oversight

Housing and Urban Development: Use and Oversight of the Economic Development Loan Fund

Published by the Government Accountability Office on 1997-08-20.

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

                  United States General Accounting Office

GAO               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
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      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




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                   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.


                   From the loan program’s inception through fiscal year 1996, the
Results in Brief   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



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             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.


             The loan program provides communities and states with a way of
Background   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.




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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

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.



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                                    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.


                                    Between fiscal years 1994 and 1996, communities and states used the loan
Loan Program                        program in far greater numbers than ever before. Over this period, HUD
Recently Experienced                approved nearly 60 percent of all the funds loaned, for a total of
Significant Growth                  $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
                                        Number of approved loan commitments
                                        250



                                        200



                                        150



                                        100


                                         50



                                          0                                                       5

                                                                                                  6
                                                  7

                                                                                                  8

                                                                                                  9
                                                  0

                                                  1




                                                                                                 0

                                                                                                 1
                                                 2

                                                 3




                                                                                                 4
                                                                                                 3
                                                                                                 2
                                                 6
                                                 5
                                                 4
                                                 9
                                                 8




                                                                                              199

                                                                                              199
                                              198

                                                                                              198

                                                                                              198
                                              198

                                              198




                                                                                              199

                                                                                              199
                                              198

                                              198




                                                                                              199
                                                                                              199
                                                                                              199
                                              198
                                              198
                                              198
                                              197
                                              197




                                                                                     Fiscal years


                                    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.



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                                    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                  Dollar value of loan commitments
                                      2,500,000,000




                                      2,000,000,000




                                      1,500,000,000




                                      1,000,000,000




                                        500,000,000




                                                 0
                                                                                                                                                          1992

                                                                                                                                                                 1993




                                                                                                                                                                                       1996
                                                                    1980

                                                                           1981




                                                                                                1984

                                                                                                       1985




                                                                                                                             1988

                                                                                                                                    1989
                                                                                         1983




                                                                                                              19 86

                                                                                                                      1987




                                                                                                                                           19 90

                                                                                                                                                   1991




                                                                                                                                                                        19 94

                                                                                                                                                                                1995
                                                      1978

                                                             1979




                                                                                  1982




                                                                                                              Fiscal years
                                                         Actual
                                                         Appropriated


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



                                    According to HUD and associations representing community development
EDI Grants Spurred                  officials, EDI grants encouraged communities to make greater use of the
Program Growth, but                 loan program. HUD provided $369 million in EDI grants from fiscal year 1994
Concerns About                      through September 1996. However, according to these officials, the
                                    program continues to be underutilized because (1) many communities and
Collateral Remain

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                         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    Recent growth in the use of the loan program was primarily stimulated by
Increased Loan Program   the introduction of EDI grants in fiscal year 1994, according to HUD and
Use                      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




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                            fund offering below-market interest rates for small businesses and a loan
                            loss reserve.


Collateral Requirements     Even though communities and states generally view the loan program
May Discourage Use of the   favorably, they have concerns about the current collateral requirements
Loan Program                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



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                          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        According to the director of HUD’s loan program, communities intend, in
Communities’ Use of       most instances, to repay loans with revenues generated by the funded
CDBG Funds to Make Loan   project or from another revenue source identified by the community or
                          state in its loan application. The director emphasized that identifying a
Payments                  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



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                      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.


                      On the basis of our sample of 100 loans approved in fiscal years 1990
Communities Used      through 1996 that had funding advances, we estimated the types of
Loans Primarily for   activities reported as funded by the program for these years. Our analysis
Economic              relied on the information that the communities and states reported to HUD.
                      (App. II provides detailed information on loans approved in fiscal years
Development           1990 through 1996 that had funding advances, and app. III provides
Activities            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.




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Table 1: Proportion of Loans Used to
Fund Eligible Activities, as Reported                                                                     Entitlement          Nonentitlement
by Entitlement and Nonentitlement                                                          Overall       communities             communities
Communities                             Eligible activities                              (percent)          (percent)               (percent)
                                        Economic development                                   73.2                  72.1                    87
                                                                        a
                                        Acquisition of real property                           12.3                  11.9                   17.4
                                        Housing rehabilitationb                                10.4                  10.8                    4.3
                                                                               c
                                        Public real property rehabilitation                      8.5                  9.2                     0
                                        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.




