the    rural   renewal loan program.

               Objectives   of      these programs are not only to provide          rural   residents
               with outdoor       recreational      projects   but also to generate     additional
               substantial,       tangible     benefits    for the rural  communities,    such as the
               attraction   of      industry.

               Types of recreational       projects       for   which loans may be made under the
               programs include    golfing     facilities,        lakes, swimming pools, rodeo arenas,
               and baseball   diamonds.

               From the inception     of the association recreation loan                program    in 1962
               and of the other two programs in 1966, FHA made loans                    totaling     about
               $98.1 million   through December 31, 1969.

               The General Accounting        Office   (GAO) made a-review   to determine    the effec-
               tiveness     of the loan programs in providing       rural residents    with outdoor
               rezreational      projects   and whether the bases on which the loans were made
               had established       adequately    the eligibility  of the organizations      for the
               loans.

               In setting    the scope of its review,   GAO took into account the audit of
I              FHA's association    recreation  loan program by the Office   of the Inspector
               General (OIG), Department of Agriculture.        GAO's review covered 24 organi-
               zations    in five States.


        FINDINGS AND CONCLUSIONS
I              Benefits      provided   to a Zimited      number of rural   residents
I
I
I              FHA made loans to many organizations      for recreational        projects    that
I
I
               provided benefits     to a limited number of rural     residents.        Loans were
I              made for recreational     projects which:
I
I                                                                             AUG.23,1971
I
I
        Tear Sheet                                               1
I
    I

    1
                                                                                                                  I
                                                                                                                  I
                                                                                                                  I
                                                                                                                  I
                                                                                                                  I
                                                                                                                k I
                                                                                                                  I
   --Served  only       a xall         percentage       of the residents        of rural     areas.               I
      (See p. 9.)                                                                                                 1             L
                                                                                                                  I
                                                                                                                  I
   --Served      primarily       urban,     rather      than   rural,    residents.        (See p. 10.)            I
                                                                                                                   I
                                                                                                                   I
   --Had membership restrictions                    which limited       the use of recreational                    I
                                                                                                                   I
      facilities to organization                   members only.                                                   I
                                                                                                                   I
   --Had fees that           were beyond the ability              of many rural       residents       to pay.      I
                                                                                                                   I
      (See p. 12.)                                                                                                 I
                                                                                                                   I
                                                                                                                   I
In many instances    the loans              did not contribute   effectively               to the program          I
objective  of providing   rural              residents  with outdoor-oriented                recreational           I
projects.                                                                                                           I
                                                                                                                    I
                                                                                                                    I
Loans made for         golfing         projects  best     illustrate    the limited        benefits        to       I
                                                                                                                    I
rural residents         under        the recreational         loan programs.                                        I
                                                                                                                    I
                                                                                                                    I
Of the $94.3 million   in loans made under the association         recreation      loan                             I
program through December 31, 1969, $79.1 million       was for golfing        proj-                                 I
ects.  GAO's review of 14 of these golfing     projects--located        in rural                                    I
                                                                                                                    I
areas having a total   of 247,000 residents --showed that only 3.8 percent                                          I
of the residents   were members of the organizations       receiving    the loans.                                  I
                                                                                                                    I
(See p. 9.)                                                                                                         I
                                                                                                                    I
Adninistration         of progrm                                                                                    i
                                                                                                                    I
FHA    needs to strengthen     its procedures   and practices     for determining                                   I
                                                                                                                    I
the    eligibility   of organizations    for recreational     projects.     Contrary     to                         I
its    instructions,   FHA made loans to organizations        for recreational      proj-                           I
                                                                                                                    I
ects     which:                                                                                                     I
                                                                                                                    I
                                                                                                                    I
   --Competed with existing    or planned facilities.         (See p. 15.)                                          I
   --Included land excess to project     needs.       (See p. 19.)                                                   I
   --Included clubhouses    not modest in design,       size, or cost.     (See p. 20.)                             I
                                                                                                                    I
   --Had memberships inadequate    to support the projects.          (See p. 22.)                                   I
                                                                                                                    I
                                                                                                                    I
FHA also made loans to organizations   without  adequately verifying                                                    I
whether the organizations'  projected  revenues would be sufficient                                   to                I
meet operating  expenses and loan repayments.    (See p. 24.)                                                           I
                                                                                                                        I
                                                                                                                        I
Curtaiihent       of   recreationa          loan     program
                                                                                                                        I
                                                                                                                        I
Substantial       changes in the scope of the recreational                       loan programs         have
taken place       in recent years.

In fiscal  year        1970 FHA made loans totaling                  $7 million  under its prin-                         I
                                                                                                                         I
cipal program--        the association   recreation               loan program--contrasted    with                       I
loans of $23.9         and $18.3 million    in fiscal              years 1968 and 1969, respec-                          I
                                                                                                                         I
tively.                                                                                                                  I
                                                                                                                         I
                                                                                                                         I
                                                                                                                         I
                                                                                                                         I
                                                                                                                         I
                                                                                                                          I
                                                                                                                            I
                                                                                                                            I
                                                                                                                            I
                                                                                                                            I
        For fiscal  year 1977 FHA estimated       that loans totaling   $2 million   would
        be made principally      to those organizations    to which loans previously
        had been made.      In its fiscal  year 1972 budget request     to the Congress,
        FHA did not request      any funds for this program.      (See p. 28.)

        Conchsions

        Many of the projects      financed   under       FHA's recreational      loan programs
        have provided    benefits    to a limited        number of rural    residents.     The
        principal   reasons are:

             --The need for       an organization to have members who are assessed ini-
                tiation fees      and annual dues for a project to be financially fea-
                sible.

             --The   limitation    on the number of memberships        in an organization.

             --Restrictions    which    preclude   the use of an organization's        facilities
                by nonmembers.

        Such restrictions,       coupled _ with_   the
                                                    .   lack of ability     or desire of rural
        residents     to pay an organization's        membership fees      and dues, have limited
        participation      in the facilities       by rural  residents.

        The decrease in the scope of FHA's recreational           loan programs is, in
        GAO's opinion,    the result    of an increasing   realization    by FHA that the
        programs,   as presently     constituted,   are not meeting program objectives.

        In view of the limited     extent to which the recreational    loan programs
        have served rural   residents,    GAO believes that congressional   consider-
        ation of the future    course of recreational    loan programs is desirable.
        (See pp. 28 and 29.)


RECOMMENDATIONSOR SUGGESTIONS

        In its report  on an audit of the association   recreation   loan program,
        OIG made a number of recommendations   to FHA for correcting     the problems
        discussed  above.  (See p. 26.)

        GAO generally         concurs with the recommendations   made to FHA by OIG for
        improving    the      administration  of this loan program.   In view of the
        actions   taken       or planned by FHA, GAO is not making any recommendations
        to FHA. (See          p. 28.)


