The loan program provides communities and states with a way of leveraging their CDBG awards to obtain additional resources for financing larger community revitalization projects without waiting for the actual CDBG award. The loans can have repayment terms of up to 20 years. In the loan program, as in the CDBG program, communities and states must use their loan proceeds only for activities that meet one or more of three national objectives: (1) benefit low- and moderate-income people—that is, households earning less than 80 percent of the local area’s median income; (2) aid in the prevention and elimination of slums or blight; or (3) meet other urgent community development needs. In addition, the loan proceeds must be used to help finance one or more of the activities cited in section 108 of the 1974 act. These activities include, among others, the acquisition of real property; the rehabilitation of real property, either publicly owned or acquired; housing rehabilitation and preservation; and economic development. Although current and future CDBG grants are the principal collateral for loans, since 1995, communities have had to provide additional collateral. To meet this requirement, HUD has generally approved loans only for those activities expected to generate a cash flow that would allow the community to repay the guaranteed loan. A 1994 amendment to the program expanded the list of eligible activities to include the acquisition and restoration of public facilities, which would generally not produce a cash flow to repay the debt. In addition to revenue generated from the project, communities and states may designate tax revenues or other revenue sources as the additional collateral. The Treasury has never had to use public funds to fulfill the federal guarantee, according to HUD’s 1996 Consolidated Annual Report to Congress. Eligible applicants include the CDBG grantees: (1) entitlement communities—generally cities designated as central cities of metropolitan statistical areas, other cities with populations of at least 50,000, and qualified urban counties—that are directly responsible for administering their grants and (2) nonentitlement communities—smaller communities, including many rural communities whose CDBG programs are administered by the state. Nonentitlement communities became eligible for the loan program through the Cranston-Gonzalez National Affordable Housing Act of 1990. Both HUD headquarters and field offices play a role in managing the loan program. Generally, headquarters provides final approval; negotiates loan terms with applicants; and, through HUD’s fiscal agent, arranges for the sale of the loans. The fiscal agent acts as a trustee under contract to HUD and, among other duties, collects loan payments from the communities and notifies HUD to take funds from communities’ CDBG allotment when payments are not received. Field offices assist communities and states in preparing applications, make recommendations to headquarters to approve or deny loans, and monitor funded activities. HUD has financial monitoring procedures to safeguard against communities’ or states’ defaulting on their loans. HUD’s fiscal agent must receive the loan payment 5 days before it is due. Payments are due either semiannually or quarterly. If the payment is not received, the fiscal agent notifies the HUD headquarters program office, which contacts the cognizant community or state. If the fiscal agent does not receive payment within 72 hours of the payment’s due date, HUD will make the loan payment using funds from the community’s or state’s CDBG allocation. When payments are made late, HUD will credit the community’s or state’s CDBG allocation. Between fiscal years 1994 and 1996, communities and states used the loan program in far greater numbers than ever before. Over this period, HUD approved nearly 60 percent of all the funds loaned, for a total of $2.63 billion. From the program’s inception through September 1996, HUD made 930 commitments to guarantee loans totaling $4.4 billion. Figure 1 shows the number of approved loan commitments from 1978—when the first loan application was approved—through September 1996. 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. According to HUD and associations representing community development officials, EDI grants encouraged communities to make greater use of the loan program. HUD provided $369 million in EDI grants from fiscal year 1994 through September 1996. However, according to these officials, the program continues to be underutilized because (1) many communities and states are reluctant to pledge their future CDBG funds as collateral for the loans, as the 1974 act, as amended, requires, and (2) collateral requirements imposed in 1995 and new procedural guidelines are likely to make communities even more reluctant to use the program. Recent growth in the use of the loan program was primarily stimulated by the introduction of EDI grants in fiscal year 1994, according to HUD and associations representing community development officials. HUD provided EDI grants for 123 out of the 395 loan commitments made between fiscal years 1994 and 1995. These EDI grants totaled $369 million. (App.1 provides detailed information on EDI grants approved during fiscal years 1994 through 1995.) The EDI grants enhance the program’s use because the communities and states can use the grant funds in a number of ways to cover the costs of administering the program, such as creating a loss reserve and writing down loan rates to businesses financing projects within the program. By helping to finance some of the projects’ costs, the grant money also strengthens the economic