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



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Figure 3: Estimates of the Types of
Economic Development Activity          Percentage
Funded                                 60


                                       50             46.8


                                       40
                                                                           36.1


                                       30


                                       20


                                                                                                 9.6
                                       10                                                                     7.5



                                        0
                                                Business start-up   Commercial property    Public property   Other
                                                & retention                     Type of project




                                      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.




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                        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.


                        According to its regulations, the Department must conduct an annual
Some Field Offices      performance review of CDBG communities and states to determine whether
Are Not Including the   CDBG-funded activities are being carried out (1) in a timely manner, (2) in

Loan Program in         accordance with approved plans, and (3) in compliance with primary and
                        national objectives.4
CDBG Monitoring
                        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

                        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.



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                  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.


                  Communities and states have made greater use of the loan program since
Conclusions       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.


                  To determine the extent to which communities and states are using CDBG
Recommendations   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




                  Page 14                    GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                      B-276545




                  •   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.


                      We provided a draft of this report to HUD for its review and comment. We
Agency Comments       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



                      Page 15                   GAO/RCED-97-195 HUD’s Economic Development Loan Fund
B-276545




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.


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




Page 16                     GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Page 17   GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Contents



Letter                                                                              1


Appendix I                                                                         20

EDI Grants and
Economic
Development Loan
Fund Loans, Fiscal
Years 1994 and 1995
Appendix II                                                                        24

Loan Fund
Commitments, Fiscal
Years 1990-96
Appendix III                                                                       35

Estimates and Related
Sampling Errors for
Projected Data
Appendix IV                                                                        38

Objectives, Scope,
and Methodology
Appendix V                                                                         41

HUD Field Offices
Surveyed




                        Page 18   GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                        Contents




Appendix VI                                                                                       42

Comments From the
Department of
Housing and Urban
Development
Appendix VII                                                                                      46

Major Contributors to
This Report
Tables                  Table 1: Proportion of Loans Used to Fund Eligible Activities, as         11
                          Reported by Entitlement and Nonentitlement Communities
                        Table I.1: Economic Development Initiative Grants and Economic            20
                          Development Loan Fund Loans, Fiscal Year 1994
                        Table I.2: EDI Grants and Economic Development Loan Fund                  21
                          Loans, Fiscal Year 1995

Figures                 Figure 1: Number of Approved Loan Commitments, Fiscal Years                5
                          1978-96
                        Figure 2: Actual Loan Dollars and Amount Approved by the                   6
                          Congress, Fiscal Years 1978-96
                        Figure 3: Estimates of the Types of Economic Development                  12
                          Activity Funded




                        Abbreviations

                        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


                        Page 19                  GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix I

EDI Grants and Economic Development
Loan Fund Loans, Fiscal Years 1994 and
1995
                                      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        Community                                    Grant amount               Loan amount
Development Loan Fund Loans, Fiscal   Selma, Alabama                                    $330,000                 $2,200,000
Year 1994
                                      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
                                                                                                                (continued)


                                      Page 20                          GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                                      Appendix I
                                      EDI Grants and Economic Development
                                      Loan Fund Loans, Fiscal Years 1994 and
                                      1995




                                      Community                                    Grant amount               Loan amount
                                      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   Community                                    Grant amount               Loan amount
Year 1995                             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
                                                                                                                (continued)



                                      Page 21                          GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix I
EDI Grants and Economic Development
Loan Fund Loans, Fiscal Years 1994 and
1995




Community                                 Grant amount               Loan amount
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
                                                                       (continued)


Page 22                       GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix I
EDI Grants and Economic Development
Loan Fund Loans, Fiscal Years 1994 and
1995




Community                                 Grant amount               Loan amount
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




Page 23                       GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix II

Loan Fund Commitments, Fiscal Years
1990-96


                                                                                                   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 incubator facility         1,000,000         92 Underway
Ala.      Selma                Renovation of a hospital into a medical clinic        2,200,000         95 Underway
Ala.      Mobile               Acqusition/Rehabilitation of a hotel                  2,000,000         91 Completed
Ala.      Greene County        Financial assistance for business start up            9,000,000         95 Underway
                               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 County                                                         1,060,000         90
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 County                                                          2,020,000         93
Calif.    Sacramento County                                                          1,000,000         94
Calif.    Vacaville                                                                    555,000         92
Calif.    Sacramento                                                                   400,000         94
Calif.    San Bernardino                                                               500,000         94
Calif.    Sacramento County                                                          1,500,000         90
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 Community                      300,000,000         95 Underway
                               Development Bank
Calif.    San Diego            Construction of a shopping center                     7,200,000         95 Underway
Calif.    Chula Vista                                                                  750,000         91
                                                                                                                   (continued)