AGENCY ACTIONS AND UNRESOLVEDISSUES

        The Administrator,  FHA, stated   that FHA had started     action   early in fis-
        cal year 1970 to discontinue    making further    loans for golfing     facilities,
        to provide more funds for higher priority      programs,   such as the rural




Tear Sheet                                           3
    water and sel;der program,    and for   the various   reasons   discussed   in this
    report.

    The Administrator     stated also that the association       recreation  loan pro-
    gram had been placed in a standby position        for fiscal     year 1972.  FHA
    will  consider    the program's  future  in connection   with its plans for re-
    development    of rural   areas.   (See app. I.)


MATTERS FOR CONSIDERATION BY THE CONGRESS

     GAO is recommending that the Congress,       in its continuing     evaluation   of
     FHA programs,   consider  the  matters discussed    in  this report    with   a
     view to determining    whether the recreational     loan programs should be
     continued  and, if so, what form the programs should take.            (See p. 29.)
                          Contents
                                                                   Page

DIGEST                                                               1

CHAPTER

  1      . INTRODUCTION                                             5
               Organization      of FHA .                           5
               Statutory    authority      for making
                  recreational      loans to public and
                 nonprofit      organizations                       5
               Recreational      loans made to public
                  and nonprofit       organizations                 7
                                                          .
  2        RECREATIONALPROJECTSHAVE PROVIDEDBENE-
           FITS TO A LIMITED NUMBEROF RURAL RESIDENTS               8
               Projects served only a small percentage
                 of the residents        of rural areas             9
               Projects served primarily           urban, rather
                 than rural,      residents                        10
               Project membership restrictions            and
                 fees resulted       in availability      of fa-
                 cilities     to a limited      number of TU-
                 ral residents                                      12

  3       NEED TO STRENGTHENADMINISTRATION OF
          RECREATIONALLOAN PROGRAMS                                 15
             Projects    in competition   with
                existing     or planned facilities                  15
             Land excess to project      needs                      19
             Clubhouses not modest in design,
                size, or cost                                       20
             Inadequate membership to support
                projects                                            22
             Inadequate verification       of estimated
                project    income from sources other
                than membership fees                               24
  4       INTERNAL AUDIT OF FJJA'S ASSOCIATION
          RECREATIONLOAN PROGRAM                                   26
  5       CONCLUSIONS,AGENCYCOHMENTS,AND MATTER
          FOR CONSIDERATIONBY THE CONGRESS                          28
CHAPTER                                                               Page
                Conclusions                                            28
                Agency comments                              *         29
                Matter for consideration           by the Con-
                  gress                                                29

        6   SCOPEOF REVIEW                                            30 .
APPENDIX

        I   Letter dated April 2, 1971, from the
              Administrator,   Farmers Home Administra-
              tion, Department of Agriculture,   to the
              General Accounting Office                               33
   II       Photographs    of unnecessary       facilities            34
 III        Principal     officials    of the Department of
               Agriculture      responsible  for administra-
               tion of the matters discussed in this re-
               port                                                   36
                             ABBREVIATIONS
FHA         Farmers Home Administration

GAO         General   Accounting   Office
OIG         Office of the Inspector         General,     Department
              of Agriculture
,
    COMPTROLLERGENERAL'S                        RECREATIONAL PROJECTS FINANCED BY THE
    REPORTTO THE CONGRESS                       FARMERS HOME ADMINISTRATION PROVIDE BENEFITS
                                                TO A LIMITED NUMBER OF RURAL RESIDENTS
                                                Department of Agriculture  B-114873


    DIGEST
    ------


    WIIYTilE REVIEWWASMADE
        The Farmers Home Administration       (FHA), Department of Agriculture,     makes
        loans to public    and nonprofit   organizations   for the development   of
        rural recreational    projects   under three loan programs.     The programs
        are

              --the    association    recreation  loan program,
              --the    resource    conservation  and development     loan   program,   and
              --the    rural   renewal loan program.

        Objectives   of      these programs are not only to provide          rural  residents
        with outdoor       recreational      projects   but also to generate additional
        substantial,       tangible     benefits    for the rural  communities,    such as the
        attraction   of      industry.

         Types of recreational    projects       for   which loans may be made under the
         programs include golfing     facilities,        lakes, swimming pools, rodeo arenas,
         and baseball   diamonds.

          From the inception    of the association recreation loan program             in 1962
        .and of the other two programs in 1966, FHA made loans totaling                  about
          $98.1 million   through December 31, 1969.

         The.General     Accounting    Office    (GAO) made a review to determine     the effec-
         tiveness     of the loan programs in providing       rural  residents   with outdoor
         recreational      projects   and whether the bases on which the loans were made
         had established       adequately    the eligibility  of the organizations      for the
         loans.

         In setting    the scope of its review,   GAO took into account the audit of
         FHA's association     recreation loan program by the Office   of the Inspector
         General (OIG), Department of Agriculture.        GAO's review covered 24 organi-
         zations    in five States.


    FINDINGS Ah'D COiKLlJSIONS
         Benefits     provided   to a limited     number of mcra7. residents

         FHA made loans to many organizations      for recreational        projects    that
         provided benefits     to a limited number of rural     residents.        Loans were
         made for recreational     projects which:


                                                        1
                                                      ,   ’                                           LI




   --Served  only       a small     percentage     of the residents            of rural    areas.
      (See p. 9.)

   --Served      primarily       urban3   rather   than       rural,    residents.        (See p. 70.)

   --Had membership restrictions               which limited           the use of recreational
      facilities to organization              members only.

   --Had fees that           were beyond the ability             of many rural       residents       to pay.
      (See pm 12.)

In many instances the loans did not contribute   effectively                              to the program
objective  of providing rural residents with outdoor-oriented                               recreational
projects.

Loans made for         golfing      projects   best   illustrate      the limited         benefits           to
rural residents         under     the recreational        loan.programs.

Of the $94.3 million   in loans made under the association         recreation      loan
program through December 31, 1969, $79.1 million       was for golfing        proj-
ects.  GAO's review of 14 of these golfing     projects--located         in rural
areas having a total   of 247,000 residents --showed that only 3.8 percent
of the residents   were members of the organizations       receiving     the loans.
(See p. 9.)

Adninistration         of progra?n

FHA    needs to strengthen        its procedures   and practices     for determining
the    eligibility      of organizations    for recreational     projects.     Contrary     to
its'   instructions,      FHA made loans to organizations        for recreational      proj-
ects     which:

   --Competed with existing or planned facilities.         (See p. 15.)
   --Included land excess to project  needs.       (See p. 19.)
   --Included clubhouses not modest in design,       size,  or cost.    (See p. 20.)
   --Had memberships inadequate to support the projects.          (See p. 22.)

FHA also made loans to organizations   without  adequately verifying
whether the organizations'  projected  revenues would be sufficient                                  to
meet operating  expenses and loan repayments.    (See p. 24.)

Cmtaihent         of recreationaZ         loan program

Substantial        changes in the scope of the recreational                      loan programs             have
taken place        in recent years.

