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TABLE OF CONTENTS
EXECUTIVE SUMMARY
Study Goals
Study Questions, Methods, and Data Sources
The Extent of Third-Party Lending
Results of Third-Party Lending
Characteristics and Performance of Third-Party Loans
The Feasibility of a Secondary Market
Selected Program Issues
CHAPTER 1: INTRODUCTION: RESEARCH QUESTIONS AND METHODOLOGY
HUD's Local-Discretion Approach to Supporting Community Development
Economic Development as a Local Community Development Option
Third-Party Lending as a Local Economic Development Option
HUD Programs that Support Third-Party Lending
Design Options for Local Third-Party Lending Programs
An Overview of the Research Questions and Methods
Organization of the Report
CHAPTER 2: NATIONAL PATTERNS OF, AND TRENDS IN, ECONOMIC DEVELOPMENT AND THIRD-PARTY LENDING USE
Highlights
Introduction
Sources and Uses of Information
Economic Development Funding
Economic Development Funding Patterns
"Explaining" Differences in Economic Development Funding
Conclusion
CHAPTER 3: PROGRAM ADMINISTRATORS' PERSPECTIVES ON CDBG AND SECTION 108 PROGRAM REQUIREMENTS
Highlights
Introduction
Sources and Uses of Information
CDBG Program Administration and Program Requirements
Special Section 108 Program Issues
Use of EDI and BEDI
State Programs
CHAPTER 4: AN ANALYSIS OF THE BENEFITS THAT DERIVE FROM HUD-SUPPORTED, LOCALLY ORIGINATED THIRD-PARTY LOANS
Highlights
Introduction
Sources and Uses of Information
National Objectives, Program Purposes, and Types of Borrowers
Program Benefits and Aspects of Program Performance
The Relationship Between Project Benefits and Business Characteristics
CHAPTER 5: THE FINANCIAL CHARACTERISTICS AND PERFORMANCE OF HUD-SUPPORTED THIRD-PARTY LOANS
Highlights
Introduction
Sources and Uses of Information
Description of the Portfolio of CDBG and Section 108 Economic Development Loans
The Relationship Between Loan Terms and Business Characteristics
Characteristics of Uses of Funds, Loan Underwriting, Collateral, and Financing Structure
The Performance of the National Portfolio of CDBG- and Section 108-Funded Loans
The Relationships Among Loan Performance and Underwriting, Collateral, Project Financing, and Business and Community Characteristics
CHAPTER 6: CONSIDERATION OF THE FEASIBILITY OF SECONDARY MARKET SALES OF THIRD-PARTY LOANS
Highlights
Introduction
A Description of Secondary Market Securitization Transaction Structures
Financial Economic Analysis of a Secondary Market for CDBG and Section 108
Third-Party Loans
Noteworthy Issues in the Establishment of an Ongoing Secondary Market for CDBG and Section 108-Funded Loans
Conclusion
APPENDIX A: SAMPLING PROCEDURES AND WEIGHTS
APPENDIX B: THE ECONOMIC DEVELOPMENT FUNDING DATABASE
APPENDIX C: DATA COLLECTION METHODOLOGIES
APPENDIX D: REGRESSION MODEL RESULTS
EXECUTIVE SUMMARY
This research examines the results and performance of economic development loans to private businesses made by state and local governments using program funding from the U.S. Department of Housing and Urban Development (HUD). It finds widespread use of HUD funds for this purpose, amounting to some $2.2 billion over the second half of the 1990s. The nation's most populated and most distressed cities and urban counties account for the preponderance of this spending. Examination of nearly 1,000 loan files maintained by 51 of the most active community users of the HUD Community Development Block Grant (CDBG) and Section 108 programs for third-party lending indicates that local loan programs create jobs and leverage private investment in poor neighborhoods at costs that are comparable to those of other federal government programs. Although default rates in these loan programs are higher than those of private-sector lenders, substantial amounts of new money could be raised by selling these loans on a secondary market, without undermining the policy goals of the federal programs that fund them. HUD could help to encourage secondary market sales by accumulating and disseminating information about loan performance and setting standards for loan underwriting, servicing, and documentation.