                                        Page 24                         GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                                      Appendix II
                                      Loan Fund Commitments, Fiscal Years
                                      1990-96




                                                                                                    Fiscal
State    Community           Project description                                        Amount        year Status
Calif.   Bakersfield         Purchase of furniture and fixtures for a                 2,500,000         94 Completed
                             convention center hotel
Calif.   Los Angeles         Housing rehabilitation, revolving loan fund             60,000,000         93 Underway
Calif.   Oakland             Renovation of the Martin Luther King, Jr.               10,945,000         95 Underway
                             Plaza
Calif.   Oakland             Finance Enterprise Community economic                   27,000,000         95 Underway
                             development activities
Calif.   Santa Ana           Acquisition of land for street widening                 20,000,000         93 Completed
Calif.   Sacramento County   Low interest loans for rehabilitation                      360,000         90 Completed
Calif.   San Francisco       Capitalization of an existing revolving loan            50,000,000         95 Underway
Calif.   Alhambra                                                                     3,000,000         95
Calif.   Carlsbad                                                                     1,200,000         94
Calif.   Santa Ana                                                                   13,900,000         95
Calif.   Huntington Park                                                              2,970,000         95
Calif.   San Mateo County                                                             2,000,000         95
Calif.   Woodland                                                                       800,000         95
Calif.   Fresno                                                                       3,150,000         95
Calif.   Downey                                                                       1,700,000         91
Colo.    Denver              Establishment of three interim financing                15,000,000         93 Completed
                             programs
Colo.    Lakewood                                                                     2,805,000         94
Colo.    Lakewood            Construction of public facilities;                       2,050,000         95 Underway
                             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 center                          500,000         95 Underway
Fla.     Miami                                                                        2,500,000         93
Fla.     Fort Myers          Acquisition/Redevelopment of land for                      750,000         93 Completed
                             low-income housing
Fla.     Jacksonvillea       Acquisition/Renovation of a waterfront                   2,850,000         90 Underway
                             resturant
Fla.     West Palm Beach     Rehabilitation of two privately owned rental             1,095,000         94 Don’t know
                             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
                                                                                                                    (continued)


                                      Page 25                            GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                                      Appendix II
                                      Loan Fund Commitments, Fiscal Years
                                      1990-96




                                                                                                  Fiscal
State   Community            Project description                                      Amount        year Status
Fla.    Boca Raton                                                                    700,000         94
Ga.     Savannah             Rehabilitation of 74 unit low- and                     1,855,000         92 Completed
                             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; construction of a hotel           1,200,000         90 Completed
Ill.    Chicago              Finance seven economic and community                  50,000,000         95 Underway
                             development programs
Ill.    Rockford                                                                      250,000         94
Ill.    Schaumburg                                                                    550,000         93
Ill.    Moline               Acquisition of land to redevelop harbor area           3,000,000         92 Underway
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 leased to US                3,470,000         95 Completed
                             Postal Service
Ind.    Indianapolis                                                                3,200,000         95
Kans.   Kansas City                                                                 7,800,000         95
Kans.   Baxter Springs       Construct manufacturing facility; purchase             7,000,000         94 Completed
                             equipment
La.     Kenner                                                                        700,000         92
La.     Jefferson Parish                                                            6,800,000         90
La.     New Orleans          Conversion of a building into hotel suites             5,600,000         91 Underway
                         a
La.     Jefferson Parish     Acquisition of equipment; refinance loan;              2,625,000         94 Underway
                             working capital for for-profit business
Mass.   Malden               Finance handicapped accessibility                        500,000         95 Completed
                             improvements
Mass.   Boston               Establishment of the Enterprise Community             22,000,000         95 Underway
                             Economic Development Loan program
                                                                                                                  (continued)