In fiscal  year        1970 FHA made loans totaling                 $7 million  under its prin-
cipal program--        the association   recreation              loan program--contrasted    with
loans of $23.9         and $18.3 million    in fiscal             years 1968 and 1969, respec-
tively.
     For fiscal  year 1971 FHA estimated       that loans totaling   $2 million   would
     be made principally      to those organizations    to which loans previously
     had been Fade.      In its fiscal  year 1972 budget request     to the Congress,
     FHA did not request any funds for this program.           (See p, 28.)

     ConcZusions

     Many of the projects      financed   under    FHA's recreational      loan programs
     have provided    benefits    to a limited     number of rural    residents.     The
     principal   reasons are:

       --The need for       an organization to have fiembers who are assessed ini-
          tiation fees      and annual dues for a project   to be financially fea-
          sible.

       --The   limitation     on the number of memberships       in an organization.

       --Restrictions    which    preclude    the use of an organization's       facilities
          by nonmembers.

     Such restrictions,       coupled with    the lack of ability     or desire of rural
     residen,ts    to pay an organization's      membershio fees     and dues, have limited
     participation      in the facilities     by rural residents.

     The decrease in the scope of FtlA's recreational          loan programs is, in
     GAO's opinion,    the result    of an increasing  realization     by FHA that the
     programs,   as presently     constituted,  are not meeting program objectives.

     In view of the limited     extent to which the recreational    loan programs
     have served rural   residents,    GAO believes that congressional   consider-
     ation of the future    course of recreational    loan programs is desirable.
     (See pp. 28 and 29.)
                        .
RECOMMENDATIONSOR SUGGESTi-ONS

     In its report   on an audit of the association   recreation   loan program,
     OIG made a number of recommendations    to FHA for correcting     the problems
     discussed  above.   (See p. 26.)

     GAO generally      concurs with the recommendations   made to FHA by OIG for
     improving    the   administration  of this loan pregram.   In view of the
     actions   taken    or planned by FHA, GAO is not making any recommendations
     to FHA. (See       p. 28.) I


AGENCY ACTIONS AND UNRESOLVEDISSUES

    The Administrator,  FHA, stated that FHA had started      action   early in fis-
    cal year 1970 to discontinue   making further    loans for golfing     facilities,
    to provide more funds for higher priority     programs,   such as the rural




                                      0        3
i ..
           water and sewer program,     and for   the various   reasons   discussed   in this    .       ,
           report.

           The Administrator     stated also that the association        recreation  loan pro-
           gram had been placed in a standby position         for fiscal     year 1972.   FHA
           will  consider    the program's   future  in connection   with its plans for re-          .
           development    of rural    areas.   (See app. I.)


       MATTERS FOR CONSIDERATION BY THE CONGRESS

            GAO is recommending that the Congress,       in its continuing    evaluation  of
            FHA programs,   consider  the matters  discussed    in this report with a
            view to determining    whether the recreational     loan programs should be
            continued  and, if so, what form the programs should take.           (See p. 29.)




                                                                                            .
                                                                       .
                                  CHAPTER1

                                INTRODUCTION

          The Farmers Home Administration       makes loans to public
    and nonprofit    organizations    for the development of rural
    recreational   projects     under three loan programs--the    associ-
    ation recreation,     the resource conservation     and development,
    and the rural renewal loan programs.
            Cur review was directed      toward determining    the effec-
    tiveness of the loan programs in providing           rural residents'
    with outdoor recreational        projects   and whether the bases on
    which the loans were made had established           adequately the
    eligibility     of organizations     for the loans.
           In setting the scope of our review, we took into ac-
    count the audit coverage of FHA's association    recreation
    loan program by the Office of the Inspector   General.      OIG's
    findings   and recommendations are summarized in chapter 4.

    ORGANIZATIONOF FHA

           FHA maintains 41 State offices--tihich         serve the 50
    States, the District     of Columbia, Puerto Rico, and the Virgin
    Islands--and    about lo700 county offices.         Each FHA State of-
    fice is headed by an FHA State director           who is responsible
    for all program operations      within his territorial        jurisdic-
    tion.     The FHA county offices,     each under the supervision        of
    an FHA county supervisor,      are located throughout the country
    to serve all agricultural      counties.      Applications    for all
    loans are made to the county or State offices.             County of-
    fice operations     are subject to review by FHA district           super-
    visors and other FHA State office        officials.
    STATUTORYAUTHORITY FOR MAKING
    REXREXTIONALLOANS TO
    PUBLIC ANIl NONPROFITORGANIZATIONS

          The Consolidated    Farmers Home Administration   Act of
,    1961 (7 U.S,C. 1926) authorizes     the association  recreation
     loan program.   Under the program FHA makes loans to public
     and nonprofit organizations     for development of recreational
    0

                                         5
      projects  which primarily    serve farmers, ranchers,   farm la-
      borers, farm tenants, and other rural residents.        Before a
      loan may be made, FHA is to determine that the organization
      is unable to obtain sufficient       credit elsewhere at reason-
      able rates and terms.     loans may be made for periods not to
      exceed 40 years, at interest      rates not to exceed 5 percent             I
      per annum, and in amounts not to exceed $4 million.

            Title III of the Bankhead-Jones Farm Tenant Act
      (7 U,S.C. 1010) authorizes      FHA to make resource conservation
      and development loans and rural renewal loans to local pub-
      lic agencies or private     nonprofit   organizations  for develop-             .
      ment of recreational    projects    in areas designated by the
    I Secretary of Agriculture.       Rural renewal projects    are to be
      located in low-income rural areas.
            Resource conservation   and development loans and rural
      renewal loans may be made in amounts not to exceed $250,000
      and for periods not to exceed 30 years.      The interest  rate
      is based on the average rate payable by the Treasury on its
      marketable public obligations    outstanding  at the beginning
      of the fiscal  year in tihich the loans, are made. The inter-
      est rate for such loans in fiscal     year 1970 was 3.342 per-
      cent"per annum..

            According to FHA instructions,         the objectives     of the
4     recreational    loan programs are to provide rural residents
      with outdoor-oriented     recreational      projects     and/or to gener-
      ate other substantial,      tangible    benefits     for rural communi-
      ties,   such as the attraction       of industry.               I
                                                                    I




                                           6
RECREATIONALLOANS MADE
TO PUBLIC AND NONPROFITORGANIZATIONS

       FHA records available        at the time of our review showed
that, from the inception       of    the association   recreation loan
program in 1962 and of the          other two programs in 1966, about
$98.1 million    of recreational        loans were made to organiza-
tions,   through  December 31,       1969, as follows:

                                                Loan amounts
      Loan program                  Made           Repaid    Outstanding

Association   recreation    $94,320,000a         $3,088,000    $91,232,000b
Resource conservation
  and development              2,767,OOO             36,000      2,731,OOO
Rural renewal                     992,000             5,000         987,000

    Total                   $98,079,000          $3,129,000    $94,950,000

aThe Treasury Department restricted    FHA from using its loan
 authority  to make loans to tax-exempt municipalities;   con-
 sequently the bulk of association   loans were made to private
 nonprofit  organizations.                                                    .
b
 Excludes unpaid advances of $2,566,000 from FHA to associa-
 tions for delinquent  principal, interest, taxes, and mis-
 cellaneous items.