Study Goals
A prevalent function of state and local governments in the United States is the promotion of economic development—attempting to increase the value of the goods and services produced by individuals and enterprises located within their jurisdictions. Public-sector transportation, land use, education, infrastructure, and other investments can help to stimulate increases in the value of these products, important in helping to create jobs and business opportunities in areas left behind by the private market.
One of the ways state and local governments have stimulated more investment and employment is through direct assistance to private-sector businesses that promise to start up or expand their economic activities in exchange for public-sector help. This government support sometimes takes the form of loans to business borrowers, typically at interest rates below those available from private lenders. An advantage of extending assistance in the form of loans is that, if successful, businesses repay the funds borrowed and these repayments become available (or are "revolved") to make new loans to other borrowers.
Several federal agencies have provided funding to state and local government agencies to create revolving loan funds. For example, the Economic Development Administration (EDA) of the U.S. Department of Commerce has, since 1965, made funds available to regional development organizations to make business loans. Likewise, community agencies have used funding from HUD to make loans to businesses that promise to create low-income jobs, serve low-income areas, or make physical improvements that contribute to the economic prospects of distressed cities and counties. Three HUD programs have been used for this purpose:
- The CDBG program awards funds by a national formula to states, urban counties, and cities to allow them to design and carry out community and neighborhood improvements in such areas as affordable housing, public works, and economic development. Throughout the 1990s, nearly $41 billion in CDBG funding was devoted to community development activities.
- The Section 108 program allows CDBG grantees to borrow federally-guaranteed funds for community development purposes, including the on-lending of these funds to private businesses. Because they can borrow up to an amount that is five times the size of their annual entitlement, localities can undertake or support large-scale projects that otherwise would not be possible with their smaller annual CDBG allocations.1 Throughout the 1990s, over $4 billion in community development investments was supported with Section 108 funding.
- The Economic Development Initiative (EDI) and the Brownfields Economic Development Initiative (BEDI) provide grants to states or communities to be used to reduce the risk (or "enhance the credit") of Section 108 loans, allowing grantees to provide additional funds to projects, create loss reserves in case borrowers fail to pay, or provide other kinds of credit enhancement. Since their creation in 1994 (EDI) and 1996 (BEDI), these two programs have provided $500 million in assistance to Section 108 participants.
There are two important reasons for studying the performance and results of HUDsupported economic-development loans. First, local, state, and federal policymakers can get better results for fewer dollars, and achieve a better match between their economic development goals and lending program outcomes, if they have good information on how results are influenced by the types of loans they make and to which kinds of borrowers. Second, local program administrators may be able to increase substantially the funding available to pursue community development aims if they can sell their loans to others, just as many housing loans made by mortgage lenders are sold to investors on the secondary market. Information about loan performance is vital to help construct this market.
Study Questions, Methods, and Data Sources
For purposes of this report, third-party loans are those originated by local governments (or other entities on their behalf) to private businesses or non-profit organizations engaged in economic activity and for which there is a reasonable expectation of repayment. Excluded, therefore, are grants, forgivable loans, loans to construct or rehabilitate housing or community facilities (unless part of a mixed-use commercial project), and loans to public agencies.
This study blends information gathered from five distinct sources covering all users of CDBG funds for third-party lending originated between 1996 and 1999, and Section 108 lending originated between 1994 and 1999. These sources and the scope of data included are:
- Telephone interviews with economic development directors of 460 of the 962 entitlement communities that used CDBG funds for economic development purposes over the past decade, and 11 of 49 state economic development program directors.2
- In-depth personal interviews with program directors and staff in 51 communities that made the largest volume of third-party loans using Section 108 or CDBG funds during the study period, accounting for 58 percent of all the CDBG lending volume and 96 percent of all the Section 108 lending volume nationwide.
