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Section 108 Loan Guarantee Relief Could Reduce CDBG Used for Housing

HUD’s Office of Community Planning and Development (CPD) has issued “Relief for HUD Section 108 Borrowers Impacted by Coronavirus” guidance that has the potential to reduce the amount of Community Development Block Grant (CDBG) funds that a jurisdiction uses to address housing needs in the community without public participation in the decision making.

The brief “question and answer” guidance document states that HUD will provide relief to a business that has received a CDBG Section 108-guaranteed loan if the business is experiencing revenue reductions due to the coronavirus pandemic. HUD will work with a borrower to restructure principal repayment terms by deferring the next scheduled principal payment on a promissory note that HUD has guaranteed under Section 108. The next scheduled principal payment on all Section 108 notes is August 1, 2020. HUD cannot forgive loans or defer interest payments.

This arcane program and the ability for a business to seek relief from a Section 108-guaranteed loan might be of concern to advocates. The guidance states that Section 108 borrowers may use CDBG funds (or program income) to pay debt service that would otherwise have been paid from business loan repayments. The use of CDBG grant funds for Section 108 debt service can, at the discretion of the grantee, operate as either forbearance or forgiveness of a portion of the business loan up to the amount of principal due on August 1, 2020.

The guidance further states that if a jurisdiction uses CDBG money to pay Section 108 debt service, the jurisdiction does not have to carry out any additional public participation “since the activity for which the Section 108 funds were used has already been the subject of citizen participation.”

NLIHC believes that while a Section 108 guaranteed loan to a business may have been included in a previous public participation process, current housing needs, especially in light of the coronavirus pandemic, warrant serious public consideration. The CARES Act has eliminated the 15% cap on the use of CARES Act CDBG (which CPD is now calling “CDBG-CV”) and any FY19 and FY20 CDBG allocations for “public services.” Jurisdictions may use CDBG to make temporary rental assistance and utility assistance to providers of such services to families for up to three months. Many advocates are urging their jurisdictions to use CDBG funds for desperately needed emergency rental and utility assistance.

The Section 108 Loan Guarantee program involves a jurisdiction pledging up to five years of a community's entire CDBG entitlement amount as collateral for a larger loan. If estimated revenues are not sufficient for a project financed with a Section 108 guaranteed loan, then CDBG money that should be used to benefit low-income people would be used to make up the shortfall, resulting in reduction or elimination of housing rehabilitation, job creation projects, or other activities that would benefit lower-income people.

“Relief for HUD Section 108 Borrowers Impacted by Coronavirus” is at: https://bit.ly/2KjX9zB

CPD’s Section 108 Loan Guarantee website is at: https://www.hudexchange.info/programs/section-108

Information about the CDBG program is on page 8-3 of NLIHC’s 2020 Advocates Guide.