       FHA records show that 197, or 27 percent,  of the 730
borrowers under the three loan programs were delinquent    in
paying their loans by $2.8 million   at December 31, 1969.
The number of borrowers and the number of those delinquent
on their outstanding   loans at December 31, 1969, were as
follows:

                                 Number            Number of
                                    of             borrowers      Percent
      Type  of loan             borrowers         delinquent     delinquent
Association   recreation            699                194             28
Resource conservation
  and development                         27s            2             7
Rural renewal                           4'               1            25
     Total        '                     730            197            27

                                    P


                                        7
                                 CHAPTER2

              RECREATIONALPROJECTSRAVE PROVIDED
        BENEFITS TO A LIMITED NUMBEROF RURAL RESIDENTS

       FHA made loans to many organizations      for recreational
‘projects   that provided benefits  to a limited    number of rural
 residents.     Specifically, loans were made for projects        which:

      --Served only a small        percentage    of the residents       of
         rural areas.

      --Served    primarily    urban,   rather   than rural,     residents.

       --Had membership restrictions           and fees that resulted       in
          the availability       of the facilities     to a limited    num-
          ber of rural residents.
       We concluded that, in many instances,            the loans did not
contribute    effectively      to the programs objectives        of provid-
ing rural residents        with outdoor-oriented      recreational     proj-
ects for their direct use.

        Our review covered 24 organizations         in five States.
Loans totaling         $4,8 million were made to 23 of the organi-
zations during the period January 1964 through December 1969
for the development of rural recreational            projects,  such as
golfing    facilities,      fair exhibit buildings,     lakes, swimming
pools, rodeo arenas, and baseball diamonds.

       OIG, in January 1970, issued its report covering a re-
view of association    recreation   loans made to 107 organi-
zations in 14 States.      The report pointed out that a number
of the loans had been made for projects      which served primarily
urban, rather than rural,      communities and/or which did not
serve recreational    needs in the rural communities.

       The following  sections discuss the types of loans made
by FDA for recreational     projects that provided only limited
benefits   to rural residents,                      .
                I
PROJECTSSERVEDONLY A SMALL PERCENTAGE
OF THE RESIDENTS OF RURAL AREAS

       To obtain broad use by residents           of rural areas of rec-
reational   facilities    financed with Government funds, FHA in-
structions    require that membership in recreational             projects
be representative      of the areas benefiting        from the projects,
Through December 31, 1969, FHA had made association                recre-
ation loans totaling      $94.3 million      to 704 organizations        for
the development of recreational         facilities,      as follows:

                                   Number of
            Type of facility       borrowers      Amount of loan

            Golfing (note a>          510          $79,130,790
            swimming                       58         4,187,500
            Other (note b)            -136          ~1,002,000

                  Total               704          $94,320,290

aSuch projects    often include related facilities,               such as
 clubhouses,   tennis courts,   and swimming pools.
b
    Such as baseball      diamonds; water,      shooting,    and winter
    sports facilities;       and recreation     centers.
      Loans totaling  $3 million  for the development of golf-
ing projects   had been made to 14 of the 24 organizations       in-
cluded in our review.    The 14 projects    were located in rural
areas having a total population     of 247,000, of which only
3.8 percent were members of the organizations.        A very small
percentage of the members in most of the golfing        projects
were farmers, ranchers,   farm laborers,    and farm tenants.

     Following are examples of projects               that   served only a
small percentage of rural residents.

        Example    1

      An association loan of $275,000 was made to an organi-
zation for the development of a golf course, clubhouse,
swimming pool, and tennis court.




                                       9
      The county    to be served by this project was entirely
rural and had a     population    of 38,000. FHA files showed that
about 1 percent     of the rural residents   of the county were
being served by     this project.

      Example   2

      An association loan of $245,500 was made to an organi-
zation for the development of a golf course, clubhouse,
swimming pool, and tennis court.

      The county    to be served by this project was entirely
rural and had a     population    of 10,500. FHA files showed that
about 4 percent     of the rural residents   of the county were
being served by     this project.

PROJECTSSERVEDPRIMARILY URBAN,
RATHERTHAN RURAL, RESIDENTS

      Both our review and OIG's review revealed a number of
instances    in which FHA, contrary   to its instructions,   had
made loans to organizations     for recreational    projects serv-
ing primarily    urban, rather than rural,    residents.

       FJ3A instructions     require that a recreational      project
be located in a rural area and serve primarily            farmers and
rural residents.         To be eligible    for financial  assistance,
an applicant      for a loan must demonstrate to FT!IAthat at
least two thirds of its membership will be residents              of a
rural area.       FHA defines a rural area as (1) open country
or (2) an incorporated         or unincorporated    town, a village,
or another place which does not have a population             exceeding
5,500.

       Following are examples of loans made to organizations
for projects    serving primarily urban, rather than rural,
residents.
      Example   3

      an association    loan of $60,000       was made to an organi-
zation for the construction       of a fair and exhibit     building
and miscellaneous    recreational    facilities     and for the


                                  10
refinancing of a loan on an existing    fairground   building
owned by the organization.

      The buildings are on land owned by, and adjacent      to, a
city having a population  of 10,000.  The organization      has a
99-year lease with the city for the land.

      The membership list submitted to FHA showed that 63 per-
cent of the organization's       members were from the urban,
rather than the rural,     area.

     Example 4
      An association loan of $619,000 was made to an organi-
zation for the development of a golf course, a clubhouse, a
swimming pool, a tennis court, and related facilities.
    ' The project was located about 3 miles from a city hav-
ing a population   of 60,000.  The organization's      membership
list furnished   to FHA showed that 64 percent of its members
were from the.urban,   rather than the rural,     area.




                               11
                                                                              .

PROJECTMEMBERSHIPRESTRICTIONSAND FEES
~WI-LTED
-----    IN AVAImILITY   OF FACILITIES TO
A LIMITED -ER    OF RURAL
                      --  RIZSIDENTS

       Both our review and 0IG"s review revealed that FHA had
made recreational    loans to a substantial     number of organiza-
tions which had membership restrictions       and fees that re-
sulted in the recreational    facilities    being available   to a
limited number of the rural residents.

      For association     loans totaling $90.9 million  made to
682 organizations     from September 1962 through August 1, 1969,
for the development of recreational      projects,   MA records
showed that:

      --59 organizations    limited        the number of members that
         could join,

      --48 organizations      had restrictions which precluded          the
         use of the facilities     by nonmembers.

      --473 organizations   required initiation     fees and/or an-
      ,  nual  membership dues,  ranging  from  $51   to $200 and
         over, that were beyond the ability     of many rural res-
         idents to pay.