- Financial, underwriting, business characteristics, and other administrative data collected from loan application, approval, and servicing files for 976 third-party loans originated in the 51 high-loan-volume communities—totaling $659 million of a total $727 million in lending done in these places. Sampled loans account for 69 percent of the total $950 million estimated to have been lent nationwide over the same period.
- Telephone interviews with 234 of the 750 business borrowers of CDBG or Section 108 funds who were still in business at the time of data collection.
- Financial data collated from HUD's IDIS and predecessor grantee reporting systems, including information on the amounts of CDBG and Section 108 funding spent for thirdparty lending purposes nationwide.
Information was also gathered from the US Census 2000 (on the poverty rates of neighborhoods in which businesses operated) and the files of Dun and Bradstreet, Inc. (on business sales, employment, and survival). Finally, the views of several experts involved in previous secondary market transactions were solicited, including their assessment of potential market sales of CDBG- and Section 108-funded loans in light of the loan-level administrative data collected for this research.
It is important to note that third-party loans made by smaller communities with funds that flow through the states are not examined in this report as extensively as are those made by entitlement communities, reflecting the difficulty and higher costs of collecting administrative information from the former. This difficulty stems from the decentralized decisionmaking and program administration structures adopted by some states.
This report answers five basic questions about third-party loans and lending programs, listed below in the order in which they are reported in this summary. The actual chapter order is indicated in parentheses following each question:
- What is the extent of third-party lending nationwide? How many and what kinds of communities have used the flexibility available to them under the CDBG and Section 108 programs to make third-party loans for economic development purposes? (Chapter 2)
- What are the results of local third-party lending programs in terms of business development and job creation benefits? Do some kinds of borrowers, in certain types of neighborhoods, create jobs or leverage private funds at lower cost than others? (Chapter 4)
- What are the characteristics of third-party loans and how do they perform? How extensive are loan repayment problems? Are some types of loans or borrowers more likely to encounter difficulties than are others? (Chapter 5)
- What is the feasibility of creating a secondary market for third-party loans? What would a transaction structure look like? What prices would loan pools likely command? What issues would have to be resolved to induce buyers and sellers to participate? (Chapter 6)
- What are some of the program and regulatory issues that affect local uses of the CDBG and Section 108 programs? (Chapter 3)
The Extent of Third-Party Lending
Nearly all states and CDBG entitlement communities across the nation funded some amount of economic development during the 1990s, totaling $8 billion of the $46 billion expended for the CDBG, Section 108, and EDI/BEDI programs over that timeframe. These expenditures included investments in public infrastructure, grants to local businesses, workforce development, and other economic-development activities. Third-party lending volume alone came to over $2 billion during the decade of the 1990s, which amounts to 27 percent of all economic-development funding. CDBG and Section 108 each contributed about $1 billion to this national lending "portfolio." About one-half of all entitlement grantees used CDBG funding and one-third used Section 108 funding to make third-party loans. Over the 1990-99 period, third-party loan funding constituted 18 percent of funding for all Section 108 activities, and 3 percent of funding for all CDBG activities.
Grantee lending activity rose over the decade, as the share of economic-development funding devoted to third-party lending increased from 25 percent between 1991 and 1994 to 29 percent between 1995 and 1999. This increase reflects a more active use of the Section 108 program for third-party lending purposes following the introduction of EDI in 1994 and BEDI in 1996. By reducing the risk that communities would be required to use CDBG funds to repay their Section 108 loans in the event of default, the credit enhancement available from these initiatives appears to have made the Section 108 program more appealing. Indeed, community development administrators were close to unanimous in reporting that EDI and BEDI grants were important to their decisions to seek Section 108 funding.
Although large numbers of communities and states either regularly or occasionally use some amount of HUD support for economic development and third-party lending, spending for these purposes is, in fact, heavily concentrated among a relatively few grantees. Over the decade, for instance, the top 10 percent of entitlement grantees (in terms of third-party loan volume) accounted for more than three-quarters of all of the lending that was originated. These tend to be the nation's more populous and economically distressed central cities and urban counties.