                                      Page 26                          GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                                   Appendix II
                                   Loan Fund Commitments, Fiscal Years
                                   1990-96




                                                                                                  Fiscal
State   Community         Project description                                         Amount        year Status
Mass.   Lawrence                                                                      700,000         93
Mass.   Lynn                                                                        7,890,000         92
Mass.   Lowell                                                                     10,000,000         94
Mass.   Springfield       Construction of a medical center                            900,000         94 Completed
Mass.   Boston            Construction of hotel and parking garage                 40,000,000         94 Underway
Mass.   Lynn              Acquisition/Site preparation work for schools             3,400,000         95 Completed
                          and firehouses
Mass.   Westfield         Working capital for local manufacturer                    2,200,000         94 Underway
Mass.   Malden            Acquisition/Relocation/Demolition of                      1,800,000         92 Underway
                          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 George’s   Acquisition/Renovation of a shopping center               6,000,000         95 Underway
        County
Md.     Prince George’s                                                             1,600,000         93
        County
Md.     Baltimore                                                                   6,750,000         91
Me.     Lewiston                                                                      500,000         95
Mich.   Cheboygan         Assistance to for-profit business for                     3,000,000         93 Completed
                          purchase of a vacant paper plant and
                          machinery
Mich.   Royal Oak                                                                   2,400,000         92
Mich.   Saginaw           Rehabilitation of a parking garage                        1,715,000         93 Completed
Mich.   Bay City          Renovation of commercial property into                      350,000         90 Completed
                          printing, graphics arts and sales facility
Mich.   Muskegon          Purchase private property ;                                 650,000         92 Completed
                          removal/installation of public facilities and
                          improvements
                                                                                                                  (continued)



                                   Page 27                             GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                                     Appendix II
                                     Loan Fund Commitments, Fiscal Years
                                     1990-96




                                                                                                  Fiscal
State   Community          Project description                                        Amount        year Status
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 Shores                                                            1,250,000         91
Mich.   Detroit                                                                     2,000,000         92
Mich.   Detroit            Construction of 23,000 sq foot addition to               1,150,000         95 Completed
                           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 of a building                  250,000         94 Completed
                           used by public service organization
Mo.     St. Josepha        Renovation of building and provide business              1,260,000         93 Underway
                           expansion opportunities
Mo.     St. Louis          Housing and neighborhood development;                   15,000,000         90 Completed
                           land acquisition; economic development
                           activities
Mo.     Kansas City        Acquisition/Relocation/Demolition of                     4,500,000         92 Completed
                           blighted and substandard properties
Miss.   Greenville         Construction of water and sewer facilities;              2,445,000         93 Underway
                           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 mill into                   1,645,000         95 Completed
                           low-income housing units
Nebr.   Lincoln                                                                       675,000         91
Nebr.   Lincoln                                                                       315,000         94
N.H.    Portsmouth         Acquisition/Rehabilitation of the Mariner’s                820,000         94 Completed
                           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
                                                                                                                  (continued)



                                     Page 28                           GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                                      Appendix II
                                      Loan Fund Commitments, Fiscal Years
                                      1990-96




                                                                                                    Fiscal
State   Community            Project description                                        Amount        year Status
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, acquire office                    870,000         96 Underway
        Township             property and machinery
N.J.    Camden               Construction of an industrial building and                 180,000         92 Underway
                             provide permanent financing
N.J.    Egg Harbor City      Finance for-profit business’ acquisition of              3,550,000         93 Underway
                             fixed assets and provide working capital
N.J.    Pohatcong Township   Acquisition/Rehabilitation of a facility into a          4,495,000         93 Underway
                             hotel
N.J.    Buena Vista          Assistance to for-profit business; working               1,400,000         93 Terminated
        Townshipb            capital and expansion
N.J.    Wanaque              Acquisition of land and construction of a                2,310,000         95 Underway
                             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 loan fund for                 5,000,000         92 Don’t know
                             commercial and industrial projects
N.Y.    Buffalo              Refinance an existing Section 108 loan and               2,200,000         94 Completed
                             make improvements to hotel.
N.Y.    Yonkers              Provide working capital for credit worthy               18,000,000         95 Underway
                             businesses, finance site improvement
N.Y.    Kingston             Assistance in capitalization of a revolving              3,700,000         95 Underway
                             loan fund
N.Y.    Babylon              Acquisition/Rehabilitation of shopping                   1,600,000         94 Underway
                             centers
                                                                                                                    (continued)