         OIGPs report on its review of association      recreation
loans made to 107 organizations         stated that (1) 28 organiza-
tions limited        the number of members that could join them
and (2) 21 organizations         did not allow nonmembers to use the
facilities.        The report stated also that most of the organi-
zations had some type of restriction          on the use of facilities
by nonmembers and that most of the organizations          having
golfing     projects    had membership fees and dues that were be-
yond the ability        or desire of lower income residents     to pay.

       Following are examples of projects     of organizations
which had membership restrictions      and fees which resulted   in
the availability     of the facilities  to a limited   number of
rural residents.
      --EkemJle
             I_ 5
      An association    loan totaling  $240,000 was made to an
organization     for the development of a golf course3 clubhouse,
swimming pool, and tennis court.

                                      12
     At the time of our review, the organization's member-
ship was.closed at 250 members; 24 persons were on a waiting
list to become members.

      Example 6

      A resource conservation     and development loan totaling
$37,000 was made to an organization      for the development of
a swimming pool,  tennis   court,   and picnic  area.

        The.F'HA files showed that the organization had only 121
members and that it did not permit nonmembers to use the fa-
cilities.

      Example   7

      An association  loan totaling      $125,500 was made to an
organization   for the construction      of a golf course, club-
house, swimming pool, and'picnic        area.
 e
     The organization established    an initial   membership fee
of $500. The median family income for the area served by
the project was about $3,100.     An official   of this organiza-
tion stated that only 25 percent of the population      in the
area could afford the membership fees and that the organiza-
tion was experiencing problems in obtaining      new members.

      Example   8

      A rural   renewal loan totaling $250,000 was made to an
organization    for the development of an Y8-hole golf course,
a clubhouse,    and a picnic area.

       F&I's records indicated       that the project,    to be finan-
cially    feasible,    would require 300 members paying annual
dues of $120 each. At the time we completed our fieldwork,
the organization       had only 179 members. The median family
income for the county served by the project was $1,921.              Also
71 percent of the residents         of the area had incomes below
the poverty-income       level established    by the Department of
Labor for rural farm and nonfarm families.             For example, the
poverty-income      level for a farm family of five is $3,500 and
for a nonfarm family of five is $4,200,


                                   13
       In September 1970, subsequent to the completion of OX's
fieldwork   and at about the time we completed ou!~ fieldwork,
F'HA revised its instructions   to provide that loans not be
made for golfing   projects.   F'HA determined that available
loan funds should be used for loans under higher priority
programs, such as the rural water and sewer loan program.




                             14
                                         CHAPTER3

                         NEED TO STRENGTHEN
                                          ADMINISTRATION

                          OF RECREATIONALLOAN PROGRAMS

         FHA needs to strengthen      its procedures and practices
. for determining     the eligibility     of organizations  for recre-
  ational   projects.    Contrary to its instructions,      FHA made
  loans to organizations       for recreational    projects which:

            --Competed with      existing      or planned      facilities.

            --Included      land excess to project          needs.

            --Included      clubhouses      not modest in design,            size,   or
               cost.

            --Had memberships       inadequate         to support    the projects.

         Also FHA made loans to organizations       for recreational
  projects without adequately verifying      whether the organiza-
  tions'    income goals for their projects    provided for suffi-
  cient revenues to meet operating      expenses and loan repay-
  ments.      The income goals were used by FHA as bases for de-
  termining whether the proposed projects       had reasonable
  prospects for financial      success.

       0IG"s report pointed out similar weaknesses for 57 of
  the 107 projects   included in its review of FHA's associa-
  tion recreation  loan program.

            The following      sections      discuss     each of these areas          in
  detail.

  PROJECTSIN COMPETITIONWITH
  EXISTING OR PUNNED FACILITIES

          FHA instructions     provide that loans not be made to fi-
  nance recreational       projects   which will either duplicate   or
  compete with existing        or planned public or private recre-
  ational    facilities.     Of the 24 projects   included in our re-
  view, however, eight competed with existing          or planned fa-
  cilities.

                                             15
       We believe that the FHA loans for these projects           were
made because FHA State and county officials,           at the time
that they were processing      the loans, did not adequately
consider the effect that existing       similar   facilities     would
have on the financial     success of the projects        and that, in
some instances,     FHA's headquarters   office did not provide
adequate assistance     to its State offices    in arriving      at
decisions    concerning these loans.

      OIG's review revealed six instances where FHA had fi-
nanced recreational   projects  that were in direct competi-
tion with existing   facilities   or did not seem to serve
needs in the communities.
     Following    are examples of loans approved for        projects
which duplicate    or compete with existing  facilities.

      Example 9

       Association  loans totaling   $110,000 were made to orga-
nization   A through 1966 for the development of a nine-hole
golf course, clubhouse, swimming pool, and tennis court.
Loan repayment feasibility      was based on 160 members, In
June 1967 the organization      had 235 members.

      In August 1967 organization  B, located 19 miles from
organization  A, applied to FHA for a resource conservation
and development loan to finance a similar project.

       The president of organization  A, in a letter         in Sep-
tember 1967, asked the FHA State director        to seriously     con--
sider the obvious adverse competitive      influence     that orga-
nization   B's golf course and another proposed golf course
nearby would have on organization    A's golf course.          He also
stated that organization    Ass board of directors       was of the
opinion that, if the two proposed projects         materialized,
they might cause serious financial    difficulties       for organi-
sation A and perhaps force the organization         into receiver-
ship.
      The State director   made numerous inquiries  of FHA's
headquarters   office  concerning the question of competition
that would exist between organization    A's golf course and
organization   Bqs proposed golf course.    The FHA
Administrator    advised the State director    that he must make
the determination     as to the feasibility   of making a loan
to organization    B, the organization's    need for the loan,
and whether the loan should be made.

      Despite the objections        by organization    A, a loan for
$189,500 was made to organization          B in December 1968. Rec-
ords at the FHA State and county offices            did not contain
any explanation    or justification       for the approval of the
loan to organization     B. '

      In August 1969 the FHA county supervisor        prepared a
special recreational      loan report on organization     A. This
report was forwarded to the FHA State director         and to the
FDA headquarters    office.    It pointed out that the member-
ship of organization      A had decreased to a point where the
organization   was handicapped in operating      and maintaining
its golf course.     The report pointed out also that the loss
of membership was due to the opening of organization          B's
golf course in an adjoining      county.

     By June 1970 organization  A's membership had decreased
from 235 to 115 members and organization  B had attained  a
membership of 210 members, of which 43 previously   were mem-
bers of organization  A.

      Example 10

         The sponsor of a,proposed 18-hole golf course inquired
  of the FI-IA State office  concerning an association   loan to
.finance the proposed project      to be located 7 miles from a
  city having a population    of 24,000.    In February 1968 the
  FHA State office advised the sponsor that FHA would not ap-
 prove such a loan because the proposed golf course would
 duplicate    or compete with two existing    nine-hole courses in
  the immediate area and an 18-hole course then under consid-
  eration.
        In July 1968, however, the State office      forwarded the
sponsorss application      for a loan to the FHA headquarters
office,     Although the FHA headquarters    office raised num-
erous questions regarding      the sponsor's eligibility     for a
loan for a project     that would duplicate   or compete with



                                 17
    existing golfing facilities,  the State director,            on May 5,
    1970, approved a $300,000 loan for the project.