Results of Third-Party Lending
Communities devise and use local third-party lending programs to create low- and moderate-income jobs and promote business investment in poverty-stricken neighborhoods. The first of these purposes is reflected in the frequency of grantee selection of one among several statutorily required national program objectives for which HUD community development funds can be used. Most (77 percent) of the dollars spent on third-party loans are justified as creating or retaining low- and moderate-income jobs within a community; remaining funds are qualified as benefiting low- and moderate-income areas (15 percent), eliminating slums or blight (six percent), or meeting some other objective (three percent). The second of these purposes is indicated by the fact that more than one-half of CDBG- and Section 108-funded lending flows to businesses in neighborhoods where 20 percent or more of the population lives below the federal poverty level. In fact, more than one-third of Section 108 program loan funds are invested in businesses in neighborhoods with poverty rates of 40 percent or more. And, about one-quarter of loans in both programs go to minority-owned businesses—substantially higher than their 15 percent share of the overall business population.
Grantees aim to achieve several types of economic-development outcomes with their third-party lending programs: they intend to help businesses carry out profitable economic activities, create low- and moderate-income jobs, and encourage private investment. Grantees often endeavor to accomplish these goals at relatively low cost, and without substituting public funds for private funds that might otherwise be invested. Data collected for this study allow the following observations:
- Although firms doing business in poor neighborhoods might be expected to fail at higher rates than others, the survival rate of CDBG- and Section 108-assisted businesses is about the same as the national average for all businesses. Nearly 80 percent of borrowers of CDBG funds and 75 percent of borrowers of Section 108 funds were still in business three years or more after loan origination.
- In the study's high-loan-volume communities, total jobs created by all borrowers amount to at least 93 percent of the total number of jobs that were planned at the time of loan origination.3 Most borrowers who opted to meet the job-creation national objective appeared to create or retain some number of jobs.4
- Reflecting the sometimes difficult business environment faced by borrowers of HUD program funds and the high-risk nature of start-up and expansion projects, only 56 percent of CDBG borrowers and 52 percent of Section 108 borrowers who promised to create or retain low- or moderate-income jobs as the condition of their loan met or exceeded their job targets.5
- Many local third-party lending programs require that businesses secure project funding from private sources, which both provides added confidence that such projects are financially feasible and helps to encourage private-sector investment in poor neighborhoods. Each loaned CDBG dollar helped to attract (or "leverage") an additional $2.69 in private funding, and each loaned Section 108 dollar helped to attract $1.54 in private funding.
- Each job created or retained as a result of CDBG-funded loans costs the program $2,673, within the range of $936 to $6,250 for other federal economic-development programs. Each job created or retained as a result of Section 108-funded loans costs the program $7,865, which is slightly higher than the upper bound for other programs.6 These figures "subtract" the amounts that borrowers must repay and, as a result, reflect only the "subsidy value" to borrowers. In terms of full loan principal, each job resulting from a CDBG-funded loan is tied to $11,615 in loan principal, while each job resulting from a Section 108-funded loan is tied to $37,957 in loan principal.
- Many local community development officials attempt to ensure that the loans they make do not simply replace or substitute for funds that business owners could have obtained from private lenders or from their own resources. That notwithstanding, 19 percent of borrowers of CDBG funds and seven percent of borrowers of Section 108 funds say that that their projects would have gone forward, on the same scale and with the same timing, in the absence of their third-party loan. In contrast, more than one-third (36 percent) of CDBG-assisted business owners and 39 percent of Section 108-assisted business owners report that their projects would not have gone forward at all without their third-party loan. The remainder of borrowers indicate that their investments otherwise would have been reduced in scale or made over a more extended period had they not received a third-party loan.