feasibility of the assisted projects. According to one CDBG entitlement community, the ability to receive an EDI grant along with a loan commitment from the loan fund was the key factor making it possible for the community to take out the loan. If not for the EDI grant, this community would have sought funds from alternative lending sources or issued bonds itself. Communities may use their EDI grants in different ways. For example, in 1994, Los Angeles was awarded a $300 million loan commitment—the largest single loan amount granted under this program—to establish and assist in funding a community development bank. The bank’s mission is to stimulate economic development that will create and/or retain jobs for Los Angeles’ low- and moderate-income families. In addition to the loan commitment, the city was awarded a $100 million EDI grant, bringing the bank’s total reserves to $400 million. The bank will provide loans, loan guarantees, venture capital investments, grants, and technical assistance to area businesses. In another instance, Kingston, New York, was awarded a $3.7 million loan to establish two revolving loan funds, one to rehabilitate housing and one to assist small businesses that are locating or expanding at a former IBM facility. In addition to the loan commitment, the city was awarded a $555,000 EDI grant to establish a revolving loan fund offering below-market interest rates for small businesses and a loan loss reserve. Even though communities and states generally view the loan program favorably, they have concerns about the current collateral requirements and the proposed guidance to communities on the collateral to be used when providing third-party loans. As the law requires, communities and states must pledge current and future CDBG grants as the principal collateral for their loan. According to officials from five of six associations that represent community development officials, the collateral requirements are a concern for their members. For example, one association representative told us that while many of the association’s members who used the program viewed it positively, the overall membership was slow to use the program because of the requirement to pledge future CDBG grants. Beginning in February 1995, HUD required all communities and states to pledge collateral beyond their CDBG grant. Previously, only communities and states that had loan repayment terms for 10 years or longer and, in some cases, loans with shorter repayment periods (such as those with “balloon” payments), had to pledge additional collateral. HUD’s new requirement was in response to the Credit Reform Act of 1990 and resulting directives from the Office of Management and Budget (OMB). The 1990 act required agencies to calculate subsidy costs for loan guarantee programs. This cost is the amount of appropriation an agency must have in order to cover anticipated losses in the program. In calculating this cost, OMB told HUD that it cannot use future CDBG grants as the only source of collateral for the loan. If additional collateral were not required, the subsidy cost on the loan program would be prohibitively high. According to HUD’s requirements, for loans that financed some type of tangible item, such as a building or equipment, the items themselves can serve as additional collateral. For public infrastructure activities, additional collateral will generally come from income related to CDBG activities, such as interest from repayments of housing rehabilitation loans. As a final option, communities can pledge revenues from future tax collections. In addition to concerns about collateral, association officials questioned the proposed more stringent guidelines on third-party loans, such as loans that communities make to businesses. HUD plans to issue draft guidance for review and comment on the procedures that communities and states may follow in granting loans from the loan program to third parties. The proposed guidelines would seek to minimize third-party default rates by using commercial lending practices as the benchmark for the communities’ own loan activities. HUD’s program manager recognized that the new guidance may make communities more reluctant to use the program and acknowledged that HUD will have to find ways to help communities adapt to the new guidelines. HUD stated that it is proposing this guidance in response to the 1990 credit reform act, and we identified five instances in which third parties had defaulted on the loans they had received from the community that had secured the loan with its CDBG allotment. Nevertheless, several associations questioned this guidance because it moves the loan program toward more stringent commercial lending practices. They believed the use of more conservative lending practices as a benchmark for any public benefit program is unrealistic and inappropriate because such projects by their nature are riskier and would be unable to qualify in a conservative lending environment. In a letter commenting on a draft of this report, HUD stressed that the underwriting guidelines will not be issued as regulations and their use will not be mandatory. HUD noted that the guidelines are not intended to be used in connection with improvements to public facilities and other activities that do not generate revenue, and that communities will still be able to use CDBG funds to repay loans used to finance activities that do not generate revenue. HUD also noted, however, that communities will have to furnish alternative security to protect the federal financial interest in the event that future appropriations are not made for the CDBG program. According to one CDBG participant, that