            On May 15, 1970, we met with an FJIA headquarters     of-
    ficial      to discuss the proposed project.     The official
    agreed that the sponsor's eligibility        for a loan for the
    project was questionable       and stated that the F'HA State of-
    fice would be requested to reexamine into the sponsor's
    eligibility       for a loan.

          On March 26, 1971, the loan was closed by the FHA
    State office,   An official      of the F'HA headquarters    office
    advised us that the F'HA State office had closed the loan
    on the basis that it had determined that the financial              suc-
    cess of the proposed golfing         project would not be affected
    by the existing  golfing    facilities      in the immediate area.

            The fact that this proposed golfing         project will du-
    plicate    existing  facilities  in its immediate area raises
    serious questions concerning its probable financial              suc-
    cess.     Past experience has shown that F'HA recreation          loan
    borrowers have had financial       difficulties      in maintaining
    what would have been financially         successful     projects  if
    similar private     or public facilities        had not been located
    in the immediate area of their projects.             (See example 9,
    pe 16.1




,




                                      18
LAND EXCESSTO PROJECTNEEDS

      FHA instructions    provide that recreational      loans not
be made to an organization        for the purchase of land in ex-
cess of a project's    needs or for the subdivision        of land for
the sale of homesites.       If a loan is made to an organization
that acquires excess land due to the owner's unwillingness
to sell a smaller tract than that desired,         the organization,
under FHA's instructions,       is required   to make arrangements
to dispose of the land as soon as practicable.

        Of the 24 organizations    included in our review, five
organizations     used a portion   of their loan funds for the pur-
chase of excess land.        OIG's review revealed eight instances
where FHA had financed recreational          projects  which were pro-
moted by real estate speculators         interested   primarily  in
realizing    personal benefits,    rather than in providing     recre-
ation for rural residents.

     Following are examples of projects for which loan funds
were used to purchase land in excess of project  needs.

      Example    11

      Through May 1969 rural renewal loans totaling           $250,000
were made to an organization     for the purchase of 614 acres
of land for the development of recreational       facilities,       such
as camping and picnic areas, a trailer      park, and a boat ramp.
In its request,  the organization    advised FHA that it planned
to sell summer homesites.

        At the time of our fieldwork,         the organization      had de-
veloped recreational      facilities,      including   a boat ramp, a
trailer    park, camping sites,       and a picnic area.         The organi-
zation had sold eight lots for summer homesites,                 was plan-
ning a subdivision     of 111 lots,       and had leased 243 of the
614 acres to an organization          for the development of an 18-
hole golf course, a clubhouse,           and a swimming pool.        FHA
made an association     loan of $330,000 to the leasing organi-
zation to finance the construction            of the facilities.




                                     19
      Example 12

      A rural renewal     loan totaling  $250,000 was made to an
organization  for the     purchase of 400 acres of land and for
the development of a      recreational  project  consisting of an
18-hole golf course,      a clubhouse, and various other facili-
ties.

      The golf course and related facilities      occupied about
250 acres; the remaining 150 acres were excess to the proj-
ect's needs,    At the time we completed our fieldwork,     the
organization   had requested permission    from the FJJA headquar-
ters office   to sell homesites on the excess land.

CLUBHOUSESNOT MODESTIN DESIGN, SIZE, OR COST

      FHA instructions        provide that construction      of authorized
clubhouses be limited          to those of modest design, size, and
cost essential       to the successful      operation of the facilities.
According to the instructions,           snac‘k bars, showers, rest
rooms o lockers,       and pro shops are the basic necessities          for
a clubhouse;      dining rooms, restaurant-type       kitchens,    liquor
bars, and dance areas are not considered necessary for
outdoor-oriented        recreational   facilities.    The instructions
state that the total cost of a clubhouse and related               facili-
ties,   including     all furniture    and fixtures,    should not ex-
ceed $50,000.

      Of the 14 golf projects     included in our review, nine
had clubhouse facilities    which FHA officials     told us they
considered  to be unnecessary for outdoor-oriented       recreation
purposes.   FHA records showed that the cost of these club-
houses ranged from $51,000 to $90,000 and that their size
ranged from 3,200 to 7,700 square feet.         (See app. II for
photographs   of facilities   that were not considered essential
for outdoor recreational    projects.)

        OIG's review revealed that FHA had financed 31 recre-
ational    projects,    each of which had a clubhouse that was not
modest in design, size, or cost.        Of these 31 clubhouses,
OIG indicated      that four had cost in excess of $100,000 each
and that most of the clubhouses contained liquor bars and
restaurants.



                                    20
      Following are examples of rural recreational projects
which had clubhouses considered by FHA to be excessive in
design, size, or cost,

      Example   13

      An association loan of $170,380 was made to an organi-
zation for the development of a nine-hole  golf course, club-
house, swimming pool, and tennis court.

       The organization's      records showed that the clubhouse
and pro shop,     which   contained    about 7,000 spare       feet of
floor space, cost about $90,000, including            furnishings     and
fixtures.     The  clubhouse    contained   a  liquor  bar,   restaurant-
type kitchen,     and 1,600-square-foot       ballroom and dining
area.

      Example 14
       Resource conservation and development loans totaling
,$198,700 were made to an organization     through December 1968
 for the development of a nine-hole    golf course, clubhouse,
 tennis court, and swimming pool.

      The organization's   records showed that the clubhouse
had cost about $86,000.     The clubhouse, which contained
about 4,000 square feet of floor space, included a pro shop,
a liquor bar, a restaurant-type      kitchen, a 1,300-square-foot
dining area, and furniture     and fixtures.




                                    21
INADEQUATEMEMBERSHIPTO SUPPORTPROJECTS

       "To ensure that a rural recreational       project    is finan-
cially    feasible,  FHA requires   an organization,      prior to the
closing of a loan, to have a sufficient         number of members
to enable the organization       to generate adequate revenues to
meet annual operating     expenses and loan repayments.

       Contrary to this requirement,     FHA made loans to nine
of the organizations    included in our review without requir-
ing the organizations     to meet FHA-established    membership
requirements.     Also OIG's review of loans to 107 organiza-
tions revealed that 12 organizations       did not have-sufficient
members at the time the loans were closed and that they'were
unable to sufficiently      increase the number of members to
place their projects    in a financially    sound position.

     Following are examples of organizations         that   did not
meet FHA's membership requirements.

      Example 15

      An association   loan of $65,000 was made to an organiza-
tion to acquire and improve an existing     nine-hole   golf
course,   FHA required that the organization      have 70 members,
The organizat+on's    records indicated that 100 members were
necessary to meet its annual financial     obligations.