Among businesses that borrow CDBG program funds, larger establishments and those located in low-poverty areas tend to achieve better results than smaller businesses or those in high-poverty areas. Larger firms survive at higher rates, leverage more non-HUD-program funding, and create jobs at less cost than smaller businesses, but they are more likely to report that HUD funds substitute for private dollars. Businesses located in high-poverty and extremepoverty tracts create fewer jobs, and the jobs they create cost more than jobs created by firms in low-poverty tracts. For extreme poverty tracts, at least, part of the explanation may lie in the firms' inability to attract other public and private funding in the same amounts as firms situated in other neighborhoods.
The relationship between business characteristics and the levels of benefits conveyed by Section 108-funded projects is less clear than that observed for CDBG-funded projects, reflecting a smaller number of large projects and the unique circumstances that pertain to many large-scale redevelopment efforts. Larger firms (in terms of sales and numbers of employees) create more jobs in relation to job targets than smaller firms and, for firms with large numbers of employees, these jobs are less expensive in terms of the face value of the loans than jobs created by smaller businesses. Firms with large annual sales, and those borrowing in large amounts, tend to leverage more public and private dollars than other firms—the latter showing below-average leveraging performance.
Characteristics and Performance of Third-Party Loans
Third-party loan program administrators, of course, want borrowers to repay their loans. Timely repayment is one sign of profitable business operation and a condition for continuing creation and retention of low- and moderate-income job opportunities. Repayment also ensures a sustained flow of economic-development funding.
The historical default rate for closed CDBG loans made between 1996 and 1999 is 23 percent, as measured by the loans that had either been fully repaid by borrowers or "written off" by lenders. Experience to date for loans still at the time of data collection suggests that the performance of outstanding loans will be similar to those now closed. Taken together, loans for which no further repayments were expected and loans more than 90 days overdue came to 25 percent of loans outstanding. These troubled loans were smaller, on average, than those in good standing at the time of data collection, accounting for only 13 percent of principal at origination.
At 42 percent, and excluding one community with an extremely high default rate, the historical default rate for Section 108-funded loans originated between 1994 and 1999 was higher than for CDBG-funded loans.7 The troubled loan rate for open loans at the time of data collection was 33 percent, suggesting that the still-open portfolio of loans may perform better than those already closed. These troubled loans also were smaller, on average, than wellperforming ones, also accounting for 13 percent of principal at origination. Two thirds of grantees used some of their CDBG loans to cover losses on defaulted loans, accounting for 16 percent of all Section 108 program participants.8
Measured by default rates, some CDBG loans are riskier than others, undoubtedly reflecting explicit public-sector decisions to invest in higher-risk businesses that operate in higher-risk neighborhoods. Loans encountering repayment problems tend, more often than those that perform, to: be for smaller loan amounts, be originated at higher rates, involve no private bank participation, be used for equipment and operating capital, and have no real estate as collateral. Non-performing loans also tend to be made to smaller, start-up, or independent businesses (not branches or franchises) and businesses located in high-poverty neighborhoods. Similarly, more risky Section 108-fimded loans tend to be smaller, issued at higher rates, and are more often used for operating capital than are performing loans, but they also tend not to include other public funding or private equity and be used for inventory purposes. More risky borrowers also tend to be smaller businesses but, unlike CDBG borrowers, are more likely to be existing businesses rather than start-ups.
The Feasibility of a Secondary Market
The flow of funds for additional economic development could be increased, in the short term, by sales of third-party loans to investors. Such sales could generate immediate, and potentially substantial amounts of cash to satisfy additional lending demand. But, past buyers of similar loans have not paid face value for them. Rather, they have discounted their prices to reflect the risk that some of the loans would not be repaid, and to reflect uncertainty surrounding default rates and the standards used (or not used) by lenders to evaluate borrower creditworthiness and to collect loan payments in a timely way.
