What is HUD’s guidance on debt collection/forgiveness on economic development loans originated with CDBG funds? Are there any reporting requirements with the IRS?
Date Published: May 2015
For CDBG economic development activities, the terms of the loan are negotiated between the grantee and the business being funded. The CDBG Program allows CDBG funds to be provided as a grant or a loan and for grantees to determine the terms of those loans. Each grantee makes decisions about how its program is run. The requirements, including terms of the agreement, including the possibility of waiving repayment for the activity, would need to be part of the grantee's policies and procedures and contained in the CDBG written agreement between the grantee and the business. If a business fails to meet the CDBG requirements within the economic development loan agreement, the grantee would typically require repayment of the loan.
Waiving repayment or a loan write-off should be done infrequently and only implemented if the following were true: a) A national objective was met in 24 CFR 570.208; and b) The public benefit standards at 24 CFR 570.209(b) are met. If either of the above is not met on an individual loan to a business, the activity would not be an eligible CDBG activity and the grantee would need to repay the CDBG program for the costs. Grantees must follow the underwriting guidelines in Appendix A of 24 CFR Part 570 or adopt their own that are as stringent or even more so when making economic development loans. This is so that the possibility of default by the business may be minimized. Grantees may look at collateral and other means of recovering their CDBG dollars if a business defaults on its loan payments if it does not want to forgive the loan. CDBG funds may be used for debt collection measures as an activity delivery cost of the economic development activity. HUD will monitor for compliance with these elements of due diligence. If the activity met a national objective, if the grantee complies and if defaulted loans are rare, HUD is less likely to require repayment of loans that had to be written off.
Questions on IRS reporting requirements should be directed to the IRS.