Just Released: Public-Sector Loans to Private-Sector Businesses: An Assessment of HUD-Supported Local Economic Development Lending Activities

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Using the resources available through three HUD programs,
state and local governments have the ability to make low-
interest economic development loans to local businesses
that promise to open or expand their activities.  In
fact, throughout the 1990s, over $45 billion in funds was
awarded or lent through these programs.

A new report published by HUD's Office of Policy
Development & Research examines the results and
performance of these economic development loans. "Public-
Sector Loans to Private-Sector Businesses: An Assessment
of HUD-Supported Local Economic Development Lending
Activities" examines the results and performance of these
economic development loans made to private businesses.

Four key HUD programs have been used to contribute to the
economic prospects of distressed cities and counties.
They are the Community Development Block Grant (CDBG)
program, the Section 108 program, the Economic
Development Initiative, and the Brownfields Economic
Development Initiative - all of which devote funds to
community development activities.  

This report answers five basic questions about third-
party loans and lending programs:

o What is the extent of third-party lending
nationwide?  

o What are the results of local third-party lending
programs in terms of business development and job
creation?

o What are the characteristics of third-party loans
and how do they perform?  

o What is the feasibility of creating a secondary
market for third-party loans?

o What are some of the programmatic and regulatory
issues affecting local use of the CDBG and Section
108 programs?

The study finds widespread use of HUD funds for economic
development loans to private businesses, amounting to
some $2.2 billion during 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 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.

"Public-Sector Loans to Private-Sector Businesses" also
reveals that, although default rates in these loan
programs are higher than those experienced by private-
sector lenders, substantial amounts of new money could be
raised by selling these loans in a secondary market,
without undermining the policy goals of the federal
programs that fund them. Based on these findings, the
author recommends that 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.

This study blends information gathered from five distinct
sources covering all users of CDBG funds for third-party
lending originated between 1996 and 1999, together with
documentation of Section 108 lending originated between
1994 and 1999. Sources included telephone interviews with
economic development directors of entitlement communities
that used CDBG funds for economic development purposes;
in-depth personal interviews with program directors and
staff in communities that made the largest volume of
third-party loans using Section 108 or CDBG funds;
financial, underwriting, business characteristics, and
other administrative data; telephone interviews with
business borrowers of CDBG or Section 108 funds who were
still in business at the time of data collection; and
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 third-
party lending purposes nationwide.

"Public-Sector Loans to Private-Sector Businesses: An
Assessment of HUD-Supported Local Economic Development
Lending Activities" is available on the web at
https://www.huduser.gov/portal/publications/econdev/pubsec_loans.html
or in printed form for a nominal charge by calling
HUD USER at 1-800-245-2691.
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HUD USER
P.O. Box 23268
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1-800-245-2691
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