Any asset, no matter how risky, can be sold on a secondary market. A method to sell financial assets that is widely accepted in the marketplace is asset-backed securities (ABSs), which allow investors to buy a share of the cash flow generated by the underlying assets. For third-party loans, state and local government lenders most likely would contribute their performing loans to a loan pool, which would be created by investment bankers or other intermediaries and made available for sale on private capital markets.
Nearly all ABSs have some form of credit enhancement to reduce risks to buyers, including over-collateralization (in which the dollar amount of securities issued is less than the dollar value of the assets sold), creation of loan-loss reserves using some of the cash flow or proceeds from bond sales, and creation of structured transactions that include senior and subordinate debt. Such structured transactions contain three parts or "tranches:" an A-rated, low-risk senior tranche; a higher-risk subordinate tranche; and an unrated, high-risk, residual tranche. As the underlying assets generate cash flow, holders of the senior tranche get paid first, holders of the subordinate tranche get paid next and, holders of the residual get paid last, if at all.
Previous small-business and economic-development-loan sales suggest a likely transaction structure for the sale of locally originated third-party loans based on the amounts of private equity and market-rate loans in these projects: about 23 percent of a CDBG/Section 108-based ABS would be apportioned to the senior tranche, 57 percent would be apportioned to the subordinate tranche, and 20 percent would be apportioned to a residual retained by the sellers.
Because this senior tranche is small relative to other small-business ABSs, and the residual is large, sellers of a CDBG/Section 108-based ABS may expect to receive only about 66 cents on the dollar—the full loan principal less the 20 percent residual and a 17 percent discount because the public debt sold is subordinate to that of private lenders (the amounts "leveraged" by project loans). Therefore, assuming that the full $324 million of loan principal outstanding for performing loans in 2002 (in the 51 high-loan-volume communities sampled for this study) were pooled into a single ABS, the sale would yield approximately $213 million for new lending or other community development purposes.
Although the creation of a secondary market for HUDsupported third-party loans is certainly feasible, several issues would have to be resolved in order to induce routine participation by potential buyers and sellers. With respect to the latter, about one-half of local officials surveyed for this study expressed interest in potential sales, yet they also voiced serious concern that investors would cream only high-performing loans, require sharp discounts, and demand standardized underwriting before they would be willing to purchase loans. These officials also fear that such demands would undermine local agency relationships with borrowers, limit flexibility to pursue high-risk projects, and produce insufficient financial benefits for their communities. Some of these issues could be resolved without compromising the policy goals of local third-party lending programs, which would continue to dictate origination of high-risk loans. Although loan buyers will certainly discount their purchase prices where loans are perceived to be high-risk, public lenders (and HUD) can at least take steps to reduce the discounts that buyers would apply because of uncertainty about how loans might perform.
Lack of information about third-party loan characteristics and their risks of default are sources of uncertainty. But, the present research shows that loan terms, financial underwriting, collateral, and business and community characteristics influence loan performance, meaning that the market can use this information to assess whether one pool of loans is likely to be of higher risk than another pool. For example, the default rate of a pool of loans consisting primarily of smaller loans to smaller businesses, located in high-poverty neighborhoods, to be used for operating capital and not secured by real estate, would be expected to exceed the default rate of a pool of larger loans to large enterprises located in low-poverty neighborhoods, to be used for real estate development and secured by real property.
Wide variation in community practice on how loans are underwritten, serviced, and documented is another source of uncertainty. But, introduction of standards for underwriting, servicing, and loan documentation could reduce this uncertainty without sacrificing the policy goals that underlay federal community development programs. To be useful to purchasers, these standards need not be as strict as those commonly followed by private lenders; they could be relaxed to preserve the policy goal of aiding higher-risk borrowers. Loan buyers, however, would welcome the reduction in uncertainty as to what underwriting and servicing policies were being followed, and documentary standards could be raised without limiting the types of loans made or borrowers assisted.
Selected Program Issues
While HUD's CDBG program affords grantees considerable latitude to pursue state and locally defined policy goals, it does so in order to achieve certain broad national policy objectives. Consequently, federal regulations are promulgated to ensure that these objectives are pursued. Invariably, however, such rules risk limiting grantees from pursuing legitimate local policy objectives without producing the offsetting public benefit of maintaining emphasis on the intended national objective.