state chose not to participate in the loan program for its nonentitlement communities because pledging the state’s future CDBG funds would put other nonentitlement communities at risk of losing their CDBG funds if the community receiving the funds were to default. This official added that while the benefits of leveraging future CDBG grants are tempting, the risk posed by the loan on future CDBG awards is too great because of the impact on countless low- and moderate-income persons around the state who depend on CDBG-funded activities. According to the director of HUD’s loan program, communities intend, in most instances, to repay loans with revenues generated by the funded project or from another revenue source identified by the community or state in its loan application. The director emphasized that identifying a viable source of revenue other than the CDBG for loan payments was a critical consideration in HUD’s review of a loan application. However, HUD was not able to provide information on communities’ actual use of CDBG funds to cover shortfalls when the intended revenue sources for loan payments do not materialize because it has not been tracking these payments. The director agreed that this is important information that HUD should be tracking to improve its oversight of the program. On the basis of our sample of 100 loans approved in fiscal years 1990 through 1996 that had funding advances, we estimated the types of activities reported as funded by the program for these years. Our analysis relied on the information that the communities and states reported to HUD. (App. II provides detailed information on loans approved in fiscal years 1990 through 1996 that had funding advances, and app. III provides detailed information, estimates, and sampling errors for the data presented in this report.) By an overwhelming margin, both entitlement and nonentitlement borrowers reported that they used their loan funds to finance economic development activities. However, nonentitlement communities were more likely than entitlement communities to report that they used their funds for economic development. Table 1 shows our estimates of the types of activities funded overall and by entitlement and nonentitlement communities. Loans for economic development were made for activities such as constructing shopping centers, creating revolving loan funds, 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. Establishing revolving loan funds is one method that communities use to make even greater use of CDBG funds by providing funding for businesses that might otherwise not qualify for commercial lending opportunities. While we estimate that only 6 percent of the loans were used to establish or enhance such funds, about half of the entitlement communities with the largest loans reported using loan commitments to finance a revolving loan fund. Only one nonentitlement community reported using loan proceeds for this purpose. These revolving loan funds are used to finance a variety of businesses. For example, Philadelphia, Pennsylvania, reported using $20 million in loan proceeds to establish a revolving loan fund for small and mid-sized inner-city businesses. The program’s goal is to foster the retention and expansion of inner-city businesses. Eligible businesses will receive long-term, fixed-rate loans that conventional banks have been unwilling to provide. Businesses that have received assistance from the fund include an insurance company, a wholesale food distributor, a smelting and refining company, an apparel warehouser and distributor, and a card and gift warehouser and distributor. On the basis of the information in the loan files, we also estimate that communities and states used about 88 percent of their loans to finance activities that benefited low- and moderate-income people from households earning less than 80 percent of the local area’s median income. For example, Greene County, Alabama, reported to HUD that it planned to use $9 million in loan proceeds to finance the construction of a 85,000-square-foot facility to house a tire and wheel assembly plant. The county estimates that the plant will create at least 180 new jobs, 51 percent of which will be for low- and moderate- income persons. Cheboygan, Michigan, reported using $3 million in loan proceeds to help a start-up, for-profit business purchase a vacant paper plant and industrial equipment. The plant will benefit the community by creating 100 jobs for low- to moderate-income persons, according to a state community development official. About 23 percent of the loans funded activities that supported the national objective of aiding in the elimination of slums and blight. However, none of the loans funded activities that supported the national objective of addressing an urgent community development need. Percentages do not add up to 100 because, in reporting to HUD, communities and states could indicate more than one national objective. 