Summary

A review was made of the Department of Housing and Urban Development's (HUD) cash management procedures for administering the rehabilitation loan program authorized by section 312 of the Housing Act of 1964. The program provides direct low-interest, long-term loans to property owners in approved areas. Local public agencies (LPA's) are responsible for loan processing leading up to and following settlement with section 312 borrowers. Additionally, they request funds from HUD to arrive in time for loan settlements and maintain loan escrow accounts for section 312 borrowers. After loan settlements, LPA's help borrowers to get contractors to start work, make periodic and final inspections of the properties, pay contractors out of the escrow accounts, and close out loans.

More appropriate financing techniques for better cash management of the Section 312 Program are needed. Problems have arisen because in some cases, the actual rehabilitation of housing units and disbursement of loan funds have been delayed for several months. As a result of the delay, local agencies have large 312 loan escrow balances on deposit for extended periods before the funds are needed to pay rehabilitation contractors. Thus, the local agencies can benefit financially by investing the escrow balances. However, the Department of the Treasury incurs unnecessary interest costs because the money for 312 loans is borrowed at rates higher than 3 percent much sooner than is required to meet actual rehabilitation disbursements. HUD has taken some corrective action by instituting modified loan procedures for large section 312 loans which more closely time cash advances with payments to contractors. Other actions are planned. Another problem involving the same local agencies is that HUD policy permits the LPA'S to make letter of credit withdrawals of direct-grant funds from the HUD Community Development Block Grant Program (CDBG) in advance of actual needs to finance rehabilitation. As in the case of the Section 312 Program, grant funds are deposited in an escrow account and subsequently paid out to rehabilitation contractors. Moreover, this practice represents an improper use of the letter of credit.