                                      Page 29                            GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                                     Appendix II
                                     Loan Fund Commitments, Fiscal Years
                                     1990-96




                                                                                                   Fiscal
State   Community           Project description                                        Amount        year Status
N.Y.    Monroe County       Expansion of an ice arena and various other              6,345,000         94 Don’t Know
                            projects.
N.Y.    Binghamton          Refinance an existing Section 108 loan to                  800,000         94 Completed
                            retain 119 jobs
N.Y.    Buffalo             Purchase 5 new fire trucks                               2,235,000         95 Underway
N.Y.    Buffalo             Refinance loan, renovate property, re-open               3,000,000         94 Don’t know
                            restaurant
N.Y.    Buffalo             Rehabilitation of a vacant store and                     1,290,000         95 Has not started
                            establish a 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 ocupancy units in             8,360,000         95 Underway
                            YMCA
O.H.    Cleveland           Establishment of two loan programs for                  87,000,000         95 Don’t know
                            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 Heights                                                              700,000         92
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 manufacturing facility,                4,000,000         93 Completed
                            equipment acquisition
O.H.    Cleveland           Renovation of 3 vacant buildings in the city’s           2,100,000         95 Completed
                            historic warehouse district
O.H.    Barberton           Renovation of theater, restaurant, and                   2,225,000         93 Completed
                            amusement center
                                                                                                                   (continued)



                                     Page 30                            GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                                     Appendix II
                                     Loan Fund Commitments, Fiscal Years
                                     1990-96




                                                                                                    Fiscal
State   Community           Project description                                         Amount        year Status
Okla.   Shawnee                                                                         450,000         95
Okla.   Oklahoma City       Establishment of a loan fund for business                20,000,000         93 Has not started
                            creation and 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 County                                                               500,000         90
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 former steel                 3,000,000         94 Completed
                            facility
Pa.     Philadelphia        Expansion/Enhancement of an existing                     30,000,000         95 Has not started
                            Section 108 loan program
Pa.     Philadelphia        Renovation of building into a 351 room hotel             16,000,000         95 Underway
Pa.     Allentown           Acquisition/Clearance of obsolete structures              4,000,000         95 Underway
                            for installation of public facilities
Pa.     Scranton            Assistance to for-profit business in the                  9,957,000         91 Don’t know
                            development of a downtown mall
P.R.    Caguas              Final improvements on Civic Center Complex                2,800,000         91 Completed
P.R.    Cayey                                                                         4,800,000         95
P.R.    Vieques             Construction of a sports complex                          5,000,000         94 Underway
P.R.    Ponce               Acquisition of building and land, district               20,600,000         95 Underway
                            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
                                                                                                                    (continued)


                                     Page 31                             GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                                       Appendix II
                                       Loan Fund Commitments, Fiscal Years
                                       1990-96




                                                                                                       Fiscal
State   Community            Project description                                           Amount        year Status
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 facility and make                9,870,000         95 Underway
                             various site improvements
P.R.    Dorado               Rehabilitation of public facilities for arts                4,105,000         95 Underway
                             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 rehabilitation of the                 2,000,000         94 Don’t know
                             Performing Arts Center
R.I.    Newport              Acquisition/Rehabilitation of a closed and                  1,350,000         94 Completed
                             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 County     Partially fund the start up of a regional airline          12,000,000         94 Underway
                             carrier
S.C.    Columbia                                                                         1,515,000         94
S.C.    Charleston                                                                       4,250,000         94
                         c
S.C.    Berkeley County      Acquisition of a closed industrial facility                12,000,000         95 Foreclosure
S.C.    Columbia             Assistance in the acquisition of a 25 acre                  1,515,000         95 Underway
                             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 Benitod          Business expansion                                            820,000         90 Terminated
                                                                                                                       (continued)




                                       Page 32                              GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                                    Appendix II
                                    Loan Fund Commitments, Fiscal Years
                                    1990-96