      The organization's     membership list submitted at the
time the loan was closed showed only 67 members. The FHA
county supervisor     advised us that he had accepted the member-
ship list of 67 members without verification       because, in
general,  the entire community was in favor of the project.

      According to the county supervisor, the organization
had only 47 paying members. At the time of our'fieldwork,
the organization  was delinquent on repayment of its loan
and its membership had decreased to 33 members.

     &mmple    16
     Association      loans of $295,000 and $50,000 were made to
an organization     through June 1969 for'the  development of an


                                  22
18-hole golf course, a clubhouse, a swimming pool, a lake
for a water system, and playgr'ounds with picnic facilities,

      Prior to closing the loan of $295,000 in May 1967, the
F'HA Acting Administrator advised the F'HA State director
that (1) the organization   should have a sufficient  number
of members pledging annual dues to generate revenue adequate
to meet the indebtedness,   operate and maintain the facili-
ties, and maintain a required reserve and (2) intiome from
other than membership dues was not dependable and should not
be considered,

      The loan of $295,000 was made to the organization    on
the basis of an operating budget submitted in April 1967.
The budget showed estimated annual operating    expenses, in-
cluding loan repayments, of $54,000; annual income of $38,000
from membership dues of 256 members at about $150 each; and
an annual operating deficit    of $16,000. On the basis of
members' paying annual dues of about $150 each, we estimated
that the organization   should have had 110 additional   members
to ensure sufficient   revenues to meet the estimated annual
operating   expenses.

         F&I made an additional  loan of $50,000 to the organiza-
 tion in June 1969 to complete the construction         of the facili-
 ties, although the organization      at that time did not have
 sufficient    membership to support the project,
>
        At the time of our fieldwork,    the organization     had only
 245 members and, as of January 1, 1970, was delinquent
 $14,000 on its loan repayments,




            .




                                  23
 INADEQUATEVERIFICATION OF
ESTIMATED PROJECTINCOME-ROB
.%%ZES OTHERTHAN MEMBERSHIPFEES

         FHA made loans to two organizations        for rural recre-
 ational     projects    without verifying   whether the organiza-
 tions'     planned income goals for the projects        would provide
 sufficient      revenues to meet their operating       expenses and '
 loan repayments.          The income goals were used by FHA as
 bases for determining         whether the proposed projects     had .
'reasonable prospects for financial          success.    We found that
 the two organizations'          actual incomes were substantially
 below the planned income goals and that both organizations
were unable to meet their FHA loan payments.              The details
 on one project       follow.
     Example 17
             -
       Association   loans of $1,232,000 were made to an orga-
nization    through March 1968 for the development of a lake
and resort facilities.

      In January 1965 an initial    loan of $850,000 was made
for purchasing 3,800 acres of land and for developing a
1,500-acre   lake, including  constructing     a dam. In March
1968 an additional    loan of $382,000 was made for installing
main water and sewer lines,     for constructing    roads, and for
developing   a cabin and homesite area.

      In addition, the Economic Development Administration,
Department of Commerce, msde a grant of $269,500 to fi-
nance part of the project's  costs.

      The organization     estimated that annual income to meet
annual operating     expenses and loan repayments totaling
$73,000 would be derived from the following      sources.

      300 members at $100 each                      $ 30,030
      Entrance fees for 63,000 cars                  132,000
      Commercial leases                              36,500
           Total



                                 24
       Prior to closing the initial            loan in January 1965, the
FHA headquarters        office  requested the FHA State office                 to
verify    the reliability      of the estimated annual income of
$132,030 from car entrance fees.               The FHA State director
advised the FHA headquarters           office      that the best ir$orma-
tion available      on the use of similar            facilities      indicated
that the annual income of $132,000 was not out of line with
the income obtained from similar              facilities        in the area.
The State director         also reported      that the most encouraging
feature was the number of persons willing                     to build facili-
ties under lease agreements.
                                                                                    c
       The F‘HA State and/or county ogfice files did not con-
tain any support for the State director's       information    re-
garding the annual income of $132,000 from car entrance
fees.    Income entrance fees did not materialize,       except for
$4,200 in 1969. As of May 1970 no commercial leases to
build facilities     had been made. The organization's      member-
ship dues have been the principal    source of income for the
project.     At January 1, 1970, the organization     was delin-
quent $128,840 on its loan repayments.




                                        25
                                 CEXPTER4

              INTERNAL AUDIT OF FHA'S ASSOCIATION
                     .RECREATIONLOAN PROGRAM

      OIG issued an audit report in January 1970 covering its
review of FHA's association    recreation  loan program in 14
States.    OIG reviewed loans, totaling   $19 million,   made to
107 associations    in the 14 States from inception    of the pro-
gram in September 1962 through August 31, 1969. OIG's report
stated that loans had been made to 57 organizations       for proj-
ects that:

      --Had restricted    membership.'
      --Did not meet the objectives    of the program as to eli-
         gibility, need, and/or feasibility.
      --Had clubhouses    that    were not modest in design,       size,
       . or cost.

       With regard to loans' not meeting program objectives,
OIG's report pointed out numerous instances where loans had
been made to organizations        that (1) served primarily    urban,
rather than rural,      communities,    (2) did not serve recre- .
ational    needs in the communities, as indicated       by a lack of
membership in the organizations         from their beginning,   and/or
the existence of similar recreational          projects in the imme-
diate area, (3) were organized to promote real estate devel-
opments, and/or (4) did not otherwise meet the intent of the
loan program.     The report indicated      that, in most cases,
more realistic     determinations     by FHA officials  as to the
need and feasibility      of the loans would have precluded the
making of the loans.

      0IGO.s report recommended, among other      things,   that     the
Administrator,    FHA:

     --Implement a monitoring       system at FHA's headquarters
        office  for determining,     on a timely basis, whether
        FHA State offices    were carrying    out national FHA
        loan-making policies     properly and uniformly.
     --Strengthen   FHA's instructions   by requiring that orga-
        nizations'  membership lists   and/or membership agree-
        ments be verified   a.$ to the accuracy of the lists
        and adequacy of agreements to ensure sustaining      mem-
        berships.

     --Expand FHA's instructions           to incorporate       specific
        guidelines     to be used in determining           the need and/or
        feasibility      of a recreational      facility      in a rural
        community, the differentiation           between rural and ur-
        ban areas, the rural population            and membership needed
        to sustain a facility,        the effects        of competition  by
        existing    facilities,    and the average membership in-
        debtedness.
     --Determine     the recreational    needs-in the areas from
        which applications      for loans are received for use in
        determining     the need and feasibility     of applicants'
        requests and for ensuring that loan funds are allo-
        cated on a priority      basis to applicants    with the
        greatest    needs.

     --Clarify   FHA's instructions to prohibit organizations
        from purchasing real estate for resale.

     --Provide   appropriate  guidelines for the construction
        of modest clubhouses,   covering such items as cost,
        square feet of floor space per member, and facilities
        that must be included and indicating    items that can-
        not be included.

