Housing and Urban Development

The Department of Housing and Urban Development's (HUD) Economic Development Loan Fund, established by Congress in 1974, allows communities to borrow up to five times the current year's allotment under the Community Development Block Grant Program using their current and future grants as collateral. Initially, only certain communities--large metropolitan areas and urban counties that receive these block grants directly--were eligible for the loan fund. In 1990, other communities--small cities and rural areas that receive block grants through their states--became eligible for the fund. To encourage communities to make greater use of the loan program, Congress substantially increased the amount of funds available for the program in 1993. The next year, it established economic development initiative grants, which communities may use to help fund projects or to pay for some of the costs associated with borrowing under the loan program. In response to congressional concerns about how these changes have affected the loan program, this report examines (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 financing with loan proceeds, and (4) HUD's procedures for overseeing the program.

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

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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