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. Because the loan program is a component of the CDBG program, loan commitments should be included in annual reviews of CDBG recipients. However, in 5 of the 30 field offices we contacted, these loan commitments were not reviewed. These five offices accounted for about 26 percent of all loan commitments. The five offices that did not include loan fund activities said that they did not do so because they (1) did not believe they had guidance on how to monitor the program, (2) did not believe they had a responsibility to monitor the loans, (3) had other priorities, or (4) lacked loan-specific information. Another two field offices did not monitor these loans because one had recently opened and one had its records destroyed. The remaining 23 field offices included the loan fund activities in their review. Even when the field offices include loan activities in the annual CDBG review, their task is made more difficult by poor communication between HUD headquarters and its field offices. According to officials in 7 of the 30 field offices we contacted, HUD representatives did not have enough information on loans to fully carry out their monitoring responsibilities. According to the HUD headquarters program director, field offices may not routinely receive copies of all loan documentation, but he was surprised to learn that some offices may not be receiving documentation containing sufficient information for monitoring purposes. Communities and states have made greater use of the loan program since the EDI grants were instituted. Nonetheless, the total amount of money loaned has remained less than the amount that congressional appropriations would support. This may be due in part to communities’ and states’ reluctance to risk having to use future CDBG funds to repay loans. However, because HUD does not track the use of CDBG funds for loan payments, it does not know the extent to which CDBG funds have been used in this manner. Furthermore, some HUD field offices have not been routinely including loan commitments in their oversight of CDBG communities and states. Seven different field offices were not getting information from headquarters on final loan terms, which affected their ability to monitor loan activities; and five field offices were not including loans in their monitoring of CDBG communities. With the increased growth in the loan program, the need to ensure that funds are being spent as reported is of even greater importance. To determine the extent to which communities and states are using CDBG allotments to repay loans, the Secretary of Housing and Urban Development should implement procedures for tracking loan payments made from communities’ or states’ CDBG allocations. To ensure that HUD’s field offices have accurate and timely information for monitoring loan fund activities and that loan fund activities are routinely reviewed, the Secretary of Housing and Urban Development should develop procedures to ensure that the information necessary to monitor program performance and compliance with program requirements is promptly provided to the cognizant field offices and direct field offices to include a review of loan fund activities when they review CDBG communities and states. We provided a draft of this report to HUD for its review and comment. We obtained comments in a meeting with the Deputy Assistant Secretary for Grant Programs and other HUD officials and subsequently received written comments. In our meeting, the Deputy Assistant Secretary stated that HUD generally agreed with the information in our report and with our recommendations. He stressed HUD’s commitment to making sure that it effectively oversees the loan program. The Deputy Assistant Secretary and the other officials provided suggestions for clarifying the report, which we incorporated as appropriate. In its letter, HUD noted that it views the growth in the loan program as positive and encourages communities to use the program to create jobs and revitalize distressed neighborhoods. At the same time, HUD stated, it is mindful of its stewardship responsibilities and therefore considers our report as constructive and generally agrees with our recommendations. HUD raised several points about collateral requirements that, while consistent with our report, provided details of HUD’s intent. HUD emphasized that the underwriting guidelines will not be issued as regulations and their use is not mandatory; rather, HUD views them as a tool for communities to underwrite revenue-generating projects financed with the loan fund. These guidelines will assist communities in protecting their CDBG programs and in providing adequate security for the loan guarantees. HUD also noted that the guidelines were not intended to be used for loans used to finance public facilities or other activities that do not generate income. Although HUD points out that the guidelines will not be mandatory, it was clear during our work that associations representing communities perceive the guidelines as requirements. Accordingly, we believe that the program may benefit from HUD’s opening and maintaining a dialogue with communities as it develops these guidelines to ensure that they are understood and not viewed as an obstacle to using the program. In connection with our recommendations, HUD agreed to implement procedures to require reporting of unplanned use of CDBG funds to make loan payments. However, our first recommendation goes beyond a reporting requirement. We believe that routine tracking of these data will provide HUD and communities with useful information on, among other things, the likelihood that communities may need to use future CDBG funds to repay loans when other intended revenue sources fail to materialize. In connection with our second recommendation, HUD noted that the distribution of oversight information needed by the field offices must be comprehensive and that while HUD has improved in this area in recent years, the current system is inadequate for accomplishing that result. HUD plans to implement our recommendation to correct this problem through a design change to its integrated disbursement and information system —a computer-based information system. HUD noted that it will consult with its field offices to ensure that they are receiving the information needed for monitoring. HUD also agreed to develop procedures to ensure that loan information is provided promptly to field offices and to direct field offices to include loan activities in their monitoring of CDBG recipients, as we recommend. HUD’s written comments and our response appear in appendix VI. 