       The FHA Assistant   Administrator   for Management advised
OIG by letter    dated May 11, 1970, that FHA was in general
agreement with the findings       and recommendations included in
its report.    He stated that FHA had discontinued      accepting
applications   for recreational     loans and that, before it re-
sumed making such loans, FHA would revise its instructions
under which recreational      loans were administered.




                                   27
                              CHARTER5

                CONCLUSIONS,AGENCYCOMMENTS,AND

           MATTERFOR CONSIDERATIONBY THE CONGRESS

CONClJJSIONS

      We generally  concur with OIG's recommendations to FHA
for improving the administration    of the association recre-
ation loan program.    In view of the actions taken or planned
by FHA, we are not making any recommendations to FHA.

       We believe that our findings,   together with OIG's find-
ings, demonstrate that many of the projects       financed under
FI-JA's recreational   loan programs have provided benefits      to a
limited    number of rural residents.   The principal    reasons
are:
 -0   --The need, for a project to be financially    feasible,
         for an organization  to have members who are assessed
         initiation  fees and annual dues.
      --The limitation     on the number of memberships       in an or-
         ganization.

      --Restrictions        which preclude the use of an organi-
         zation's    facilities    by nonmembers.

Such restrictions,     coupled with the lack of ability      or desire
of rural residents     to pay an organization's  membership ini-
tiation    fees and annual dues, have limited   participation     in
the facilities     by rural residents.
        Substantial changes in the scope of the recreational
loan programs have ta'ken place in recent years.             In fiscal
year 1970 FHA made loans totaling        $7 million     under its prin-
cipal program-- the association      recreation     loan program--con-
trasted with loans of $23.9 and $18.3 million            in fiscal
years 1968 and 1969, respectively.          For fiscal    year 1971 FHA
estimated that loans totaling       $2 million    would be made prin-
cipally    to those organizations    to which loans previously         had
been made. In its fiscal        year 1972 budget request to the

                                   28
Congress,    FHA did not request     any funds for    the association
recreation    loan program.

      As stated    previously,  FHA issued new instructions    to
its FHA State     and county offices   in September 1970 to provide
that loans not     be made for golfing   projects.   FHA determined
that available     loan funds should be used for loans under
higher priority      programs.

      The decrease in the scope of, and other changes in,
F'HA's recreational     loan programs are, in our opinion,    the
result of an increasing      realization  by FJ3A that the programs,
as presently    constituted,    are not meeting their objectives.

AGENCYCOMMENTS

      The Administrator,      FHA, in commenting on a draft of
this report (see app. I), stated that FWA had started action
early in fiscal    year 1970 to discontinue       making further  loans
for golfing   projects,     to provide more funds for higher pri-
ority programs, such as the rural water and sewer program,
and for the reasons indicated          by us. He stated also that
the association    recreation      loan program had been placed in
a standby position      for fiscal     year 1972 and that FHA would
consider the program's future in connection with FHA's plans
for redevelopment of rural areas,

MATTERFOR CONSIDERATIONBY THE CONGRESS

      In view    of the limited   extent to which'the       recreational
loan programs     have served rural residents,        we recommend that
the Congress,     in its continuing    evaluation     of FHA programs,
consider the     matters discussed in this report with a view
to determining     whether the recreational       loan programs should
be continued     and, if so, what form the programs should take.




                                    29
                               CHAPTER6
                               -.-

                           SCOPEOF REVIEW

      Our review was made at the FHA headquarters     office  in
Washington, D.C.; at the FHA Finance Office,      St. Louis,
Missouri;   at the FHA State offices   in Arkansas, Missouri,
New Mexico, North Carolina,    and Virginia;   and at 22 FHA
county offices    in the above five States.
        Wereviewedpertinent      legislation      and FHA policies     and
procedures for making recreational            loans to public and non-
profit    organizations.      We examined, in detail,       into loans
made to 24 organizations.          Our major considerations         in se-
lecting    these loans were (1) the amounts of loans made to
the organizations        from January 1966 and (2) whether the or-
ganizations'     recreational    facilities      were representative     of
the types of facilities        authorized     for financing    under FHA's
recreational     loan programs.      We discussed these loans with
F'HA State and county officials           and interviewed   officials    of
the organizations        which had received the loans.

       We also examined an internal       audit report by OIG on its
review of recreational     loans to 107 associations        in 14
States, including    Colorado, Florida,      Idaho, Illinois,     Iowa,
Kentucky, Louisiana,    Mississippi,     Montana, North Carolina,
South Dakota, Texas, Washington, and Wisconsin.             Our review
in North Carolina was limited        to loans for rural renewal
projects,because   OIG's review had included association           loans.




                                    30
APPENDIXES




  31
                                                                                                             APPENDIX   I


                                        UNITED   STATES       DEPARTMENT         OF      AGRICULTURE
                                                 FARMERS         HOME   ADMINISTRATION

                                                          WASHINGTON.     D.C.   20250

                                                                                           APR 2 1971
OFFICE   OF   THE   ADMINISTRATOR




              SUBJECT: Proposed Report to the Congress on the Effectiveness
                         and Administration of Rural Recreation Loan
                         Programs Under FRA
                        TO:         Bernard Sacks, Assistant             Director
                                    Civil Division, GAO




              We appreciate             the opportunity           to comment on the draft              report.
              In order to provide more funds for higher priority     programs such as
              rural community water and sewer systems and for the reasons listed
              in the draft report, this Administration    moved early in F'Y 1970 to
              eliminate further loans for golfing facilities.
              Further, it reduced the program to $2 million                                 in FY 1971 and has
              placed it in a st    y position for FY 1972.
              We will cons                     e future of this program in connection with the
              Administrati                   lam for redevelopment of rural areas.
APPENDIX   II
                                                      1
                                                          .




                PHOTOGRAPHSOF WNMECESSARYFACILITIES




                               Liquor   bar




                      Restaurant-type     kitchen
                                      ‘ENDIX   II


PHOTOGRAPHSOF UNMECESSARYFACILITIES




            Dining    room




            Dance floor

                 35
APPENDIX III
                                                                          .


   PRINCIPAL OFFICIALS OF THE DEPARTMENTOF AGRICULTURE
        RESPONSIBLE FOR ADMINISTRATION   OF THEMATTEXS

                  DISCUSSEDIN THIS REPORT

                                         Tenure of office
                                         From            -To
SECRETARYOF AGRICULTURE:
   Clifford M. Hardin                Jail.   1969      Present
   Orville L. Freeman                Jan.    1961      Jan. 1969
ASSISTANT 'SECRETARYOF AGRICUL-
  TURE FORRURAL DEVELOPMENT
                          AND
  CONSERVATION:
    Thomas K. Cowden   s             Apr.    i969      Present
    John A. Baker                    Mar.    1961      Jan. 1969
ADMINISTRATOR, FARMERSHOMEAD-
  MINISTRATION:
    James V. Smith                   Jan.    1969     Present
    Howard Bertsch                   Apr.    1961     Jan. 1969




                             36                     U.S GAO. Vash..D.C.
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