                                                                                                   Fiscal
State   Community          Project description                                         Amount        year Status
Tex.    Dallas             Rehabilitation/Conversion of building into               25,000,000         94 Some underway;
                           multi-family rental units                                                      some haven’t
                                                                                                          started
U.T.    Fillmore City      Construction of a facility, acquisition of                  650,000         95 Underway
                           machinery; training
U.T.    Salt Lake County                                                             5,000,000         93
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 real property,             15,000,000         92 Underway
                           clearance and relocation
Va.     Virginia Beach     Housing rehabilitation in three targeted                  2,000,000         93 Underway
                           neighborhoods
Wash.   Seattle            Assistance in financing,expanding and                     2,400,000         95 Completed
                           stabalizing a shopping center
Wash.   Spokane                                                                      5,555,000         91
Wash.   Tacoma                                                                       1,135,000         95
Wash.   Bellingham         Gap financing for private businesses to                   1,755,000         90 Completed
                           revitalize central business district
Wash.   Hoquiam            Working capital to acquire and reopen a                   3,300,000         94 Completed
                           paper mill
Wash.   Tacoma             Acquisition of first mortgage on downtown                 5,180,000         93 Completed
                           hotel
Wash.   Ocean Shores       Finance construction and permanent                        3,600,000         94 Completed
                           financing of a full service hotel
Wash.   Leavenworth        Finance land, equipment, and other costs to               2,220,000         95 Completed
                           develop amusement center
Wash.   Seattle            Acquisition of a building to eliminate slum              24,200,000         94 Completed
                           and blight on a spot basis
Wis.    Wausau                                                                       2,000,000         95
Wyo.    Cheyenne                                                                       800,000         95
Wyo.    Laramie            Assistance in financing a distribution and                1,500,000         95 Completed
                           manufacturing facility
TOTAL                                                                           $1,738,916,000

                                                                                                      (Table notes on next page)




                                    Page 33                             GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix II
Loan Fund Commitments, Fiscal Years
1990-96




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.




Page 34                                 GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix III

Estimates and Related Sampling Errors for
Projected Data


                                                                                                Confidence interval
Description                                   Estimate Sampling error                               From                         To
What type of activity was financed with the loan? (%)
Economic development                                73.2 9.0                                         64.2                       82.2
activities
Acquisition of real property                        12.3 6.1                                          6.2                       18.4
Housing rehabilitation                              10.4 6.1                                          4.3                       16.5
Public property rehabilitation                       8.5 5.7                                          2.8                       14.2
What type of activity was financed with the loan by entitlement communities? (%)
Economic development                                72.1 9.4                                         62.7                       81.5
activities
Acquisition of real property                        11.9 6.5                                          5.4                       18.4
Housing rehabilitation                              10.8 6.5                                          4.3                       17.3
Public property rehabilitation                       9.2 5.9                                          3.3                       15.1
Relocation costs                                     5.2 4.7                                          0.5                        9.9
What type of activity was financed with the loan by non-entitlement communities? (%)
Economic development                                87.0 Not applicable
activities
Acquisition of real property                        17.4 Not applicable
Housing rehabilitation                               4.3 Not applicable
Public property rehabilitation                           0 Not applicable
Relocation costs                                     4.3 Not applicable
What percentage of loans fulfilled the national objectives?
National objective to benefit                       88.4 6.7                                         81.7                       95.1
low- and moderate-income
people
National objective to reduce                        23.2 8.4                                         14.8                       31.6
slums and blight
What amount of loan proceeds were used to finance economic development activities?
At least this amount of loan            $1,303,483,421 $2,738,961                          $1,300,744,460             $1,306,222,382
proceeds to finance
economic development
activities
What number of loans were used to finance economic development activities?
At least this number of                             210 20                                           190                        230
loans to finance economic
development activities
What percentage of loans financed specific types of economic development activities?
Financing acquisition,                              36.6 11.4                                        25.2                       48.0
construction, or renovation
of commercial properties
                                                                                                                         (continued)




                                               Page 35                       GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                                             Appendix III
                                             Estimates and Related Sampling Errors for
                                             Projected Data