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. 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. Los Angeles County, California Washington, D.C. Prince George’s County, Maryland Atlantic City, New Jersey (continued) San Bernadino County, California Los Angeles County, California (continued) Construction of a business incubator facility Renovation of a hospital into a medical clinic Financial assistance for business start up costs; construct plant Establishment of a loan fund Fund the Los Angeles Community Development Bank Construction of a shopping center (continued) Purchase of furniture and fixtures for a convention center hotel Housing rehabilitation, revolving loan fund Renovation of the Martin Luther King, Jr. Plaza Finance Enterprise Community economic development activities Acquisition of land for street widening Low interest loans for rehabilitation Capitalization of an existing revolving loan Establishment of three interim financing programs Construction of public facilities; infrastructure improvements Construction of a shopping center Acquisition/Redevelopment of land for low-income housing Acquisition/Renovation of a waterfront resturant Rehabilitation of two privately owned rental housing complexes 94 Don’t know (continued) Rehabilitation of 74 unit low- and moderate-income rental housing Acquisition of land; construction of a hotel Finance seven economic and community development programs Acquisition of land to redevelop harbor area Construction of a building leased to US Postal Service Construct manufacturing facility; purchase equipment Conversion of a building into hotel suites Acquisition of equipment; refinance loan; working capital for for-profit business Establishment of the Enterprise Community Economic Development Loan program (continued) Construction of a medical center Construction of hotel and parking garage Acquisition/Site preparation work for schools and firehouses Working capital for local manufacturer Acquisition/Renovation of a shopping center Assistance to for-profit business for purchase of a vacant paper plant and machinery Rehabilitation of a parking garage Renovation of commercial property into printing, graphics arts and sales facility Purchase private property ; removal/installation of public facilities and improvements (continued) Construction of 23,000 sq foot addition to Riverbend Shopping Center Construction/Rehabilitation of a building used by public service organization Renovation of building and provide business expansion opportunities Housing and neighborhood development; land acquisition; economic development activities Acquisition/Relocation/Demolition of blighted and substandard properties Construction of water and sewer facilities; acquisition of real property; relocation costs Rehabilitation of a historic mill into low-income housing units Acquisition/Rehabilitation of the Mariner’s Village housing complex (continued) Refinance an existing Section 108 loan and make improvements to hotel. Provide working capital for credit worthy businesses, finance site improvement Assistance in capitalization of a revolving loan fund (continued) Expansion of an ice arena and various other projects. Construction of a manufacturing facility, equipment acquisition Renovation of 3 vacant buildings in the city’s historic warehouse district Renovation of theater, restaurant, and amusement center (continued) Establishment of a loan fund for business creation and expansion projects) Final improvements on Civic Center Complex Construction of a sports complex Acquisition of building and land, district redevelopment, and construction (continued) Acquisition/Rehabilitation of a closed and vacant school Partially fund the start up of a regional airline carrier Acquisition of a closed industrial facility Assistance in the acquisition of a 25 acre site for redevelopment (continued) Construction of a facility, acquisition of machinery; training Acquisition/Rehabilitation of real property, clearance and relocation Housing rehabilitation in three targeted neighborhoods Assistance in financing,expanding and stabalizing a shopping center Gap financing for private businesses to revitalize central business district Working capital to acquire and reopen a paper mill Acquisition of first mortgage on downtown hotel Finance construction and permanent financing of a full service hotel Finance land, equipment, and other costs to develop amusement center Acquisition of a building to eliminate slum and blight on a spot basis Assistance in financing a distribution and manufacturing facility (Table notes on next page) Loan to a for-profit business is in default. The community is repaying the loan. Loan to a for-profit business is in default. The state is repaying the loan State is foreclosing on for-profit business. The state is repaying the loan. HUD terminated the project due to the community’s mismanagement of loan funds. The community is repaying the loan. (continued) What number of loans financed specific types of economic development activities? What percentage of loans financed revolving loan funds? What number of loans financed revolving loan funds? What percentage of loans received reviews? (continued) 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? 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? 