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. From the program’s inception through September 1996, HUD made 930 commitments to guarantee loans totaling $4.4 billion. About 38 percent of entitlement communities have received 884 loan guarantees totaling $4.2 billion. HUD provided $369 million in EDI grants from fiscal year 1994 through September 1996. EDI Grants Encouraged Increased Loan Program Use

Recent growth in the use of the loan program was primarily stimulated by the introduction of EDI grants in fiscal year 1994, according to HUD and associations representing community development officials. 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. Collateral Requirements May Discourage Use of the Loan Program

Even though communities and states generally view the loan program favorably, they have concerns about the current collateral requirements and the proposed guidance to communities on the collateral to be used when providing third-party loans. By an overwhelming margin, both entitlement and nonentitlement borrowers reported that they used their loan funds to finance economic development activities. Some Field Offices Are Not Including the Loan Program in CDBG Monitoring

According to its regulations, the Department must conduct an annual performance review of CDBG communities and states to determine whether CDBG-funded activities are being carried out (1) in a timely manner, (2) in accordance with approved plans, and (3) in compliance with primary and national objectives. However, in 5 of the 30 field offices we contacted, these loan commitments were not reviewed. 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. Loan to a for-profit business is in default. (continued)
What number of loans financed specific types of economic development activities? 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. We also reviewed HUD’s annual reports to the Congress for community development programs for 1994 and 1996. However, we were able to describe these offices in terms of the number of loan commitments for which they were responsible.
Why GAO Did This Study

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

What GAO Found

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.