                                                                                              Confidence interval
Description                                  Estimate Sampling error                              From                      To
Financing acquisition,                            9.6 6.9                                           2.7                    16.5
construction, or renovation
of public property
Financing business start up                      46.4 11.6                                         34.8                    58.0
or retention of for-profit
business/
revolving loan funds
What number of loans financed specific types of economic development activities?
Financing acquisition,                             84 28                                            56                     112
construction, or renovation
of commercial properties
Financing acquisition,                             22 14                                             8                      36
construction, or renovation
of public property
Financing business start up                       106 29                                            77                     135
or retention of for-profit
business/ revolving loan
funds
What percentage of loans financed revolving loan funds?
Financing revolving loan                          6.2 3.7                                           2.5                     9.9
funds-all loans
Financing revolving loan                         45.0 Not applicable
funds-top 20 entitlement
communities
Financing revolving loan                          4.3 Not applicable
funds-non-entitlement
communities
What number of loans financed revolving loan funds?
Financing revolving loan                           19 12                                             7                      31
funds-all loans
Financing revolving loan                               9 Not applicable
funds-top 20 entitlement
communities
Financing revolving loan                               1 Not applicable
funds-non-entitlement
communities
What percentage of loans received reviews?
Receiving technical                              24.2 8.8                                          15.4                    33.0
assistance
Receiving an on-site                             29.4 8.6                                          20.8                    38.0
inspection
Receiving an annual                              54.9 9.6                                          45.3                    64.5
in-house assessment
Receiving another type of                         7.9 5.4                                           2.5                    13.3
review
                                                                                                                    (continued)


                                             Page 36                       GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                                              Appendix III
                                              Estimates and Related Sampling Errors for
                                              Projected Data




                                                                                                   Confidence interval
Description                                  Estimate Sampling error                                   From                          To
For the field offices that do not routinely include a review of Economic Development Loan Fund loans, what is the percentage of loans
for which those field offices are responsible?
Loan responsibility for the 5                     26.5 8.8                                              17.7                        35.3
field offices not routinely
including a review of the
loan in their regular CDBG
monitoring
Loan responsibility for the 7                     39.6 9.8                                              29.8                        49.4
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 loans
for which those field offices are responsible?
Amount of funds for the 5                $292,746,316 $735,649                                 $292,010,767              $293,481,965
field offices not routinely
including a review of the
loan in their regular CDBG
monitoring
Amount of funds for the 7                $792,141,053 $1,128,487                               $791,012,566              $793,269,540
field offices that did not
routinely have the final loan
terms




                                              Page 37                        GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix IV

Objectives, Scope, and Methodology


              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.


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



              Page 38                             GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix IV
Objectives, Scope, and Methodology




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.



Page 39                       GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix IV
Objectives, Scope, and Methodology




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.




Page 40                       GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix V

HUD Field Offices Surveyed



                                                                                                  Indianapolis
                                                                         Chicago
                                                                                                  Detroit
                                                             Milwaukee                              Columbus
                                                           St. Louis                                  Buffalo
                                           Minneapolis
       Seattle                              Omaha                                                      Pittsburgh

       Portland


                                                                                                         Manchester
                                                                                                         Boston
                                                                                                          Hartford
                                                                                                        Newark
                                                                                                        New York
  San Francisco                                                                                         Philadelphia
      Denver                                                                                            Baltimore
                                                                                                        Washington
                                                                                                        Richmond
                                                                                                        Greensboro
     Los Angeles
             Phoenix                                                                               Louisville
             Albuquerque                                                                           Columbia
                                                                                                   Knoxville
                                Kansas City                                                   Jacksonville


      Anchorage
                                                                                                  Coral Gables

             Honolulu           Oklahoma City                                           Atlanta
                                     Fort Worth                                      Birmingham
                                             San Antonio                       New Orleans
                                                   Little Rock               Jackson
                                                     Puerto Rico
                  Sampled
                  Not sampled




                                          Page 41                    GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix VI

Comments From the Department of Housing
and Urban Development

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




See comment 2




                             Page 42   GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                 Appendix VI
                 Comments From the Department of Housing
                 and Urban Development




See comment 3.




                 Page 43                     GAO/RCED-97-195 HUD’s Economic Development Loan Fund
                 Appendix VI
                 Comments From the Department of Housing
                 and Urban Development




See comment 4.




See comment 5.




                 Page 44                     GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix VI
Comments From the Department of Housing
and Urban Development




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.




Page 45                     GAO/RCED-97-195 HUD’s Economic Development Loan Fund
Appendix VII

Major Contributors to This Report


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




(385660)       Page 46              GAO/RCED-97-195 HUD’s Economic Development Loan Fund
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