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. We interviewed the Director, Office of Block Grant Assistance; the Director, Financial Management Division (FMD) (the loan fund program office); FMD representatives; HUD Community Planning and Development officials in HUD field offices in Atlanta, Georgia; Columbia, South Carolina; and Portland, Oregon. We also interviewed community development officials for the states of Georgia and South Carolina, and the cities of Atlanta, Georgia, and Columbia, South Carolina. We reviewed Inspector General reports issued as of January 7, 1997. To determine the extent to which communities and states use the program, we obtained and analyzed FMD’s database of HUD’s loan fund. We identified the manner in which the data were collected and summarized. We reviewed annual reports to the Congress for community development programs for 1994 and 1996. We interviewed the Director, Financial Management Division, and Community Planning and Development officials at HUD’s field offices in Atlanta, Georgia, and Columbia, South Carolina. To identify the factors affecting communities’ willingness to use the program, we interviewed officials of associations that represent communities eligible for the program, including the Council of State Community Development Agencies, the National Congress for Community Economic Development, the National Council for Urban Economic Development, the U.S. Conference of Mayors, the National Community Development Association, and the National Association of State Development Agencies. We discussed this issue with the Director of HUD’s Financial Management Division; and HUD Community Planning and Development officials at two HUD field offices. In addition, we interviewed state community development officials in Georgia and South Carolina, and city development officials in Atlanta and Columbia. We also reviewed documentation obtained during these interviews. To identify the types of projects financed with loan proceeds, we obtained and analyzed FMD’s database of HUD’s loan fund. We developed two data collection instruments to obtain additional information about loan commitments. With the first, we recorded data from loan files on the activities communities and states financed with loan proceeds. With the second, we conducted a telephone survey with HUD community planning and development officials at HUD field offices responsible for monitoring loan commitments in our sample. HUD program officials reviewed and commented on the telephone data collection instrument, and we incorporated their suggested changes. (App. V shows the locations of HUD field offices contacted.) In developing these instruments, we interviewed program officials, reviewed Economic Development Loan Fund legislation and regulations, and examined selected loan fund files. We used these data collection instruments to collect information about a sample of loan commitments. We selected a stratified random sample of 100 loan commitments approved (out of 313 loan commitments) in fiscal years 1990 through 1996 that had funding advances. We included all loan commitments of $15 million and above (20 loans) given to entitlement communities and states, all loan commitments to nonentitlement communities (23 loans), and a random sample of the remaining loan commitments to entitlement communities and states (57 of 270 loans). We appropriately weighted the information to take into consideration the stratification used to select loan commitments. Since we used a sample (called a probability sample) of loan commitments to develop our estimates, each estimate has a measurable precision, or sampling error, that may be expressed as a plus/minus figure. A sampling error indicates how closely we can reproduce from a sample the results that we would obtain if we were to take a complete count of the universe using the same measurement methods. By adding the sampling error to and subtracting it from the estimate, we can develop upper and lower bounds for each estimate. This range is called a confidence interval. Sampling errors and confidence intervals are stated at a certain confidence level—in this case, 95 percent. For example, a confidence interval at the 95-percent confidence level means that in 95 out of 100 instances, the sampling procedure we used would produce a confidence interval containing the universe value we are estimating. To determine HUD’s monitoring of the program, we conducted a telephone survey of HUD community planning and development officials in HUD field offices responsible for monitoring loan fund commitments in our sample. This resulted in our interviewing HUD officials in 30 of 44 field offices. We also obtained and reviewed HUD reports of the most recent monitoring activities performed on the CDBG communities or states that held the respective loan commitments. Using the information collected about the sample of 100 loans, we are able to provides estimates for the 313 loan commitments approved in fiscal years 1990 and 1996 which had funding advances. Appendix IV provides the sampling errors of estimates, referred to in this report, that were made from the above mentioned data collection instruments. In contrast, information obtained from the 30 of 44 field offices is not projectable to the program, as a whole. However, we were able to describe these offices in terms of the number of loan commitments for which they were responsible. 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. Erin Lansburgh Signora J. May Johnnie E. Barnes Sherrill C. Dunbar Alice G. Feldesman John T. McGrail The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Summary: 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. 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.