In fact, however, this risk appears not to be especially serious with respect to HUDsupported third-party lending programs. Larger, more distressed cities and urban counties are the most frequent users of CDBG and Section 108 funds for third-party lending; these types of communities have spent more money for this purpose, more consistently over the years, and in greater amounts than smaller, less distressed suburban communities. This relationship between community characteristics and program use implies that local conditions and needs strongly influence local decisions to adopt business lending as an appropriate response. Further, asked whether federal requirements associated with the CDBG or Section 108 programs pose a major hindrance to their programs, a majority of local officials charged with administering them reported that they did not.
That notwithstanding, however, a substantial minority of officials is concerned about the effects of federal low- and moderate-income job creation (especially documentation) requirements on their loan programs, primarily because these are perceived to increase costs to both businesses and administering agencies. While some grantees see these and other rules as detrimental to their interest in carrying out economic development and third-party lending programs, it should be mentioned that some of this appears to be due to grantee misunderstandings about the range of options available to them. The confusion often centers on rules for qualifying expenditures as meeting national objectives, which, in the view of many local officials, requires them to qualify most expenditures in terms of low- and moderate-income job creation. In reality, however, other options may be available that are less burdensome to smaller business or to certain neighborhood programs, indicating a need for more technical assistance and guidance in this area.
With respect to Section 108, those communities that spend relatively small amounts of money on third-party loans appear less willing than others to accept the special requirements that pertain to that program—including the long-standing requirement that a community's CDBG funding be pledged as collateral in the event of default on loan repayment. In this regard, local community development officials attach considerable value to EDI and BEDI as tools to help them reduce what, to some, is a substantial risk. Also, additional security requirements introduced in 1996 and the considerable time required to receive HUD approval of Section 108 applications are issues of concern to a broad spectrum of grantees.9
State community development program administrators second the concerns raised by some local entitlement grantees concerning the difficulty of complying with the income and documentation requirements of the job-creation national objective in both the CDBG and Section 108 programs. They appear, however, to be somewhat more risk-averse in response to Section 108 requirements than local officials; administrators representing three of the four state Section 108 borrowers interviewed for this study indicate they will not apply to the program in the future—largely because of disappointing loan repayment performance on the part of borrowers.
Notes from This Section
1. In the event grantees cannot pay back their Section 108 loans with project revenues or some other local source, however, they must repay using a portion of their future CDBG allocations.
2. The 50 states and Puerto Rico operate CDBG programs. However, information was not available for Hawaii and New York where, at state option, HUD administered programs for non-entitlement areas within the state during the study period.
3. Some grantees appear not to record the number of jobs created after targets are reached, making this a likely under-estimate of the actual percentage of jobs created relative to those planned.
4. While HUD monitors grantees to verify that job creation and other national objectives are met, the audit procedures used by the Department differ from the research methods used to collect data for this study. The latter indicate that over 90 percent of grantees created the jobs they intended. However, jobs data were unavailable to researchers for about 15 percent of loan-funded projects, suggesting that some grantees may not have not complied fully with the CDBG program's documentary requirements.
5. Because a number of larger projects exceeded their job goals by large margins, these percentages are considerably lower than the 93 percent figure contained in the preceding finding.
6. Loans are converted to their grant equivalents to permit a fair comparison. Figures include jobs in businesses that subsequently failed.
7. Grantees were promised anonymity to elicit their cooperation. Consequently, the identity of this community is not revealed.
8. This percentage pertains to grantees, not loans. Loan-level data on sources of repayment and amount of funds recovered are not available.
9. On the latter point, HUD officials acknowledge a slow-down in application processing times during the flood of applications received after EDI was introduced in 1994, but suggest that this has been subsequently resolved by an increase in staff devoted to reviews.
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