The Housing and Community Development Act was first signed into law in 1974, and authorized the creation of the U.S. Housing and Urban Development Department's (HUD) Community Development Block Grant Program (CDBG). The overarching goal of the program is to provide affordable, sustainable, and suitable housing for the nation's low- and moderate-income families. One of the ways it achieves that goal is through the Section 108 Loan Guarantee Program.
To understand the Section 108 Loan Guarantee Program, it's important to understand the Community Development Block Grant (CDBG) program as a whole. The CDBG program awards grants to state and local governments for the purpose of developing housing, infrastructure, and public facilities. Grants are awarded based on certain criteria and formulae, and are distributed - at minimum - on an annual basis. The Section 108 program allows governments to use their CDBG funding to secure loans that are used to invest in larger projects.
Current regulations allow CDBG recipients to apply for loans equivalent to five times their current CDBG allocation. In other words, if a city's Housing Authority has been awarded $1 million in CDBG funding, it can opt instead to use the $1 million to secure a $5 million loan. To ensure that governments to do over-extend themselves, existing Section 108 loan balances are subtracted from the dollar amount a government entity can borrow. Section 108 loans can then be used to fund any type of project that fits Community Development Block Grant criteria, including: economic development, purchase and rehabilitation of real property, site improvement and preparation, and public works improvements. Financing obtained through the Section 108 program is often used in conjunction with other programs like the Brownfield Economic Development Initiative. As previously mentioned, Section 108 loans typically fund large-scale projects that aim to revitalized and rehabilitate entire neighborhoods at one time.
The benefit of obtaining a Section 108 loan is that it enables government entities to instill confidence in a particular project, thereby encouraging private investment in the project as well. As with all CDBG projects, Section108 loans must primarily benefit low- and moderate-income residents and are consequently often focused on neighborhoods with higher-than-average blight and fewer vocational and educational opportunities.
Governments have up to 20 years to repay Section 108 loans, and interest rates are based on the 3-month London Interbank Offered (LIBO) rate. The rate is adjusted annually. To date, not one Section 108 borrower has defaulted on repayment, making it one of the safest ways for the Department of Housing and Urban Development to promote large-scale projects and secure maximum benefit for the country's low- and moderate-income residents.
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